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Examples of Where It Has Worked
Bayonne, N.J. Case Study
NCPPP Workshop
February 12, 2013
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Introduction to SUEZ ENVIRONNEMENT NORTH AMERICA # 2 water player in 2012
3 Business Lines (Regulated, Environmental Services, Utility Service) under 2 local brands
2,600 employees
7 million population served
Operating in 41 states
# 1 water player in 2012
50/50 partnership with Peñoles
1,000 employees
5 million population served
Developing presence
3 water contracts
2 solid waste O&M contracts
200 employees
3
SENA - Organized to Meet U.S. Market Needs
Political difficulty
Valu
e P
rovid
ed
Do Nothing
Outsource
Operations
&/or CPM
Equipment
Purchases
Lease System
for Upfront
Payment
Transfer
Ownership
Design
Build Operate
Asset
&/or
Tank
Management
Capital
Improvement
Delivery
Packaged
Services
Management
Services
United Water
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The United Water and KKR Team
Traditional Water and Wastewater Services
– Approximately 5.7 million people served in 21 states
– 18 Regulated Utilities
– 100 Contract Operations
2,300 employees
$3.0 billion in total assets
$800 million in revenues
Leading investment firm
Private Equity, Infrastructure & Natural Resources,
Credit & Mezzanine, Public Equity
Global presence
Offices in 14 major cities in 9 countries across 4 continents
“One-firm” culture that evolves, learns,
and innovates
Adaptive to change
Relationship-driven approach
Sourcing investment opportunities
Partnering with clients
Aligned with our partners
“Eat our own cooking”
Economic incentives driven by results
Focused on managing stakeholder interests Assets Under Management
As of December 31, 2011 ($ in billions)
$43.6
$15.4
Private Equity Credit
KKR United Water
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Introduction to the City of Bayonne
City of Bayonne
The city of Bayonne is located in Hudson
County, New Jersey and lies in the heart of
the Port of New York and New Jersey
Bayonne is situated east of Newark, the
state's largest city, west of Brooklyn, shares
a land border with Jersey City to the north
and is connected to Staten Island by the
Bayonne Bridge
Traditional manufacturing, distribution,
healthcare and maritime activities remain
important to the economy of the city
Location
Key Statistics
Mayor Mark Smith (term ends May 2014)
Population 63,024(1)
Area (Land) 5.80 square miles
Density 10,858.7 persons per square mile
Unemployment Rate 11.5%(2)
(1) 2010 Census Data
(2) Seasonally unadjusted unemployment rate as of March 2012
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Bayonne Municipal Utilities Authority (BMUA)
Description Amount
Number of Employees 33
Number of Service Connections ~12,000
Daily Average Flow (Millions of Gallons) 8.5
Maximum Daily Capacity (Millions of Gallons) 17.6
Individual Position
Sam Maggio Chairman
Olivia Klim Treasurer
Father John Fencik Secretary
Hon. Gary La Pelusa, Sr. Commissioner
Thomas Jacobson Commissioner
Hon. Debra Czerwienski Commissioner
Michael Furmaniak (Resigned) Alternate
[Open] Alternate
Stephen Gallo Executive Director
Joseph Nichols General Counsel
McManimon, Scotland & Baumann Bond Counsel
Bank of New York Mellon Trustee
Overview
The Bayonne Municipal Utilities Authority was created
by virtue of an ordinance adopted October 9, 1997 by
the City Council and the City of Bayonne
It is a public body, corporate and politic, organized under
the State of New Jersey
Authority was created for the purpose of acquiring,
constructing, maintaining and operating facilities for the
treatment, purification and disposal of sewage and other
wastes originating in the City of Bayonne
The Authority is also responsible for operating,
maintaining and managing the City’s water system
Prior to the creation of the Authority, the City operated
the system as a combined utility within the City’s budget
The Authority’s governing body consists of five
members, and two alternates, appointed by the Major of
the City
Members are appointed for a term of 5 years
Key Individuals
Rate History (per 100CF)
Key Statistics Year Water Rate(1) Sewer Rate
2011 4.29 3.50
2006 2.45 2.90
2005 2.21 2.06
2004 2.21 2.06
2003 1.85 2.00
(1) Rate for the first 110 CF per quarter
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System Overview
Water System Overview
Description
The BMUA owns and operates a water
transmission aqueduct and distribution
system that serves the City
The aqueduct transfers water from the North
Jersey District Water Supply Commission’s
(“NJDWSC”) Wanaque and Monksville
reservoirs, both of which are located in
Passaic County
The BMUA has an allotment of 10.5 million
gallons per day (“MGD”) from NJDWSC, of
which an average of 8.5 MGD is used
The distribution system exceeds 96 miles of
mains including valves, fire hydrants and
other appurtenances
It is purely a distribution and metering
system, with no pumping, storage or
treatment required under the Contract
Location
1
1
2
2
Monksville Reservoir
Wanaque Reservoir
3
NJDWSC
Aqueduct
Reservoir
3 Belleville
4
Kearny
Pipeline
4 Kearny Water Distribution System
5 City of Bayonne
5
Authority
Aqueduct
8
System Overview
Wastewater System Overview
Description
The City's combined sanitary/storm sewer system
is owned by the BMUA
Wastewater flows are collected on the west side of
the City and pumped to an East Side Interceptor
Sewer
This interceptor collects all flows conveys them
to the Oak Street Pumping Station which then
pumps the flows to the Passaic Valley Sewerage
Commission (“PVSC”) by a force main
The Contract does not call for the treatment of
this sewage, as this remains as a responsibility
of the PVSC
Total system capacity is 17.6 MGD, which is the
maximum amount of flow that can be transmitted to
PVSC for treatment due to hydraulic capacity of
the force main
The wastewater pumps have the capacity to
pump up to 40MGD during wet weather events
The average daily flow-Dry Weather Flow
pumped to PVSC for treatment is approximately
8.3 MGD
Location
1 City of Bayonne
1
2
2 PVSC Water Pollution Control Facility (Newark)
Force Main
PVSC
Facility
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o Deeply Leveraged, i.e. Beyond
Underlying Value of Assets
o History of Deferred Investment in
System Assets
o Credit Quality Problems
o Beyond Water and
o Wastewater System
o Funding Requirements
o Difficulty Attracting & Retaining
Qualified Staff
Bayonne MUA Challenges & Objectives
Guaranteed capital improvements and recovery from years of deferred investment
Built-in mechanisms for capital improvements without typical politicized maintenance vs. capital disagreements
Improvement in asset condition and customer service
Strengthen balance sheet and leave the Authority debt free
Long-term rate predictability
Qualified staff, bench strength, and training programs
Triple bottom line approach to managing utility
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Choosing a Contract Model to Meet the BMUA’s Objectives
You want to keep responsibility
for operation AND benefit from
expertise of the private sector Management Contract
You want to delegate full
responsibility for operation
O&M Outsourcing
Contract
You want to share responsibility
for managing your utility and pay
a fixed fee, combined with an
incentive for performance
Alliance Partnering
Contract
You want world-class know-how
provided in an integrated manner
to solve your operational needs Specialized Services
You want reliable operation
coupled with funding of future
capital needs & refinancing of
City’s debt to improve credit United Water’s Solution
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Our Solution is an innovation in the water sector.
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BMUA Transaction Overview
Organizational Structure – 4 Key Agreements are Foundation of Transaction
(2)
Bayonne Water Joint Venture, LLC
United Water Operations Contracts,
Inc
Bayonne Municipal Utilities Authority
Capital Projects (as
required)
Senior Secured Notes due
2037
NJDWSC (Water
Supply)
Bayonne Energy
Center Supply
Utilities (Wind Turbine
O&M)
PVSC (Wastewater
Treatment)
Pass Through
Contracts
1. BMUA
Agreement
2. O&M
Agreement
Upfront Payment
Direct Agreement
Consortium
Equity
Revolving Credit Facility
O&M Fee
3.NPA*
4. Joint Venture Agreement
*Note Purchase Agreement
requiring 3rd Party Due Diligence
to support Debt Rating
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BMUA Agreement: Revenue Requirement Overview
2011 Revenue
$20.6 mm
For the period covering 2013-2014
rates will be fixed
Rates will increase by 8.5% initially and
then remain flat in 2013 and 2014, and
grow at 3.5% in 2015
2015 Revenue
$26.3 mm 2013 - 2014
$19.4 mm
$6.9 mm
2015 Fixed
Revenue
2015 Inflation Linked
Revenue
2015 - 2052
Initial based year 2011 revenue has
been set at $20,639,000 as per the
BMUA Agreement
~3.50% from 2015 -2021
3.75% per year thereafter
2015 - 2052
20% at the Labor Adjustment Index plus (i)
1.00% per year during 2015 to 2021 and (ii)
1.25% per year thereafter
10% at the Standard Adjustment Index plus
(i) 1.00% per year during 2015 to 2021 and
(ii) 1.25% per year thereafter
Rate Freeze Period
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BMUA Agreement: Revenue Requirement Adjustment Events
Development
Usage
Replacement of water meters is expected to result in
additional meter usage
In the event this does not materialize, rates will be
adjusted to maintain the Revenue Requirement
Capex
United takes the risk on increased cost of the
Base Capex Program
If Incremental Capex exceeds an agreed
threshold, this will result in a rate increase
Operating Cost
Development of Bayonne is expected to result in
incremental customer growth
In the event this does not materialize, rates will be
adjusted to maintain the Revenue Requirement
Certain operating costs are to be compared to a
baseline (Pass-Through Expense Baseline)
Any expenditures incurred on these items above
the base line will result in a rate increase
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Risk Allocation
Revenue
Customer growth in New Jersey has grown steadily over the past 40 years and are expected to show even
higher levels of growth in Bayonne from various developments in the region
In the event that usage actually decreases, there are contractually protected rate adjustments to ensure
payment to the Joint Venture according to the Revenue Requirement
Usage Risk
30% of revenue is inflation linked which provides alignment between revenues and costs Inflation
Water rates are comparable to other municipalities and sewer rates are considerably lower
Rate growth stipulated in the BMUA Agreement is below the historical rate growth in NJ
Rate Increases to Unsustainable
Levels
No volume risk due to contracted Revenue Requirement set out for the term of the BMUA Agreement
A rate adjustment mechanism will be applied to ensure the defined Revenue Requirement is maintained
Such rate adjustments will occur annually and will be bi-directional
Issuer is not dependent upon regulatory approval for rate base adjustments typical of a regulated utility
Underperformance of Revenue
93% of customers are residential and spread over 11,000+ accounts, limiting counterparty risk
Residents of Bayonne are relatively affluent, with a median household income 12% greater than the
national average
Counterparty Risk
Collections are expected to increase from the installation of the new metering system
Secured by the BMUA’s obligation to remit proceeds of annual lien sales for unpaid bills Collections Risk
Quantity and quality of water supply is guaranteed by the Authority Supply Risk
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Risk Allocation (Continued)
Significant termination compensation available in the event of a Joint Venture or Authority default
In both cases the termination payment must be at least the debt, accrued interest and make-whole
BMUA has no significant payment obligations as revenue shortfalls are passed through to rate payers under
the rate adjustment mechanism
Termination payment would be funded by proceeds of a re-concession or a BMUA debt issuance
A Deficiency Agreement between the City of Bayonne and the BMUA will be maintained throughout the life
of the Agreement which will allow the BMUA to issue bonds back by the City to pay termination payments
Concessionaire / BMUA Default
Contractual
Other
No material pension or labor liabilities Pension and Labour
United operates 100+ systems under contract and also owns and operates utilities in 8 states
United has never had a contract terminated because of an environmental concern Environmental
Costs
United assumes the risk of increased costs of the Base Capex program
Any divergence in ongoing capex from the agreed upon threshold results in a true up in the following year Capex Increases
Costs are either pass-through to rate payers, covered by United under a fixed price contract, fixed amount
as per the BMUA Agreement or represent relatively small overhead and administrative costs Opex Increases
Large supply of companies with the financial strength and operational expertise to manage the System
Robust replacement and operating cost sensitivities O&M Contract Terminated
“Safety valves” kick in if pass-through costs or volumes are below certain levels during the rate freeze
period
Availability of a $10.0 million revolving credit facility, a $6.5 million rate stablization payment amount, and
$5.0mm of cash on the balance sheet will mitigate any short term liquidity risk
Liquidity Issues
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We will bring operational best practices and capital improvements to the BMUA.
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United Water’s Solution Provides for:
Operational Best Practices, Life Cycle Cost Analysis, and Capital Investment to Modernize Facilities and Systems
O&M Responsibility for a Wind Turbine which has capacity to sustainably power all water & sewer system needs
“Base” Capital Improvements – Advanced Metering Infrastructure (AMI)
“Incremental” Capital improvements – Repair & Replacement of Underground Infrastructure, Improve SCADA, Safety & Security
Third Category of Capital Expenditures (Modifications) related to Unforeseen Events which trigger a Revenue Adjustment
BMUA Agreement – Key Features
Meter
Transmitter Unit
(MTU)
Data
Collector Unit (DCU)
Network
Control Computer (NCC)
Utility IT Network
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United Water’s Solution Saves BMUA ~ $35M
(Approx. 6%)
Projected Revenue Requirement
i.e. Without Contract)
Cost - United Water’s Solution
UW/KKR Option
Net Upfront Payment (after Debt Defeasance)
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4.29
3.70 3.583.393.50
5.53
4.88 4.73
5.31
$0
$2
$3
$5
$6
$8
Bayonne Ramsey Jersey City Mahwah North Hudson
Rate
s (
$ / 1
00
cF
)
Water Sewer
32.9%
16.4%
12.7%
2.8% 2.3%1.0%
0%
10%
20%
30%
40%
Housing Transportation Food Electricity Telephone Water
% o
f A
vera
ge
Annual E
xpen
diture
Projected Rate Increases are Sustainable
The risk of rates being considered too high is
unlikely for the following reasons:
Average monthly water and sewer bill for users in
Bayonne is ~$44 and $31, respectively. Water rates are in
line with other municipalities and the sewer rates are much
lower
Water rates for United Water New Jersey have grown at a
CAGR of 5.0% since 1970 which is well above the rate
increases that are stipulated in the Concession Agreement
Water is an essential service but still represents a very low
percentage of total annual expenditures (1.0% of total)
Relative Water & Sewer Rates
Historical Rate Increases in New Jersey Relative Water Expenditure(1)
(1) Bureau of Labor Statistics, Consumer Expenditure Survey
n/a
108149
241
348
493
575 575 593
759
$0
$200
$400
$600
$800
$1,000
1970 1975 1980 1985 1990 1995 2000 2005 2010
Avg
. A
nn
ua
l B
ill
CAGR: 5.0%
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“SOLUTION: Investing in America’s Water” BMUA Summary and the Next Project Underway
Bayonne, NJ (Pop. 63,000)
Financial Partners: KKR Infrastructure & United Water Operator: United Water Duration: 40 years Financial Benefits: Full operation of water & sewer >$100M Capital funds to insure future
system upgrades over 40 years $150M upfront payment to remove all debt
from Bayonne MUA balance sheet Tariff (set by City)
Nassau Co, NY (Pop. 1.1 million) Financial Partners: To be selected
Operator: United Water Duration: 40-50 years Financial Benefits: Full operation of sewer system (30-35% cost
reduction from County operation) $300-400M Capital funds for next 10 years
(then ~25-30M/year) $750M to eliminate all Sewer Authority &
County debt for sewer system Tariff (set by County) – increases at CPI level
Nassau will be the largest partnership in the U.S.
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Chosen by the CLINTON GLOBAL INITIATIVE as an “innovative partnership which meets one of the world’s most pressing challenges”
Selected by the AMERICAN WATER SUMMIT 2012 as the Partnership Performance of the Year which delivered “the most dramatic improvement in service and customer value in the 3 most recent years”