Dan Sugarman Sustainable City Network Webinar
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Transcript of Dan Sugarman Sustainable City Network Webinar
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Water Partnerships Provide Investment Capital and Debt Relief in Bayonne, N.J. Sustainable City Network Dan Sugarman December 11, 2012
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SUEZ ENVIRONNEMENT, a Global Leader
! One of the two world leaders in environment
! Technology and sustainable development focus
! 2011 revenues: €14.83bn ! 2011 EBITDA: €2.51bn ! 80,410 employees
Water
! 1,888 drinking water production units managed, 91 million people supplied
! 1,643 wastewater plants managed, 63 million people served for water sanitation
! 1 billion inhabitants served by water treatment plants engineered by SUEZ Environnement / Degrémont
Waste
! Over 400,000 industrial and commercial customers
! 57 million people benefiting from waste services
! 42 million tons of waste treated
! 47 incinerators worldwide (of which 46 with energy recovery capability)
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Introduction to United Water and 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
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SENA - Organized to Meet U.S. Market Needs
Political difficulty
Valu
e Pr
ovid
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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United Water Today
¢ 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
¢ $800 million in revenues
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Introduction to KKR
è Leading investment firm Private Equity, Infrastructure & Natural Resources, Credit & Mezzanine, Public Equity
è Global presence Offices in 14 major cities in 9 countries across 4 continents
è “One-firm” culture that evolves, learns, and innovates Adaptive to change
è Relationship-driven approach Sourcing investment opportunities Partnering with clients
è Aligned with our partners “Eat our own cooking”
Economic incentives driven by results Focused on managing stakeholder interests
Assets Under Management As of December 31, 2011
($ in billions)
Established in 1976, Kohlberg Kravis Roberts & Co. L.P. (“KKR”) is a leading global investment firm with industry-leading investment experience, in-depth industry knowledge, sophisticated processes for growing and improving businesses, and a strong culture committed to teamwork
$43.6
$15.4
Private Equity Credit
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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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Introduction to the City of Bayonne
§ Future port development projects include a 50 foot deepening at Port Jersey, a multi-million container terminal expansion by GCT at Port Jersey, the development by PANYNJ of a container terminal at the Peninsula, and the development of the Greenville rail yard
§ Capital investments in the port area between 2012 and 2017 are expected to create an additional 41,300 total jobs across the region, more than $2 billion in personal income and more than $4.4 billion in business income
Port Activity and Development Should Provide Employment and Economic Stability
§ The Bayonne Medical Center is one of the largest employers in Bayonne, employing over 1,800 people § The Central Business District is the primary retail area of the City and includes over 270 businesses located
directly on Broadway § In September 2002 the City was designated an Urban Enterprise Zone, offering participating businesses
many incentives to encourage business growth and stimulate local economies
Stable Central Business District in Bayonne Anchored by a Large Medical Center
§ Manufacturing and distribution have historically been the largest contributor to the Bayonne economy § A number of large manufacturers and distributors are located in Bayonne, including Haddad and Jerhel - The development plans for Bayonne’s ports and railways will only increase the number of manufacturers
and distributors
Manufacturing and Distribution Still Remain Key Industries with Healthy Prospects for Growth
§ The median household income in Bayonne has historically been higher than the national median - The 2010 median household income for Bayonne was approximately 12% higher than the national median
Median Household Incomes Are Much Higher than National Averages
§ Located across the bay from New York City, Bayonne is situated to benefit from the strength of New York’s economy - Because of its convenient location, many workers commute daily to New York and surrounding area
§ The Bayonne Bridge is an important connection between Staten Island and the commercial and industrial districts in Bayonne
Proximity to New York will Ensure Long Term Viability
§ The City lies at the heart of the Port of New York and New Jersey, east of Newark, and shares a land border with Jersey City to the north - Newark is the largest city in New Jersey and one of the nation's major air, shipping, and rail hubs - Jersey City is an important transportation terminus and distribution and manufacturing center for the Port
of New York and New Jersey
Economies of Neighboring Counties and Communities Remain Strong
Key Economic Themes
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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
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NJDWSC Aqueduct
Reservoir
3 Belleville
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Kearny Pipeline
4 Kearny Water Distribution System
5 City of Bayonne
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Authority Aqueduct
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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
True-up
Mechanism
Development
Defined Revenue Requirement
Actual Revenue
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 3.58 3.393.50
5.53
4.88 4.73
5.31
$0
$2
$3
$5
$6
$8
Bayonne Ramsey Jersey City Mahwah North Hudson
Rat
es ($
/ 10
0 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 Ave
rage
Ann
ual E
xpen
ditu
re
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.
Ann
ual 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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What does the “fiscal cliff” mean to local government?
“If the fiscal cliff that the Federal Government faces is to be avoided, there is a potential point of compromise that could fundamentally change the relationship between the public and private sectors in the water industry. The House GOP has expressed its openness to creating new revenue for the government, but not by hiking tax rates on the highest earners, which is the president’s desire. The two sides have discussed reducing certain tax incentives, among them the tax-free status of interest paid to those who invest in municipal bonds … If the Bayonne model takes off, it could create a safety net for municipalities with few options left in a muni bond market stripped of its prized tax-free status.”
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Chosen by the CLINTON GLOBAL INITIATIVE as an “innova9ve 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 drama+c improvement in service and customer value in the 3 most recent years” Launch Solution Video