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U.S. Water Related PPP ProjectsRisks, misconceptions, benefits, project types and structures, case studies, and pipeline

March 2017John Medina, Vice President - Senior Analyst

2U.S. Water Related PPP Projects March 2017

Agenda1. U.S. Water and Wastewater Market

2. U.S. Water Infrastructure Financing

3. Water Related PPP Projects: Diverse project types and procurement methods

4. Water Project Risks and PPP Misconceptions, Myths and Benefits

5. Conditions are ripe for Water PPPs in the U.S.

6. Water PPP Case Studies

7. Water PPP Project Pipeline

8. Moody’s rating approach depends on the project’s ownership, regulatory regime, and structure

9. Appendix: Moody’s Involvement in the PPP Market Globally and in the U.S.


U.S. Water and Wastewater Market: Decentralized, Underinvested, and Growing Funding Gap1


U.S. Water and Wastewater Systems» 54,000 drinking water systems

– 1,000,000+ miles of water mains» About 60% of mains are ferrous; PVC is about 40% of new construction

– Chronic leaks in small diameter service lines are the villains» Large water main breaks, very noticeable and quickly repaired, contribute

1% of total water loss

» 10-20% water loss from leakage is common

» 19,500 sanitary sewer systems– 600,000 miles of sewer pipe

» 30,000 pressurized force mains

– House or service “laterals” (building to street) can contribute up to 70-80% of sewer infiltration» Manholes can contribute 30-50% particularly in wet weather

» Drinking water distribution systems regulated by the EPA– EPA categorizes U.S. water systems by size, in order to appropriate

funding» Small water systems are given special consideration because smaller

customer base could mean greater difficulty paying for system improvements

Source: Environmental Protection Agency


Funding Gap Growing as Funding Options Increase» EPA ‘funding gap’ for 2000-2019 to remedy deferred maintenance and replacement

– $263 billon for drinking water

– $270 billon for waste water

» ASCE report as of 2014 – U.S. Water Infrastructure has a “D” grade– U.S. Systems are experiencing their first major renewal cycle in many areas

– Between 2009 and 2014, state and local governments decreased capital spending for both drinking water and wastewater by 22% while federal capital spending did not change significantly

» Water/Wastewater Infrastructure benefits from government funding programs– Established: State Revolving Funds, Municipal Tax Exempt Bonds, Private Activity Bonds (PABs)

– New: WIFIA - Developing lending standards and likely to be similar to TIFIA but remains to be seen as details are being worked out

» Private Investor interest is strong for long-dated inflation linked essential assets like those for water and waste water systems


U.S. Water and Wastewater Infrastructure Financing2


Many Low Cost Financing Options Available in U.S.» Tax Exempt Bonds (Municipally Owned Utilities)

– $276 billion in water and sewer municipal revenue bonds outstanding, Source: Bloomberg

– $51.1 billion issued in 2016 compared to $40.3 billion issued in 2015, Source: Bond Buyer

» Taxable Debt, Bank loans and Equity (Investor Owned Regulated Utilities)– US$55 billion of total rated debt in 2015 for publicly-rated regulated water utilities (including their

fully-guaranteed finance subsidiaries) Source: Regulated Water Utilities Rating Methodology

» State Revolving Funds – $32 billion of Moody’s rated SRF bonds are outstanding, supported by about $53 billion in loans

– Clean Water Act» 2016 Total Annual Federal Grants: $4,447,645,287, Source: Environmental Protection Agency

– Safe Drinking Water Act» 2016 Total Annual Federal Grants: $800,653,275, Source: Environmental Protection Agency

» Private Activity Bonds (PABs)– Limited allocation per state and key for future PPPs in the U.S., similar to transportation

» Water Infrastructure Finance and Innovation Act (WIFIA)– NEW and has yet to lend to date as it establishes its lending criteria

– All systems are eligible for WIFIA (corporations, CWSRF and SDWSRF programs, etc.)


WIFIA: Water, Infrastructure Finance & Innovation Act

» WIFIA can fund a maximum of 49% of eligible project costs– SRF loans can be used for the remaining 51%

» Eligible borrowers– Local, state, tribal and federal government entities

– Partnerships and joint ventures

– Corporations and trusts

– Clean Water and Drinking Water SRF programs

» Eligible projects– Wastewater conveyance and treatment eligible for the Clean Water SRF

– Drinking water treatment and distribution projects eligible for the Drinking Water SRF

– Enhanced energy efficiency projects at drinking water and wastewater facilities

– Desalination, aquifer, recharge and water recycling projects

– Acquisition of integral property to a project or property that will mitigate the project’s environmental impact

– Combination of projects secured by a common security pledge or submitted under one application by an SRF program

WIFIA may be the catalyst for Water PPPs like TIFIA was initially for Transport PPPs

Source: Environmental Protection Agency


U.S. Alternative Water Financings: Unique and bespoke

Source: UNC Environmental Finance Center, The Financial Impacts of Alternative Water Project Delivery Models

» Debt issued by a conduit public issuer, the utility, private sector, or special vehicle

» Tax-exempt, taxable private placement, SRF loans and/or private equity funding

» Goal of those with upfront concession payments is to monetize the value of the system and use these funds for other government purposes or for the system itself while others provide “cost savings” over the contract term


Municipal Water Acquisitions by IOUs are NOT PPPs

» Muni needs capital: City of Scranton, PA (unrated)– Sewer Authority

» $23 million in Revenue and $75 million in Net PP&E

» $140 million of EPA mandated system upgrades

– City had significant underfunded pension obligations driving interest in monetizing assets to improve pension funding and reduce budgetary pressure

» IOU has capital: Pennsylvania American Water (A3 stable)– $620 million in annual Revenue and $3.6 billion in Net PP&E

– Over $300 million per year in Capex

» Pennsylvania has two important features that make acquisitions attractive to IOUs– Fair Value legislation

– Single-tariff rate making

We see the pending American Water Works, Inc. (AWK, A3 stable) acquisition of Scranton Sewer Authority as a possible template for future deals.


Water Related PPP Projects: Diverse project types and procurement methods3


Range of Project Types: Treatment, Desalination, Upgrades

» Water Treatment– Wyuna Water Pty Limited (Sydney, AUS) (A2)

» Water Supply– San Antonio Water Vista Ridge Project (Treatment

plant and pipeline)

» Desalination– Poseidon Resources (Channelside) LP (California)

(Baa3)

» Wastewater– Stirling Water Seafield Finance Plc (Scotland) (Baa1)

– City of Gresham (OR) partnership with Veolia Water North America

» Stormwater system upgrades– Nassau County, NY partnership with United Water

– Prince George’s County (MD) partnership with Corvias Solutions

» PPP projects can be specific to one “node” or for the entire system

» Not included: – Flood mitigation

– Climate change resiliency


PPP parties involved in typical transaction

Construction Contactor

Sponsor or Private

Developer

Project Company and

Borrower

DebtEquityLenders

Operating & Maintenance

Provider

Public Sector Utility or Offtaker

OperatingContract

ConstructionContract

Project or Concession Agreement

Demand Risk PPP: user fees from

patrons still pass through utility

Availability PPP: availability

payments from offtaker

Advisors


PPP parties involved in typical transaction

» Public Sector Utility or Governmental Entity or “Offtaker” is central to all PPPs and retains asset ownership over the term of the Project

» Project Company – Special Purpose Vehicle created for the project and is the borrower of the debt

» Equity Sponsors

– Private infrastructure developer funded by private investors including large institutional investors like pension funds and insurance companies

– Primary Construction contractor and Operator generally have some equity stake

» Operating, Maintenance and Lifecycle/Rehabilitation Provider

» Construction Contractor – Design Build Joint Venture

» Lenders – Debt investors, letter of credit and hedge providers

» Advisors – Legal, Technical, Insurance, and other specialists as needed


Participants Motivations to enter into a PPP differ

Participant Primary MotivationsPublic Offtaker • Leverage public funding to meet public commitments

• Resolve network issues (i.e. congestion, safety, reliability, etc.)• Enhance quality of public services• Transfer financial and technical risks to private sector

Equity Investors / Sponsor / Project Company (SPV)

• Long-term stable source of revenue• Diversify investment portfolio• Enter new markets or jurisdictions

Lenders or Bondholders • Long-term source of interest “spread” from creditworthy loan• Earn up-front financing fees• Enhance relationships with public authorities/ clients, equity

investors, etc.

Design Build Contractors • Increased risk = increased profitability• Competing against fewer bidders (typically 3 bidders in RFP Stage)• Competing against companies with similar profit metrics

Operators / Service Providers • Long-term contract with similar risks to those currently managed• Flexibility to increase profit through life-cycle efficiencies

Source: Graham Gracorp Advisors, Intro to PPP.

Public Offtaker benefits from the private sector’s long-term full life of asset evaluation up front which minimizes total costs and maximizes project efficiencies


What is the government’s or utility’s role in a PPP?Decide if a PPP procurement is a good option for a specific project

» Define which projects are a priority, for what reasons and under what specifications

» Define which project can benefit from a PPP procurement process and why

» Perform value for money or cost/benefit analysis to compare traditional procurement placing monetary value on risk transferred to the private sector (i.e. high value of risk transfer for complex projects)

» Determine an affordability threshold and the cost and time associated with the PPP procurement process compared to the forecast benefits gained by using a PPP

Once a PPP is chosen, the government or public utility offtaker will…

» Negotiate risk sharing in the Project Agreement with private developer

» Work with the preferred proponent during development – right-of-way, permits, approvals

» Accept the project if substantial completion requirements are meet

» Monitor operating performance and apply deductions and service failure points if performance standards are not meet

» Appropriate funds to pay annual availability payments and any payments during construction or at substantial completion


Structure of PPP determines Rating Methodology used» Availability Payment PPP

– Once construction is completed, the private developer is entitled to payments from the government, as long as contract conditions are fulfilled. Availability payments are sized to cover operating and maintenance costs, debt service costs and equity returns as the private entity operates the project. Availability payments are not subject to swings in demand, such as traffic levels, and are adjusted typically only for lack of performance or lack of availability of the asset to the public.

– The availability- payment PPP is prevalent in the UK (Aa1 negative), for example, where they are also called private finance initiatives, or PFIs; in Canada (Aaa stable); in Australia (Aaa stable); in France (Aa2 stable); in the Netherlands (Aaa stable); and in Portugal (Ba1 stable).

» Demand Risk PPP– Demand risk PPPs, or concessions, have a long history of public-private financing and have been used in a number

of European countries and in Latin America, particularly for toll roads. Under a concession or demand risk PPP, the project is largely financed by user fees, and the government takes on no or only limited demand risk. The government can limit the range of future user rate increases under the contract.

– This model is often applied for toll roads, public transport, water, gas and electricity PPPs.

» Hybrid PPP– PPP arrangements can have characteristics of both an availability-payment and a demand risk PPP, exposing the

government to a variety of potential liabilities: » (1) explicit obligations such as availability payments;

» (2) contingent obligations such as financial guarantees, termination payments, subsidies if demand falls under certain thresholds; and

» (3) more remote contingent obligations, such as the risk of contract renegotiations or takeover of the project in case of default of the special purpose entity.


Wide range of PPP Procurement Models used to date» Water/Wastewater sectors lend themselves well to all forms of PPP procurements given

the asset has a defined revenue stream that can be assigned over to the private sector or retained by the public sector, or some combination of both.

» Separate parts of the system or the entire system can be included/excluded from scope

» Performance Based operating contracts are NOT PPPs, but are rather a contracted way to work “in partnership” with the private sector.

Availability Payment PPP

» Regina Wastewater Treatment Plant (Canada)– City of Regina partnering with

EPCOR Saskatchewan Water Partners

– Dec. 19, 2016 reached substantial completion on time and on budget

– Meets environmental regulations

– New wet weather flow storage system to accommodate extreme storm flows, returning the flow to the beginning of the process for treatment when the storm subsides

– Source: EPCOR and Infra Deals

Demand Risk & Hybrid PPPs

» Poseidon Resources (Channelside) LP (Baa3, stable)– Availability-like payments come

from Water Purchase Agreement with San Diego County Water Authority (SDCWA, Aa2, stable)

– Similar to power projects with fixed minimum capacity payments and variable operating payments related to volumes

» Wyuna Water Pty Limited (A2, stable)– Revenue stream of availability like

tariffs paid by Sydney Water

Performance based contracts (Not PPPs)

» Nassau County and United Water– Wastewater management

» City of Gresham and Veolia– Wastewater management

» Prince George County and Corvias– Stormwater management

Moody’s – US Public Private Partnerships 19

Generic Project Finance Methodology: Hybrid PPPsFactor 1: Long Term Commercial Viability & Competitive Position

Factor 2: Stability of Net Cash Flows:

2a) Predictability of Net Cash Flows

2b) Technology & Operating Risk

Factor 3: Exposure to Event Risk

Fundamental Project Risk:

Four Risk “buckets”

- Aaa-A: Low

- Baa: Medium-Low

- Ba: Medium-High

- B-Ca: High

Determines Weight of & Thresholds to Use for Financial Metrics

- Amortizing debt

- Non-amortizing debt

Scoring Represents “Steady State Operational Risk Profile”.

Notching and other considerations:

- Construction Risk

- Liquidity

- Project Finance Features

- Refinancing Risk

- Other


Water Project Risks andPPP Misconceptions, Myths and Benefits4


Key Risks of Water Related PPP Projects» Regulatory Changes and Environmental Compliance Risks

– Highly regulated sector and projects must satisfy constantly evolving environmental regulations and multiple levels of government

» Risk allocation – What if contaminated water or other issues occur?

– Natural events like earthquakes and floods that disperse contaminated water, key permit delays, etc.

» Contractual volume and price risks– What is the project’s exposure to variations in volumes and demand? Can project recover costs?

» Capital Intensive projects require ongoing reinvestment to maintain performance

» Influent and Effluent Quality– Municipal utilities may have higher than usual performance standards and older systems

– What if parameters governing the quality are exceeded? (i.e. heavy rain that congests the whole system over and above the design intake)


Key Risks of Water Related PPP Projects

Assumed Infrastructure

» Latent Defects– Phasing and execution risk increases if brownfield asset is assumed that needs to be upgraded

while operations continue.

» Staff relationship management– Assuming existing employees who may be unionized or have a defined benefit pension plan

– Managing implementation of transition and any optimization strategies

New Build

» New Technology

» Construction Risk – geotechnical, performance standards, schedule/price risks

» Commissioning and start-up risks

» Operating risks of meeting key performance indicators

» Disposal Method & Discharge Approval


PPP Misconceptions and Myths

» Selling public assets to private owners– Public retains ownership and receives asset at end of contract term

» Giving the private sector full control over future water rate increases– Contract typically limits future water rate increases by a specified formula

» Service will decline as private sector seeks to maximize profits and spend less– Contract specifies service level and asset condition requirements or deductions will be applied and

if bad performance continues contract can be terminated

» PPPs are just another form of financing– PPPs are a procurement method that includes some financing as a tool to transfer risk and hold

the private sector accountable. Capital cost is a very small part of deciding to use a PPP or not.

While experience is growing, misconceptions persist especially as PPPs are used in new asset classes and in new regions


PPP Misconceptions and Myths

» Free money in the form of “off balance” sheet financing– PPPs are not free money but the accounting for the obligation to a single offtaker may or not be on

the balance sheet, but it is part of our credit analysis of the offtaker’s credit profile

» Private sector will take all risks for a PPP project – Risk allocation is fundamental to all PPPs where risks are identified and allocated to the party best

able to manage the risk up front along with procedures to handle unidentified issues that may arise

» Once a PPP procurement begins it will be completed– Political risk has resulted in cancelled PPP procurements at various stages

While experience is growing, misconceptions persist especially as PPPs are used in new asset classes and in new regions


PPP Potential Benefits

» Risk Transfer and Risk Sharing– Key risks allocated to the party best able to manage them upfront

– Construction cost overruns and completion, commissioning and operating performance, etc. transferred under fixed price, date certain contracts with guarantees and performance security

» Long-term evaluation of total life of asset costs can lower total project costs– KEY BENEFIT – Private partner provides a full of life asset evaluation when bidding on the PPP.

This may result in efficiencies that lower total project costs, inclusive of construction, maintenance and lifecycle/rehabilitation. (i.e. alter design or materials in order to lower maintenance costs)

» Private Sector Expertise– Private partners incentivized to provide operating efficiencies and use innovative technology

» Accelerated Project Delivery– Some complex projects can be completed faster than if privately funded all at once now versus

completed incrementally over time by the public sector.

Demonstrated PPP benefits in other markets and sectors


PPP Potential Benefits

» No Deferred Maintenance – Contract requires ongoing asset investment funded from project revenues so the utility is unable to

reduce maintenance during times of austerity

» Specified asset performance over life of contract– Contract requires performance standards that must be met or deductions applied

» Asset returned to utility/government owner in specified condition– Asset must be returned to the public owner at the end of the term

» Increases government’s ability to take on multiple projects at any given time– Government resources can span a greater number of projects with the involvement of the private

sector as government oversees development of projects versus directly completing them all

Demonstrated PPP benefits in other markets and sectors


Conditions are ripe for Water PPPs5


Conditions are Ripe for Water PPPs in the U.S., but likely to remain a small share of total investment» Aging systems need renewal and upgrades due to historical underinvestment that

has increased the project backlog.

» Funding gap grows as investment has declined in recent years.

» Complex projects increase value of risk transfer– PPP procurement model works well for projects with high complexity where local authority lacks

technological expertise and can maximize value of private sector expertise

» Lack of local government expertise with PPPs – Limited experience of local government offtakers with the PPP procurement model and regulations

present unique challenges. International construction companies bring PPP experience to the U.S. and share this knowledge with local construction firm project partners and public offtakers.


Conditions are Ripe for Water PPPs in the U.S., but likely to remain a small share of total investment

» Regional needs drive need for more partnership oriented solutions

» Monetization of existing assets to fund system upgrades or some other government need (i.e. pension liabilities)

» Growing political support for PPPs and alternative procurements as well as increasing appreciation for full of life asset cost assessments

» Historical unwillingness to raise water rates for capital investment is key obstacle


Water PPP Case Studies6


San Antonio Water Vista Ridge Project» Project

– Production, treatment, delivery and sale to San Antonio Water System (SAWS), the city's public water utility, of up to 50,000 acre-feet of drinking water each year for 30 years

– Where is the need?» Compliance with environmental regulations protecting the Edwards Aquifer and its endangered species

» Protecting rate payers against reliance on Edwards Aquifer, which is prone to droughts

– Benefit to the private partnership» Ratepayers will only pay for delivered water, equity investor will take on all risk of undelivered water

Source: San Antonio Water System

» Obstacle– Fall 2015

» Seville-based Albengoa S.A. (holding company of Abengoa Vista Ridge) began early stages of bankruptcy proceedings, threatening the project

» Solution– March 2016: Change of course

» Kansas City-based Garney Construction bought 80% of the project along with all decision making authority

» Financial close: Nov. 6, 2016 in the short term bank market

» Continuing concerns– Garney Construction is a smaller firm, less experienced with the complex financing aspect of a PPP than AlbengoaSource: Texas Tribune: Deal Struck to Move Forward with Pipeline


Project Finance and PPP ProjectsPoseidon Resources (Channelside) LP (California, USA) (Baa3, stable)

» Rated under the Generic Project Finance Methodology

» California prone to drought – the plant will provide 8-10% of SDCWA’s water supply by 2020

» Key drivers of the Baa3 rating– Predictable contracted cashflows under 30-year (+3 year extension option) Water Purchase

Agreement and strategic importance of project to San Diego County Water Authority (SDCWA, Aa2)

– Typical project finance features benefit bondholders such as a 12 months debt service reserve fund for both the plant and pipeline bonds, restrictions to dividends and additional debt, and reserve requirements

– While the project began commercial operations in December of 2015, the rating is constrained by the risks associated with further construction and transition

» Recent Developments– The plant currently uses the infrastructure of the adjacent Encina power station for seawater intake

– Encina is scheduled to be shut down and depending on the shut down date Poseidon will have 12 additional months to use the system, this will be at least until the end of 2018

– Poseidon will have to build its own stand-alone seawater intake system, which Poseidon will finance with new debt of approximately $37.5 million

Source: Moody’s Investors Service


Project Finance and PPP ProjectsWyuna Water Pty Limited (Sydney, AUS) (A2, stable)

» Rated under the Generic Project Finance Methodology

» Special Purpose Vehicle owned jointly by IFM Investors (70%) and Veolia (30%)

Key drivers of the A2 rating

» Predictable cash flows derived from availability-based tariffs from Sydney Water, under Water Filtration Agreement for two water treatment plants

» Strong operating track record of water to over 500,000 people since the mid-1990’s

» Robust financial profile expected to strengthen following recent extension of the Water Filtration Agreement by 15 years to 2036 that was initially 25 years so 40 years totalSource: Veolia and Moody’s Investors Service

Tampa Bay Seawater Desalination Plant

» Facility owned by Tampa Bay Water, operated by American Water and Acciona

» Provides up to 25 million gallons per day of drinking water to the region

» Supplies water to Hillsborough County, Pasco County, Pinellas County, New Port Richey, St. Petersburg and TampaSource: Tampa Bay Water


Project Finance and PPP ProjectsStirling Water Seafield Finance Plc (Scotland) (Baa1, Stable)

» Rated under the Operational Privately Financed Public Infrastructure (PFI/PPP/P3) Projects Methodology

» Wastewater treatment works at 6 sites, completed in 2001 and runs until 2029

» Suffered significant operating issues culminating in Scottish Water serving a Default and Defects Notice on ProjectCo in July 2007 that was withdrawn in January 2013 after improvements were completed.

Key drivers of the Baa1 rating

» Predictable cashflows from concession with Scottish Water

» Stable earnings reflect limited volume risk and consistent sound operating performance

» Strong experience and capability of the operator Veolia Water Outsourcing Limited

» Project financing structural features including a reserves, distribution tests, debt limits

» Highly leveraged project reduces ability to withstand unexpected stress

» Asset hand back requirements at the end of the concession may prove challenging


Project Finance and PPP ProjectsStirling Water Seafield Finance Plc (Scotland) (Baa1, Stable)

» Typical cash flow profile during operations for Availability Payment PPP


Performance based contracts are not PPPs

» Nassau County (NY) partnership with United Water – 20-year agreement for United Water to operate and maintain the County’s three sewage treatment

plants and sewer system

– Sewage system serves 1.2 million people on Long IslandSource: Business Wire

» City of Gresham (OR) partnership with Veolia Water North America – Management and operations of its wastewater treatment plant

– One of a few Energy Net-Zero plants in the U.S. which means the plant now produces more energy than it uses

– Service population of approximately 114,000Source: Environmental Protection Agency


U.S. Water Related Project Financings

Source: UNC Environmental Finance Center Report The Financial Impacts of Alternative Water Project Delivery Models


U.S. Water Related Project Financings



U.S. and Canada Water Related Project Financings



Water PPP Project Pipeline7


PPP Project Pipeline: Several in California California market ready for water PPPsSource: Infra Americas

» Doheny Desalination Plant – $90+ million plant to provide approximately 15 million gallons of drinking water for south Orange

County

– Project expected to be completed by 2018

» Huntington Beach Desalination Plant– Build and operate a seawater desalination facility capable of processing 50 million gallons per day

– Brookfield Infrastructure Fund III

» Santa Clara Expedited Purified Water PPP – $950 million project could provide up to 45,000 acre-feet per year of purified water for indirect and/or

direct potable reuse to supplement existing water supply

– Expansion of the Silicon Valley Advanced Water Purification Center and the development of the Mid-Basin and Westside injection wells

» Los Angeles Satellite Water Reclamation Facility– The City of Los Angeles’ Bureau of Sanitation (LASAN) expects to issue an RFP for a satellite water

reclamation facility (WRF) PPP before summer 2017 Source: Infra Deals


PPP Project Pipeline: Other Privately Financed Projects

» Fargo-Moorhead Area Flood Diversion Project – Will establish permanent flood protection measures for the region

– 30 miles of channels, two aqueducts, two river inlets, four railroad bridges, four interstate highway bridges and 10 county road bridges and the channel outfall

– Procurement late summer into fall with preferred proponent to be identified in fall 2017

» Miami-Dade Water Distribution System Storage Tank & Main replacements– Installation of a new 2.5 MG storage tank

– Replacement and renewal of treatment plant facilities, water and sewer pipelines, and pumps

» Aquarion Water Sale (not a PPP but a private-to-private asset sale)– Macquarie Infrastructure Partners (MIP) looking to sell its 55% stake in the Aquarion Water Company

Source: Infra Deals


Moody’s rating approach depends on the project’s ownership, regulatory regime, and structure8


Regulated Water Utilities: Definition of the Rated Universe

» Principal line of business: provision of regulated water and wastewater services

» Also captures pure wholesalers or single asset providers, where revenues are earned under regulated licensing, concession or similar arrangement

» Assets may be owned outright or operated under terms of licence or concession

Source: Genesis Water Technology


Regulated Water Utilities: Global Rated Universe» 34 corporate families captured under the global rating methodology

– Inclusion of concession-based water activities of multi-utilities in France and Italy, but other methodologies also applied for non-water activities

– Around $55 billion (USD) of rated debt, excluding multi-utility issuance

– Global reach, but majority of rated debt issued in the UK

UK86%

US8%

Asia4%

Australia0%

Brazil1%

Italy0%

Spain1%

0

2

4

6

8

10

12

14

Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba2 Ba3 B1Rated Universe data as of Dec. 2015


Regulated Water Utilities: Methodology Scorecard

Source: Regulated Water Utilities Methodology

Overall rating can be a combination of low business risk and high leverage or vice versa.


Regulated Water Utilities: Examples in the U.S.» Sizeable, geographically diverse operations across the U.S.

» American Water Works Company, Inc. (A3 stable)– Largest investor-owned provider of water, wastewater and related services in North America

– Serves an estimated 15 million people in the U.S. and Canada

– Pennsylvania-American Water Company (A3 stable)» Subsidiary of American Water Works Company operating across Pennsylvania

– New Jersey-American Water Company (A3 stable)» Subsidiary of American Water Works Company

» Aquarion Company (Baa3 stable)– Owns holding company Aquarion Water Company with three regulated water utilities in

Connecticut, Massachusetts and New Hampshire

– Aquarion Water Company of Connecticut (Baa1 stable)» Largest utility subsidiary of Aquarion Water Company, primarily in areas of western Connecticut

» Serves approximately 196,000 customers

» Golden State Water Company (A2 stable)– Subsidiary of American States Water Company operating in Southern California

– Serves approximately 261,000 water customers


U.S. Water is the Most Capital Intensive Utility Sector» Future investment is significant

– Very old infrastructure at high replacement costs

– Acceleration of replacement

» Moody’s observations from rated U.S. IOUs:– 3-year capital plans, on average, are approximately 25% of utility current Net PP&E

– Estimated to be approximately 35% of current Rate Base

– Financing 5-7% of existing capital each year

Source: Moody’s Investors Service

0%

50%

100%

150%

200%

250%

300%

US Water UK Water Elec. Integ. Elec. T&D Gas LDC

Utility Sector Capex / Depreciation 5-Year Averages

Municipal Water Utilities: Water & Sewer Rating Distribution

» Moody’s maintains approximately 1,120 municipal utility ratings

» Ratings range from Aaa to Caa3, with a median rating of Aa3

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca

Moody's General Obligation Bond Ratings

0.0%

10.0%

20.0%

30.0%

40.0%

Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca

Moody's Water/Sewer Revenue Bond Ratings

Water Enterprises Sewer Enterprises Combined Enterprises

49


Municipal Water Utilities: Relationship with the Government’s General Obligation Rating

» A municipal utility’s credit quality is related to the strength of its associated local government entity.

» Examples of credit linkages include:

» Economy: Coterminous or overlapping economic base and service area

» Finances: Cash can often flow between the two entities

» Debt: Revenues to support GO and utility paid by the same group of constituents

» Management and Governance: Management teams may be the same or have close ties

» Capital Markets: GO and utility need to access the same capital markets for funding

» Rating levels are usually similar (within 2 notches) due to these linkages


Municipal Water Utilities: Methodology Scorecard

Source: US Municipal Utilities Revenue Debt Methodology


Municipal Water Utilities: Recent Examples of Default

When and Why?

» Jefferson County (AL) Sewer

» Default date: 4/1/2008; Current rating: WR

• Highly over leveraged with complex derivative structure

• Weak fiscal and debt management

• Unwillingness to implement timely needed rate increases

» Oakdale (CA) Sewer

• Default date: 8/31/12; Current rating: WR

• Lack of fiscal controls

• Weak debt management


State Revolving Funds: Ratings and Methodology

» SRFs are a key funding source for U.S. water utilities

» Moody’s rates almost all traditional SRF programs Aaa and one is rated Aa1

» Top 5 borrowers in each state tend to be the largest water systems

» Smaller water systems tend to be unrated and some are of weaker credit quality given their scale, but not necessarily as some have strong and wealthy economic bases

Source: Rating Methodology U.S. State Revolving Fund Debt

Rating Factors Factor Weighting Scorecard SubfactorPortfolio Credit Quality and Default Tolerance Score 50%

Size of Portfolio

Percentage of borrow ers w ith less than 1% of the portfolioPercentage of loans to the top f ive borrow s

Debt Structure

Investments

Cash f low s

Governance and Management 15%

Total 100%

Portfolio Size and Diversity 15%

Debt Structure, Investments, and Cash Flow s 20%


Appendix: Moody’s Involvement in the PPP Market Globally and in the U.S. 9


Moody’s Investors Service

CyprusCzech Rep.

Egypt*France

GermanySouth Africa

Spain

UAEUK

Israel*

ItalyPolandRussia*

United StatesCanada

ArgentinaBrazil

MexicoPeru*

AustraliaChina*

Hong KongIndia*

JapanKorea*

Singapore

Americas Offices EMEA Offices Asia-Pac Offices

*Countries where the affiliates of Moody’s Investors Service are located.

Our depth of institutional knowledge covers virtually any industry everywhere in the world

Our deep sector knowledge and industry benchmarking form key aspects of our rating analysis


Leading Global Infrastructure Franchise

Sources: Moody’s as of December 2015

Sector distribution by count

Over US$2.6 trillion of rated corporate infrastructure securities, including project finance entities

Regional distribution by volume


Unparalleled Analytical Capabilities 140+ Analysts Globally

EMEA

5 Senior management staff

44 Analytical staff

» 407 issuers covered

» 14 languages spoken

Asia Pacific


17 Analytical staff

» 175 issuers covered


Americas


64 Analytical staff

» 1,055 issuers covered


Analytical support staff

» Dedicated credit policy officers ensuring global rating consistency

» Dedicated legal and accounting specialists


Transparent Rating ApproachConstruction Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects Jun-16

Regulated Water Utilities Dec-15

Operational Privately Financed Public Infrastructure (PFI/PPP/P3) Projects Mar-15

Privately Managed Airports and Related Issuers Dec-14

Regulated Electric and Gas Networks Nov-14

Unregulated Utilities and Unregulated Power Companies Oct-14

Privately Managed Toll Roads May-14

Regulated Electric and Gas Utilities Dec-13

Privately Managed Port Companies May-13

Power Generation Projects Dec-12

Natural Gas Pipelines Nov-12

Waste-to-Energy Projects Apr-12

Generic Project Finance Methodology Dec-10

13 sector specific global infrastructure methodologies

US Public Power Electric Utilities With Generation Ownership Exposure Dec-15

Publicly Managed Airports and Related Issuers Nov-15

Public Port Revenue Bonds Dec-13

U.S. Electric Generation & Transmission Cooperatives Apr-13

U.S. Municipal Joint Action Agencies Oct-12

Government Owned Toll Roads Oct-12

6 methodologies dedicated to Public Finance infrastructure


A Proactive Opinion Maker in the Infrastructure Sector

587One to one interactions with top 20 IG

corporate bond investorsAEGON USA Investment Management

162Speaking engagements

and 3rd party conferences

87Conference/roundtables/

webcast and teleconferences

AIG Asset Management

AllianceBernstein

BlackRock Advisors

BlackRock Fund Advisors

Fidelity Management & Research Company

Franklin Advisers

Lincoln Financial Group

Lord Abbett & Company

Mason Street Advisors

MetLife Investment Advisors Company

Natixis Asset Management

New York Life Investment Management

Pacific Life Fund Advisors

PIMCO

Prudential Investment Management

T. Rowe Price Associates

The Vanguard Group

TIAA CREF Investment Management

Amsterdam

Frankfurt

Jakarta

Johannesburg

Hong Kong

Lisbon

London

Madrid

Milan

Moscow

New Delhi

New York

Paris

Prague

Riga

Sao Paulo

Singapore

Warsaw

Zurich

Amsterdam

Basel

Beijing

Brussels

Helsinki

Hong Kong

Istanbul

London

Mexico

Moscow

Mumbai

New York

Nice

Paris

Shanghai

Singapore

Sydney

Vilnius

Warsaw


A Proactive Opinion Maker in the Infrastructure Sector

Over 1,600 issuer related reports in 2015 Over 240 industry related reports in 2015

Credit Opinion» Interactive» Updated

regularly» Feeds into

dashboard: This is your “shop window”

Issuer in Depth» Deep Dive» Peer

Comparison» FAQ» Scenario

Analysis

New Issuer Report» On new ratings

Issuer Comment» One-off events» Immediate

response to concerns

» Ratings unaffected, but credit impact likely to be positive or negative

Credit Outlook» Journalistic

commentary

» Monday and Thursday editions

Sector in Depth» Deeper analysis» Flexibility to

choose format

Industry outlook» Global/ regional

sectors» Outlook

Issuer-specific Industry/topic-specific


John MedinaVice President – Senior [email protected]


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