Dan Sugarman Sustainable City Network Webinar


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Dan Sugarman Sustainable City Network Webinar

  1. 1. Water Partnerships Provide Investment Capital and Debt Relief in Bayonne, N.J. Sustainable City Network Dan Sugarman December 11, 20121
  2. 2. SUEZ ENVIRONNEMENT, a Global Leader ! One of the two world leaders ! 2011 revenues: €14.83bn in environment ! 2011 EBITDA: €2.51bn ! Technology and sustainable ! 80,410 employees development focus Water Waste !  1,888 drinking water production units !  Over 400,000 industrial and commercial managed, 91 million people supplied customers !  1,643 wastewater plants managed, !  57 million people benefiting from waste 63 million people served for water services sanitation !  42 million tons of waste treated !  1 billion inhabitants served by water !  47 incinerators worldwide (of which 46 with treatment plants engineered by energy recovery capability) SUEZ Environnement / Degrémont 2
  3. 3. Introduction to United Water andSUEZ 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 servedDeveloping presence§  3 water contracts§  2 solid waste O&M contracts§  200 employees 3
  4. 4. SENA - Organized to Meet U.S. Market Needs Transfer Ownership Lease System for Upfront Payment Design Build Operate OutsourceValue Provided Operations &/or CPM Management Services Asset Packaged &/or Services Capital Tank United Water Improvement Management Delivery Equipment PurchasesDo Nothing Political difficulty 4
  5. 5. 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 ¢  $800 million in revenues 5
  6. 6. Introduction to KKREstablished in 1976, Kohlberg Kravis Roberts & Co. L.P. (“KKR”) is a leading global investment firmwith industry-leading investment experience, in-depth industry knowledge, sophisticated processes forgrowing and improving businesses, and a strong culture committed to teamworkè  Leading investment firm Private Equity, Infrastructure & Natural Resources, Assets Under Management Credit & Mezzanine, Public Equity As of December 31, 2011è  Global presence ($ in billions) Offices in 14 major cities in 9 countries across 4 continentsè  “One-firm” culture that evolves, learns, and innovates Adaptive to change $15.4è  Relationship-driven approach Sourcing investment opportunities Partnering with clients $43.6è  Aligned with our partners “Eat our own cooking” Economic incentives driven by results Private Equity Credit Focused on managing stakeholder interests 6
  7. 7. Introduction to the City of Bayonne City of Bayonne Location §  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 states 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 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 7
  8. 8. Introduction to the City of BayonneKey Economic Themes §  Future port development projects include a 50 foot deepening at Port Jersey, a multi-million container terminalPort Activity and Development expansion by GCT at Port Jersey, the development by PANYNJ of a container terminal at the Peninsula, andShould Provide Employment the development of the Greenville rail yardand Economic Stability §  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 §  The Bayonne Medical Center is one of the largest employers in Bayonne, employing over 1,800 peopleStable Central Business §  The Central Business District is the primary retail area of the City and includes over 270 businesses locatedDistrict in Bayonne Anchored directly on Broadwayby a Large Medical Center §  In September 2002 the City was designated an Urban Enterprise Zone, offering participating businesses many incentives to encourage business growth and stimulate local economiesManufacturing and §  Manufacturing and distribution have historically been the largest contributor to the Bayonne economyDistribution Still Remain Key §  A number of large manufacturers and distributors are located in Bayonne, including Haddad and JerhelIndustries with Healthy -  The development plans for Bayonne’s ports and railways will only increase the number of manufacturersProspects for Growth and distributorsMedian Household Incomes §  The median household income in Bayonne has historically been higher than the national medianAre Much Higher than NationalAverages -  The 2010 median household income for Bayonne was approximately 12% higher than the national median §  Located across the bay from New York City, Bayonne is situated to benefit from the strength of New York’s economyProximity to New York will -  Because of its convenient location, many workers commute daily to New York and surrounding areaEnsure Long Term Viability §  The Bayonne Bridge is an important connection between Staten Island and the commercial and industrial districts in Bayonne §  The City lies at the heart of the Port of New York and New Jersey, east of Newark, and shares a land borderEconomies of Neighboring with Jersey City to the northCounties and Communities -  Newark is the largest city in New Jersey and one of the nations major air, shipping, and rail hubsRemain Strong -  Jersey City is an important transportation terminus and distribution and manufacturing center for the Port of New York and New Jersey 8
  9. 9. Bayonne Municipal Utilities Authority (BMUA)Overview Key Individuals§  The Bayonne Municipal Utilities Authority was created by Individual Position virtue of an ordinance adopted October 9, 1997 by the City Council and the City of Bayonne Sam Maggio Chairman§  It is a public body, corporate and politic, organized under Olivia Klim Treasurer the State of New Jersey Father John Fencik Secretary§  Authority was created for the purpose of acquiring, Hon. Gary La Pelusa, Sr. Commissioner constructing, maintaining and operating facilities for the Thomas Jacobson Commissioner treatment, purification and disposal of sewage and other wastes originating in the City of Bayonne Hon. Debra Czerwienski Commissioner§  The Authority is also responsible for operating, Michael Furmaniak (Resigned) Alternate maintaining and managing the City’s water system [Open] Alternate§  Prior to the creation of the Authority, the City operated Stephen Gallo Executive Director the system as a combined utility within the City’s budget Joseph Nichols General Counsel§  The Authority’s governing body consists of five members, and two alternates, appointed by the Major of McManimon, Scotland & Baumann Bond Counsel the City Bank of New York Mellon Trustee -  Members are appointed for a term of 5 years Rate History (per 100CF)Key Statistics Year Water Rate(1) Sewer RateDescription Amount 2011 4.29 3.50Number of Employees 33 2006 2.45 2.90Number of Service Connections ~12,000 2005 2.21 2.06Daily Average Flow (Millions of Gallons) 8.5 2004 2.21 2.06Maximum Daily Capacity (Millions of Gallons) 17.6 2003 1.85 2.00(1) Rate for the first 110 CF per quarter 9
  10. 10. System Overview Water System Overview Description Location §  The BMUA owns and operates a water 1 Reservoir transmission aqueduct and distribution system that serves the City 2 §  The aqueduct transfers water from the North Jersey District Water Supply Commission’s (“NJDWSC”) Wanaque and Monksville reservoirs, both of which are located in NJDWSC Aqueduct Passaic County Kearny Pipeline §  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 3 4 §  The distribution system exceeds 96 miles of Authority mains including valves, fire hydrants and Aqueduct other appurtenances §  It is purely a distribution and metering system, with no pumping, storage or 5 treatment required under the Contract 1 Monksville Reservoir 4 Kearny Water Distribution System 2 Wanaque Reservoir 5 City of Bayonne 3 Belleville 10
  11. 11. System Overview Wastewater System Overview Description Location§  The Citys 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 PVSC -  The Contract does not call for the treatment of Facility this sewage, as this remains as a responsibility of the PVSC Force Main§  Total system capacity is 17.6 MGD, which is the 2 maximum amount of flow that can be transmitted to PVSC for treatment due to hydraulic capacity of the force main 1 -  The wastewater pumps have the capacity to 1 City of Bayonne pump up to 40MGD during wet weather events 2 PVSC Water Pollution Control Facility (Newark) -  The average daily flow-Dry Weather Flow pumped to PVSC for treatment is approximately 8.3 MGD 11
  12. 12. Bayonne MUA Challenges & Objectiveso  Deeply Leveraged, i.e. Beyond ¢  Guaranteed capital improvements Underlying Value of Assets and recovery from years of deferred investmento  History of Deferred Investment in System Assets ¢  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 freeo  Credit Quality Problems ¢  Long-term rate predictability o  Beyond Water and o  Wastewater System ¢  Qualified staff, bench strength, and o  Funding Requirements training programso  Difficulty Attracting & Retaining ¢  Triple bottom line approach to Qualified Staff managing utility 12
  13. 13. Choosing a Contract Model toMeet the BMUA’s ObjectivesYou want world-class know-howprovided in an integrated manner Specialized Servicesto solve your operational needsYou want to keep responsibilityfor operation AND benefit from Management Contractexpertise of the private sectorYou want to share responsibilityfor managing your utility and paya fixed fee, combined with an Alliance Partneringincentive for performance ContractYou want to delegate fullresponsibility for operation O&M Outsourcing ContractYou want reliable operationcoupled with funding of futurecapital needs & refinancing of United Water’s SolutionCity’s debt to improve credit 13
  14. 14. Our Solution is an innovationin the water sector. 14
  15. 15. BMUA Transaction OverviewOrganizational Structure – 4 Key Agreements are Foundation of Transaction Bayonne Municipal Utilities Authority NJDWSC (Water Direct Agreement Supply) 1. BMUA Upfront Payment AgreementSenior Secured Notes due PVSC (Wastewater 2037 Treatment) 3.NPA* Bayonne Water Joint Venture, LLC 4. Joint Venture Agreement Revolving Credit Facility (2) Bayonne Energy Center Supply 2. O&M O&M Fee Equity Agreement Utilities (Wind Turbine United Water Operations Contracts, O&M) Consortium Inc Pass Through Contracts*Note Purchase Agreement Capital Projects (asrequiring 3rd Party Due Diligence required)to support Debt Rating 15
  16. 16. BMUA Agreement:Revenue Requirement Overview §  ~3.50% from 2015 -2021 §  3.75% per year thereafter§  Initial based year 2011 revenue has been set at $20,639,000 as per the BMUA Agreement $19.4 mm 2015 - 2052 2015 Fixed Rate Freeze Period Revenue $20.6 mm 2013 - 2014 $26.3 mm2011 Revenue 2015 Revenue 2015 Inflation Linked Revenue §  For the period covering 2013-2014 $6.9 mm 2015 - 2052 rates will be fixed §  Rates will increase by 8.5% initially and then remain flat in 2013 and 2014, and §  20% at the Labor Adjustment Index plus (i) grow at 3.5% in 2015 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 16
  17. 17. BMUA Agreement:Revenue Requirement Adjustment Events nue Actual Reve True-up m ment Mechanis nue Require Defined ReveUsage Capex §  Replacement of water meters is expected to result in §  United takes the risk on increased cost of the additional meter usage Base Capex Program §  In the event this does not materialize, rates will be §  If Incremental Capex exceeds an agreed adjusted to maintain the Revenue Requirement threshold, this will result in a rate increaseDevelopment Operating Cost §  Development of Bayonne is expected to result in §  Certain operating costs are to be compared to a incremental customer growth baseline (Pass-Through Expense Baseline) §  In the event this does not materialize, rates will be §  Any expenditures incurred on these items above adjusted to maintain the Revenue Requirement the base line will result in a rate increase 17
  18. 18. Risk Allocation Revenue §  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 maintainedUnderperformance of Revenue §  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 utilityRate Increases to Unsustainable §  Water rates are comparable to other municipalities and sewer rates are considerably lowerLevels §  Rate growth stipulated in the BMUA Agreement is below the historical rate growth in NJ §  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 regionUsage Risk §  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 §  93% of customers are residential and spread over 11,000+ accounts, limiting counterparty riskCounterparty Risk §  Residents of Bayonne are relatively affluent, with a median household income 12% greater than the national average §  Collections are expected to increase from the installation of the new metering systemCollections Risk §  Secured by the BMUA’s obligation to remit proceeds of annual lien sales for unpaid billsSupply Risk §  Quantity and quality of water supply is guaranteed by the AuthorityInflation §  30% of revenue is inflation linked which provides alignment between revenues and costs 18
  19. 19. Risk Allocation (Continued)Costs §  United assumes the risk of increased costs of the Base Capex programCapex Increases §  Any divergence in ongoing capex from the agreed upon threshold results in a true up in the following year §  Costs are either pass-through to rate payers, covered by United under a fixed price contract, fixed amountOpex Increases as per the BMUA Agreement or represent relatively small overhead and administrative costs §  Large supply of companies with the financial strength and operational expertise to manage the SystemO&M Contract Terminated §  Robust replacement and operating cost sensitivities §  “Safety valves” kick in if pass-through costs or volumes are below certain levels during the rate freeze periodLiquidity Issues §  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 riskContractual §  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 payersConcessionaire / BMUA Default 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 paymentsOtherPension and Labour §  No material pension or labor liabilities §  United operates 100+ systems under contract and also owns and operates utilities in 8 statesEnvironmental §  United has never had a contract terminated because of an environmental concern 19
  20. 20. We will bring operational best practicesand capital improvements to the BMUA. 20
  21. 21. BMUA Agreement – Key Features 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 Meter Data Network Utility IT trigger a Revenue Adjustment Transmitt er Unit Collector Unit Control Computer Network (MTU) (DCU) (NCC) 21
  22. 22. United Water’s Solution Saves BMUA ~ $35M UW/KKR Option Projected Revenue Requirement Cost - United Water’s Solution i.e. Without Contract) Net Upfront Payment (after Debt Defeasance) (Approx. 6%) 22
  23. 23. Projected Rate Increases are Sustainable The risk of rates being considered too high is Relative Water & Sewer Rates unlikely for the following reasons: $8 Water Sewer -  Average monthly water and sewer bill for users in $6 Bayonne is ~$44 and $31, respectively. Water rates are in 5.53 5.31 line with other municipalities and the sewer rates are 4.88 4.73 Rates ($ / 100 cF) much lower $5 4.29 3.70 3.58 3.50 3.39 -  Water rates for United Water New Jersey have grown at a $3 CAGR of 5.0% since 1970 which is well above the rate increases that are stipulated in the Concession Agreement $2 -  Water is an essential service but still represents a very low percentage of total annual expenditures (1.0% of total) $0 n/a Bayonne Ramsey Jersey City Mahwah North Hudson Historical Rate Increases in New Jersey Relative Water Expenditure(1) $1,000 40% 32.9% % of Average Annual Expenditure $800 759 CAGR: 5.0% 30% Avg. Annual Bill 575 575 593 $600 493 20% 16.4% $400 348 12.7% 241 10% $200 149 108 2.8% 2.3% 1.0% $0 0% 1970 1975 1980 1985 1990 1995 2000 2005 2010 Housing Transportation Food Electricity Telephone Water(1) Bureau of Labor Statistics, Consumer Expenditure Survey 23
  24. 24. “SOLUTION: Investing in America’s Water”BMUA Summary and the Next Project UnderwayBayonne, NJ Nassau Co, NY(Pop. 63,000) (Pop. 1.1 million)Financial Partners: Financial Partners:KKR Infrastructure To be selected & United WaterOperator: Operator:United Water United WaterDuration: 40 years Duration: 40-50 yearsFinancial Benefits: Financial Benefits:¢  Full operation of water & sewer ¢  Full operation of sewer system (30-35% cost¢  >$100M Capital funds to insure future reduction from County operation) system upgrades over 40 years ¢  $300-400M Capital funds for next 10 years¢  $150M upfront payment to remove all debt (then ~25-30M/year) from Bayonne MUA balance sheet ¢  $750M to eliminate all Sewer Authority &¢  Tariff (set by City) County debt for sewer system ¢  Tariff (set by County) – increases at CPI level Nassau will be the largest partnership in the U.S. 24
  25. 25. What does the “fiscal cliff”mean to local government?“If the fiscal cliff that the Federal Governmentfaces is to be avoided, there is a potential pointof compromise that could fundamentally changethe relationship between the public and privatesectors in the water industry. The House GOPhas expressed its openness to creating newrevenue for the government, but not by hikingtax rates on the highest earners, which is thepresident’s desire. The two sides have discussedreducing certain tax incentives, among them thetax-free status of interest paid to those whoinvest in municipal bonds … If the Bayonnemodel takes off, it could create a safety net formunicipalities with few options left in a munibond market stripped of its prized tax-freestatus.” 25
  26. 26. 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 26