1

Examples of Where It Has Worked

Bayonne, N.J. Case Study

NCPPP Workshop

February 12, 2013

2

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

4

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

6

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

7

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

10

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”