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					Confidential Presentation




                      Western Governor’s Association
                            Western States Water Council
                    Interstate Council on Water Policy

                       Water Supply Infrastructure Finance
                                     March 5, 2008
Primary Reasons for Utilizing P3s
   Accelerating the implementation of high priority projects


   Accessing new technology from the private sector


   Accessing global private sector expertise


   Benefiting from private sector management of projects to reduce lifecycle costs


   Accessing the financial resources of the private sector
    – Fast tracking financing; Less cumbersome


   Leveraging scarce public resources
    – Personnel; Monetary


The private sector has incentive to maximize performance


                                                 1
Evolution of Infrastructure Financings
Government Perspective                                                       Financial Markets Perspective
   Fiscal challenges                                                           Increase in global liquidity
   Increasing capital needs                                                    Patient international equity investors
   Lack of funding sources                                                     Tax-exempt/taxable spreads
   Resistance to tax increases                                                 Private sponsor appetite for infrastructure
   Increased demand for services                                                sector investments
   Management of non-core assets                                               Established long-term international
   Operational cost savings                                                     concession financing models

   Accelerated project requirements                                            Established international credit and rating
                                                                                 criteria
                                                        Catalysts
                                       Increased willingness to tap private sector
                                        expertise
                                       New focus on optimizing user fees
                                       Longer-term perspective on project
                                        management



                                                 New Paradigm for US
                                                    Infrastructure
                                                      Investment



                                                             2
Paradigm Shift Driven By Recent Market Developments
As a result of recent concession financings in the infrastructure sector, the following
characteristics are becoming accepted for infrastructure financings

 Shift   to life-cycle financial analysis for construction and O&M
 Private investment   replaces or supplements public debt
 Long-term asset management transfers to private sector with public oversight
  through contractual agreements
 Long-term debt    financing horizons considered investment grade (50 years plus)
 Deferred principal   amortization (can be negative amortization)
 DSCR     is measured as cash-on-cash while partial interest is paid
 Multiple rollovers/refinancings are modeled in base finance plan similar to
  corporate finance model




                                             3
Consequences of Recent Market Developments
New infrastructure funding sources and financing structures:


 Increased privatesector interest in infrastructure investments presents new
  financing opportunities
 Market acceptance of long-term financing structures beyond traditional fully
  amortizing 30-40 year final maturity practice
  – Rating agencies: realize long-term debt repayment capability
  – Credit enhancers: insure embedded refinancing risk
  – Private investors: desire stable, long-term investment return
 Payment   regime and residual value policy is critical to the evaluation of
  privatization options
 Financingproceeds can be increased through extended final maturities, managed
  payment regimes, and/or partial or full ownership sales


Ability to unlock value in infrastructure assets not realized under traditional
  municipal financings can be applied to public, joint and private ownership models
                                           4
Ownership Options
Lehman Brothers believes that a variety of ownership structures can be considered
based on asset capitalization and control objectives:

 Public:

  – Control of operations and residual interest
  – Traditionally very conservative leverage with A-category plus rating levels
 Public/Private:

  – Public control of operations and residual interest in most cases
  – Opportunity to increase leverage at BBB rating category and/or with private
    investment while keeping majority ownership interest
 Private:

  – Public contractual control of operations and maintenance through concession
    agreements with residual value shifting to private investors
  – Maximum leverage and upfront capitalization of value




                                           5
Financing/Ownership Options for Infrastructure Projects

Financing
   Tax-Exempt Bonds
    – Governmental Purpose Bonds: Unlimited availability, but limits private participation,
    – Private Activity Bonds: Limited availability, but allows private participation,
   Taxable Bonds: Unlimited availability, but potentially higher all-in cost
   Private Equity: Can be used in conjunction with certain types of Tax-Exempt
    Private Activity Bonds and all Taxable Bonds
Ownership
   Public Ownership: Limits private participation in many types of projects
   Public “Benefit” Corporations: 501(c)(3) or 63-20 non-profit corporations
   Private Ownership: Limits use of Tax-Exempt Bonds




                                                6
Tax-Exempt Financing Availability


Type of Tax-Exempt   Governmental Purpose       Private Activity          Private Activity
       Bond          Bond Cap Not Required   Bond Cap Not Required       Bond Cap Required
Ownership                   Public                    Public                  Private
Asset Class
Public Facilities             
Water/Wastewater                                                                
Solid Waste                                                                    
Airport                                                
Surface                                          $15 Billion of New PAB Authorization Under
                              
Transportation                                                  SAFETEA-LU
Ports                                                  
Housing                                                                         
Education                     
Healthcare                    



                                             7
Project Risk Assumption /Equity Investment Profile as a Function
of Bond Structure

                                         Tax-Exempt Governmental      Tax-Exempt Private Activity
 Project Cost/Investment Component
                                              Purpose Bonds                or Taxable Bonds

 Proposal Costs                                  Private                       Private
 Negotiation and Development Costs            Public/Private                   Private
 Environmental Permitting Costs               Public/Private                Public/Private
 Uncontrollable Circumstances                 Public/Private                Public/Private
 Fixed Construction Costs                        Private*                      Private
 Fixed Operating Costs                           Private*                      Private
 Subordinated Debt Investment                    Private*                      Private
                                        Private* for limited amount
 Debt Guarantee                                                                   --
                                          typically subordinated
 Equity Investment/Residual Value                    --                        Private
 Alternative Revenue Sources                      Public                    Public/Private



* Subject to private use restrictions
                                                 8
Conclusion


   Tested and proven financing structures exist in the capital markets to finance
    public-private partnerships in the water/wastewater sector
   Projects can be structured as public-private partnerships to optimize development,
    construction and long term operation, as well as appropriate sharing of risks
    between the public and private partners
   Highly-regarded private companies active in the water/wastewater market
    facilitate the structuring of long-term public-private partnerships
   Long term risk assumption and equity investment in water/wastewater projects
    increases with the use of tax-exempt private activity bonds




                                            9
Private Activity Bond Structure: JFK International Air Terminal


                                               Financing Details
                                                  Largest U.S. Airport Privatization Project and
                                                   Largest Non-Recourse Airport Revenue Bond
                                                   Issue, $934 million JFK International Air
                                                   Terminal LLC (“JFK IAT”) Tax-Exempt
                                                   Bonds
                                                  Lehman Brothers contributed a portion of the
                                                   development costs to the project and is
                                                   currently a 20% equity partner in the project,
 Project Details:                                  along with Schiphol USA, a subsidiary of
                                                   Amsterdam Airport Schiphol, and LCOR, a
 • The terminal redevelopment project              New York based property developer
   consisted of the design, construction and
   operation of the JFK International Air         JFK IAT entered into a 28-year lease with the
   Terminal, new $1.2 billion, 16-gate, 1.5        Port Authority to operate the existing terminal
   million square foot facility with two           and the new terminal
   flight concourses connected by a three-
   level terminal                                 Initial mid-level investment grade ratings of
                                                   “A”, “BBB+” and “Baa2” on the non-recourse
                                                   tax-exempt project bonds


                                               10
Governmental Purpose Bond Structure: San Juan Basin Desalter Project

                                           Financing Details:
                                              $32 million of Tax-Exempt Governmental
                                               Purpose Lease Revenue Bonds secured by
                                               lease payments made by the Capistrano
                                               Valley Water District, payable by pledged
                                               water revenues
                                              The Project is also receiving a subsidy of up
                                               to $250 per acre-feet from the Metropolitan
                                               Water District of Southern California as an
                                               incentive to develop alternative water
                                               sources
Project Details:                              The Water District engaged ECO Resources
• 5.14 MGD brackish groundwater                under a 20-year fixed price
  treatment facility located in the City       design/build/operate Service Contract
  of San Juan Capistrano                       subject to acceptance and performance
• Treatment process will utilize the
                                               requirements
  commercially proven reverse osmosis
  technology                                  Investment grade ratings and bond
                                               insurance were obtained for the Project

                                           11
 Governmental Purpose Bond Structure: 91 Express Lanes



                                               Financing Details:
                                                   The original private owners financed the 91
                                                    Express Lanes through a private placement of
                                                    taxable bonds in 1993
                                                   In January 2003, OCTA purchased the 91
                                                    Express Lanes and assumed the outstanding
                                                    taxable bonds
Project Details:                               In November 2003, Lehman Brothers
• Originally financed, constructed and owned
                                                underwrote $195 million of tax-exempt
  by a private consortium granted an exclusive
                                                governmental purpose bonds to refund the
  franchise under AB 680
• The Orange County Transportation Agency outstanding taxable bonds
  (OCTA) purchased the 91 Express Lanes  The tax-exempt bonds are rated Aa2/A-/A-, the
  from the private consortium in 2001 to        first “stand-alone” toll facility revenue bond to
  eliminate a non-compete clause                be rated in the “A” category
• Toll rates are established utilizing a
  congestion pricing model that keeps traffic
  flowing at all times

                                               12
Governmental Purpose Bond Structure: Downtown Phoenix Hotel
Sole Source of Repayments is Hotel Revenues
$350,000,000
Downtown Phoenix Hotel Corporation
Senior and Subordinate Revenue Bonds

Tax-Exempt Series 2005A $157,000,000
 Moody’s: AAA
 S&P:        AAA
 Senior debt service is structured assuming 3.00x
  coverage from projected revenues and moderate
  annual growth of 1% per annum between now and
  2040 (final maturity of the bonds), which meets
  both rating agencies’ investment grade rating
  criteria.

Tax-Exempt Series 2005B $168,000,000
Taxable Series 2005C $25,000,000
Moody’s:      AAA
 S&P:        AAA                                      Proceeds used for:
 Subordinate debt receives second lien on projected       To finance the planning, design, engineering,
  revenues as well as additional pledge of City’s           development, construction, equipping, furnishing and
  Sports Facilities Fund (a portion of the Excise
  Taxes).                                                   opening of the approximately 1,000-room, full-service,
 The pledge of Sports Facilities Taxes under the           first-class, Downtown Phoenix Hotel (the “Hotel”), a
  Room Block Leaseback Agreement is subject to a
  prior lien on Excise Taxes                                parking garage underneath the Hotel with approximately
                                                            500-600 parking spaces.




                                                       13
Concession: Port of Miami Tunnel Project
    Transportation: Tunnel Concession                                                                Port of Miami Tunnel

   Public/private partnership (PPP) under a Concession
    Agreement, under the direction of the Florida Department of
    Transportation and the County of Miami-Dade.
   The tunnel will:
       – Provide direct access between the Seaport, I-395 and I-95
       – Create an alternative to the Port Bridge, now the only
         connection to the mainland
       – Keep the Port of Miami competitive, at the same time maintaining its importance as Miami-Dade County’s second
         largest economic generator
       – Improve traffic safety in downtown Miami by removing cargo trucks and cruise line buses from already-congested
         streets
       – Facilitate ongoing and future development plans in and around downtown Miami.
    Firm financing commitments supported bids for a 35-year development and concession, included the application for Private
     Activity Bonds authorized under the SAFETEA-LU program, likely making the Tunnel the first to incorporate PABs under
     this program.
    FDOT will make several Milestone Payments during construction and at project completion, totaling $450 million.
    After startup, FDOT will make annual concession payments of approximately $33 million adjusted for inflation.
    The 35-year concession saved the project approximately $300 million by incorporating international expertise and taking
     into account product life-cycle cost factors.
    The concession procurement process also aided in expediting project delivery by significantly compressing the
     development and procurement schedule.
    Almost all construction and development risk is the responsibility of the Concessionaire.


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