Accelerating Solutions: Innovative H20 Financing

WIFIA, New SRF Financial Assistance Opportunities and Environmental Market- Based Solutions

Water Infrastructure and Resiliency Finance Centergebhardt.jim@epa.gov(o) (202) 564-0323(m) (202) 734-1607

EPAFunding:WIFIA

StateRevolvingFund(SRF)Innovations

EnvironmentalMarketsandSocialImpactInvestors

Appendix

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Where are the Innovative Opportunities

1 EPA Funding: WIFIA

WIFIAOperates asaHighlyLeveraged FederalCredit Program

§ $17millionCongressionalappropriationfundedalossreserve

§ OMBhassetlossassumptionsthatareexpectedtoresultin1.6%to2%assumedlossratesforWIFIAloans

§ Yieldsabout$1billioninloancapacityfundedbyU.S.Treasury

§ Lossratevariesbasedonthelevelofriskinessofeachloan

EPA Funding: WIFIA

EligibleBorrowers

§ Local,state,tribal,andfederalgovernmententities

§ Partnershipsandjointventures

§ Corporationsandtrusts§ CleanWaterandDrinkingWaterStateRevolvingFund(SRF)programs

EligibleProjects

§ Wastewaterconveyanceandtreatmentprojectsthatareeligibleforthe CleanWaterSRF

§ Drinkingwatertreatmentanddistributionprojectsthatareeligibleforthe DrinkingWaterSRF

§ Enhancedenergyefficiencyprojectsatdrinkingwaterandwastewaterfacilities

§ Brackishorseawaterdesalination,aquiferrecharge,alternativewatersupply,andwaterrecyclingprojects

§ Droughtprevention,reduction,ormitigationprojects

§ Acquisitionofpropertyifitisintegraltotheprojectorwillmitigatetheenvironmentalimpactofaproject

§ AcombinationofprojectssecuredbyacommonsecuritypledgeorsubmittedunderoneapplicationbyanSRFprogram

1

EPA Funding: WIFIA, Important Features1

Minimumprojectsizeforlargecommunities.

Minimumprojectsizeforsmallcommunities(populationof25,000orless).

MaximumportionofeligibleprojectcoststhatWIFIAcanfund.

Maximumfinalmaturitydatefromsubstantialcompletion.

Maximumtimethatrepaymentmaybedeferredaftersubstantialcompletionoftheproject.

Interestratewillbeequaltoorgreaterthanthe U.S.Treasuryrateofasimilarmaturity.

Projectsmustbecreditworthy.

NEPA, Davis-Bacon, AmericanIronandSteel,andallfederalcross-cutterprovisionsapply.

WIFIA Offer Flexible Repayment Terms

0

1

2

3

4

5

6

1 6 11 16 21 26 31 36

DebtServicePaymen

t($M

)

Amortizationofa$100MFinancing

30YearBondPrincipal 30YearBondInterest WIFIAPrincipal WIFIAInterest

Interest-onlyperiodforbond

WIFIApaymentsbackloaded

1

WIFIA Takes Subordinated Lien

WaterUtilityLienStructure JointUtilitytax-exempt-WIFIAfinancingcanprovideaveryattractiveblendedinterestrateforlargewaterinfrastructureprojects(especiallyformidtolowertierratedutilities)

SeniorDebtServiceAccounts

SubordinatedDebt(WIFIALoan)

NetSystemRevenue

PublicInvestors

U.S.Treasury

Ratepayers

1

WIFIA Application Process

ProjectSelection

• NoticeofFundingAvailability

• LetterofInterestsubmission*

• LetterofInterestevaluation

• Invitationtoapply

ProjectApproval

• Applicationsubmission

• Applicationevaluation• Termsheet• Applicationapproval

Negotiation&Closing

• Negotiationactivities• Creditagreementexecution

*FirstroundlettersofinterestweredueApril10,2017

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EPA Funding: SRF Innovation

Guaranteeisaformofprojectinsurancethatcanhelpreducecostsforinnovativeprojectsthatmaycurrentlyhavetroubleaccessingfinancingataviablecost.

2

Success Story: New York SRF’s Use of the Guarantee

§ TheNYSRFusedtheguaranteetounderwriteaportfolioofenergyefficiencyloans

§ $24MillionNewYorkStateEnergyResearchandDevelopmentAuthorityResidentialEnergyEfficiencyFinancingRevenueBonds,Series2013A(FederallyTaxable)

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Why is this Success Story of Value to Water Utilities?

TheSRFguaranteecapacitycanbeusedtosupportenvironmentalmarketstoaddresswaterqualityandquantitychallenges.

2

X

X

X

An Example of an Ecosystem Service Benefiting from An SRF Guarantee: The Forest Resiliency Impact Bond

3

SubordinateImpactBonds

PrivatePlacement

SeniorTriple-ABondsIssuedtoPublicMarkets

ProjectManager

ForestRestorationContractor(s)

Water&ElectricUtilityService

Payers

U.S.ForestServicePayer

SRFGuarantee

IndependentServiceValidator

IndependentServiceValidator

CreditEnhancementMinimizesInterestCostEnhancesEconomicValuetoPayers

INVESTORS

Payments

Payments

Payments

Proceeds

Forest Resiliency Impact Bond3

1) Investors provideupfrontcapitaltoaProjectManager2) TheProjectManager contractswithForestRestoration

Crews3) Anindependentevaluator determinesiftreatments

resultinanincreaseinwateryield4) Ifso,waterandelectricutilities provideannualpayments

totheProjectManager5) Aseparateindependentevaluatordeterminesif

treatmentssuccessfullyreducecatastrophicfirerisk6) Ifso,theForestService providestheProjectManagera

portionofitsmodeledcostsavings7) Investors receiveannualpaymentsfromutilitiesanda

finalpaymentfromtheForestService8) Traditional“Senior”Bondholdersarepaidfirstwith

paymentguaranteedbytheSRF

Structure

ScalingForestRestorationProjects:• reducesriskofcatastrophicwildfire• createsjobsinruralcommunities• increaseswateryieldtofarmers&communities• savestheU.S.ForestServiceandutilitiesmoney• reducesgreenhousegasemissions• improvesrecreationalopportunities&wildlifehabitat

AForestResilienceImpactBond:• allowstheForestServicetosharerestorationcostswithutilities,

resultinginasignificantper-acrediscountforthecostoftreatments

• shiftsfundingresponsibilityandriskfromtaxpayerstotheprivatesector

• incentivizesprivateinvestorstoprovideupfrontfinancing• createsareplicabletemplatetofinanceforestrestoration

projectsatscale

Value

Hurdles to Overcome3

§ Utilitieswillneedtoidentifyrevenuestreamsforenvironmentalmarkets

§ Utilitiesandstatesneedtorecognizetherearefinancingtoolsavailable thatareunderutilized

§ SRFAdministratorsneedtopushtheenvelope

§Weneedwillingbuyersandsellers

Water Infrastructure and Resiliency Finance Center

TheWaterFinanceCenterisaninformationandassistancecenter,helpingcommunitiesmakeinformeddecisionsfordrinkingwater, wastewater, andstormwaterinfrastructuretoprotecthumanhealthandtheenvironment.

Research Advise Innovate Network

https://www.epa.gov/waterfinancecenter

Appendix

WaterInfrastructureandResiliencyFinanceCenter“TheFinancialImpactsofAlternativeWaterProjectDeliveryModels”UniversityofNorthCarolinaEnvironmentalFinanceCenter,March2017TheWaterFinanceCentercollaboratedwithUNC’sEnvironmentalFinanceCenter(EFC)todevelopaPublic-PrivateandPublic-PublicPartnerships(“P3s”)report.TheUNCreportprovidesanin-depthexaminationofnineprojectswherecommunitiesusedP3sinthewatersector.https://efc.sog.unc.edu/project/alternative-water-project-delivery-models

USEPAFinancialAdvisoryBoard“UtilizingSRFFundingforGreenInfrastructureProjects,”January2014;and“SRFInvestmentFunction:CurrentStatusandProspectsforEnhancingSRFSustainability,”February2011;www.epa.gov/waterfinancecenter

SquiresPattonBoggs/EncourageCapital“LiquidAssets:InvestingforImpactintheColoradoRiverBasin”www.encouragecapital.com/wp-content/uploads/docs/water-in-the-west-exec-summary-final_web.pdf.

References

EPA Funding: SRF Innovation

FromTitleVI,Section603(d)ExceptasotherwiselimitedbyStatelaw,awaterpollutioncontrolrevolvingfundofaStateunderthissectionmaybeusedonly—

§ (1)tomakeloans;§ (2)tobuyorrefinancethedebtobligationofmunicipalitiesandintermunicipal andinterstateagencieswithintheStateatorbelowmarketrates,wheresuchdebtobligationswereincurredafterMarch7,1985;

§ (3)toguarantee,orpurchaseinsurancefor,localobligationswheresuchactionwouldimprovecreditmarketaccessorreduceinterestrates;

§ (4)asasourceofrevenueorsecurityforthepaymentofprincipalandinterestonrevenueorgeneralobligationbondsissuedbytheStateiftheproceedsofthesaleofsuchbondswillbedepositedinthefund;

§ (5)toprovideloanguaranteesforsimilarrevolvingfundsestablishedbymunicipalitiesorintermunicipal agencies;

§ (6)toearninterestonfundaccounts;

FinancialAssistanceAuthorityProvidedUndertheCleanWaterActOffersToolsforInnovativeSolutions

EPA Funding: SRF Innovation Clean Water SRF Fund Flows/ Financial Position (FY2016)

SRFBorrowers$50.3billion

Loansoutstanding

BondTrustee$18.8bn bonds;$4.0bn pledged

reserves

EquityAccount

$13.0billionCash&CashEquivalents

PurchasesofUSTreasuryBillsInterestPaymentsAndInvestmentRedemptions

AppropriationsTofundloansandreserves BondProceedsforLoans

LoanPayments/ReserveDeposits

ReleaseofSurplusLoanPaymentsandReserveInvestments

US

TREASUARY

“TheSRFShortRunProductionCurve”

INVESTORS

InvestmentProceeds

BondInterestandPrincipalPayments

EPA Funding: SRF Innovation

ItAllDependsonNetProgramCashFlows WhichinFY2016Consistedof:

(inmillions)LoanPrincipalRepayments $4,093LoanInterestPayments 1,005

TotalLoanPayments $5,098

BondInterestPaid $875BondPrincipalPaid 1,573

TotalBondPayments$2,448

NetSRFCashFlow $2,650

CanAGuaranteeProductBeManagedAlongsideExistingLoanProducts?

AndRatingAgencyDiscountofCashflows forAssumedCreditRisk(Losses):(inmillions)

TotalLoanPayments $5,098Less:TotalBondPayments $2,448NetSRFCashFlow $2,650

Less:Triple-ASRFLoanLossAssumptions Moody’s S&P Fitch(guaranteedportfolioisnon-investmentgrade)MaximumCapitalCharge -79% -65% -57%

NetAnnualCashflow AvailableforSRFGuarantees: $556 $927 $1,139

CanAGuaranteeProductBeManagedAlongsideExistingLoanProducts?

EPA Funding: SRF Innovation

WhatDoesDiscountedCashflow YieldinTermsofTriple-ARatedGuaranteeCapacity?:

CanAGuaranteeProductBeManagedAlongsideExistingLoanProducts?

Terms InterestRate GuaranteeCapacityBasedonTriple-ACriteriafor

Non-InvestmentGradePortfolio

GuaranteeCapacityBasedonTriple-ACriteriafor

InvestmentGradePortfolio

Moody’s S&P Fitch Moody’s S&P Fitch

(InMillions) (InMillions)

5Yrs 2.5% $24,115 $81,991

7 2.5 $7,738 $12,534 $7,738 $25,148

10 3.0 10,388 14,310 25,493 10,388 26,235 63,335

20 4.0 16,652 17,914 24,062 16,652 26,394 41,764

Statesthatdonotleverageprogramresourceswithbondfinancingwillhaveguaranteecapacityof1.5xto2xgreaterthanastatethatleverageitsprogramresources

EPA Funding: SRF Innovation

EPA Funding: SRF Innovation Clean Water SRF Fund Flows/ Financial Position (FY2016)

SRFBorrowers$50.3billion

Loansoutstanding

BondTrustee$18.8bn bonds;$4.0bn pledged

reserves

EquityAccount

$13.0billionCash&CashEquivalents

PurchasesofUSTreasuryBills

InvestmentReturnsandRedemptions

AppropriationsTofundloansandreserves BondProceedsforLoans

LoanPayments/ReserveDeposits

ReleaseofSurplusLoanPaymentsandReserveInvestments

US

TREASUARY

“AnSRFLongRunProductionCurve”

INVESTORS

InvestmentProceeds

BondInterestandPrincipalPayments

BondTrustee$7bn– 24bnGuaranteeCapacity

SubordinateLienonBondPledgedAssets

AlternativeInvestmentsEcosystemServices/EE(“PA”)WaterTechnology(Proposed)

A Recent Success Story: New York SRF’s Use of the Guarantee

$24MillionNewYorkStateEnergyResearchandDevelopmentAuthorityResidentialEnergyEfficiencyFinancingRevenueBonds,Series2013A(FederallyTaxable),SRFGuaranteed

§ Thethird-partyirrevocable,unconditionalSRFguaranteeofbondssupportedlendingtocommercialandresidentialenergyefficiencyprojectsconsistentwithState’s319Plan.LossreserveheldbyCollateralAgent,fundedfromRegionalGreenhouseGasInitiativerevenues,coversfirstloss.

§ CWSRFGuaranteebenefitsfrompledgeofsubordinatelien,availablecash&cashequivalentsandiscross-collateralizedbytheDrinkingWaterSRF

§ Underlyingassetsareunsecuredresidentialloanswithcreditscoreanddebt-to-incomethresholdrequirements

§ BondswereratedAaa/AAA/AAAbyMoody’s,S&PandFitch,respectively§ Transactionassuredmarketaccessandsuperiorpricing.Loansbenefittedfromannualinterestcost

savingsofabout2%.

Why is this Success Story of Value to Water Utilities?UtilitiesCanLooktoSRFGuaranteetoSupportDevelopmentofEnvironmentalMarkets

§ ImpedimentstothedevelopmentofprivatelyfinancedP3solutionsforGreenInfrastructurestemfromconcernsabouthighcostsofcapital,lackofliquidityandloanseasoning.

§ AhighlyratedSRFguaranteeproductcanaddresstheseweaknesses.

Non-PointSource(“NPS”)ProjectsCanDirectlyBenefitfromSRFSupportedCreditEnhancementMechanisms

§ NPSProjectstendtorankloweronastate’sProjectPriorityListandarelesslikelytoqualifyfortraditionalSRFfinancing.

§ NPSProjectscanbeprivatelyownedandstillqualifyasprojecteligibleundertheCleanWaterAct.(Pointsourceprojectsmust bepubliclyowned)

§ PrerequisitesforNPSProjectstoobtainSRFfinancialsupportinclude:

§ ProjectlistingontheSRFAnnualIntendedUsePlan

§ CategoricalprojectlistingsonthestatewideSection319WaterConservationManagementorSection320EstuaryManagementPlans

§ ConfirmationofprojecteligibilityunderthefederalCleanWaterActandstateenablinglegislation

§ GuaranteesupportshouldimproveeconomicsofNPSprojects,includinggreeninfrastructureandsourcewaterprotection

§ Triple-ApricingbenefitcanbedeliveredtoprivateownerswhileimpactofcreditriskofprivateownersontheSRFcanbemanagedwithunderwritingstandardsandthird-partyfundedlossreserves