accelerating solutions: innovative h20 financing...accelerating solutions: innovative h20 financing...
TRANSCRIPT
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Accelerating Solutions: Innovative H20 Financing
WIFIA, New SRF Financial Assistance Opportunities and Environmental Market- Based Solutions
Water Infrastructure and Resiliency Finance [email protected](o) (202) 564-0323(m) (202) 734-1607
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EPAFunding:WIFIA
StateRevolvingFund(SRF)Innovations
EnvironmentalMarketsandSocialImpactInvestors
Appendix
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Where are the Innovative Opportunities
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1 EPA Funding: WIFIA
WIFIAOperates asaHighlyLeveraged FederalCredit Program
§ $17millionCongressionalappropriationfundedalossreserve
§ OMBhassetlossassumptionsthatareexpectedtoresultin1.6%to2%assumedlossratesforWIFIAloans
§ Yieldsabout$1billioninloancapacityfundedbyU.S.Treasury
§ Lossratevariesbasedonthelevelofriskinessofeachloan
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EPA Funding: WIFIA
EligibleBorrowers
§ Local,state,tribal,andfederalgovernmententities
§ Partnershipsandjointventures
§ Corporationsandtrusts§ CleanWaterandDrinkingWaterStateRevolvingFund(SRF)programs
EligibleProjects
§ Wastewaterconveyanceandtreatmentprojectsthatareeligibleforthe CleanWaterSRF
§ Drinkingwatertreatmentanddistributionprojectsthatareeligibleforthe DrinkingWaterSRF
§ Enhancedenergyefficiencyprojectsatdrinkingwaterandwastewaterfacilities
§ Brackishorseawaterdesalination,aquiferrecharge,alternativewatersupply,andwaterrecyclingprojects
§ Droughtprevention,reduction,ormitigationprojects
§ Acquisitionofpropertyifitisintegraltotheprojectorwillmitigatetheenvironmentalimpactofaproject
§ AcombinationofprojectssecuredbyacommonsecuritypledgeorsubmittedunderoneapplicationbyanSRFprogram
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EPA Funding: WIFIA, Important Features1
Minimumprojectsizeforlargecommunities.
Minimumprojectsizeforsmallcommunities(populationof25,000orless).
MaximumportionofeligibleprojectcoststhatWIFIAcanfund.
Maximumfinalmaturitydatefromsubstantialcompletion.
Maximumtimethatrepaymentmaybedeferredaftersubstantialcompletionoftheproject.
Interestratewillbeequaltoorgreaterthanthe U.S.Treasuryrateofasimilarmaturity.
Projectsmustbecreditworthy.
NEPA, Davis-Bacon, AmericanIronandSteel,andallfederalcross-cutterprovisionsapply.
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WIFIA Offer Flexible Repayment Terms
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1 6 11 16 21 26 31 36
DebtServicePaymen
t($M
)
Amortizationofa$100MFinancing
30YearBondPrincipal 30YearBondInterest WIFIAPrincipal WIFIAInterest
Interest-onlyperiodforbond
WIFIApaymentsbackloaded
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WIFIA Takes Subordinated Lien
WaterUtilityLienStructure JointUtilitytax-exempt-WIFIAfinancingcanprovideaveryattractiveblendedinterestrateforlargewaterinfrastructureprojects(especiallyformidtolowertierratedutilities)
SeniorDebtServiceAccounts
SubordinatedDebt(WIFIALoan)
NetSystemRevenue
PublicInvestors
U.S.Treasury
Ratepayers
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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.
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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.
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An Example of an Ecosystem Service Benefiting from An SRF Guarantee: The Forest Resiliency Impact Bond
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SubordinateImpactBonds
PrivatePlacement
SeniorTriple-ABondsIssuedtoPublicMarkets
ProjectManager
ForestRestorationContractor(s)
Water&ElectricUtilityService
Payers
U.S.ForestServicePayer
SRFGuarantee
IndependentServiceValidator
IndependentServiceValidator
CreditEnhancementMinimizesInterestCostEnhancesEconomicValuetoPayers
INVESTORS
Payments
Payments
Payments
Proceeds
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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
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Hurdles to Overcome3
§ Utilitieswillneedtoidentifyrevenuestreamsforenvironmentalmarkets
§ Utilitiesandstatesneedtorecognizetherearefinancingtoolsavailable thatareunderutilized
§ SRFAdministratorsneedtopushtheenvelope
§Weneedwillingbuyersandsellers
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Water Infrastructure and Resiliency Finance Center
TheWaterFinanceCenterisaninformationandassistancecenter,helpingcommunitiesmakeinformeddecisionsfordrinkingwater, wastewater, andstormwaterinfrastructuretoprotecthumanhealthandtheenvironment.
Research Advise Innovate Network
https://www.epa.gov/waterfinancecenter
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Appendix
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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
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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
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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
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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?
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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
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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
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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)
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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%.
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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