Technical Discussion of: Debt Financing Alternatives for Private Water Utilities (Infrastructure, Refinancings , Acqu

1. Technical Discussion of: Debt Financing Alternatives for Private Water Utilities (Infrastructure, Refinancings, Acquisitions & Raising Capital) Presented by: Mark Reader, Managing Director, Phoenix mreader@syllc.com; (602) 794-4011 Bryan Lundberg, Managing Director, Phoenix blundberg@syllc.com; (602) 794-4007 Monday, October 31, 2011 11:45 A.M. – 1:00 P.M. 2555 East Camelback Road, Suite 280 Phoenix, Arizona 85016 (602) 794-4000

2. Disclosure Pursuant to revised Municipal Securities Rulemaking Board (“MSRB”) Rule G-23 (the “Rule”), in connection with new issues for which the Time of Formal Award occurs after November 27, 2011, a broker, dealer, or municipal securities dealer (“dealer”) is prohibited from acting as a Financial Advisor or Municipal Advisor, as defined in Section 15B of the Exchange Act of 1934 (as amended), to an issuer for a particular issue sold on a negotiated or competitive bid basis and subsequently switching roles to act as underwriter or placement agent with respect to the same issue. In compliance with the rules set forth by the MSRB, Stifel, Nicolaus & Company, Inc. (“Stifel”) may act as an underwriter or placement agent and not a Financial Advisor or Municipal Advisor in connection with all services proposed and/or provided. MSRB Notice 2011-29 (the “Notice”) defines as “underwritings” both (i) the acquisition of all or any portion of an issue, directly or indirectly, from the issuer as principal, either alone or as a participant in a syndicate or other similar account formed for that purpose and (ii) acting as an agent for the issuer in arranging the placement of an issue. Additionally, the MSRB defines the role of an underwriter in the Notice, which states, “the primary role of an underwriter is to purchase securities in an arm’s-length commercial transaction between the issuer and the underwriter” and, “the underwriter has financial and other interests that differ from those of the issuer.” Furthermore, the Rule states that an underwriter may provide advice concerning the structure, timing, terms, and other similar matters related to the issuance of municipal securities to the extent the underwriter discloses that such advice is provided with respect to the underwriting and not in relation to a financial advisory relationship, as specifically defined in the Rule. Accordingly, any such services provided by Stifel as they relate to our role as underwriter or placement agent should not be construed as those of a Financial Advisor or Municipal Advisor and such notice, as described above, is hereby provided as set forth in the Rule. Additional information is available upon request Stifel, Nicolaus & Company, Inc., 501 N. Broadway, St. Louis, MO 63102 1

3. Table of Contents • Purpose of Presentation • Executive Summary • U.S. Tax Exempt Capital Markets • U.S. Debt Securities Markets • Private Water and Wastewater Utility Credit Rating Criteria • Financing Alternatives for Private Water Companies (Water & Wastewater Infrastructure Improvements) • Summary • Water Infrastructure Finance Authority of Arizona (WIFA) • Private Activity (Tax-Exempt) Bonds [Public Offering or Private Placement] • Sample $10 Million Financing • Sample Refunding Case Study: ABC Water Company Revenue Bonds-Refunding Analysis • Financing Alternatives Utilized by Arizona Governments to Fund Water & Wastewater Acquisition & Infrastructure Improvements • Role of Underwriter/Private Placement Agent or Financial Advisor 2

4. Table of Contents APPENDIX (Included as Separate handout) • Water & Wastewater Utility Credit Rating Criteria & Reports • Sample IDA Policies and Procedures and Application Guidelines • Arizona Commerce Authority Program Summary and Private Activity Bonds & Volume Cap Application Procedures • WIFA Policies & Procedures • Utility Bond Experience Since January 2006 3

5. Purpose of Presentation

6. Purpose of Presentation • Educate WUAA members on how to access tax-exempt, low cost,debt financing options available in Arizona, including Private Activity Tax-Exempt Utility Revenue Bonds (Public Offering or Private Placement) and the Water Infrastructure Finance Authority of Arizona (WIFA) • Taxable obligations can also be issued for raising equity capital • Review utility revenue bond refinancing mechanics and current opportunities • Educate WUAA members on how Arizona cities/towns/counties and special districts finance their public infrastructure improvements (if desired) • Introduce S&Y – a premier investment banking firm that specializes in water & wastewater utility revenue & tax secured financings • Underwriter (UW)/Private Placement Agent (PPA) • Financial Advisor (FA) 5

7. Executive Summary

8. Executive Summary • Tax exempt markets are a viable source of low cost debt capital • Equity market remains volatile • Treasury yields plummet; approach all-time lows; tax exempt market follows • Demand for tax exempt rated utility system credits has been elevated in today’s market • Industrial Development Authorities provide access for private utility companies • Federal tax exempt borrowing authority given to each state, for annual capacity allocation • Entities eager to provide capacity for viable projects • Project Finance Approach de linked from corporate guarantees • Debt is issued leveraging the credit of the customer rate base of individual water systems • Rate setting covenant to maintain minimum debt service coverage ratio • Anti dilution covenant via additional bonds test • Pledge of net revenues and not balance sheet assets • No corporate cross collateral pledges • Arizona Corporation Commission Oversight • Review of rate setting process • Cost of capital calculations included in rate process 7

9. U.S. Tax-Exempt Capital Markets

10. Municipal Tax-Exempt Interest Rates Tax-exempt revenue bond rates remain near historic lows Source: The Bond Buyer. Tax-Exempt Bonds maturing in 30 years with average rating of A1/A+. As of 10/24/2011. 9

11. Municipal Tax-Exempt Interest Rates Tax-exempt revenue bond rates remain near historic lows Percentage of the Time RBI Has Been Below the Current Level Since 1980 Historical RBI Levels (January 1980 to Present) Source: The Bond Buyer. Tax-Exempt Bonds maturing in 30 years with average rating of A1/A+. As of 10/24/2011. 10 10

12. Municipal Market Overview Positive market tone cools, but rates remain low • Municipal market sells off over the past few weeks • Yields remain historically low following recent Treasury rally • Recent correction brings rates just above 2010 lows but still well below January 2011 highs • Yield curve particularly steep inside of 10 years • 30-Year MMD Yield (1/1/2010-10/24/2011) • Municipal Market Data (MMD) Yield Curves Source: Thomson Financial. 11

13. Financial Markets Overview • Financial markets • Equity markets rebound slightly after enduring heavy losses in September; Q3 2011 finished as worst quarter in previous 3 years • Treasury rates remain historically low amid European debt fears and economic uncertainty • Economic indicators • Payrolls increased by 103,000 in September (forecast: 60,000), lowering fears of recession • Q2 2011 GDP abysmal at 1.3% • Unemployment rate holds at 9.1% • Eyes on the Fed • Federal Reserve announces operation “twist”; to be completed by June 2012 • Will buy $400 billion of UST securities with maturities in 6- to 30-year range, sell equivalent amount of securities with maturities of 3 years or less • Fed Funds rate to remain “exceptionally low” at least through mid-2013 (Fed) • 10-Year and 30-Year U.S. Treasuries (1/1/11-10/24/11) Source: Bloomberg. 12 12

14. U.S. Debt Securities Markets

15. Debt Issuance in the U.S. Securities Markets (a) Includes all non-convertible debt, MTNs and Yankee bonds, but excludes CDs and federal agency debt. (b) Includes GNMA, FNMA, and FHLMC mortgage-backed securities and CMOs and private-label MBS/CMOs. (c) Interest bearing marketable coupon public debt. Source: Federal Reserve System and Securities Industry and Financial Markets Association (SIFMA) 14

16. Outstanding U.S. Debt Securities (2nd Quarter 2011) 2nd Qtr 2011 Total = $35,227.3 (a) Interest bearing marketable public debt. (b) Includes GNMA, FNMA and FHLMC mortgage-backed securities and CMOs and private-label MBS/CMOs. (c) Estimates by the Securities Industry and Financial Markets Association. (d) Includes commercial paper, bankers acceptances and large time deposits. Source: Federal Reserve System and Securities Industry and Financial Markets Association (SIFMA) 15

17. Holders of Municipal Securities and Loans (Debt) 2nd Q 2011 2nd Qtr 2011 Total = $2,886.0 (a) Includes nonfinancial corporate business, nonfarm noncorporate business, state and local governments and retirement funds and government-sponsored enterprises. (b) Includes property-casualty and life insurance companies. (c) Includes commercial banks, savings institutions and brokers and dealers. (d) Includes mutual funds, money market funds and close-end funds. Source: Federal Reserve System. 16

18. Amount of Arizona Municipal Financings by Purpose (a) Includes issues sold for primary and secondary education, higher education, student loan programs and miscellaneous education projects. Source: Thomson Financial. 17

19. Private Water Utility Credit Rating Criteria

20. Credit Rating Criteria Regulated Water and Wastewater Utility Companies • Credit rating agencies active in the regulated water & wastewater utility sector include S&P and Moody’s • Fitch is not active in the sector • S&Y would assist issuer with carefully managing the credit rating agency process • Recent S&P report: U.S. investor owned water utilities continue to display rating stability • Credit rating gradation system as follows: U.S. Credit Ratings Comparison 19

21. Credit Rating Criteria Regulated Water and Wastewater Utility Companies • Regulatory Environment & Asset Ownership Model • Operational Characteristics & Asset Risk • Stability of Business Model & Financial Structure • Key Credit Metrics 20

22. Credit Rating Criteria Sample S&P Credit Rating Report Summary: American Water Works Company, BBB+ (stable) • Strengths: • A diverse geographic and regulatory environment • Largely residential and commercial customer base, enabling cashflow stability • Relatively low operating risk of nonregulated operations • Above-average service territory • Weaknesses: • Acquisition-based growth strategy • High expected capital expenses of over $1 billion for each of the next three years • Rationale: • Company’s reliance on acquisitions to provide growth partly offset above strengths • Average ROE (in AWW’s seven largest jurisdictions) approximates 10.3% • AWW recovers replacement capital spending up to a stated percentage • Certain states allow for surcharges related to the cost of power, chemicals and purchased water • $75 million of rate increases granted in 2010 • Funds from Operations (FFO) total $830 million; FFO/Debt: 13%; debt to capital: 60.5% • Uncertainties associated with the timing of the rate cases and the substantially higher capital plans are significant risks 21

23. Financing Alternatives for Private Water Companies (Water and Wastewater Infrastructure Improvements)

24. Financing Alternatives Summary (a) Private Activity Bond (PAB) volume cap required. Financing required to be issued through an IDA. (b) No PAB volume cap required if par-to-par maintained (expected). Financing required to be issued through an IDA. (c) Does not require PAB cap approval. Economics are based on market conditions of tax-exempt versus taxable. (d) S&Y would serve as Financial Advisor to assist with all aspects of the WIFA financing program. (e) Could be tax-exempt (similar to bond transaction) if PAB volume cap is obtained. Financing required to be issued through an IDA. (f) No PAB volume cap required if par-to-par maintained. 23

25. Water Infrastructure Finance Authority of Arizona (WIFA)General Program Overview • State Revolving Loan Fund to assist cities/towns, counties, special districts, Indian tribes, non- profits and private water companies with low cost financing programs • Programs subsidized by Federal Government (EPA) with State of Arizona matching funds • Separate programs for water (DW) and wastewater (CW) • Private company financial assistance policies outlined in Appendix, Section D • Private company interest rate setting methodology and annual fees outlined in WIFA Policy #III.3 • Interest Rate: Prime rate (currently 3.25%) plus adjustment based on amortization period • 20-year amortization: 2.00% over prime or 5.25% • 15-year amortization: 1.00% over prime or 4.25% • 10-year amortization: prime or 3.25% • 5-year amortization: prime – 1.00% - 2.25% • Other WIFA rules: • Amortization periods generally limited to 20-years • Davis-Bacon wage requirements apply which could increase costs • Credit approval required by staff and WIFA Board of Directors (including financing covenants) 24

26. Private Activity (Tax-Exempt Water & Wastewater Revenue Bonds)Industrial Development Authority Bonds • Government lends tax-exempt status to private corporation (pursuant to Internal Revenue Code 141 et. Seq.) • Conduit financing - Issued by governmental entity for private facility (i.e., IDA) • Bonds paid by loan repayments from private corporation from revenue of utility system • Used previously in Arizona by Chaparral City Water Company, Liberty Water Company, Arizona Water & Global Water • Eligible exempt facilities include water and sewer facilities, airports, docks, parking garage and certain rental housing • Volume cap allocated by Federal Government to each State based on population: • Arizona 2011 Allocation: $600 million ($593,241,615 available) • New Mexico 2011 Allocation: $277 million ($215,820,000 available) 25

27. Private Activity (Tax-Exempt) BondsSteps in Issuance • IDA selected by issuer. Several in AZ, but cost varies significantly • Application is made to an IDA for preliminary approval • A preliminary resolution (or inducement resolution) is considered by the IDA • Borrower submits application/request to Arizona Commerce Authority • Includes preliminary resolution (or inducement resolution) from IDA Application for Volume Cap • Maximum allocation of $35 million until December 17, 2011 • Thereafter at Director’s discretion (currently $593 million available in AZ and $215.8 million in NM) • If required under Section 147, a notice of public hearing is published-TEFRA Hearing (Tax Equity and Fiscal Responsibility Act of 1982) • Public TEFRA hearing is held (at least 14 days after publication notice) • If necessary under Section 147, approval is obtained from entity that formed the IDA and entities having jurisdiction over location at facilities financed (“host approval”) • Timing 26

28. Private Activity (Tax-Exempt Bonds)Application Deadlines for Issuance Under $35 Million • Applications received in 2011, are on a first come, first serve basis. If the application is received in 2011, the deal will need to close by 12/16 unless extended until 12/26. • Applications received in 2012 are on a first come first serve basis. If an application is received between January 1 and April 1, 2012, it will need to close within 90 days or by June 30th, whichever is first. • Application fees due with application and all other fees are due prior to receiving a confirmation 27

29. Private Activity (Tax-Exempt) Bonds (a)Summary of Private Activity Bond Transaction Sells Bonds Industrial Development Authority (IDA)(b) Trustee (pursuant to Trust Indenture) Bondholders (d) Principal and Interest Payment on Bonds Principal and Interest Payments Loans Bond Proceeds Loan Repayments Payments Assigned by Issuer to Trustee Private Utility Revenues Generated by Utility Project New Money, Acquisi- tion, Refunding (c) Underwriter (S&Y) (Public Offering or PP Agent) $ Received from Bondholders Finance Project (a) Arizona Commerce Authority administers allocation of Private Activity Bonds through application process summarized herein. (b) An IDA serves as the conduit issuer. IDAs have authority under U.S. tax law to issue, on behalf of private companies tax-exempt bonds for eligible public infrastructure projects. • U.S. tax laws limit the amount of bonds that can be issued for acquisition. (Further discussion with bond counsel required) • Could include marketing bonds to utility customer base. 28

30. Sample $10 Million Tax-Exempt FinancingDraft Sources & Uses of Funds • Assumes a bond sale or private placement in March 2012 • Assumes AZ Commerce Authority approval of requested volume cap in the amount of $10 million • Assumes 15-year amortization, level debt service structure (Annual debt service of approximately $980,650 per year-subject to change) • All-in true interest cost: 4.93% • Assumes debt service reserve fund with bond proceeds (subject to change) • Assumes ‘A+’ underlying credit rating • Does not assume credit enhancement (subject to be further discussed) 29

31. Sample $10 Million Tax-Exempt FinancingEstimated Costs of Issuance • Will endeavor to keep costs as low as possible • Select IDA which is most efficient for issuer 30

32. Sample $10 Million FinancingEstimated Cost of Capital to Sample Issuer1 • Municipal Market Data (MMD) - benchmark index for high grade national AAA/Aaa General Obligation municipal bonds • Spread assumes 230 basis points over natural AAA index (includes AMT adjustment of approximately 75 basis points) • All-in true interest cost: 4.93% • Average weighted life: 8.287 years ¹ Based on estimated rates as of 10/26/2011 which includes AMT adjustment. Yields subject to change based on final credit structure, rating(s) and bond market conditions at time of sale. Assumes “A+” underlying credit rating (to be determined). Alternative Minimum Tax (AMT) is a separate tax computation under the Internal Revenue Code that, in effect, eliminates some deductions and credits and creates a tax liability for an individual who would otherwise pay little or not tax. 31

33. Tax-Exempt Refunding OpportunityABC Water Company $10,000,000 The Industrial Development Authority of the County of XYZ Water System Improvement Revenue Bonds (ABC Water Company Project), Series 1997A (AMT) • Outstanding Debt: • Callable in whole any date or in part on any interest payment date without a premium • All maturities merit consideration (sinking fund installments 2013-2022) 32

34. Tax-Exempt Refunding OpportunityABC Water Company • Spread to MMD¹ ¹Based on rates as of 10/26/2011; subject to change. Assumes “AA-” underlying credit rating. 33

35. Tax-Exempt Refunding OpportunityABC Water Company • Savings can be structured to achieve issuer’s Operational and Rate Structure objectives For example: 1) Up-front cash flow savings 2) Tail-end savings (payoff debt early) with no cash flow implications in early years • Net Present Value Savings1: ¹Based on rates as of 10/26/2011; subject to change. 2Debt service reserve fund amount from refunded bond issue. 3Refunding funds on hand consist of debt service reserve funds and additional proceeds for refunding bonds. 34

36. Financing Alternatives Utilized by Arizona Governments to Fund Water & Wastewater Acquisition & Infrastructure Improvements

37. Financing Alternatives Utilized by Arizona Governments to Fund Water & Wastewater Acquisition & Infrastructure Improvements Governmental Issuers: Arizona, Cities, Towns, Counties & Special Tax Districts • Additional Information included in the Appendix • Most issue bonds in the capital markets or through WIFA 36

38. Role of Underwriter/Private Placement Agentor Financial Advisor

39. Role of Underwriter/Private Placement Agent or Financial Advisor Summary of Responsibilities Decision made by the borrower to retain an Underwriter such as S&Y to issue bonds in the public securities/bond market or privately place the bonds with a bank / financial institution (depending up their preference). Public sale allows investors to bid on bonds across the yield curve (each maturity). Decision made by the borrower to retain a Financial Advisor such as S&Y (not to underwrite bonds). Financial Advisor would advise on all aspects of financing transaction with the selected financial institution (see above services) . Private Activity Bond Volume Cap required for tax-exempt new money and refunding (if not par to par). Significant expertise required to comply with federal tax laws, notice to bondholders’, possible escrow cash verification requirements and disclosure details. Note: most banks don’t routinely provide this expertise. Technical debt structuring assistance and communications to aide in ACC communications and approval. 38