Water Assets Divestment

Project
Joint Working Group – CEO Briefing
‘On-Screen’

July 2020

STRICTLY PRIVATE AND CONFIDENTIAL

Table of Contents
Introduction
1. About Adelaide Equity Partners (“AEP”)
2. Our Analytical Approach to Infrastructure Investments
3. Joint Working Group (“JWG”) Introduction
Industry and Investment Highlights
4. Regional Themes and Challenges
5. Investment Highlights
6. Scope of Private Sector Investment
Financial Considerations
7. Financial Forecasts and Valuation
8. Modelling Approach
9. – 10. Key Modelling Inputs and CWMS Model Outputs
Timing and Governance
11. Key Stages in Market Approach
12. Soft Sounding
13. Project Timeline
14. Mandatory Evaluation Criteria
15. Project Management and Governance
16. Next Steps

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1. About Adelaide Equity Partners (“AEP”)
AEP provides a full suite of advisory and analytical services to assist our clients develop and execute their growth strategies.

Corporate Advisory Skillset Infrastructure Transactions

AEP’s core corporate advisory services include:
 Formulating growth strategies
 Identifying potential corporate or commercial
opportunities
 Reviewing and/or valuing potential corporate or
commercial opportunities
 Merger, acquisition and divestment advice
 Advice on strategic investments, joint ventures and
farm-in/farmout transactions
 Negotiation and management of corporate
transactions
 Advice on appropriate funding structures
AEP has advised on a number of infrastructure
transactions including:
 $1b acquisition of WA Gas Networks
 Bid process for a leading Asia-Pacific energy and
infrastructure business
 Bid process for two ASX-listed remote energy
generation businesses ($500m & $150m)
 Bid process for Moomba to Adelaide Pipeline System
 Unsolicited proposal to acquire Santos’ Moomba
infrastructure assets
 Acquisition of 50% share in SA-based gas fired power
station
 PPA Fund for an Australian embedded utility networks
developer

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2. Our Analytical Approach to Infrastructure Investment
We take a value-driven approach to assessing energy and water infrastructure focusing on the long-term benefits to all stakeholders

Analytical Approach Methodologies and Value Outcome

Methodology Value Outcome
AEP uses a market-based approach to valuation which is cross
DCF
checked against intrinsic and fundamental analysis, such as: - forecast ungeared cash flows
- discount at WACC
 Capitalisation of future maintainable earnings (i.e., applying a Value of the Business Operations
(Enterprise Value)
comparable trading / industry / transaction multiple to EBITDA, Multiplies
- revenue Plus
EBIT, PE). - EBITDA / EBITDAR
Investments, investments in
- EBITA / EBIT
 Intrinsic or Income approaches (e.g. a DCF through applying a - Book value (ungeared)
associates, surplus assets,
marketable securities and cash
discount rate to FCF to derive an NPV).
Less
 Others (asset based, real options, industry rules of thumb) DCF Borrowings, finance leases, non
- geared cash flows trading liabilities
- discount at cost of equity
Equals
Multiples
- NPAT (PE) Value of Equity
- Book value / NTA (geared)
Free Cash Flow and Revenue Building Blocks
FCF Variants Discount Rate Financing Assumption

Unlevered FCFE – post-tax Unlevered cost of equity
Ungeared FCFF – post-tax Post-tax nominal WACC
Ungeared FCFF – BTAX Pre-tax nominal WACC
Levered FCFE Levered cost of equity
FCF calc.
+ EBIT
- Tax on EBIT
+ add-back D&A
- CapEx
100% equity Revenue Building Blocks (real / nominal / pre-
WACC / Discount Rate tax / post-tax)
Ave. weights debt & equity
= Re x E / (D + E) + Rd (1 – Tc) x D / (D + E) Regulatory Asset Base
“As above”
Re: required return on equity = Rf + Be x (Rm – Rf) x Cost of Capital (e.g. Vanilla WACC)
Marginal weights of debt & equity
E: market value of equity = Return on Capital / Capital Charge
D: market value of debt + Return of Capital / Regulatory Depreciation
Rd: required return on debt + Operating Expenditure
Tc: corporate tax rate + Corporate tax allowance (after imputation)
= Required Revenues

+/- net decrease / (increase) in WC

= FCFF (ungeared)

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3. Joint Working Group (“JWG”) Introduction
The Water Assets Divestment Project was established by the JWG to pursue a collective divestment and marketing strategy.

JWG – Introduction
 Consists of City of Onkaparinga (“CoO”), as lead council; Adelaide
Hills Council (“AHC”); and Rural City of Murray Bridge (“RCMB”);
 Established in 2018 to formulate a collective divestment strategy to
ascribe a potential premium from the assets.
 Seeking offers from interested parties for the future ownership,
ongoing operation and investment in the wastewater, potable water 7 x CWMS
and alternative water supply assets.
 A combined approach to be more cost effective and provide a
value premium or value-added outcomes.
 Encourage efficient operation and pricing to stakeholders.

2 x CWMS
JWG – Objectives 5 x Alternative
Water
 “Value for money for users.  Engagement with stakeholders. Schemes
 Continuation and improvement  Keeping end users in front of
of the level of service. mind. 2 x Potable
Water
 Future / capacity investment  Assets will be saleable jointly Networks
in networks and expansion. and separably. 7 x CWMS

 Less risk to councils.  Engagement with affected

communities before divestment
decision is made.”

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4. Regional Themes and Challenges
The scale of the water sector is immense

Background Cost Share in the Supply Chain

South Australia: Supply chain element Description Typical cost
share
 SA Water services most metropolitan / major regional areas;
Bulk water supply The collection of water from rivers and aquifers, and the 21%
 Provides services to 1.7m South Australians; production of potable water by desalinating sea water.
Water treatment Treatment of bulk water so that it is fit for its intended purpose. 11%
 Subject to full economic regulation by ESCOSA;
Water transport Transportation of water from bulk supply sources to the final 24%
 RAB of $8.1b ($2018) for drinking water and $4.2b ($2018) for customer.
sewerage) with annual regulatory revenues of c$950m. Wastewater transport Transportation of wastewater from its point of use to a 24%
treatment plant.
Australia: Wastewater treatment Treatment of wastewater to a standard suitable for disposal or 16%
reuse.
 Most water assets remain publicly owned; however private
Retail Retailing of these services to customers; primarily billing and 4%
participation is growing considerably in operating assets; handling customer complaints.
 Water and wastewater assets valued at more than A$160b with
investment averaging $A5b pa.

Regional Industry Themes Key Challenges in Regional Operations

 Water reforms continuing against backdrop of rapidly growing
Australian population (forecast to be 30 million by 2030).
 Agricultural irrigation, industrial usage and reclaimed water
operations are most accessible / attractive for private investors.
 Community needs focused through sustainable water
management, infrastructure and use of renewable energy.
 100% reuse objective of all recycled water – both treated
wastewater and harvested stormwater (to reduce demand on River
Murray or potable water supplies).
 Economic growth is a key objective through incentivising new
residential developments, farming and mining sectors.
 Reducing the environmental impacts.
 Lack of centralised planning and investment.
 Water security concerns for some isolated communities which
occupy Australia’s most arid regions.
 Increased costs / lower efficiencies due to scale.
 Lack of expertise and ability of councils to retain and attract
skilled staff.
 Limited funding to invest in research and development / new
technologies.
 Quality and reliability of service often do not meet acceptable
standards.

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5. Investment Highlights
Wastewater and alternative water schemes offer benefits of regulated investments with minimal exposure to climate risks.

 The regulatory environment in Australia is mature and supportive of industry investment.

Established Regulatory  In regional areas Australian governments typically undertake light-handed economic regulation of water and
Environment wastewater.

 Stable customer base with natural rate of population growth and regional economic development.
Stable Customer Base  Australia council regions are supportive of community expansion, agricultural development and sustainable solutions.

 Low risk of competition and high barriers to entry.

Monopoly  Significant investments already made in high quality long-life assets fully funded by councils / state and federal
Characteristics bodies.

Predictable Revenues  Stable revenues with typically quarterly free cash flow generation with relatively stable fixed capital costs.
and Cash Generation  Ability for long-term investments to be underwritten through customer pricing, capital contributions and capital grants.

Partnering  Partnering with councils and governments to provide sustainable environmental and community solutions through
Opportunities innovative use of recycled water and renewable energy.

 Growth opportunities in regional Australia are primarily centred around agriculture / agribusiness, food processing,
Growth Opportunities irrigated horticulture, tourism and advanced manurfacturing.
 Substantive infill growth opportunities and network expansion potential.

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6. Scope of Private Sector Investment

Public Private Spectrum (with scale of usage)

Public Outsource DBO / Single asset

PPPs Private utility
provided services Alliances sales

High High High / Med. Medium Low Low

Key Characteristics E.g. BOO / BOOT Arrangements for Treatment Plants

 Majority are publicly owned utilities (rarely offered to market)
 Considerable degree of private sector participation through
traditional and more sophisticated contracting approaches (per
figure above).
 Outsourcing of services, build-own-operate (BOO) contracts,
Public Private Partnerships (PPPs) and joint ventures are now
established in the Australian water industry.
 Asset sales and direct service provision by private suppliers are
less common.
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 Trility designed, built and financed 10 major water treatment plants
along the Murray River.
 Vendor: SA Water Corporation
 When: mid-1990s
 Location: Treatment plants are spread along 305 km
 Service area: water supplied to communities from Renmark to
Tailem Bend with some treated water being pumped as far as the
York Peninsula.
 Benefits: resulted in a visible change in water quality and today
continues to boost economic growth in the region.
 Other examples: the Prospect Water Treatment Plant (New South
Wales); the Yan Yean Water Treatment Plant (Victoria); the Illawarra
and Woronora Water Treatment Plant (New South Wales); the
Ballarat North Water Reclamation Plant (Victoria); and the AQUA
2000 project (Victoria).
7. Financial Forecasts and Valuation

Financial Characteristics

The Community Wastewater Management Schemes (CWMS) offered by the JWG provides an exceptional opportunity for a third party to
establish a leading utility business in South Australia. These assets represent the following financial characteristics:

 Stable and consistent revenues streams supported by natural growth in council regions;
 An established pricing framework to ensure reasonable cost recovery from the customer base;
 Bankable free cash generation which supports reasonable gearing; and
 An asset valuation targeted to provide a commensurate risk-adjusted return to investors.

A summary of the financial forecasts from AEP’s modelling are shown below. This represents a ‘baseline’ cash flow model.
CF Waterfall (10 yr.) FY 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Revenues 1
5.3 5.6 5.9 6.3 6.5 6.7 6.9 7.1 7.7 7.9
Opex (3.9) (4.0) (4.1) (4.2) (4.3) (4.4) (4.6) (4.7) (4.9) (5.0)
EBITDA 1.5 1.6 1.8 2.1 2.2 2.3 2.3 2.4 2.9 2.9
Capex (0.1) (1.5) (0.8) (0.0) (0.5) (0.1) (0.7) (7.1) (0.2) (1.2)
Tax - - - - - - - - - -
Debt Service (net) (1.4) 0.0 (0.8) (1.6) (1.2) (1.6) (1.1) 5.0 (2.2) (1.3)
FCFE (0.0) 0.1 0.2 0.4 0.5 0.5 0.6 0.4 0.4 0.4
Cummulative FCFE (0.0) 0.1 0.3 0.7 1.2 1.7 2.3 2.6 3.0 3.5

A summary of the valuation outputs are shown below:

Asset / Operation RAV WUA – NBIO1 '19 Business Value2 '20 AEP Value3
CoO - CWMS 26.0 30.3 19.4 - 25.2
27.0 - 32.0
CoO - Stormwater / Alt. Schemes 58.5 (3.0) tba.
AHC - CWMS 14.0 5.5 - 6.0 11.7 - 19.9 10.1 - 13.1
RCMB - Potable Water 0.7 u/a tba.
0.1 - 0.3
RCMB - CWMS 0.6 u/a 0.4 - 0.5
Total 99.7 32.6 - 38.3 39.0 - 47.2 29.9 - 38.8
1 Refers to Water Utilities Australia’s non-binding indicative offer o 29-May-18; 2 Internal business valuation undertaken by each council (where
applicable); 3 AEP valuation applying to CWMS schemes reflects both it’s baseline (“model”) valuation and a control premium valuation by applying
a 30% uplift.

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8. Modelling Approach
AEP have developed a regulated infrastructure transaction model to evaluate the assets of the JWG
Background
The JWG model has been prepared to provide decision support to
the JWG and other senior management. The financial model applies
to 5 council operations across three council areas:
 AHC – CWMS;
 CoO – CWMS;
 CoO – Stormwater Harvest / Alternative Water Supply Schemes;
 RCMB – CWMS; and
 RCMB – Potable Water Supply
Modelling Objectives
The three (3) primary objectives of the modelling are:
 Evaluating what an alternative service provider would pay for
the efficient operation of the JWG assets (i.e., referred to as the
JWG base case);
 Deriving a price path acceptable to Councils’ and ESCOSA, in
line with applicable pricing principles; and
 Assessing the financial impact of future growth options and
synergies.
AEP considers these are the key ‘financial’ negotiating points to
arrive at a fair market value for the assets.
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Approach to Modelling
 Intrinsic value using a FCFE approach.
 30-year forecast period.
 A revenue building-blocks methodology is used to calculate the
required revenues. The methodology uses the post-tax revenue
model (“PTRM”) which is a nationally accepted regulatory
framework.
 AEP proposes retaining the current regulatory asset values for
the purposes of the evaluation (i.e., no write-down)
 Real price paths are calculated using an annutised pricing
approach applied to base case demand forecasts.
 Debt financing assumptions have been modelled to simulate
likely funding to be employed by private enterprises.
Uses of the Model
 Provision of base case financial forecasts to short-listed parties
(i.e., FY21 to FY24).
 Evaluation of respondents pricing proposals to ensure it is
acceptable in line with the evaluation plan.
 Assessment of the respondent’s NPV / Enterprise Value against
the JWG preferred position included in the financial model.
 A valuation and pricing review (to the extent able to be
undertaken) on respondents proposed business case in evaluating
growth opportunities.
 Provision of scenario and sensitivity analysis during the
negotiation process (as required).
9. Key Modelling Inputs | Baseline
Core modelling inputs are underpinned by information provided by the JWG

Key Inputs / Sources FY19 Revenue Composition ($m)

Data Source
Alternative water (CoO); 0.4
Actuals (OpEx, CapEx,  Annual Financial and Operational Reports to ESCOSA
RAV, Customer Numbers)  FY period ending 30-Jun-18 and 30-Jun-19
CWMS service fees
(AHC); 1.7
 Annual Price Monitoring Reports to ESCOSA
Pricing
 FY period ending 30-Jun-18 and 30-Jun-19

 Utintja business valuation modelling for CoO and AHC

Forecast commercial and
 Refer to: CWMS model v0.6.xlsx | Water model v0.8.xlsx | AHC
operating assumptions CWMS service fees
CWMS Valuation Model v0.5.xlsx CWMS service fees
(CoO); 3.1
(RCMB); 0.0
 Referenced to ESCOSA determination for SA Water (adj. to reflect Water charges (RCMB);
Cost of Capital
higher risks in the schemes). 0.1
Other operating income
 Other financials such as asset registers; and capital values of (Group); 0.2
Other Financials
customer properties (as applicable).

Regulatory Asset Values (30-Jun-19) Cost of Capital / WACC

Risk free rate 1.16%
Total Group 99.7
Equity beta 0.80

RCMB - CWMS 0.6 MRP 6.00%

RCMB - Potable Water 0.7 Post-tax nom. cost of equity 5.96%

Total of CWMS: $40.6m
LT inflation expectations 2.33%
AHC - CWMS 14.0
Pre-tax cost of debt 5.50%
CoO - Stormwater / Alt. Schemes 58.5
Debt to total capital 60%

CoO - CWMS 26.0 Nominal vanilla WACC 5.68%

- 20 40 60 80 100 120 Real vanilla WACC 3.28%

A$m

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10. CWMS Model Outputs | Baseline
Valuations and financial outputs are driven by pricing assumptions and required returns to equity.

Key Outputs Debt to RAV

%
Data Comments 80%

Pricing  Annuitised price paths over 4 years for each scheme 70%

60%
 Conservatively no growth is assumed for the smaller schemes (AHC
Demand Forecasts
/ RCMB); 0.5% growth in customer numbers for CoO. 50%

Total Revenues  $302.5m (30 years – FY21 to FY50) 40%

30%
CF Available to Equity  $26.8m (over 30 years FY21 to FY50)
20%
Indicative Valuation  Equity: c.$12m; Debt: $18m; EV: $29.9m
10%
Equity IRR  7.5% pa. post-tax nominal (inc. value of FC utilised) -

Debt to RAV  Max: 44.3% over 30 years

Debt to RAV

Revenue Profile Cumulative FCFE

A$m A$m
18.0 35
16.0
30
14.0
25
12.0
10.0 20
8.0
15
6.0
4.0 10

2.0 5
-
-
18 020 022 024 026 028 030 032 034 036 038 040 042 044 046 048 050
20 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
CoO - CWMS CoO - Stormwater / Alt. Schemes AHC - CWMS RCMB - Potable Water Cummulative FCFE (p...
RCMB - CWMS

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11. Key Stages in Market Approach
Key stages established to provide appropriate oversight and governance when approaching the market.

Stage 1 – Expression of Interest Stage 3 – Short Listing and Select Tender

 Early community engagement by Councils.
 EOI process completed between April 2018 and June 2018
through SA Tenders.
 Four EOI briefs prepared, one for each council scheme.
 Other document provided to interested parties:
- Conditions of EOI;
- Joint Councils Introduction Document;
- EOI Response Forms;
- Clarifications / Addenda;
 External advisor engagement (e.g. Valuation and Corporate
Advisory Services).
 Evaluation recommendation, approval process, and short-listing
meeting.
 AEP presentation / report to CEOs on select tender.
 CEO direction on proceeding to select tender.
 Preparation of final tender material (including data room).
 Invitations, NDAs and data room access provided to invited parties.
 Closing date of select tender (Inc. submission of NBIO)
 Final evaluation.
 Council report on tender outcomes.
Other potential activities include: Q&A sessions, site visits,
community engagement.

Stage 2 – Soft Sounding and Registration of Interest Stage 4 – Due Diligence, Financial Close and Transition
CEO approvals are required for:  Detailed due diligence commencement
 Market materials;  Invitation to negotiate
 Commencement of Soft Sounding and ROI process.  Best and Final Offers (post DD)
The approach includes:  Recommendation and council approval
 ROI Advertisement and nomination of AEP as principal contact;  Community engagement
 Bidder registration via SA Tenders;  Final documentation preparation
 Evaluation planning preparation;  Financial Close and Transition
 Clarifications;
 Close of Soft Sounding;

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12. Soft Sounding
AEP’s soft soundings will provide an effective and independent approach to the market

It is essential to establish and

provide a compelling message Investor Categories
to attract market interest
Engage Government Owned Private Operators
Operators
Media /
SA Water Water Utilities Australia
Advertising
Sydney Water Alano Group

3rd Party Service

Financials / Insto.
Providers

AEP interface Trility Group IFM Investors

with Investment Veolia QIC
Community Cleanaway Waste Infrastructure Capital
Management Group

Diversified Private Equity Backed

Infrastructure / Energy SPV

Invite parties to ATCO Group KKR

participate Epic Energy SA Pty Ltd Colonial First State
and/or seek
feedback

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13. Project Timeline | Target Dates
Revised Date Deliverable Milestone

 Joint CEO Briefing

 Memo seeking CEO approval to
2 - 10 July 2020
be finalised following briefing
 Sign-off

 Soft sounding process begins with

13 July 2020 Soft Sounding
ROI lodged through Tenders SA

 CEO Technical Briefing 2 (CoO)

Mid to Late July 2020
 EM Workshop – Retain Scen.1

 Key tender preparation tasks

(AEP final proposal; Data room
July / August 2020 preparation; Appoint legal advisor;
Tender doc. preparation; Decision
on water business)

 AEP Presentation / Report to

CEO’s on select tender
Registration of Interest / Soft
6 – 10 August 2020 recommendation
Sounding – Stage 2 complete
 Seek direction on proceeding to
tender.

 EM Workshop – Retain Scen.2

 Council Reports for approval to
Council Approval to Proceed with
Mid to Late August 2020 tender / authority to negotiate
Select Tender
 NDAs provided to tenderers
 Data room ready for access

 Close of Select Tender

October / November 2020  Potential Decision Gate – Council Stage 3 complete
report on tender outcomes

 Community engagement and

negotiation period
November 2020
 Potential Decision Gate – Council
Report on Negotiated Outcome

 Detailed Due Diligence

Post November 2020 Stage 4 complete
 Financial Close and Transition

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14. Mandatory Evaluation Criteria

Mandatory Criteria Indicators (abbrev.)

 Information provided either does or does not
Declaration Form
comply.

 Require an appropriate retail licence issued by

ESCOSA (unless it is exempt).
Ability to be a licensed water industry participant  Be a ‘suitable person’ able to carry on
operations in the water industry in accordance
with the terms and conditions of their licence.

 Size and scope of asset ownership and/or asset

operations relevant to the operation of a public
utility or operation of the type of water assets
Demonstrated capability to operate and maintain a
included in the Project.
public utility or the type of water assets included in
 Proven track record in owning, operating,
the Project
and/or delivering infrastructure projects in
Australia in accordance with regulatory and
environmental obligations.

 Respondent to demonstrate is has in place the

liquidity to fund any acquisition as well has the
financial capacity to operate the scheme into
Financial capacity to fund a commercial offer and the future based on the written down value (or
future investment requirements invested capital) and financial requirements for
continued operation of the assets.
 The level of financial capacity necessary will be
dictated by value of the financial offer.

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15. Project Management and Governance

The
JWG and
Evaluation
Advisors
Team

Councillors and
Community
Engagement
Internal
Probity and
Council /
Due
CEOs
Diligence
Approvals

17
16. Next Steps

Jul-20 / CEOs ‘In-principle endorsement’ for AEP to approach the

Now market

By Market documents finalised (teaser and mandatory criteria

3-Jul-20 sign-off to be included in evaluation plan)

By Formal CEO approvals to commence soft sounding (inc.

10-Jul-20
final market documents)

13-Jul-20 Soft sounding commences

4-week process

10-Aug-20 Soft sounding closes

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