CRITICAL INFRASTRUCTURE PROJECT IMPLEMENTATION—

A WATER PERSPECTIVE

NARUC STAFF SUBCOMMITTEE ON ACCOUNTING AND FINANCE SPRING MEETING

New Orleans

April 2, 2008

Walton Hill and Sameet Master

APRIL 2, 2008 I

United Water at a Glance

• 139 years in the US water market

• 2000: Became wholly owned subsidiary of Suez Group

• Key Highlights Revenues $600M Total assets $2.0B 2,000 employees Active in 20 States 6.5 Million people served

• Two Business Segments: Regulated and Contract Services 21 Regulated utilities 138 O&M contracts*

Strategy:

Develop a balanced portfolio of Regulated and Contract Services operations that generate value in line with their risk profiles

* includes 2007 Aquarion and AOS Acquisitions

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The New York Experience

• Established and evolving regulatory framework and practice since 1977

• History of “normal” rate cases, regulatory improvements

• New era of greatly increasing capital requirements—two examples

• A new approach that works for major capital projects for water supply and/or water quality, not revenue producing

United Water New RochelleDelaware Interconnection Project

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Key Statistics - United Water New Rochelle

•Regulated by: New York Public Service Commission

(PSC) New York Department of Health (DOH)

•Population served: 145,000

•Service Area: Westchester County, NY

•Average daily production: 21 mgd

•Max. daily production: 36 mgd

•Total peak hour production: 50 mgd

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UWNR Service Area

Communities Served:

•Ardsley

•Bronxville

•Dobbs Ferry

•Eastchester

•Greenburgh

•Hastings

•New Rochelle

•North Pelham

•Pelham

•Pelham Manor

•Tuckahoe

Seasonal Supply – Briarcliff Manor

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UWNR

Water Supply

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Water Supply

Catskill Supply

Delaware Supply (Shaft 22)

Central Avenue PS

Little Catskill PS

Delaware PSDistribution

System

Croton PSCroton Supply

Croton Supply Eliminated

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Project Drivers/Constraints

•Regulatory requirements Project is required by New York State Department of Health

> Croton supply no longer meets EPA regulations

•Deficiencies in water supply reliability Heavy reliance (90% of supply) is on Catskill Aqueduct source New York City has defined plans for aqueduct repairs – with sustained shutdowns

> Catskill shutdown from September to May from 2010 – 2014> Delaware shutdown continuously as early as 2013

Lack of adequate storage in the system Poor supply pressure at times of peak demands

•Deficiencies in asset conditions Minimum redundancy, constant speed pumps, outdated controls Aged equipment causing deficiencies in chemical storage, handling, spill

containment, controls, and safety

APRIL 2, 2008 I

Project History/Key Events

• 1989 – US EPA promulgated the Surface Water Treatment Rule (SWTR), adopted by DOH Established criteria for avoiding filtration Established source water quality requirements Established disinfection requirements Established filtration requirements if avoidance criteria not met Established monitoring and reporting requirements

• 1991 – UWNR notified by DOH that the Croton Supply does not meet the SWTR Provide filtration or discontinue use

• 1992 – UWNR began planning for treatment or replacement of the Croton supply

• 1993 – DOH requires UWNR to eliminate Croton supply and develop new source of supply, a connection to the Delaware

UWNR developed concept of the DIP with new pump station at UWNR property located in the Town of Eastchester, NY, initiates engineering and permitting

• 1995 - 2005 – UWNR is in prolonged litigation with the Town, public resistance ongoing (“not in my backyard”)

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Project History/Key Events, continued

•May 2005 – Application to connect to NYC Delaware Aqueduct filed with NYC

•Dec. 2005 – UWNR and Town settle litigation, construction of the Delaware Pump Station begins

•April 2007 – Approval from the City of Yonkers to construct the Shaft 22 Transmission Main is obtained

•May 2007 – Construction of the Transmission Main begins

APRIL 2, 2008 I

Project Current Status

•Delaware Pump Station Construction substantially complete, commissioning and testing underway.

Final completion expected in June 2008

•Shaft 22 Connection/Pipeline Construction of the transmission main is underway, completion expected in June

2008

Approval of from NYC to connect to Delaware Aqueduct is imminent, construction expected to begin in May 2008, and completion is expected in September 2008

•System Improvements Construction substantially complete, commissioning and testing underway.

Final completion expected in June 2008

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Project Current Status, continued

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Project Budget Summaries

UWNR DIP

Total Project Value $52,000,000

Expenditures prior to construction

$6,000,000

Cost to Complete Project $46,000,000

• UWNR DIP Expenditures prior to construction include: Costs incurred since 1992 through July 2005 Legal, engineering, and company overheads

United Water New YorkHudson River Desalination Project

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Key Statistics - United Water New York

• Regulated by: New York Public Service Commission

(PSC) New York Department of Health (DOH)

• Population served: 266,000

• Service Area: Rockland County, NY

• Average Day: 30 mgd

• Peak Day: 46.5 mgd

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UWNY Service Area

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Water Supply - Current

• Existing Sources of Supply Peak sustainable supply: 45.5 mgd Short-term peak supply: 48.5 mgd

> Additional 3 mgd from RVWF, during peak demand periods, based on Ramapo River flow

Four sources of supply> System Wells (20.5 mgd)> Ramapo Valley Well Field (4 mgd/7 mgd)> Lake DeForest WTP (20 mgd)> Letchworth Village WTP (1 mgd)

• System Demands growing 5% - 7.5% per year Growth rate includes significant conservation measures implemented over the years

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Water Supply - Planned

30.0

35.0

40.0

45.0

50.0

55.0

60.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Year

Dem

an

d &

Su

pp

ly (

mg

d)

Maximum Day Demand

Maxumum Day Demand (low er limit)

Short Term Supply

3-Day Maximum Demand

7-Day Maximum Demand

Long Term Supply

Near Term Strategy

Long Term Water Supply Option

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Project Drivers/Constraints

• 2006 Rate Case settlement requires UWNY to achieve Average Supply Increases to be implemented in two phases:

Short-Term: 3 – 5 years Long-Term: 6 – 8 years

• 2006 Rate Case* established milestones that UWNY must meet: Project Description to PSC – January 15, 2007 (Filed) Preliminary conceptual design – September 30, 2007 (Filed) Submit DEIS and all required environmental permit applications – September 30, 2008 Complete pilot plant studies, if required – December 31, 2009 Obtain Environmental Permits – September 30, 2010 Complete 50% design – September 30, 2011 Begin Construction – May 31, 2013 In-service – December 31, 2015 Failure to achieve these milestones will result in financial penalties * State of New York Public Service Commission, Case 06-W-0131, Exhibit 11

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Project Budget Summaries

UWNR DIP UWNY LTWSP

Total Project Value $52,000,000 $78,000,000

Expenditures prior to construction

$6,000,000 $17,000,000

Cost to Complete Project $46,000,000 $61,000,00

• UWNR DIP Expenditures prior to construction include: Costs incurred since 1992 through July 2005 Legal, engineering, and company overheads

• UWNY LTWSP Expenditures prior to construction include: Land purchase, legal, and engineering costs to be incurred from 2007 through 2012

APRIL 2, 2008 I

NYPSC’s Policy Statement

• Established regulatory framework in 1977

• Consistently employed since then (for water)

• “Unsuitability of historic test years”

• Goal of ratemaking: to ascertain as much as possible revenue, expenses and conditions in the year the new rates will be in effect

• Basic framework: historic “base year”, “bridge period” fully forecasted “rate year”

• Year end 12-31-07, plus 14 months “bridge”, to date of PSC decision, 2-28-09 begin “rate year”

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NARUC Best Practices

• NAWC’s 2005 Water Policy Forum

• NARUC’s July 2005 Best Practices Resolution

Prospective test years DSIC CWIP (rate base/surcharges) Pass-throughs Consolidation Streamlined rate process Mediation and settlement Integrated resource management Fair return Improved communication

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“Rate Year” As A Platform For Continued Improvement

• Revenue reconciliation (decoupling)

• Plant reconciliation

• Cost reconciliations: r/e taxes, purchased water, power and chemicals

• Earnings sharing provisions

• Multiyear rate plans

• “Collaborate or die”—regulatory efficiency

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Recent Developments

• Distribution System Improvement Charge (DSIC-PA), LTMRP, UIRP

• NYPSC Water Supply Surcharge

• Regulatory reactions to greatly increasing infrastructure investment requirements

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How They Work

• Preconstruction—annual filings, primarily to avoid continued AFUDC compounding

• During construction, semiannual filings for capital costs

• Depreciation, property tax and personnel after closing until next base rate case

(CE-AD-ADIT) x ROR+D+P+PT

R

• Percentage applied to customer bills, annual reconciliation

• NY NWSS tied to construction milestones