John S. Young, Jr. MAGNY LUNCHEON NOVEMBER 17, 2011

1. John S. Young, Jr. MAGNY LUNCHEON NOVEMBER 17, 2011 “From Corruption To Hope To Bankruptcy” The Trials and Tribulations of the Jefferson County (AL) Wastewater System

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3. Consent Decree Financing • Initial fixed rate financing • 2002 financing • Variable rates • Swaps

4. Financing-The Swaps Fixed Rate Swap Dealer Jefferson County Bondholders 67% of 1M LIBOR SIFMA Index INDENTURE SWAP AGREEMENT BASIS RISK • Complex financial maneuver to lower debt service. • Nationwide credit crisis • Result: County loses bet on interest rates

5. Financing: 2003 Variable Rates Warrants and Swaps

6. Criminal Activity • 4 County Commissioners convicted • 6 County employees convicted • 9 Contractors convicted • 2 Brokers convicted • Total fines and restitution = $84,000,000+ • Total years of sentences = 42 years 3 months

7. Valley Creek Pump Station

8. How We Got Here • How we became involved in Jefferson County, AL • Jefferson County debt default • Federal Court asked for assistance • The Special Master’s Report

9. Jefferson County Wastewater System Overview • Largest wastewater utility in Alabama • 435 employees • 144,000 active customer accounts serving 478,000 people in 23 municipalities • 9 Treatment facilities • 3,137 miles of pipe • 174 Pump stations • 80,196 manholes • 262MG Average Daily Treatment • 1135MG Maximum Daily Treatment

10. Role and Authority of the Receiver • Administer and operate the system to create a viable, sustainable and efficient organization that protects the public health and environment. • Authority to increase rates and charges. • Control over all operating assets, accounts and employees. • Facilitate a negotiated settlement.

11. The Receiver’s Observations • Operational Assessment • The Existing Culture • Entitlement culture • Technically isolated • Morale issues • Shared business services with County government • Changing the Culture • Effective operations • Efficient operations • Customer focused

12. The Interim Report-The Turning Point • System’s historical perspective • First comprehensive long-term business plan • Demand study • Revenue projections • Rate design & rate stabilization: What cost of service looks like • www.JeffcoWastewaterFacts.com

13. The Reasonableness of Rates • Definition of reasonableness of rates under Alabama law. • Rates high enough to operate the system, pay its debt, and generate a surplus are not per se unreasonable or confiscatory. • Amendment 73: Rates and charges of the sewer system must be “reasonable and non-discriminatory.” 13

14. Five Reasons Supporting Rate Increase • Look-back analysis • No rate increases since January 2008--makeup • Not significant rate shock in comparison to other utilities • Meets legal requirement of reasonableness • Within acceptable range of EPA financial impact analysis

15. Negotiating the Settlement The largest Chapter 9 filing or largest municipal bond concession in history. State’s moral obligation: The Game Changer The County's General Fund problem.

16. Rounding Up the Parties • A list of major creditors involved in Jefferson County JP Morgan Bank of America Morgan Stanley Citi Bank State Street Bank and Trust Bank of New York Mellon The Bank of Nova Scotia Societe Generale Regions Bank Lloyds TSB Bank Assured Guaranty Syncora FIGC Various hedge funds 16

17. Why a Negotiated Solution Impact of moral obligation on rate increase Supports economical development and growth Avoids the stigma of bankruptcy Maintain adequate County services due to General Fund solution. Enhance future borrowing throughout Alabama 17

18. Benefits to the Creditors Ends costly litigation and preserve reputation Time value of money Helps municipal bond market by not having the largest municipal bankruptcy in U.S. history Minimizes exposure to insurers 18

19. The County’s Term Sheet Debt level “approximately” $2.05 billion Moral obligation by the State $1 billion of bond insurance Creation of independent public corporation (GUSC) Fix for general fund problem Rate/Revenue increases not to exceed 8.2% annually for first three years for residential customer class Mandatory hookups County overhead charges paid by Receiver Low-Income Assistance Program Dismissal of all litigation and releases Execution of definitive agreements

20. Hurdles…. • Drafting definitive settlement agreements • Rate increase and litigation • Legislation – general fund, GUSC, hookups, moral obligation • GUSC formation and appointment of Board • IRS audit resolution • County financial audits • Dismissal of all pending litigation • Securing additional concessions • Successful refinancing of reduced debt level

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22. Chapter 9: The Process • The status of the Receiver • The eligibility of the County • The County presents a bankruptcy plan • Litigation/challenges to plan • Plan confirmation process

23. Lesson Learned:Proper Due Diligence • Revenue • Customer growth • Declining per capita water use • Required mandatory hookups • History of rate increases • Economic status of customer base • Financial requirements • Presence of a EPA Consent Decree • Physical condition of the system/future capital • Business plan • Check financial systems and records • Operations • Compliance record • Policies, procedures and controls • Culture

24. www.JeffcoWastewaterFacts.com 24

25. John S. Young, Jr. MAGNY LUNCHEON NOVEMBER 17, 2011 “From Corruption To Hope To Bankruptcy” The Trials and Tribulations of the Jefferson County (AL) Wastewater System