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DynamicInvestmentApproachtoCapitalize onPositiveTrendsinWater
February,2011
Deterioratingwaterinfrastructureandincreasinglystringentwater
qualityregulationsrequiresignificantincreasesincapitalspending.
Waterindustryshistoricallypositivepricingpowerisacceleratingas
marketbasedpricingforwatergrowsinacceptanceasameansto allocatescarceresources.
Proven and available solutions exist to remedy all water supply and
quality issues.
TheWorldIsRunningOutOfCheapWater
W Water Tariff T iff:Denmark/Germany k/
US/Canada/Spain/Japan India/China
Other:
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TheCongressional g Budget g Office( (CBO) )report p FutureInvestmentinDrinking gWater andWastewaterInfrastructureestimatesannualwatersystemneedsof$12.2to $21.2Billion,whichwouldextrapolatetoa20yeartotalneedintherangeof$245to $424Billion.2 TheWaterInfrastructureNetworks(WINs)CleanandSafeWaterforthe21st Century ARenewed R dNational N ti lCommitment C it tto t Water W t and dWastewater W t t Infrastructure I f t t estimateswatersystemneedsof$21Billionannually,whichextrapolatesto$420 Billionover20years. 3
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%ofPopulation
%ofPopulation
%ofPopulation
Source:GlobalWaterIntelligence g 11/08 /
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Hi t i ll F Historically Favorable bl R Returns t And A dVolatility V l tilit F ForW Water t Equities E iti
17YearAnnualizedReturnsandVolatilitythroughNovember2010
Thewatersector continuesto generateabove averagereturns withlowervolatility thantheS&P500, electricutilities, energycompanies andcommodities overtime
25% 20% 15% 10% 5% 0% WAM OpportunitySet USWater Utilities S&P500 Philadelphia Utility Index Price Return,CAGR AnnualVolatility Amex OilIndex GSCommodity Index
Jun-10 Dec-09 Jun-09 Dec-08 Jun-08 Dec-07 Jun-07 Dec-06 Jun-06 Dec-05 Jun-05 Dec-04 Jun-04 Dec-03 Jun-03 Dec-02 Jun-02 Dec-01 Jun-01 Dec-00 Jun-00 Dec-99 Jun-99 Dec-98 Jun-98 Dec-97 Jun-97 Dec-96 Jun-96 Dec-95 Jun-95 Dec-94 Jun-94 Dec-93 Jun-93 Dec-92
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120%
100%
Quarterlysp pread
80%
S&P 500 WAM OpSet
60%
40%
20%
0%
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10
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Historically,thewater sectorhas demonstratedahigh degreeofdispersion ininvestmentreturns returns, offeringopportunities togeneratereturns onbothlongand shortstockselection
AverageAnnual Performance19962009,byDecile
Decile1
Decile2
Decile3
Decile4
Decile5
Decile7
Decile8
Decile9
Decile10
20%
40%
60%
80%
100%
120%
140%
160%
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TRF Results
S&P 500
MSCI AC
Compound ROR
11.48%
2.29%
3.02%
Cumulative Return
72.18%
11.99%
16.03%
S&P 500
MSCI AC
$1,722
$1,120
$1,160
S&P 500
MSCI AC
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KeyCERESmembersinclude
CalPERS CalSTRS IllinoisStateBoard of Retirement IllinoisStateTreasurer NorthCarolina Treasurer NYCComptroller Deutsche Asset Management BlackrockFinancial TIAACREF StateStreet GlobalAdvisors PrudentialInvestment Management
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ANewEraofWaterStressintheU U.S. S
LakeMead
z z
LakePowell
z
WatermaybetransferredtoLakeMead
Bay Delta
z z z
Energy
z
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Creditratingsdonotconsistentlycommunicatethesetrends
Rating gopinions: p
Assumethatwaterflowsinthefuturewillbeconsistentwiththerecentpast. Nostresstesttounderstandrevenueeffectsofmanmadesupplyshocks. Donotalwaysassesshowwaterlimitationsfacingwholesaleproviderscanimpact providers. retailp Sometimesconfoundrevenuegrowthandvolumegrowth. Applymetricslikeregionalwaterratebenchmarksthatmaydiscourageconservation pricing. Donotnecessarilydifferentiatebetweenwelldiversified,resilientsystemsfrommore vulnerablesystems.
Utilityinvestorsfacetwomainfinancialrisks:
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USWaterStress:ProjectedPopulationGrowthinWesternU U.S. S
Population shifts due to migration and birth rates will continue to favor the Western U.S. populations p are p projected j to increase by y almost 40% % between 2005 and 2030. where p
State .Arizona Arizona .California .Colorado .Idaho .Nevada Nevada .NewMexico .Oregon .Texas .Utah .Washington TOTAL
Footnotes:
Source:U.S.CensusBureau,PopulationDivision,InterimStatePopulationProjections,2005.
2005 5,868,004 5 868 004 36,038,859 4,617,962 1,407,060 2 352 086 2,352,086 1,902,057 3,596,083 22,775,044 2,417,998 6,204,632 87,179,785
Projections 2030 10 712 397 10,712,397 46,444,861 5,792,357 1,969,624 4 282 102 4,282,102 2,099,708 4,833,918 33,317,744 3,485,367 8,624,801 121,562,879
Projected Growth 4 844 393 4,844,393 10,406,002 1,174,395 562,564 1 930 016 1,930,016 197,651 1,237,835 10,542,700 1,067,369 2,420,169 34,383,094
%Increase 83% 29% 25% 40% 82% 10% 34% 46% 44% 39% 39%
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WesternUSWaterResourcesInvestmentRationale
Tenmillionacrefeetofadditionalwaterannuallycouldberequiredto sustaintheWesternU.S.overthenexttwentyyears
This increase in water will be needed to:
Replace depleted allocations Enhance existing supplies Provide for future housing Enable industrial development Ensure recreational viability Preserve critical habitat Satisfycoolingandprocessingneedsof conventionalandrenewablepowerplants
EstimatedUrbanWaterUsage Increaseby2030
State
California Texas Utah C l d Colorado Arizona Nevada Oregon TOTAL
ProjectedIncrease
1,300,0005,800,000af 2,500,0003,000,000af 600,000af 670 000af 670,000 f 250,000500,000af 200,000300,000af 250,000500,000af 5,770,00011,400,000af
Ca l i foni a Wa terPl a n Advi s oryCommi ttee 2005Upda te on Urba n Us e Texa s Wa terDevel opmentBoa rd Uta h Di vi s i on ofWa terRes ources Col ora do Sta tewi de Wa terSuppl yIni ti a ti ve Ari zona Depa rtmentofWa terRes ources Neva da Di vi s i on ofWa terPl a nni ng,Neva da Sta te Wa terPl a n Sta tewi de Wa terNeeds As s es ment,Oregon Wa terRes ource Depa rtment
4
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WAL acquires i 50% of f Winnemucca Wi F Farm f from Wi Winnemucca F Farms, I (WFI). Inc. (WFI) WFI will Triple Net Lease the farm from WAL for an initial 10 year term at a rate of $3,000,000 per year. The lease will be collateralized by WFIs ownership in WAL. Lease payments will be used to: Pay a 4% annual dividend Fund asset development Cover management overhead Pursue additional transactions
Pursuant to the business plan WAL has initiated discussions with a company pursuing a Northern Nevada integrated power generation and transmission strategy and a company interested in constructing concentrating solar power plants. Both entities are considering either acquiring and/or leasing water from the property or alternatively developing a portion of the property as a power site.
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WaterResources:PotentialWaterSupplyBuyers
ConventionalPowerPlantOperator
RealEstateDeveloper
AgricultureWaterDistrict
CoalBedMethaneProducer
WaterBankingAuthority
ConcentratingSolarPlantFacility
Leaseswatertosecureareliable longtermsupply.
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RegulatedUtilitieslikelytoseeconsolidationopportunities
Regulatedutilitiesprovideinflationprotected,highvisibilitycashflows Regulatedmonopolieswithsignificantdownsideprotectionandahistoryofgeneratinglongtermlow doubledigitreturns Toplinerevenuegrowthsupportedbysalesofanessentialresourcewithconsistentpricingpower Highlyvisibleinflationprotectedcashflowssupportconsistentdividendgrowth Financialshocksmitigatedbyregulatoryenvironmentwhichpermitsrecoveryofunanticipated expenses Preapprovedcapitalinvestmentsandtheassociatedincreaseinratesareprimarilydrivenby environmentalcomplianceandthereplacementofdilapidatedcriticalinfrastructure SouthWestoperatesintwoofthemostdynamicstatesforeconomicgrowthandwaterresource development Californiascustomerbaseisaprimarilyurban,stablecustomerbasewhiletheTexascustomerbaseis primarilylocatedinthefastgrowingsuburbanandexurbanmetroregionsofAustinandDallas Contractserviceshaveadiversecustomerbaseacrosssixstateswithminimalcustomerconcentration SouthWesthassubstantialwaterrightsandwaterstoragerights Whileoffbalancesheet,thesehavesignificantvalue:~$160million Strategiesforassuringwatersupplyreliabilityandwaterresourcevaluecreationinexistingbasins beingdeveloped Diverseserviceterritories,includingnonregulatedbusinesses,providecomplementarygrowthopportunities Financiallystressedmunicipalities,manyoutofcompliance,requirequalifiedwaterandwastewater solutionproviderstocreateoperatingefficienciesandtocomplywithenvironmentalrequirements
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RegulatedUtilities:USAWaterServicesLLC
USAWaterServicesLLC,throughitsinvestmentinSouthWest Waterprovidesinvestorsa unique i opportunity i toi investi inthe h consolidation lid i of fthe h USwaterutility ili i industry d with i h attractivefinancialreturns. SouthWest WaterCompanyisauniquelyattractiveinvestmentforlongterminvestors Expected E t dannual lcash hdi dividend id dyield: i ld 8 8.5% 5%(fi (first t10yearaverage), ) growing i 4% longterm ExpectedIRRof12%+ Keyassetslocatedinattractiveregulatoryenvironments Opportunity O t it t toi invest tsubstantial b t ti ladditional dditi lcapital it lin i platform l tf growth thstrategy t t SouthWestWaterCompanywasacquiredbyWaterAssetManagementandJ.P.Morgan AssetManagementsInfrastructureInvestmentsFundforapproximately$336millionin S t b 2010 September
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Conclusion
Waterinvestmentspendingtoaccelerateglobally Wateravailabilityanincreasinglyimportantrisk,largely underappreciatedbythefinancialcommunity. Governmentownershiptodeclinedrivenbyfiscalpressuresand recognitionofincreasedinvestmentandoperatingexpense. Regulatoryreformlikelyasprivatecapitalisincentivizedtoenterthe void idcreated db bypublic bli fi financial i lconstraints. i Privateownershipandinvestmentinbothphysicalwaterand distributionassetswillgrowglobally. WAMinvestsinmultiplevehiclestocapitalizeontheopportunity opportunity, longshortequity,privateU.Swaterutility,waterrights,and agriculturalpropertieswithexcesswaterinkeyhydrologicalareas.
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Di l i Disclaimer
THE INFORMATION CONTAINED HEREIN IS PROVIDED FOR INFORMATIONAL AND DISCUSSION PURPOSES ONLY AND IS NOT, AND MAY NOT BE RELIED ON IN ANY MANNER AS, LEGAL, TAX OR INVESTMENT ADVICE OR AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY AN INTEREST IN TRF MASTER FUND (CAYMAN), LP (THE FUND). A PRIVATE OFFERING OF INTERESTS IN THE FUND WILL ONLY BE MADE PURSUANT TO A CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM (THE OFFERING MEMORANDUM) AND THE FUNDS SUBSCRIPTION DOCUMENTS, , WHICH WILL BE FURNISHED TO PROSPECTIVE INVESTORS AT A LATER DATE. ANY INFORMATION CONTAINED HEREIN TO BE Q QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE OFFERING MEMORANDUM, WHICH CONTAINS ADDITIONAL INFORMATION ABOUT THE INVESTMENT OBJECTIVE, TERMS AND CONDITIONS OF AN INVESTMENT IN THE FUND AND ALSO CONTAINS TAX INFORMATION AND RISK DISCLOSURES THAT ARE IMPORTANT TO ANY INVESTMENT DECISION REGARDING THE FUND. NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY STATEMENT CONCERNING THE FUND OTHER THAN AS SET FORTH IN THE OFFERING MEMORANDUM AND ANY SUCH STATEMENTS, IF MADE, MAY NOT BE RELIED UPON. THE INFORMATION CONTAINED HEREIN MUST BE KEPT STRICTLY CONFIDENTIAL AND MAY NOT BE REPRODUCED OR REDISTRIBUTED IN ANY FORMAT WITHOUT THE APPROVAL OF THE FUND. WITHOUT LIMITATION OF ANY KIND, THE TAX TREATMENT AND TAX STRUCTURE OF THE FUND AND ITS INVESTMENTS AND ALL MATERIALS OF ANY KIND (INCLUDING OPINIONS OR OTHER TAX ANAYLSES) THAT ARE PROVIDED TO SUCH INVESTOR OR PROSPECTIVE INVESTOR RELATING TO SUCH TAX TREATMENT AND TAX STRUCTURE, MAY BE DISCLOSED BY SUCH INVESTOR OR PROSPECTIVE INVESTOR PROVIDED, HOWEVER, THAT SUCH DISCLOSURE SHALL NOT INCLUDE THE NAME (OR OTHER IDENTIFYING INFORMATION NOT RELEVANT TO THE TAX STRUCTURE OR TAX TREATMENT) ) OF ANY PERSON AND SHALL NOT INCLUDE INFORMATION FOR WHICH NONDISCLOSURE IS REASONABLY NECESSARY IN ORDER TO COMPLY WITH APPLICABLE SECURITIES LAWS. INVESTMENT IN THE FUND WILL INVOLVE SIGNIFICANT RISKS, INCLUDING LOSS OF THE ENTIRE INVESTMENT. THE FUND WILL BE ILLIQUID, AS THERE IS NO SECONDARY MARKET FOR INTERESTS IN THE FUND AND NONE IS EXPECTED TO DEVELOP. THERE WILL BE RESTRICTIONS ON TRANSFERRING INTERESTS IN THE FUND, INVESTMENTS MAY BE LEVERAGED AND THE INVESTMENT PERFORMANCE MAY BE VOLATILE. BEFORE DECIDING TO INVEST IN THE FUND, PROSPECTIVE INVESTORS SHOULD READ THE OFFERING MEMORANDUM AND PAY PARTICULAR ATTENTION TO THE RISK FACTORS CONTAINED IN THE OFFERING MEMORANDUM. INVESTORS SHOULD HAVE THE FINANCIAL ABILITY AND WILLINGNESS TO ACCEPT THE RISK CHARACTERISTICS OF THE FUNDS INVESTMENTS. IN CONSIDERING ANY PERFORMANCE DATA CONTAINED HEREIN, YOU SHOULD BEAR IN MIND THAT PAST OR TARGETED PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS, AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL ACHIEVE COMPARABLE RESULTS OR THAT TARGET RETURNS WILL BE MET. IN ADDITION, THERE CAN BE NO ASSURANCE THAT UNREALIZED INVESTMENTS WILL BE REALIZED AT THE VALUATIONS SHOWN AS ACTUAL REALIZED RETURNS WILL DEPEND ON, AMONG OTHER FACTORS, FUTURE OPERATING RESULTS, THE VALUE OF THE ASSETS AND MARKET CONDITIONS AT THE TIME OF DISPOSITION, ANY RELATED TRANSACTION COSTS, AND THE TIMING AND MANNER OF SALE, ALL OF WHICH MAY DIFFER FROM THE ASSUMPTIONS ON WHICH THE VALUATIONS CONTAINED HEREIN ARE BASED. THE IRRS PRESENTED ON A GROSS BASIS DO NOT REFLECT, AND WILL BE REDUCED BY, ANY MANAGEMENT FEES, CARRIED INTEREST, TAXES AND ALLOCABLE EXPENSES BORNE BY INVESTORS, WHICH IN THE AGGREGATE MAY BE SUBSTANTIAL. ALL IRRS PRESENTED ARE ANNUALIZED AND CALCULATED ON THE BASIS OF MONTHLY INVESTMENT INFLOWS AND OUTFLOWS. NOTHING CONTAINED HEREIN SHOULD BE DEEMED TO BE A PREDICTION OR PROJECTION OF FUTURE PERFORMANCE OF THE FUND. PROSPECTIVE INVESTORS SHOULD MAKE THEIR OWN INVESTIGATIONS AND EVALUATIONS OF THE INFORMATION CONTAINED HEREIN. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN ATTORNEY, BUSINESS ADVISER AND TAX ADVISER AS TO LEGAL, BUSINESS, TAX AND RELATED MATTERS CONCERNING THE INFORMATION CONTAINED HEREIN AND SUCH OFFERING. EXCEPT WHERE OTHERWISE INDICATED HEREIN, THE INFORMATION PROVIDED HEREIN IS BASED ON MATTERS AS THEY EXIST AS OF THE DATE OF PREPARATION AND NOT AS OF ANY FUTURE DATE, AND WILL NOT BE UPDATED OR OTHERWISE REVISED TO REFLECT INFORMATION THAT SUBSEQUENTLY BECOMES AVAILABLE, OR CIRUMSTANCES EXISTING OR CHANGES OCCURING AFTER THE DATE HEREOF. CERTAIN INFORMATION CONTAINED IN THIS PRESENTATION CONSTITUTES FORWARDLOOKING STATEMENTS, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARDLOOKING TERMINOLOGY SUCH AS MAY, WILL, SHOULD, EXPECT, ANTICIPATE, TARGET, PROJECT, ESTIMATE, INTEND, CONTINUE OR BELIEVE, OR THE NEGATIVES THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, DUE TO VARIOUS RISKS AND UNCERTAINTIES, ACTUAL EVENTS OR RESULTS OR THE ACTUAL PERFORMANCE OF ANY THE FUND MAY DIFFER MATERIALLY FROM THOSE REFLECTED OR CONTEMPLATED IN SUCH FORWARDLOOKING STATEMENTS, CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN ARE DEFINED IN THE OFFERING MEMORANDUM.
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