RBC Capital Markets The Huntington Investment Company BofA Merrill Lynch. Book-Running Senior Manager. Co-Managers

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1 OFFICIAL STATEMENT DATED DECEMBER 12, 2013 NEW ISSUE Book-Entry Only RATINGS: See Ratings of the 2013 Bonds herein In the opinion of Bond Counsel, based upon an analysis of existing laws, regulations, rulings and court decisions and continuing compliance by the Authority with certain covenants to comply with the provisions of the Internal Revenue Code of 1986, as amended (the Code ), interest on the 2013 Bonds is excluded from gross income for federal income tax purposes. Bond Counsel is also of the opinion that interest on the 2013 Bonds is not a specific item of tax preference under 57 of the Internal Revenue Code of 1986, as amended (the Code ) for purposes of Federal individual or corporate alternative minimum taxes. In the opinion of Bond Counsel, the 2013 Bonds and interest income therefrom, are free from taxation for purposes of personal income, corporate net income and personal property taxes within the Commonwealth of Pennsylvania. For further information concerning federal and state tax matters relating to the 2013 Bonds, see Tax MATTERS herein. $216,910,000 THE PITTSBURGH WATER AND SEWER AUTHORITY $130,215,000 (Fixed Rate) Water and Sewer System First Lien Revenue Refunding Bonds, Series A of 2013 $86,695,000 (Fixed Rate) Water and Sewer System First Lien Revenue Bonds, Series B of 2013 Dated: Date of Delivery First Interest Payment Date: March 1, 2014 Due: September 1, as shown in the inside front cover Authorized Denomination: $5,000 and integral multiples thereof The Pittsburgh Water and Sewer Authority (the Authority ) is issuing its $130,215,000 (Fixed Rate) Water and Sewer System First Lien Revenue Refunding Bonds, Series A of 2013 (the 2013 A Bonds ) and $86,695,000 (Fixed Rate) Water and Sewer System First Lien Revenue Bonds, Series B of 2013 (the 2013 B Bonds and together with the 2013 A Bonds, the 2013 Bonds ). The 2013 Bonds are secured by first lien pledge of the Receipts and Revenues of the Authority after payment of the Current Expenses, together with certain funds held by the Trustee under the Indenture as provided therein. The 2013 Bonds will mature on the dates and in the aggregate amounts set forth in the inside front cover hereof. The 2013 Bonds are dated the date of delivery and are issued pursuant to a Trust Indenture dated as of October 15, 1993 (the First Lien Indenture ), as amended and supplemented, including by an Eighth Supplemental First Lien Indenture dated as of December 1, 2013 (the Eighth Supplemental Indenture and together with all other amendments and supplements to the First Lien Indenture, the Indenture ), each by and between the Authority and The Bank of New York Mellon Trust Company, N.A., as successor Trustee (in such capacity, the Trustee ). The 2013 Bonds will be issued in book-entry form registered in the name of Cede & Co., the nominee of The Depository Trust Company, New York, New York ( DTC ). The payment of the principal of and premium, if any, and interest on the 2013 Bonds will be made by the Trustee directly to Cede & Co., as nominee for DTC, a registered owner of the 2013 Bonds, to be subsequently disbursed to DTC Participants and thereafter to beneficial owners of the 2013 Bonds, all as described herein. Purchasers of the 2013 Bonds will not receive physical delivery of certificates representing their ownership interest in the 2013 Bonds. See BOOK-ENTRY ONLY SYSTEM. The 2013 Bonds will initially be issued in fully registered form in minimum denominations of $5,000. The 2013 Bonds are subject to redemption prior to maturity as herein described. See THE 2013 BONDS Optional Redemption; Mandatory Sinking Fund Redemption; and Extraordinary Redemption herein. The scheduled payment of the principal and interest on the 2013 A Bonds maturing on September 1, 2015 through and including September 1, 2021, on September 1, 2025 through and including September 1, 2029 and on September 1, 2032 through and including September 1, 2033 when due (the Insured 2013A Bonds ) will be insured under an insurance policy (the Bond Insurance Policy ) to be issued concurrently with the delivery of the 2013 Bonds by Assured Guaranty Municipal Corp. (the Bond Insurer ). The scheduled payment of the principal and interest on the 2013B Bonds maturing on September 1, 2015 and on September 1, 2017 through and including September 1, 2021, and on September 1, 2025, September 1, 2028 and on September 1, 2032 when due (the Insured 2013B Bonds and together with the Insured 2013A Bonds, the Insured Bonds ) will be insured under the Bond Insurance Policy issued by the Bond Insurer. The proceeds of the 2013A Bonds will be used to: (i) fund the costs of the current refunding of all or a portion of the Authority s Water and Sewer System Revenue Refunding Bonds, Series of 2003 (the 2003 Refunded Bonds ), the Authority s (Variable Rate Demand) Water and Sewer System First Lien Revenue Bonds, Series B-1 of 2007 (the 2007 B-1 Refunded Bonds ) and the Authority s (Variable Rate Demand) Water and Sewer System First Lien Revenue Bonds, Series B-2 of 2007 (the 2007 B-2 Refunded Bonds and together with the 2007 B-1 Refunded Bonds and the 2003 Refunded Bonds collectively the Refunded Bonds ); (ii) pay certain amounts in respect of termination of certain interest rate swap agreements related to the 2007 B-1 Refunded Bonds and the 2007 B-2 Refunded Bonds; (iii) fund the premium for the Bond Insurance Policy securing payments on the Insured 2013A Bonds; and (iv) fund the costs of issuance of the 2013A Bonds. The proceeds of the 2013B Bonds will be used to: (i) fund certain Water and Sewer System Capital Improvement projects of the Authority; (ii) reimburse the Authority for certain capital expenditures previously made by the Authority for certain Capital Improvement projects; (iii) fund any required deposits to the Debt Service Reserve Fund; (iv) fund the premium for the Bond Insurance Policy securing payments on the Insured 2013 B Bonds; and (v) fund the costs of issuance of the 2013B Bonds. THE 2013 BONDS ARE LIMITED OBLIGATIONS OF THE AUTHORITY PAYABLE FROM THE RECEIPTS AND REVENUES (AS DEFINED IN THE INDENTURE) PLEDGED THERETO. NEITHER THE CITY OF PITTSBURGH NOR THE COMMONWEALTH OF PENNSYLVANIA NOR ANY POLITICAL SUBDIVISION THEREOF IS OBLIGATED TO PAY THE PRINCIPAL, REDEMPTION PRICE OF, OR INTEREST ON, THE 2013 BONDS, AND NEITHER THE FULL FAITH, CREDIT NOR TAXING POWER OF THE CITY OF PITTSBURGH OR THE COMMONWEALTH OF PENNSYLVANIA OR ANY OTHER POLITICAL SUBDIVISION THEREOF IS PLEDGED TO SUCH PAYMENT. THE AUTHORITY HAS NO TAXING POWERS. The 2013 Bonds are offered when, as and if issued by the Authority and received by the Underwriters, subject to the receipt of the approval legal opinion of Dinsmore & Shohl LLP, Bond Counsel. Certain legal matters will be passed upon for the Authority by Clark Hill Thorp Reed, and for the Underwriters by Schnader Harrison Segal & Lewis LLP. The Authority expects that delivery of the 2013 Bonds in definitive form will be made in New York, New York, on or about December 18, Book-Running Senior Manager PNC Capital Markets LLC Co-Managers RBC Capital Markets The Huntington Investment Company BofA Merrill Lynch

2 $216,910,000 THE PITTSBURGH WATER AND SEWER AUTHORITY $130,215,000 (Fixed Rate) Water and Sewer System First Lien Revenue Refunding Bonds Series A of 2013 Dated: Date of Delivery First Interest Payment Date: March 1, 2014 Due: September 1, as shown below Denomination: $5,000 and integral multiples thereof Maturity (September 1) Principal Maturity Amount Initial Offering Yield Initial Offering Price (1) CUSIP (3) Interest Rate 2014 $11,925, % 0.195% % RT ,385, RU ,620, RV ,460, RW ,705, RX ,690, RY ,010, RZ ,190, SA ,530, SB ,885, SC ,390, (2) SD ,840, (2) SE , SF , SG , SH , SJ ,535, (2) SK ,765, (2) SL ,860, SM ,955, SN 0 (1) (2) (3) Based on expected settlement date of December 18, 2013, unless otherwise noted. Based on first optional redemption date of September 1, Copyright 2011, American Bankers Association, CUSIP data herein are provided by Standard & Poor s CUSIP Service Bureau a division of The McGraw & Hill Companies, Inc. The CUSIP numbers listed above are being provided solely for the convenience of Bondholders only at the time of issuance of the Bonds and neither the Authority nor any of the Underwriters makes any representation with respect to such numbers or undertakes any responsibility for their accuracy now or at any time in the future. The CUSIP number for a specific maturity is subject to being changed after the issuance of the Bonds as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the Bonds.

3 $86,695,000 (Fixed Rate) Water and Sewer System First Lien Revenue Bonds Series B of 2013 Dated: Date of Delivery First Interest Payment Date: March 1, 2014 Due: September 1, as shown below Denomination: $5,000 and integral multiples thereof Maturity (September 1) Principal Maturity Amount Initial Offering Yield Initial Offering Price (1) CUSIP (3) Interest Rate 2015 $1,815, % 0.540% % SP ,860, SQ ,920, SR ,995, SS ,075, ST ,180, SU ,285, SV ,400, SW ,520, SX ,645, (2) SY ,780, (2) SZ ,920, TA ,035, (2) TB ,185, TC ,320, (2) TD ,485, (2) TE ,665, (2) TF ,850, TG (4) 17,405, (2) TH (4) 21,355, (2) TJ 8 (1) (2) (3) (4) Based on expected settlement date of December 18, 2013, unless otherwise noted. Based on first optional redemption date of September 1, Copyright 2011, American Bankers Association, CUSIP data herein are provided by Standard & Poor s CUSIP Service Bureau a division of The McGraw & Hill Companies, Inc. The CUSIP numbers listed above are being provided solely for the convenience of Bondholders only at the time of issuance of the Bonds and neither the Authority nor any of the Underwriters makes any representation with respect to such numbers or undertakes any responsibility for their accuracy now or at any time in the future. The CUSIP number for a specific maturity is subject to being changed after the issuance of the Bonds as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the Bonds. Term Bond.

4 THE PITTSBURGH WATER AND SEWER AUTHORITY BOARD MEMBERS Dan Deasy, Chairman Robert P. Jablonowski, Vice Chairman Scott Kunka, Treasurer Henry C. Blum, Secretary Margaret L. Lanier, Assistant Secretary/Assistant Treasurer Patrick Bigley, Member INTERIM EXECUTIVE MANAGEMENT SERVICER Veolia Water North America Northeast LLC INTERIM EXECUTIVE DIRECTOR James Good Veolia Water North America Northeast LLC INTERIM DIRECTOR OF FINANCE Joey Tolbert Veolia Water North America Northeast LLC AUTHORITY COUNSEL Clark Hill Thorp Reed Pittsburgh, Pennsylvania AUTHORITY CONSULTING ENGINEER Chester Engineers Pittsburgh, Pennsylvania FINANCIAL ADVISOR Public Financial Management, Inc. Philadelphia, Pennsylvania SWAP ADVISOR Swap Financial Group, LLC South Orange, New Jersey BOND COUNSEL Dinsmore & Shohl LLP Pittsburgh, Pennsylvania UNDERWRITERS PNC Capital Markets LLC BofA Merrill Lynch The Huntington Investment Company RBC Capital Markets UNDERWRITERS COUNSEL Schnader Harrison Segal & Lewis LLP Pittsburgh, Pennsylvania TRUSTEE AND PAYING AGENT The Bank of New York Mellon Trust Company, N.A. Pittsburgh, Pennsylvania

5 No dealer, broker, salesperson or other person has been authorized by the Authority to give any information or to make any representation in connection with the 2013 Bonds or the matters described herein, other than those contained in this Official Statement, and, if given or made, such other information or representation must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the 2013 Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. All quotations from and summaries and explanations of provisions of laws herein do not purport to be complete and reference is made to said laws for full and complete statements of their provisions. This Official Statement is not to be construed as a contract or agreement between the Authority and the purchasers or holders of any of the 2013 Bonds. Any statements made in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended merely as opinion and not as representations of fact. The information contained herein is subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Authority since the date hereof. The order and placement of materials in this Official Statement, including the Appendices, are not to be deemed to be a determination of relevance, materiality or importance, and this Official Statement, including the Appendices, must be considered in its entirety. The Authority has deemed this Official Statement to be final for the purposes of Securities and Exchange Commission Rule 15c2-12(b)(3) promulgated under the Securities Exchange Act. The Underwriters has reviewed the information in this Official Statement in accordance with, and as a part of, their responsibilities to investors under federal securities law, as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. Assured Guaranty Municipal Corp. ( AGM ) makes no representation regarding the 2013 Bonds or the advisability of investing in the 2013 Bonds. In addition, AGM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding AGM supplied by AGM and presented under the heading BOND INSURANCE and APPENDIX G SPECIMEN MUNICIPAL BOND INSURANCE POLICY. THE 2013 BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, NOR HAS THE INDENTURE BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACTS. THE REGISTRATION OR QUALIFICATION OF THE 2013 BONDS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF THE SECURITIES LAWS OF THE STATES, IF ANY, IN WHICH THE 2013 BONDS HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN CERTAIN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THESE STATES NOR ANY OF THEIR AGENCIES HAVE PASSED UPON THE MERITS OF THE 2013 BONDS OR THE ACCURACY OR COMPLETENESS OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE.

6 TABLE OF CONTENTS INTRODUCTION... 1 THE AUTHORITY... 2 DEBT OF THE AUTHORITY... 3 THE 2013 BONDS... 4 REGISTRATION, TRANSFER AND EXCHANGE OF THE 2013 BONDS... 6 BOOK-ENTRY ONLY SYSTEM... 7 BOND INSURANCE... 9 BOND INSURANCE RISK FACTORS PLAN OF FINANCING ESTIMATED SOURCES AND USES OF FUNDS SECURITY FOR THE 2013 BONDS FLOW OF FUNDS RATE COVENANT INTEREST RATE SWAP AGREEMENTS CERTAIN BONDHOLDERS RISKS LITIGATION TAX MATTERS THE TRUSTEE LEGAL OPINIONS INDEPENDENT AUDITORS CONSULTING ENGINEERS RATINGS OF THE 2013 BONDS CONTINUING DISCLOSURE; DISCLOSURE DISSEMINATION UNDERWRITING FINANCIAL ADVISOR SWAP ADVISOR CERTAIN RELATIONSHIPS MISCELLANEOUS APPENDIX A Description of the Authority and Water and Sewer System APPENDIX B Summary of the Indentures APPENDIX C Authority Financial Statements as of December 31, 2012 and December 31, 2011 APPENDIX D Certain Information Regarding the City of Pittsburgh APPENDIX E Consulting Engineer s Report in Support of the 2013 Capital Improvements Bond Issue dated November 26, 2013 APPENDIX F Form of Bond Counsel Opinion APPENDIX G Specimen Municipal Bond Insurance Policy -i-

7 SUMMARY INFORMATION THIS SUMMARY STATEMENT IS SUBJECT IN ALL RESPECTS TO THE MORE COMPLETE INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT AND OFFERING OF THE 2013 BONDS TO THE POTENTIAL PURCHASERS IS MADE ONLY BY MEANS OF THIS OFFICIAL STATEMENT. NO PERSON IS AUTHORIZED TO DETACH THIS SUMMARY FROM THE OFFICIAL STATEMENT OR OTHERWISE TO USE THE SAME WITHOUT THE ENTIRE OFFICIAL STATEMENT. Issuer: The Pittsburgh Water and Sewer Authority (the Authority ) Bonds: The Pittsburgh Water and Sewer Authority, $130,215,000 (Fixed Rate) Water and Sewer System First Lien Revenue Refunding Bonds, Series A of 2013 ( 2013A Bonds ) and $86,695,000 (Fixed Rate) Water and Sewer System First Lien Revenue Bonds, Series B of 2013 (the 2013B Bonds ). Date of Bonds: Date of Delivery. Denomination: $5,000 and integral multiples thereof. Maturity: September 1, of the years specified on the inside front cover hereof. Interest: Payable each March 1 and September 1, commencing March 1, Final Maturity: September 1, 2033, 2013A Bonds September 1, 2040, 2013B Bonds Security: Bond Ratings: The 2013 Bonds are secured (along with all other bonds issued pursuant to the Indenture, certain Periodic Payments due under Qualified Interest Rate Swap Agreements and certain Reimbursement Obligations, as defined in the Indenture) by a first lien pledge of the Receipts and Revenues of the Authority after payment of the Current Expenses, together with certain funds held by the Trustee under the Indenture as provided therein. (See SECURITY FOR THE 2013 BONDS PLEDGE OF RECEIPTS AND REVENUES herein). Standard & Poor s and Moody s Investors Service have assigned their underlying municipal bond ratings of A (stable outlook), A2 (stable outlook), respectively, to the 2013 Bonds (See RATINGS OF THE 2013 BONDS herein.) Standard & Poor s and Moody s Investors Service are expected to assign their municipal bond rating of AA- (stable outlook) and A2 (stable outlook), respectively, to the Insured 2013A Bonds, as hereinafter defined, and the Insured 2013B Bonds, as hereinafter defined, with the understanding that upon delivery of the Insured 2013A Bonds and the Insured 2013B Bonds, policies insuring the scheduled payment when due of the principal of and interest on the Insured 2013A Bonds and the Insured 2013B Bonds will be issued by the Bond Insurer, as hereinafter defined. Bond Insurance: The scheduled payment of principal of and interest on the 2013A Bonds maturing on September 1, 2015 through and including September 1, 2021, on September 1, 2025 through and including September 1, 2029 and on September 1, 2032 through and including September 1, 2033 (the Insured 2013A Bonds ) and on the 2013B Bonds maturing on September 1, 2015, and on September 1, 2017 through and including September 1, 2021, and on September 1, 2025, on September 1, 2028 and on September 1, 2032 (the Insured 2013B Bonds, and together with the Insured 2013A Bonds, the Insured Bonds ) are insured under bond insurance policies (the Bond Insurance Policies ) issued by -ii-

8 Assured Guaranty Municipal Corp. (the Bond Insurer ) (See SECURITY FOR THE 2013 BONDS and BOND INSURANCE herein.) Use of Proceeds: The proceeds of the 2013A Bonds will be used to: (i) fund the costs of the current refunding of all or a portion of the Authority s Water and Sewer System Revenue Refunding Bonds, Series of 2003 (the 2003 Refunded Bonds ), the Authority s (Variable Rate Demand) Water and Sewer System First Lien Revenue Bonds Series B-1 of 2007 (the 2007 B-1 Refunded Bonds ) and the Authority s (Variable Rate Demand) Water and Sewer System First Lien Revenue Bonds Series B-2 of 2007 (the 2007 B-2 Refunded Bonds and together with the 2003 Refunded Bonds and the 2007 B-1 Refunded Bonds the Refunded Bonds ); (ii) pay certain amounts in respect of termination of certain interest rate swap agreements related to the 2007 B-1 Refunded Bonds and the 2007 B-2 Refunded Bonds; (iii) fund the premium for the Bond Insurance Policy securing payments on the Insured 2013A Bonds (the 2013A Insurance Policy ); and (iv) to fund the costs of issuance of the 2013A Bonds. The proceeds of the 2013B Bonds will be used to: (i) fund certain Water and Sewer System Capital Improvement projects of the Authority; (ii) reimburse the Authority for certain capital expenditures previously made by the Authority for certain Capital Improvement projects; (iii) fund any required deposits to the Debt Service Reserve Fund; (iv) fund the premium for the Bond Insurance Policy securing payments on the Insured 2013B Bonds (the 2013B Insurance Policy ) and (v) fund the costs of issuance of the 2013B Bonds. Redemption: Continuing Disclosure Undertaking: Trustee & Paying Agent: The 2013 Bonds are subject to optional and mandatory redemption, and extraordinary optional redemption prior to maturity (See THE 2013 BONDS OPTIONAL REDEMPTION; MANDATORY SINKING FUND REDEMPTION; and EXTRAORDINARY REDEMPTION herein). The Authority has agreed to provide, or cause to be provided, in a timely manner, certain information in accordance with the requirements of Rule , as promulgated under the Securities Exchange Act of 1934, as amended and interpreted (the Rule ) (See CONTINUING DISCLOSURE; DISCLOSURE DISSEMINATION herein.) The Bank of New York Mellon Trust Company, N.A. -iii-

9 THE PITTSBURGH WATER AND SEWER AUTHORITY $130,215,000 (Fixed Rate) Water and Sewer System First Lien Revenue Refunding Bonds, Series A of 2013 $86,695,000 (Fixed Rate) Water and Sewer System First Lien Revenue Bonds, Series B of 2013 INTRODUCTION The purpose of this Official Statement, which includes this introductory statement, the cover page, the summary information and the Appendices hereto, is to set forth certain information pertaining to The Pittsburgh Water and Sewer Authority (the Authority ), a body corporate and politic duly created and existing under the Pennsylvania Municipality Authorities Act, 53 Pa. C.S.A et seq. (the Act ), and the issuance by the Authority of the following bonds (collectively the 2013 Bonds ): (a) $130,215,000 (Fixed Rate) Water and Sewer System First Lien Revenue Refunding Bonds, Series A of 2013; and (b) of $86,695,000 (Fixed Rate) Water and Sewer System First Lien Revenue Bonds, Series B The 2013 Bonds are being issued pursuant to a Trust Indenture dated as of October 15, 1993 (the First Lien Indenture ), as amended and supplemented by a First Supplemental Indenture dated as of July 15, 1995, a Second Supplemental Indenture dated as of March 1, 1998, a Third Supplemental Indenture dated as of March 1, 2002, a Fourth Supplemental Indenture dated as of September 15, 2003, a Fifth Supplemental Indenture dated as of June 1, 2005, a Sixth Supplemental Indenture dated as of March 1, 2007 and a Seventh Supplemental Indenture dated as of June 1, 2008, as amended, including as amended by the Amending Supplement to the Initial First Lien Indenture and the Seventh Supplemental Indenture dated as of October 15, 2009 and the Second Amendment to the Seventh Supplemental Indenture dated as of August 1, 2010, as further amended by a Second Amending Supplement to the Initial First Lien Indenture and Third Amending Supplement to the Seventh Supplemental Indenture dated as of October 22, 2013 and the Eighth Supplemental First Lien Indenture dated as of December 1, 2013 (collectively, the Indenture or the First Lien Indenture ) by and between the Authority and The Bank of New York Mellon Trust Company, N.A., as Trustee (the Trustee ). All capitalized terms not otherwise defined herein shall have the same meanings ascribed to them in the definitions set forth in APPENDIX B SUMMARY OF THE INDENTURES DEFINITIONS OF CERTAIN TERMS. All references herein to the Act, the 2013 Bonds, the Indenture and the Disclosure Dissemination Agreement are qualified in their entirety by reference to the complete texts thereof. Copies of drafts of such documents may be obtained during the initial offering period from the principal offices of the Underwriters and thereafter, executed copies may be obtained from the Trustee. All statements in this Official Statement involving matters of opinion, estimates, forecasts, projections or the like, whether or not expressly so stated, are intended as such and not as representations of fact. No representation is made that any of such statements will be realized. 1

10 THE AUTHORITY The Authority is a body corporate and politic organized and existing under the Act pursuant to Resolution No. 36 of the Council of the City of Pittsburgh (the City ), duly enacted on February 6, 1984, approved by the Mayor on February 8, 1984, and effective February 16, The Secretary of the Commonwealth of Pennsylvania approved the Authority s Articles of Incorporation and issued a Certificate of Incorporation on February 17, Articles of Amendment were approved and a Certificate of Amendment was issued by the Pennsylvania Department of State on December 11, 1989, to include, among authorized projects, low head dams and facilities for generating surplus electric power. Articles of Amendment were approved and a Certificate of Amendment was issued by the Pennsylvania Department of State on May 9, 2008, to extend the term of existence of the Authority to May 21, Under its Articles of Incorporation, the Authority is specifically authorized to acquire, hold, construct, finance, improve, maintain, operate, own and lease, either as lessor or lessee, projects of the following kinds and character: sewers, sewer systems or parts thereof, waterworks, water supply works, and water distribution systems, low head dams and facilities for generating surplus power. The Authority was established in February 1984 by the City for the purpose of assuming responsibility for the operation of the City s water supply and distribution and wastewater collection systems (the Water and Sewer System ). Pursuant to a Lease and Management Agreement dated March 29, 1984 between the Authority and the City (the Lease and Management Agreement ), the Water and Sewer System was leased to the Authority. In 1995, the Lease and Management Agreement was terminated and the Authority was granted the option to acquire the portion of the Water and Sewer System owned by the City pursuant to a Capital Lease Agreement dated as of July 15, 1995 between the Authority and the City (the Capital Lease Agreement ). (See APPENDIX A DESCRIPTION OF THE AUTHORITY AND WATER AND SEWER SYSTEM CAPITAL LEASE AGREEMENT WITH THE CITY OF PITTSBURGH. ) The Water and Sewer System provides water for 84% of the total population in the geographic boundaries of the City and the Authority provides wastewater collection and transmission service to almost the entire City, estimated at 310,000 residents. The Water and Sewer System does not include wastewater treatment facilities; such facilities are the responsibility of Allegheny County Sanitary Authority ( ALCOSAN ), a separate and distinct legal entity. Rates and charges established by the Authority are not subject to the approval of any department, board or agency of the Commonwealth of Pennsylvania or the City. Interim Executive Management Agreement with Veolia Water With the intent of providing more efficient services and adopting best practices for the Authority, on July 25, 2012, the Authority s Board of Directors approved an Agreement (the Agreement ) for interim Executive Management Services with Veolia Water North America Northeast, LLC ( Veolia Water ). The Agreement provides for Veolia Water to provide two types of services. On July 10, 2013, the Board voted unanimously to extend the Agreement through December 31, Veolia Water is providing the Authority with the services of a full time, on site, interim executive director. Veolia Water is also providing the Authority with consulting services known as Peer Performance Solutions or PPS, led by a full time, on-site manager. The Agreement identifies various areas of consulting and implementation services to be provided including, general administration and management, financial and budgeting, operations and maintenance, and includes many specific deliverables. Veolia Water is performing the services under the Agreement for a base compensation of $135,000 per month, plus additional incentive payments for the achievement of approved initiatives that identify new revenue, efficiencies and process changes. 2

11 2013 Rate Study In May 2013 Veolia Water and the Authority retained Sycamore Advisors, LLC to conduct a rate study of the Authority s water and sewer conveyance charges. The results of the study and the report of Sycamore Advisors, LLC ( Sycamore ) is attached as Exhibit C to the Engineers Report (See APPENDIX E ENGINEERS REPORT.) As a result of the Sycamore report, on October 11, 2013 the Authority adopted revised rates, effective 2014, for years 2014, 2015, 2016 and (See APPENDIX A RATE INCREASE.) Capital Improvement Plan and Additional Debt In 2010, the Authority conducted and developed a 40 year, $2.4 billion Capital Plan that will estimate the financial resources needed for capital improvements in rolling five-year plans. The 40 Year Plan is a guide for the future. This Plan identified upgrades to maintain and enhance the performance of the Authority s water and sewer systems. The website address to the 40 Year Plan can be found at The Capital Improvement Program or CIP is a series of 5 year plans that address more immediate repair and replacements. A portion of the proceeds of the 2013B Bonds are to be used to advance the Authority s Capital Improvement Program. (See APPENDIX A DESCRIPTION OF THE AUTHORITY AND THE WATER AND SEWER SYSTEM CAPITAL IMPROVEMENT PLAN ). The Authority anticipates issuing additional bonds, perhaps as early as 2015, to continue its Capital Improvement Program in the estimated amount of $75,000,000 to $100,000,000. Additional information about the Authority can be found at DEBT OF THE AUTHORITY First Lien Debt In addition to the 2013 Bonds, the Authority has previously issued under the Indenture other bonds which have a parity claim to the Receipts and Revenue of the Authority. The parity issues that will be outstanding following the delivery of the 2013 Bonds and the refunding of the Refunded Bonds is as follows: Water and Sewer System First Lien Revenue Bonds, Series B of 1998 in the stated maturity amount of $146,805,000 (the 1998B First Lien Bonds ); Water and Sewer System First Lien Revenue Bonds, Series A of 2007 in the outstanding principal amount of $20,335,000 (the 2007A First Lien Bonds ); Water and Sewer System First Lien Revenue Bonds Taxable, Series A of 2008 in the outstanding principal amount of $68,970,000 (the 2008A First Lien Bonds ); (Variable Rate Demand) Water and Sewer System First Lien Revenue Refunding Bonds, Series B-1of 2008 in the outstanding principal amount of $72,750,000 (the 2008B-1 First Lien Bonds ); (Variable Rate Demand) Water and Sewer System First Lien Revenue Refunding Bonds, Series B-2 of 2008 in the outstanding principal amount of $72,745,000 (the 2008B-2 First Lien Bonds ); Water and Sewer System First Lien Revenue Refunding Bonds, Series D-1 of 2008 in the outstanding principal amount of $24,665,000 (the 2008D-1 First Lien Bonds ); Water and Sewer System First Lien Revenue Bonds, Series D-2 of 2008 in the outstanding principal amount of $71,225,000 (the 2008D-2 First Lien Bonds ) (all such Outstanding Prior Bonds being collectively referred to herein as the Prior Outstanding First Lien Bonds ). Subordinated Debt In addition to the Prior Outstanding First Lien Bonds, the Authority has outstanding five series or subseries of subordinate revenue bonds (collectively, the Subordinate Bonds ) issued pursuant to the Authority s Subordinate Trust Indenture, dated as of July 15, 1995, as supplemented and amended, by and between the Authority and The Bank of New York Mellon Trust Company, N.A., as successor trustee (the Subordinate Lien Indenture ) in an aggregate principal amount of $103,660,000 designated the Water and Sewer System Subordinate Revenue Refunding Bonds, Series C-1A, Series C-1B, Series C-1C, Series C-1D and Series C-2 of 2008 (collectively, the Series 2008C Bonds ). 3

12 PENNVEST In addition to the Subordinate Bonds, the Authority has outstanding 14 loans (three of which were concluded in August, October and November of 2013) from the Pennsylvania Infrastructure Investment Authority ( PENNVEST ) in the current outstanding principal amount of $53,227,405 (the Pennvest Loans ), which loans are also subordinated to the Authority s First Lien Bonds and Subordinate Bonds. The Authority has two (2) additional funding offers pending with PENNVEST for loans in the aggregate amount of $5,120,000 which are expected to close in THE 2013 BONDS The 2013 Bonds will be issued as fully registered bonds in book-entry form. The 2013 Bonds will be issued in denominations of $5,000 principal amount, or any integral multiple thereof, and will bear interest at the rates and will mature on the dates and in the amounts set forth on the inside cover of this Official Statement. Principal and interest shall be paid in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts. Interest on the 2013 Bonds will be computed on the basis of a 360-day year of twelve 30-day months. Interest shall be payable on the 2013 Bonds on March 1 and September 1 of each year commencing March 1, 2014 (each an Interest Payment Date ). Each 2013 Bond will be initially dated the date of issuance, and thereafter will be dated as of its date of authentication. The 2013 Bonds shall bear interest from the Interest Payment Date to which interest has been paid next preceding the date of authentication, unless the date of authentication (i) is an Interest Payment Date to which interest has been paid, in which event the Bonds shall bear interest from the date of authentication, or (ii) is on or prior to the Regular Record Date for the first Interest Payment Date for the 2013 Bonds, in which event such Bond shall bear interest from the Issue Date, or (iii) is after a Regular Record Date and on or before the succeeding Interest Payment Date, in which event the 2013 Bonds shall bear interest from the succeeding Interest Payment Date. Interest on the 2013 Bonds shall be paid on each Interest Payment Date. Each Fixed Rate Bond shall bear interest on overdue principal at the rates borne by the 2013 Bonds during the period such principal is overdue. Both principal and interest shall, however, be payable out of the Receipts and Revenues of the Authority derived from the Water and Sewer System and shall be payable at the designated corporate trust office of the Trustee in lawful money of the United States of America. The 2013 Bonds are payable as to principal at the designated office of the Trustee or any successor trustee or paying agent. Payment of interest on the 2013 Bonds shall be made to the 2013 Bondholders of record on the registration books of the Trustee as of the close of business on the fifteenth day of the month (whether or not such day is a business day) next preceding the Interest Payment Date (the Record Date ) by check mailed to such owner at the address shown on the registration books, by wire transfer under certain circumstances, as described below, or in any other manner as may be mutually acceptable to the owner and the Trustee. Defaulted interest with respect to any 2013 Bond shall cease to be payable to the owner thereof on the relevant Record Date and shall be payable instead to the registered Bondholder as of the close of business on a Special Record Date for the payment of such defaulted interest established by the Trustee in accordance with the First Lien Indenture. Payment of interest on any Bond shall be made to any owner of $1,000,000 or more in aggregate principal amount of such Bonds by wire transfer to such owner on any Interest Payment Date upon written notice from such owner received by the Trustee not later than the Business Day next preceding the Record Date for the applicable Interest Payment Date, such notice to contain the wire transfer address within the continental United States to which such owner wishes to have such wire directed. The 2013 Bonds are available in book-entry form only. (See BOOK-ENTRY ONLY SYSTEM ) herein. So long as Cede & Co. is the registered owner of the 2013 Bonds, as nominee of The Depository Trust Company, New York, New York ( DTC ), references herein to the owners of the 2013 Bonds means Cede & Co. and not the Beneficial Owners (as defined hereafter) of the 2013 Bonds. The principal of and interest on the 2013 Bonds will be payable by the Trustee to Cede & Co. 4

13 The 2013 Bonds are subject to optional and mandatory redemption as described herein under the captions THE 2013 BONDS Optional Redemption, Mandatory Sinking Fund Redemption and Extraordinary Optional Redemption. Optional Redemption The 2013A Bonds which mature on or after September 1, 2024 are subject to redemption, at the option of the Authority, in whole or in part, in the order of maturity selected by the Authority and by lot within a maturity, at any time on or after September 1, Any such redemption will be made at a redemption price equal to 100% of the principal amount thereof plus accrued interest to the date fixed for redemption. The 2013B Bonds which mature on or after September 1, 2024 are subject to redemption, at the option of the Authority, in whole or in part, in the order of maturity selected by the Authority and by lot within a maturity, at any time on or after September 1, Any such redemption will be made at a redemption price equal to 100% of the principal amount thereof plus accrued interest to the date fixed for redemption. Mandatory Sinking Fund Redemption The 2013A Bonds are not subject to mandatory sinking fund redemption prior to their stated maturity dates. The 2013B Bonds which mature on September 1 of 2036 and 2040 are subject to mandatory sinking fund redemption, in part, in order of maturity and by lot within a maturity of the respective series, on September 1 in the years and the principal amounts listed below, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued interest to the date fixed for redemption. The 2013B Bonds Stated The 2013B Bonds Stated to Mature on September 1, 2036 to Mature on September 1, 2040 Year Principal Amount Year Principal Amount 2033 $4,025, $4,935, ,235, ,195, ,455, ,470, ,690,000 (1) ,755,000 (1) (1) Upon maturity. Extraordinary Optional Redemption The 2013 Bonds are subject to extraordinary redemption prior to maturity at the option of the Authority in whole or in part at any time, in the event of condemnation, damage or destruction of the Water and Sewer System, from moneys deposited with or held by the Trustee for such purpose, upon payment of 100% of the principal amount thereof being redeemed, together with interest accrued to the date fixed for redemption. The redemption of the 2013 Bonds shall be made in the manner and upon the terms and conditions set forth in the First Lien Indenture. 5

14 Partial Redemption If less than all 2013 Bonds are to be redeemed, the particular 2013 Bonds to be redeemed shall be selected by the Trustee by lot or by such other method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (in Authorized Denominations) of the principal of 2013 Bonds in a denomination larger than the smallest Authorized Denomination. Effect of Redemption 2013 Bonds (or portions thereof as aforesaid) for which redemption and payment provision is made in accordance with the First Lien Indenture shall cease to bear interest from and after the date fixed for redemption. Notice of Redemption Any notice of redemption shall be given by first class mail, postage prepaid, mailed not less than 30 days prior to the redemption date, to each Holder of 2013 Bonds to be redeemed, at his address appearing in the Register. So long as DTC is effective book-entry transfers of the 2013 Bonds, the Trustee shall provide the notices specified under this heading only to DTC. It is expected that the DTC shall, in turn, notify its Participants and that the Participants, in turn, will notify or cause to be notified the beneficial owners. Any failure on the part of DTC or a Participant, or failure on the part of a nominee of a beneficial owner of a 2013 Bond to notify the beneficial owner of the 2013 Bond so affected, shall not affect the validity of the redemption of such 2013 Bond. REGISTRATION, TRANSFER AND EXCHANGE OF THE 2013 BONDS The Trustee has been appointed bond registrar and as such shall keep the bond register at its designated office. The Person in whose name any 2013 Bond shall be registered on the bond register shall be deemed and regarded as the absolute owner of such 2013 Bond for all purposes, and payment of or on account of the principal of and redemption premium, if any, and interest on any such 2013 Bond shall be made only to or upon the order of the Registered Owner thereof or his legal representative. All such payments shall be valid and effectual to satisfy, and discharge the liability upon such 2013 Bond, including the interest thereon, to the extent of the sum or sums so paid. Any 2013 Bond may be transferred only upon the bond register upon surrender thereof to the Trustee duly endorsed for transfer or accompanied by an assignment duly executed by the Registered Owner or his attorney or legal representative in such form as shall be satisfactory to the Trustee. Upon any such transfer, the Authority shall execute and the Trustee shall authenticate and deliver in exchange for such 2013 Bond a new 2013 Bond or 2013 Bonds, registered in the name of the transferee, of any authorized denomination and of the same maturity and series and bearing interest at the same rate. The Trustee may charge an amount sufficient to reimburse it for any tax, fee or other governmental charge required to be paid in connection with any such transfer, registration, conversion or exchange. The Trustee shall not be required to (i) transfer or exchange any 2013 Bond during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of such 2013 Bond and ending at the close of business on the day of such mailing, or (ii) transfer or exchange any 2013 Bond so selected for redemption in whole or in part, or (iii) during a period beginning at the opening of business on any Record Date for such 2013 Bond and ending at the close of business on the relevant Interest Payment Date therefor. See also BOOK-ENTRY ONLY SYSTEM herein for further information regarding registration, transfer and exchange of the 2013 Bonds. 6

15 BOOK-ENTRY ONLY SYSTEM The information set forth below concerning The Depository Trust Company and the book-entry only system has been extracted from materials provided by DTC for such purpose. No representation is made by the Authority or the Underwriters as to the accuracy of such information provided by DTC or as to the absence of material adverse changes in such information subsequent to the date hereof. The Depository Trust Company ( DTC ), New York, NY, will act as securities depository for the 2013 Bonds (the Securities ). The Securities will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Security certificate will be issued for each subseries of the Securities, each in the aggregate principal amount of each maturity of such issue, and will be deposited with DTC. DTC, the world s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity, corporate and municipal debt issues, and money market instrument from over 100 countries that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has a Standard & Poor s rating of: AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at Purchases of Securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the Securities on DTC s records. The ownership interest of each actual purchaser of each Security ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Securities are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Securities, except in the event that use of the book-entry system for the Securities is discontinued. To facilitate subsequent transfers, all Securities deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of Securities with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Securities: DTC s records reflect only the identity of the Direct Participants to whose accounts such Securities are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. 7

16 Conveyance of notices and other communications to Direct Participants by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Securities may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Securities, such as redemptions, tenders, defaults, and proposed amendments to the security documents. For example, Beneficial Owners of Securities may wish to ascertain that the nominee holding the Securities for their benefit has agreed to obtain and transmit notices to Beneficial Owners, in the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Securities within an issue are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Securities unless authorized by a Direct Participant in accordance with DTC s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts the Securities are credited on the record date (identified in a listing the Authority attached to the Omnibus Proxy). Redemption proceeds, distributions, and dividend payments on the Securities will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts, upon DTC s receipt of funds and corresponding detail information from Authority or Trustee ( Agent ) on a payment date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC nor its nominee, Agent, or Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. for such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the Securities at any time by giving reasonable notice to Authority or Agent. Under such circumstances, in the event that a successor securities depository is not obtained, Security certificates are required to be printed and delivered. The Authority may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered to DTC. The information in this section concerning DTC and DTC s book-entry system has been obtained from sources that Authority believes to be reliable, but the Authority takes no responsibility for the accuracy thereof. Principal, premium and interest payments on the Securities will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participant s accounts upon DTC s receipt of funds and corresponding detail information from the Authority, on the payment date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary 8

17 practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name and will be the responsibility of such Participant and not of DTC, the Trustee or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time, Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. THE AUTHORITY AND THE TRUSTEE WILL HAVE NO RESPONSIBILITY OR OBLIGATION TO THE DIRECT PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH RESPECT TO THE ACCURACY OF THE RECORDS OF DTC, ITS NOMINEE OR ANY DIRECT PARTICIPANT PERTAINING TO OWNERSHIP IN THE SECURITIES OR THE PAYMENTS TO, OR THE PROVIDING OF NOTICE FOR, THE DIRECT PARTICIPANTS, OR THE INDIRECT PARTICIPANTS OR THE BENEFICIAL OWNERS. SO LONG AS CEDE & CO., AS NOMINEE OF DTC, IS THE REGISTERED OWNER OF THE SECURITIES, REFERENCES HEREIN TO THE HOLDERS OF THE SECURITIES, OR OWNERS OF THE SECURITIES, SHALL MEAN CEDE & CO., AND SHALL NOT MEAN THE BENEFICIAL OWNERS. Discontinuation of Book-Entry Only System DTC may determine to discontinue providing its service with respect to the 2013 Bonds at any time by giving notice to the Authority and the Trustee and discharging its responsibilities with respect thereto under applicable law. Upon the giving of such notice, the book-entry only system for the 2013 Bonds will be discontinued unless a successor securities depository is appointed by the Authority. If the Authority and the Trustee concur that it would be in the best interests of the Holders of the 2013 Bonds for the book-entry only system to be discontinued ( in whole or in part), such book-entry only system shall be discontinued (in whole or in part) in accordance with the provisions of the applicable procedures of DTC. BOND INSURANCE POLICY BOND INSURANCE Concurrently with the issuance of the 2013 Bonds, Assured Guaranty Municipal Corp. ("AGM") will issue its Bond Insurance Policies for the Insured Bonds (the "Policies"). The Policies guarantee the scheduled payment of principal of and interest on the Insured 2013A Bonds and the Insured 2013B Bonds, as applicable, when due as set forth in the form of the Policies included as APPENDIX G SPECIMEN MUNICIPAL BOND INSURANCE POLICY of this Official Statement. The Policies are not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law. ASSURED GUARANTY MUNICIPAL CORP. AGM is a New York domiciled financial guaranty insurance company and an indirect subsidiary of Assured Guaranty Ltd. ( AGL ), a Bermuda-based holding company whose shares are publicly traded and are listed on the New York Stock Exchange under the symbol AGO. AGL, through its operating subsidiaries, provides credit enhancement products to the U.S. and global public finance, infrastructure and structured finance markets. Neither AGL nor any of its shareholders or affiliates, other than AGM, is obligated to pay any debts of AGM or any claims under any insurance policy issued by AGM. 9

18 AGM s financial strength is rated AA- (stable outlook) by Standard and Poor s Ratings Services, a Standard & Poor s Financial Services LLC business ( S&P ) and A2 (stable outlook) by Moody s Investors Service, Inc. ( Moody s ). Each rating of AGM should be evaluated independently. An explanation of the significance of the above ratings may be obtained from the applicable rating agency. The above ratings are not recommendations to buy, sell or hold any security, and such ratings are subject to revision or withdrawal at any time by the rating agencies, including withdrawal initiated at the request of AGM in its sole discretion. In addition, the rating agencies may at any time change AGM s long-term rating outlooks or place such ratings on a watch list for possible downgrade in the near term. Any downward revision or withdrawal of any of the above ratings, the assignment of a negative outlook to such ratings or the placement of such ratings on a negative watch list may have an adverse effect on the market price of any security guaranteed by AGM. AGM only guarantees scheduled principal and scheduled interest payments payable by the issuer of bonds insured by AGM on the date(s) when such amounts were initially scheduled to become due and payable (subject to and in accordance with the terms of the relevant insurance policy), and does not guarantee the market price or liquidity of the securities it insures, nor does it guarantee that the ratings on such securities will not be revised or withdrawn. Current Financial Strength Ratings On June 12, 2013, S&P published a report in which it affirmed AGM s AA- (stable outlook) financial strength rating. AGM can give no assurance as to any further ratings action that S&P may take. On January 17, 2013, Moody s issued a press release stating that it had downgraded AGM s insurance financial strength rating to A2 (stable outlook) from Aa3. AGM can give no assurance as to any further ratings action that Moody s may take. For more information regarding AGM s financial strength ratings and the risks relating thereto, see AGL s Annual Report on Form 10-K for the fiscal year ended December 31, Capitalization of AGM At September 30, 2013, AGM s consolidated policyholders surplus and contingency reserves were $3,458,464,281 and its total net unearned premium reserve was $1,902,038,053, in each case, in accordance with statutory accounting principles. Incorporation of Certain Documents by Reference Portions of the following documents filed by AGL with the Securities and Exchange Commission (the SEC ) that relate to AGM are incorporated by reference into this Official Statement and shall be deemed to be a part hereof: (i) (ii) (iii) the Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (filed by AGL with the SEC on March 1, 2013); the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013 (filed by AGL with the SEC on May 10, 2013); the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 (filed by AGL with the SEC on August 9, 2013); and (iv) the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 (filed by AGL with the SEC on November 12, 2013). All consolidated financial statements of AGM and all other information relating to AGM included in, or as exhibits to, documents filed by AGL with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, excluding Current Reports or portions thereof furnished 10

19 under Item 2.02 or Item 7.01 of Form 8-K, after the filing of the last document referred to above and before the termination of the offering of the Bonds shall be deemed incorporated by reference into this Official Statement and to be a part hereof from the respective dates of filing such documents. Copies of materials incorporated by reference are available over the internet at the SEC s website at at AGL s website at or will be provided upon request to Assured Guaranty Municipal Corp.: 31 West 52 nd Street, New York, New York 10019, Attention: Communications Department (telephone (212) ). Except for the information referred to above, no information available on or through AGL s website shall be deemed to be part of or incorporated in this Official Statement. Any information regarding AGM included herein under the caption BOND INSURANCE Assured Guaranty Municipal Corp. or included in a document incorporated by reference herein (collectively, the AGM Information ) shall be modified or superseded to the extent that any subsequently included AGM Information (either directly or through incorporation by reference) modifies or supersedes such previously included AGM Information. Any AGM Information so modified or superseded shall not constitute a part of this Official Statement, except as so modified or superseded. Miscellaneous Matters AGM or one of its affiliates may purchase a portion of the Insured Bonds or any uninsured bonds offered under this Official Statement and such purchases may constitute a significant proportion of the bonds offered. AGM or such affiliate may hold such Insured Bonds or uninsured bonds for investment or may sell or otherwise dispose of such Insured Bonds or uninsured bonds at any time or from time to time. AGM makes no representation regarding the Insured Bonds or the advisability of investing in the Insured Bonds. In addition, AGM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding AGM supplied by AGM and presented under the heading BOND INSURANCE herein. BOND INSURANCE RISK FACTORS In the event of a default in the scheduled payment of principal or interest with respect to the Insured Bonds when any such payment becomes due, the Trustee on behalf any owner of the Insured Bonds will have a claim under the applicable Policy for such payment. However, in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or resulting from any default or otherwise, other than any advancement of maturity pursuant to a scheduled mandatory sinking fund payment, any payments to be made pursuant to the Policies will be made in such amounts and at such times as such payments would have been due had there not been any such acceleration. In addition, the Policies do not insure the payment of any redemption premium. To the extent that any payment of principal and interest by the Authority in connection with a mandatory or optional prepayment of the Insured Bonds is recovered by the Authority from any owner of the Insured Bonds as a voidable preference under applicable bankruptcy law, such payments are covered by the Policies. However, such payments will be made by AGM at such times and in such amounts as such payments would have been due had there been no such prepayment by the Authority, unless AGM chooses in its discretion to pay such amounts at an earlier date. Any default in the payment of principal and interest does not accelerate the obligations of AGM without its consent. AGM may direct, and must consent to, any remedies that the Trustee exercises following such a default and AGM s consent may be required in connection with amendments to the Indenture in those circumstances. 11

20 In the event that AGM is unable to make any payments of principal and interest as such payments become due under the Policies, the Insured Bonds will be payable solely from the moneys received by the Trustee pursuant to the Indenture. In the event that AGM becomes obligated to make payments with respect to the Insured Bonds, no assurance is given that such event will not adversely affect the market price of the Insured Bonds or the marketability (liquidity) for the Insured Bonds. The long-term ratings on the Insured Bonds are dependent in part on the financial strength of AGM and its claims paying ability. AGM s financial strength and claims paying ability are predicated upon a number of factors that could change over time. No assurance is given that the long-term ratings of AGM and, therefore, the ratings on the Insured Bonds insured will not be subject to downgrade, and such event could adversely affect the market price of the Insured Bonds or the marketability (liquidity) for the Insured Bonds. (See BOND RATINGS herein). The obligations of AGM under the Policy are unsecured obligations of AGM and, upon an event of default by AGM, the remedies available to the Trustee may be limited by applicable bankruptcy law or other similar laws related to the insolvency of entities like AGM. Neither the Authority nor the Underwriters have made an independent investigation into the claims paying ability of AGM and no assurance or representation regarding the financial strength or projected financial strength of AGM is given. Thus, when making an investment decision, potential investors should carefully consider the ability of the Authority to pay principal and interest on the Insured Bonds and the claims paying ability of AGM, particularly over the life of their investment. PLAN OF FINANCING The proceeds of the 2013A Bonds will be used to: (i) fund the costs of the current refunding of all the Authority s Water and Sewer System Revenue Refunding Bonds, Series of 2003 (the 2003 Refunded Bonds ), the Authority s Water and Sewer System First Lien Revenue Bonds Series B-1 of 2007 (the 2007 B-1 Refunded Bonds ) and the Authority s Water and Sewer System First Lien Revenue Bonds Series B-2 of 2007 (the 2007 B-2 Refunded Bonds and together with the 2003 Refunded Bonds and the 2007 B-1 Refunded Bonds the Refunded Bonds ); (ii) pay certain amounts in respect of termination of certain interest rate swap agreements related to the 2007 B-1 Refunded Bonds and the 2007 B-2 Refunded Bonds; (iii) fund the premium for the 2013A Bond Insurance Policy securing payments on the Insured 2013A Bonds; and (iv) fund the costs of issuance of the 2013A Bonds. The proceeds of this 2013B Bonds will be used to: (i) fund certain Water and Sewer System Capital Improvement projects of the Authority; (ii) reimburse the Authority for certain capital expenditures previously made by the Authority for certain Capital Improvement projects; (iii) fund any required deposits to the Debt Service Reserve Fund; (iv) fund the premium for the 2013B Bond Insurance Policy securing payments on the Insured 2013B Bonds; and (v) fund the costs of issuance of the 2013B Bonds. The proceeds of the 2013B Bonds deposited in the Project Fund shall be used for Capital Projects of the Authority. (See APPENDIX E CONSULTING ENGINEER S REPORT ). A portion of the proceeds of the 2013B Bonds will be used to fund the Debt Service Reserve Fund for the 2013B Bonds. (See SECURITY FOR THE 2013 BONDS DEBT SERVICE RESERVE FUND ) herein. Verification Agent The accuracy of arithmetic computations supporting the conclusion that the principal amounts of and interest earned on, deposits made to redeem the Refunded Bonds are sufficient to pay the interest on the Refunded Bonds when due and the redemption price of the Refunded Bonds on the redemption date together with calculations supporting Bond Counsel s opinion regarding the Federal tax exemption of the 12

21 Bonds, will be independently verified by Causey, Demgen & Moore, P.C., Certified Public Accountants and Consultants. ESTIMATED SOURCES AND USES OF FUNDS Series A of 2013 Series B of 2013 TOTAL Sources of Funds: Par Amount of Bonds $130,215, $86,695, $216,910, Net Original Issue Premium 10,902, ,925, ,828, TOTAL $141,117, $90,620, $231,738, Use of Funds: Current Refunding Requirement 2003 Bonds (estimated call date: December 20, 2013) $44,648, $0.00 $44,648, Current Refunding Requirement 2007B-1 Bonds and 2007 B-2 Bonds (estimated call date: December 20, 2013) 83,032, ,032, Swap Termination Payments 2007B-1 Swap and 2007 B-2 Swap 12,375, ,375, Deposit to Project Fund ,000, ,000, Authority Reimbursements ,941, ,941, Deposit to Debt Service Reserve Fund ,066, ,066, Municipal Bond Insurance Premium 262, , , Costs of Issuance and Miscellaneous* 797, , ,350, TOTAL $141,117, $90,620, $231,738, *Includes certain legal fees, financial advisory and swap advisory fees, rating fees, printing costs, administrative expenses, underwriters discount, trustee fees and other miscellaneous expenses of the 2013 Bonds. [Remainder of this page intentionally left blank.] 13

22 Limited Obligations SECURITY FOR THE 2013 BONDS THE 2013 BONDS ARE LIMITED OBLIGATIONS OF THE AUTHORITY. THE 2013 BONDS DO NOT PLEDGE THE GENERAL CREDIT OR TAXING POWER OF THE CITY OF PITTSBURGH (THE CITY ), THE COMMONWEALTH OF PENNSYLVANIA (THE COMMONWEALTH ) OR ANY POLITICAL SUBDIVISION THEREOF; NOR SHALL THE 2013 BONDS BE DEEMED AN OBLIGATION OF THE CITY, THE COMMONWEALTH OR ANY POLITICAL SUBDIVISION THEREOF (OTHER THAN THE AUTHORITY); NOR SHALL THE CITY, THE COMMONWEALTH OR ANY POLITICAL SUBDIVISION THEREOF (OTHER THAN THE AUTHORITY) BE LIABLE FOR PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, OR INTEREST ON THE 2013 BONDS. THE AUTHORITY HAS NO TAXING POWER. Pledge of Receipts and Revenues First Lien Bonds. The 2013 Bonds, together with the other First Lien Bonds and the Authority s obligation to make Periodic Payments under Qualified Interest Rate Swap Agreements related to such First Lien Bonds, if any, and certain Reimbursement Obligations, as defined in the Indenture, are secured, on a parity basis, by a first lien pledge of the Receipts and Revenues of the Water and Sewer System after payment of Current Expenses, each as defined in the Indenture, together with cash and investments from time to time held in certain funds pursuant to the Indenture. Any other amounts due and payable by the Authority under a Qualified Interest Rate Swap Agreement relating to any First Lien Bond, including any termination payments, shall be subordinate to debt service payments on First Lien Bonds and Periodic Payments related thereto, to the Authority s obligations under Reimbursement Agreements, to debt service payments on Subordinate Bonds and Periodic Payments related thereto, and to the requirement to replenish shortfalls in the Debt Service Reserve Fund. (See APPENDIX A DESCRIPTION OF THE AUTHORITY AND WATER AND SEWER SYSTEM DEBT OF THE AUTHORITY and APPENDIX B SUMMARY OF THE INDENTURES.) Subordinate Bonds. The Subordinate Bonds issued under the Subordinate Indenture and the Authority s obligation to make Periodic Payments under Qualified Interest Rate Swap Agreements related to such Subordinate Bonds, if any, and certain Reimbursement Obligations, as defined in the Subordinate Indenture, are secured, on a parity, by a pledge of the Receipts and Revenues of the Water and Sewer System after payment of (i) Current Expenses, (ii) the debt service due on the First Lien Bonds and Periodic Payments related thereto, and certain Reimbursement Obligations, as defined in the Indenture, (iii) the funding of the Debt Service Reserve Fund, the Operating Reserve Fund, the Renewal and Replacement Fund, held pursuant to and as required and defined in the First Lien Indenture, and (iv) Policy Costs (as defined in the First Lien Indenture) (the Subordinate Receipts and Revenues ), together with cash and investments from time to time held in certain funds pursuant to the Subordinate Indenture. Any other amounts due, including any termination payments, under a Qualified Interest Rate Swap Agreement related to either the First Lien Bonds or the Subordinate Bonds are subordinate to payments of debt service on the Subordinate Bonds. Rate Covenant The First Lien Indenture requires the Authority to adopt and maintain rates sufficient to pay certain costs and expenses of the Authority, and to pay debt service on the Authority s outstanding debt. Compliance with the rate covenant is verified yearly by the Authority s Consulting Engineers (See RATE COVENANT herein). 14

23 Debt Service Reserve Fund Currently, the Debt Service Reserve Fund for the First Lien Bonds and the Subordinate Bonds is fully funded as required under the Indentures and is comprised of Municipal Bond Debt Service Reserve Fund Policies issued by AGM and Financial Guaranty Insurance Company ( FGIC ). In November of 2009 the New York Insurance Department ordered FGIC to suspend payment on all claims and in June of 2011 FGIC was taken over by New York State. In August of 2013 National Public Finance Guarantee Corporation became the successor to FGIC for certain policies. First Lien Bonds. The Indenture requires that a Debt Service Reserve Fund be funded in an amount equal to the maximum annual debt service requirements on the First Lien Bonds, subject to restrictions of federal tax laws. The Authority currently maintains surety bonds to fund the Debt Service Reserve Fund in an aggregate amount sufficient, together with amounts on deposit therein, to equal the maximum annual debt service requirements on the First Lien Bonds. Currently, the Debt Service Reserve Fund for such First Lien Bonds is fully funded as required under the First Lien Indenture and is comprised of Municipal Bond Debt Service Reserve Fund Policies issued by Assured Guaranty Municipal Corp. (formerly known as Financial Security Assurance Inc.) ( AGM ). The 2013B Bonds Debt Service Reserve Fund shall be funded with a portion of the proceeds of the 2013B Bonds. Subordinate Bonds. The Subordinate Indenture requires that a Debt Service Reserve Fund be funded in an amount which when added to the amounts on hand in the Debt Service Reserve Fund of the First Lien Indenture is equal to the maximum annual debt service requirements on all Authority Bonds. The Debt Service Reserve Fund under the Subordinate Indenture is also funded by a surety bond issued by AGM. Surety Rating Downgrade Funding Requirements. Section 6.04 of the First Lien Indenture provides that any amount required to be maintained in the Debt Service Reserve Fund may be in the form of cash, a letter of credit or other credit instrument, a surety bond or a combination thereof and shall conform to the requirements set forth in Exhibit A to the First Lien Indenture as incorporated therein, unless specifically waived or amended in writing by the Bond Insurer. Exhibit A to the First Lien Indenture provides in Paragraph 6 thereof, among other things, that if the rating of the claims paying ability of the issuer of a surety bond or insurance policy funding the Debt Service Reserve Fund falls below a S&P AAA or a Moody s Aaa, the Authority shall either (i) deposit into the Debt Service Reserve Fund an amount sufficient to cause the cash or permitted investments on deposit in the Debt Service Reserve Fund to equal the Reserve Fund Requirement (Maximum Annual Debt Service Requirements) on all outstanding Bonds, such amount to be paid over the ensuing five years in equal installments deposited at least semi-annually or (ii), within six months of such occurrence, replace such instrument with a surety bond, insurance policy or letter of credit meeting the rating and other requirements of Exhibit A to the First Lien Indenture. If the rating of the claims-paying ability of the issuer of the surety bond or insurance policy falls below A or the issuer of a Debt Service Reserve Fund credit instrument defaults in its payment obligations or the issuer of a Debt Service Reserve Fund credit instrument becomes insolvent, the Authority shall either (i) deposit into the Debt Service Reserve Fund an amount sufficient to cause the cash or permitted investments on deposit in the Debt Service Reserve Fund to equal to Reserve Fund Requirement on all outstanding Bonds, such amount to be paid over the ensuing year in equal installments on at least a monthly basis or (ii) within six months of such occurrence, replace such instrument with a surety bond, insurance policy or letter of credit meeting the rating and other requirements of Exhibit A to the First Lien Indenture. With respect to prior rating downgrades of AGM, the Authority has obtained from National Public Financial Guarantee Corporation, successor in interest to FGIC, the original Bond Insurer under the First Lien Indenture, waivers of compliance with the provisions of Paragraph 6 of Exhibit A to the First Lien 15

24 Indenture. The ability of the Authority to obtain similar waivers from NPFGC in the event of future rating downgrades of AGM is uncertain. Municipal Bond Insurance The scheduled payment of principal and interest on the 2013A Bonds maturing on September 1, 2015 through and including September 1, 2021 and on September 1, 2025 through and including September 1, 2029 and on September 1, 2032 through and including September 1, 2033 (the Insured 2013A Bonds ) and on the 2013B Bonds maturing on September 1, 2015, and on September 1, 2017 through and including September 1, 2021, and on September 1, 2025, on September 1, 2028 and on September 1, 2032 (the Insured 2013B Bonds, and together with the Insured 2013A Bonds, the Insured Bonds ), when due are insured by a municipal bond insurance policies issued simultaneously with the issuance of the 2013 Bonds (See BOND INSURANCE herein). Additional Debt The Authority may issue additional bonds on parity with the 2013 Bonds for the purposes of financing the cost of acquiring, constructing or completing capital additions or refunding outstanding indebtedness incurred under the Indenture, upon satisfaction of the conditions set forth in the First Lien Indenture, Additional Bonds may be issued under the Subordinate Indenture for any lawful purpose, including refunding. The Subordinate Indenture also permits the incurrence of debt that is subordinate to payments due on the Subordinate Bonds. Covenants of the Authority Under the First Lien Indenture the Authority covenants, among other things: (1) to insure the property of the Water and Sewer System in accordance with customary practice, (2) to employ a consulting engineer to make recommendations annually concerning, among other things, the proper maintenance, repair and operation of the Water and Sewer System, (3) to maintain the Water and Sewer System in good repair, working order and condition, (4) to maintain its rates and charges at a specified level, and (5) limiting the disposition of assets and encumbering assets with liens. (See RATE COVENANT herein and APPENDIX B SUMMARY OF THE INDENTURES ). Events of Default and Remedies The First Lien Indenture sets forth certain events which upon their occurrence arise to an Events of Default. These events include payment and covenant defaults. Upon an Event of Default the Trustee, Bondholders, Letter of Credit Banks and Bond Insurer, as applicable, have certain remedies, including, in certain circumstances the acceleration of principal. (See APPENDIX B SUMMARY OF INDENTURES ). Rights of Bond Insurer Upon the occurrence of an event of default under both the First Lien Indenture and the Subordinate Indenture, the Insured Bonds may be accelerated only with the consent of, or at the direction of the Bond Insurer, for so long as it is not in default under the applicable Policy. In addition, for so long as it is not in default under the applicable Policy, the Bond Insurer may, on behalf of all holders of Insured 2013A Bonds or Insured 2013B Bonds, as applicable, direct the Trustee in the pursuit of remedies available upon default and may approve certain amendments to the financing documents on behalf of Insured 2013A Bondholders or the Insured 2013B Bondholders, as applicable, (See APPENDIX B SUMMARY OF THE INDENTURES ). If the Bond Insurer pays the principal of or interest on any Insured 2013A Bonds or Insured 2013B Bonds, as applicable, pursuant to the terms of the applicable Policy, the Bond Insurer will be subrogated to all of the rights of the Holders of such 16

25 Insured Bonds granted under the applicable Indenture, including the right to receive payment of principal of and interest on the 2013 Bonds. FLOW OF FUNDS The Authority has heretofore established a special fund (the Revenue Fund ) with Authorized Depositories into which it deposits its Receipts and Revenues. The Authority will withdraw from the Revenue Fund for deposit to the credit of the following funds in the order, on the dates and for the following purposes: 1. Operation and Maintenance Fund - Established Under First Lien Indenture On or before the first day of each month, the Authority shall transfer from the Revenue Fund to the Operation and Maintenance Fund an amount equal to the amount budgeted by the Authority for that month for payment of the Current Expenses as the same become due. 2. Operating Reserve Account- Established Under First Lien Indenture There is a special account within the Operation and Maintenance Fund called the Operating Reserve Account, which is held by the Trustee under the Indenture. There shall be maintained in the Operating Reserve Account one-sixth of the amount equal to the Authority s budgeted Current Expenses for the current Fiscal Year. Amounts in the Operating Reserve Account shall be applied to pay the Current Expenses of the Authority to the extent that the amounts on deposit in the Operation and Maintenance Fund are insufficient. 3. Debt Service Fund - Established Under First Lien Indenture After making the foregoing transfers, on or before each Interest Payment Date and Periodic Payment Date, moneys in the amount of the interest to come due on the First Lien Bonds on such Interest Payment Date, Periodic Payments owed, if any, to such Counterparty under a Qualified Interest Rate Swap Agreement related to any First Lien Bonds on such Periodic Payment Date, and obligations owed under Reimbursement Agreements, and on or before the first day of each month moneys in the amount of 1/12 of the principal to come due on the First Lien Bonds on the next principal payment date are to be transferred to the Debt Service Fund of the Indenture. 4. Debt Service Reserve Fund and Deficiency in Operating Reserve Account - Established Under First Lien Indenture Next, on the first day of each month in which there is a deficiency in the Debt Service Reserve Fund or the Operating Reserve Account, both established under the First Lien Indenture, or if there has been a draw on the surety bond held in the Debt Service Reserve Fund of the Indenture, amounts sufficient to repay any deficiency or repay any such draw, together with expenses due, in not more than 12 equal monthly payments shall be transferred, as applicable, to the Debt Service Reserve Fund or the Operating Reserve Account or paid to the surety provider. 5. Renewal and Replacement Fund-- Established Under First Lien Indenture After the foregoing transfers, on the dates and in the amounts set forth in the annual consulting engineer s report moneys are to be transferred to the Renewal and Replacement Fund held pursuant to the Indenture. 17

26 6. Debt Service for Subordinated Debt Held under the Subordinated Indenture After making the foregoing transfers, on the first day of each month moneys shall be transferred in amounts sufficient to make all payments due on Subordinate Bonds and Periodic Payments on Qualified Interest Rate Swap Agreements related to any Subordinate Bonds. 7. Debt Service Fund Established Under Indenture and the Subordinated Indenture Any payments, other than Periodic Payments, due under any Qualified Interest Rate Swap Agreements relating to Authority Bonds, including, without limitation, termination payments. 8. Depreciation Reserve Account Held outside of the Indenture On December 1 of each year, after making the foregoing transfers, moneys shall be transferred to the Depreciation Reserve Account held by an Authorized Depository as an account within the Revenue Fund required to be established by the Indenture, in an amount equal to the excess of the depreciation on the Water and Sewer System during such year over the principal payments on the Bonds outstanding during such year and the amount of Capital Additions funded from the Authority s Gross Revenues during such year. Moneys in the Depreciation Reserve Account may be used by the Authority to pay (i) principal on the Bonds of the Authority; (ii) Capital Additions; and (iii) the costs of construction, acquisition and improvements to the Water and Sewer System. RATE COVENANT Under the First Lien Indenture the Authority has covenanted with the owners of the Bonds to adopt rates complying with either (1) or (2) of the following in each fiscal year: (1) The Authority will maintain, charge and collect, so long as any Bonds are outstanding, reasonable rates, rentals and other charges for the use of the facilities of the Water and Sewer System which (after making due and reasonable allowances for contingencies and a margin of error in the estimates) together with other Receipts and Revenues, including any unrestricted cash and investments accumulated in the Revenue Fund at the beginning of each Fiscal Year, shall be at all times at least sufficient to provide annually: (a) Amounts sufficient to pay all of the Current Expenses of the Authority; and (b) An amount equal to 120% of the debt service requirements with respect to the Authority Bonds (i.e., the First Lien Bonds and Subordinate Bonds) and other Authority Long Term Indebtedness during the then current fiscal year of the Authority. (2) The Authority will maintain, charge and collect, so long as any Bonds are outstanding, reasonable rates, rentals and other charges for the use of the facilities of the Water and Sewer System which (after making due and reasonable allowances for contingencies and a margin of error in the estimates), together with other Receipts and Revenues, for the then current fiscal year (exclusive of interest income earned by the Authority on funds other than the Debt Service Reserve Fund; provided, however, that earnings on the construction/acquisition fund may also be included during any construction period, but only to the extent such earnings are expressly required to be either retained in the construction/acquisition fund and may be used to pay debt service on the Authority Bonds or other Authority Long Term Indebtedness or are applied directly to payment of debt service on the Authority 18

27 Bonds or other Authority Long Term Indebtedness), shall be at all times at least sufficient to provide annually: (a) Funds to pay all of the Current Expenses of the Authority; and (b) An amount equal to 100% of the debt service requirements with respect to the Authority Bonds and other Authority Long Term Indebtedness during the then current fiscal year of the Authority. Calculation of compliance with the covenant shall be made on the following basis: (a) operating revenue, construction/acquisition fund income, earnings on the Debt Service Reserve Fund, expenses, required deposits to replenish any withdrawals from the Debt Service Reserve Fund and the Renewal and Replacement Fund which have not been capitalized shall be accounted for on the accrual basis; (b) costs of issuance of the Authority Bonds and other Authority Long Term Indebtedness may be treated as if such amounts are amortized over the life of the Authority Bonds and other Authority Long Term Indebtedness irrespective of any shorter period over which such costs are actually amortized; and (c) depreciation is specifically excluded from the calculation. In the event that any Policy Costs are due and owing at the time of the calculation of the rate covenant, Gross Revenues of the Authority shall be reduced by the amount of any Policy Costs then due and owing. The Authority also covenants with the holders of the 2013 Bonds that if at any time the revenues collected shall not be sufficient to enable the Authority to comply with the provisions set forth above, it will promptly revise its water or sewer rates, rents and other charges so that the Authority will be in compliance and so that any deficiencies in transfers of funds required to be made pursuant to the Indenture will be remedied before the end of the next ensuing fiscal year. (See APPENDIX A DESCRIPTION OF THE AUTHORITY AND THE WATER AND SEWER SYSTEM ). INTEREST RATE SWAP AGREEMENTS The Authority has previously entered into Qualified Interest Rate Swap Agreements relating to outstanding bonds with JPMorgan Chase Bank, National Association and Merrill Lynch Capital Services, Inc. The Swap Agreements provide, in general, that the Authority will pay to the respective Counterparties periodic fixed amounts ( Periodic Payments ) based on a fixed percentage on an aggregate notional amount equal to the Authority s aggregate outstanding amount of Bonds and that the respective Counterparties will pay to the Authority periodic floating amounts based on the Securities Industry and Financial Market Association ( SIFMA ) Municipal Swap Index times the same notional amount until September 1, 2040, unless earlier terminated. As the Qualified Interest Rate Swap Agreements are Qualified Interest Rate Swap Agreements as defined in the Indenture, the obligations of the Authority to make Periodic Payments (but not Settlement Amounts (defined below) payable under the Swap Agreements) will be secured on parity with the Authority s obligations to make payments on the 2013 Bonds and other Bonds issued under the First Lien Indenture. Under certain circumstances (including certain events of default with respect to the Authority or either of the Counterparties), the Qualified Interest Rate Swap Agreements could terminate in whole or in part prior to their respective stated termination dates. Following any such early termination of the Qualified Interest Rate Swap Agreements, either the Authority or the Counterparties, as applicable, may owe a termination payment ( Settlement Amounts ) to the other, depending upon market conditions. If at the time of an early termination of the Swap Agreements long-term interest rates are significantly lower than they were when the Swap Agreements were executed and delivered, the Authority could owe 19

28 substantial Settlement Amounts to the Counterparties. The Authority s obligation to pay any Settlement Amounts with respect to Qualified Interest Rate Swap Agreements relating to any First Lien Bonds will be subordinate to the Authority s obligation to make all payments due and owing on the 2013 Bonds, any other outstanding First Lien Bonds and Periodic Payments due under the Swap Agreements and Reimbursement Obligations, as defined in the Indenture, and to any of the Authority s obligation to make any payments on any Subordinate Bonds and any Periodic Payments under Qualified Interest Rate Swap Agreements related to such Subordinate Bonds. The Authority has adopted a policy relating to interest rate management agreements ( Swap Policy ) to establish guidelines for the use and management of all interest rate management agreements, including, but not limited to, interest rate swaps, swaptions, caps, collars and floors (collectively Swaps or Agreements ) incurred in connection with the incurrence of debt. The Authority may change the Swap Policy at any time in its sole discretion. The Swap Policy authorizes the Authority to use swaps to hedge interest rate movement, basis risk and other risks, to lock-in a fixed rate or, alternatively, to create synthetic variable rate debt. Swaps may also be used to produce interest rate savings, limit or hedge variable rate payments, alter the pattern of debt service payments, manage exposure to changing market conditions in advance of anticipated bond issues (through the use of anticipatory hedging instruments) or for asset/liability matching purposes. The Swap Policy includes provisions relating to the credit quality of counterparties, the term and notional amount of Swaps, monitoring of existing Swaps, the engagement of advisors to assist the Authority in monitoring the Swaps, disclosure and reporting of amounts, value and issues relative to existing Swaps, and other related matters. Pursuant to the Swap Policy, the Authority will actively monitor the degree of risk and exposure associated with Swaps to which it is a party but can offer no assurances that compliance with its Swap Policy will prevent the Authority from suffering adverse financial consequences as a result of these transactions. See INTEREST RATE SWAP AGREEMENTS under APPENDIX A DESCRIPTION OF THE AUTHORITY AND THE WATER AND SEWER SYSTEM for a list of outstanding swap agreements. CERTAIN BONDHOLDERS RISKS Investment in the 2013 Bonds may involve certain risks and each investor should carefully consider the risks involved to determine whether to purchase any of the 2013 Bonds. Each prospective investor should carefully examine this Official Statement and his or her own financial condition (including the diversification of his or her investment portfolio) in order to make a judgment as to whether the 2013 Bonds are an appropriate investment. The Authority has identified and summarized below certain bondholders risks that could adversely affect the finances of the Authority, the operation of the Water and Sewer System and/or the funds available for payment of the 2013 Bonds, which should be considered by prospective investors. The following discussion is not intended to be exhaustive, but includes certain major factors, which should be considered along with other factors set forth elsewhere in this Official Statement, including the Appendices hereto. Certain Environmental Matters The Authority is subject to a variety of federal, state and local environmental laws and regulations governing discharges to air and water, conveyance of sanitary/storm wastewaters and possibly the storage and disposal of solid waste materials. The Sewer System conveys wastewater generated within the City boundaries, and from certain other municipalities connected to the sewer conveyance systems to 20

29 ALCOSAN interceptors located along the rivers and streams of the City for conveyance to ALCOSAN s wastewater treatment facility for processing prior to discharge into the Ohio River. The combined Sewer System (wastewater and stormwater) is designed so that during wet weather, a portion of the collected storm water and diluted wastewater is discharged to natural watercourses by diversion chambers located throughout the Authority s Sewer Systems and at connections to the ALCOSAN interceptors. The Sewer System operates satisfactorily and has adequate capacity for the dry weather wastewater flows; during wet weather, however, the Sewer System is often taxed beyond its treatment capacity, resulting in certain overflows, bypassing and flooding. (See APPENDIX A DESCRIPTION OF THE AUTHORITY AND WATER AND SEWER SYSTEM GOVERNMENT REGULATION and THE SEWER SYSTEM. ) The U.S. Environmental Protection Agency ( USEPA ) has adopted regulations governing discharges to surface bodies of water under the Federal Clean Water Act, coupled with a Combined Sewer Overflow Policy (the CSO Policy ) regarding overflows from combined sewers during wet weather events that result in the discharge to receiving water of untreated sanitary sewage. These combined sewer overflows ( CSOs ) contain pollutants that are present in domestic and industrial wastewater, as well as those in the urban storm water runoff that enter the combined sewer system. 77% of the 1,234 miles of the Authority s sewers are combined sewers and there are 194 permitted CSOs within the Authority s Sewer System including connections to ALCOSAN s interceptors. The CSO Policy requires owners of any sewer system having CSOs to acquire National Pollutant Discharge Elimination System ( NPDES ) discharge permits for each overflow site. On January 29, 2004, pursuant to a resolution adopted by its Board on December 19, 2003, the Authority entered into a Consent Order and Agreement (the Order ) regarding alleged wet weather sewer overflows within the City. The other signatories to the Order are the City of Pittsburgh, the Pennsylvania Department of Environmental Protection ( DEP ) and the Allegheny County Health Department ( ACHD ). The Order was developed as part of a two-year process of negotiation and consensus-building among the DEP, the ACHD, the Authority and eighty-two other municipalities and municipal authorities whose sewage is ultimately treated by ALCOSAN at its Woods Run Sewage Treatment Plant. In the negotiations and consensus-building, the participants developed proposed orders to be used by the municipalities served by ALCOSAN to address regional concerns regarding wet weather sewer overflows. Generally, the Order requires the Authority and the City to assess the combined and separate sanitary sewers within the City in order to develop a plan to address alleged wet weather sewer overflows within the City. The assessment activities required under the Order include performing: (1) a physical survey and visual inspection of manholes; (2) sewer line cleaning and closed circuit television internal inspections; (3) sewer system mapping; (4) sewer system dye testing; (5) a system of hydraulic characterization; and (6) flow monitoring. The Order provides a very specific schedule for the completion of assessment activities. Generally, most assessment activities for critical sewers and the separate sanitary portion of the sewer system were completed by Most assessment activities for non-critical sewers were substantially completed by In addition to assessment activities, the Order requires the Authority and the City to implement the Nine Minimum Controls for the control of CS0s, and to perform repairs and maintenance to the deficiencies in the sewer system revealed by the assessment activities. Such deficiency corrections include eliminating the conveyance of streams by the sewer system and repairing or replacing sewer lines that restrict flows causing unpermitted overflows. Generally, deficiency corrections in the critical sewers and the separate sanitary sewer system were completed by Most deficiency corrections in the assessed, non-critical sewers were substantially completed in

30 The Order called for collection system investigations, repairs and further studies. The collection system investigation and repairs are reflected in the Capital Improvement Program. The Authority has completed its wet weather feasibility study which it submitted to the DEP and ACHD on July 31, The Authority is waiting a response to its feasibility study but does not anticipate such until mid to late Ultimately, an ALCOSAN Regional Long Term Control Plan must be developed for the elimination of sanitary sewer overflows and the reduction of combined sewer overflows to acceptable levels. The Regional Long Term Control Plan developed by ALCOSAN was submitted to the regulatory agencies in The Authority s share related to corrections is estimated to cost $165,000,000, but will be more accurately determined when the Regional Long Term Control Plan and the Authority s feasibility study are finally approved. The amount is dependent, in part, on coordination with other regional providers and ALCOSAN. According to the ALCOSAN Consent Decree, the construction of all wet weather facilities is to be completed by The DEP has issued to the Authority and the City a National Pollutant Discharge Elimination System ( NPDES ) permit regarding the CSOs within the City. The Authority is permitted for a total of 194 CSOs in the sewage collection system. Of these, the Authority operates and maintains 40 of the CSOs. The remainder of CSOs are operated and controlled by the regional treatment provider, ALCOSAN. Water Supply Although the quantity of water available from the Authority s sole source of water, the Allegheny River, is believed to be adequate, it is possible that circumstances could change this condition. The total flow of the river could, for example be limited by drought conditions, and any constraints that may be imposed on withdrawals in drought conditions, such as pass-by flow conditions designed to leave sufficient water in the stream for navigation and fisheries. Geographic Concentration The number of customers using the Water and Sewer System may be adversely affected by regional and local economic conditions, competitive conditions, changes in population and general market conditions. There can be no assurance that the Water and Sewer System will be able to maintain the current number of existing users, if there are changes in the resident and/or commercial population of the service area. Insurance and Legal Proceedings The Authority carries property insurance in amounts deemed adequate by the Board and consistent with industry practices. Since January 1, 2002, the Authority has been self-insured as to general liability claims. The Authority is covered by Pennsylvania governmental immunity statutes including exceptions thereto and limitations on damages. While there are pending liability claims against the Authority, it is not expected that such claims if adversely determined would have a material adverse effect upon the financial affairs of the Authority. Governmental Regulation The federal and local governments significantly regulate providers of water and sewer systems. Future regulations and conditions affecting the acquisition, development ownership and operation of the 22

31 Water and Sewer System could increase the operating expenses of the Water and Sewer System or could otherwise have a material adverse effect on the financial condition of the Authority. (See APPENDIX A DESCRIPTION OF THE AUTHORITY AND WATER AND SEWER SYSTEM GOVERNMENT REGULATION. ) Swap Agreements Under the First Lien Indenture and Subordinate Lien Indenture, the Authority is also a party to seven separate variable to fixed interest rate exchange agreements in the combined aggregate outstanding notional amount as of October 1, 2013 of $403,025,000 with respect to certain series of Bonds issued under the Indenture and the Subordinate Lien Indenture (collectively, the Swap Agreements ). See INTEREST RATE SWAP AGREEMENTS herein. Collateral Posting Requirements The Authority has entered into various swap agreements as described under Interest Rate Swap Agreements herein. Under certain circumstances (including certain events of default with respect to the Authority or either of the Counterparties), the Swap Agreements could terminate in whole or in part prior to their respective stated termination dates. Following any such early termination of the Swap Agreements, either the Authority or the Counterparties, as applicable may owe a termination payment ( Settlement Amounts ) to the other, depending upon market conditions. If at the time of an early termination of the Swap Agreements long-term interest rates are significantly lower than they were when the Swap Agreements were executed and delivered, the Authority could owe substantial Settlement Amounts to the Counterparties. The Authority s obligation to pay any Settlement Amounts with respect to Qualified Interest Rate Swap Agreements relating to any First Lien Bonds will be subordinate to the Authority s obligation to make all payments due and owing on the 2013 Bonds, any other outstanding First Lien Bonds and Periodic Payments due under the Swap Agreements, and Reimbursement Obligations, as defined in the Indenture and to any of the Authority s obligation to make any payments on any Subordinate Bonds and any Periodic Payments under Qualified Interest Rate Swap Agreements related to such Subordinate Bonds. The Authority s payment obligation with respect to Periodic Payments, but not any Settlement Amounts, under the Swap Agreements relating to bonds issued under the Indenture have been guaranteed by AGM under one or more swap insurance policies. The provider of the swap insurance policy will be given certain rights under the Swap Agreements, including rights to consent to the designation of an early termination date (which may result in the payment of a Settlement Amount) upon the occurrence of certain events and the right to designate an early termination date with respect to the Authority, if an event of default under the Swap Agreements occurs with respect to the Authority as the defaulting party. There are a number of risks associated with the Swap Agreements that could affect the value of the Swap Agreements, the ability of the Authority to accomplish its objectives in entering into the Swap Agreements and the ability of the Authority to meet its obligations under the Swap Agreements and with respect to the 2013 Bonds. These risks include, among others, the following: (i) counterparty risk - the failure of the Counterparty to make required payments; (ii) credit risk - the occurrence of an event modifying the credit rating of the Authority or the respective Counterparties; (iii) termination risk - the need to terminate the transaction in a market that dictates a payment of a Settlement Amount by the Authority; and 23

32 (iv) basis risk - the mismatch between actual variable rate debt service on the Authority s variable rate bonds and variable rate indices used to determine swap payments. In addition, the Swap Agreements require the posting of collateral from one counterparty to the other counterparty based on the market to market calculations when such calculations result in an amount that exceeds certain thresholds set forth in the contract. Collateral posting may be required if there is a change in the ratings of either counterparty. As of the date of this offering, the Authority has not had to post collateral under these agreements. Credit and Liquidity Support for the Authority s Variable Rate Bonds In connection with the issuance of certain First Lien Bonds and Subordinate Bonds, the Authority entered into various liquidity and credit agreements which are subject to renewal. Please refer to APPENDIX A DESCRIPTION OF THE AUTHORITY AND WATER AND SEWER SYSTEM for more information. LITIGATION In the opinion of Authority Counsel, there is no litigation pending or threatened seeking to enjoin the issuance, sale or delivery of the 2013 Bonds or affecting the security pledged therefor. There are no pending claims or actions against the Authority arising from the operation and maintenance of the Water and Sewer System, that, if determinations or settlements were made adverse to the Authority, and upon consideration of statutory liability limitations, would have, in the opinion of the Authority s Counsel, a material adverse effect on the Authority s financial position. State Tax Matters TAX MATTERS In the opinion of Bond Counsel, the 2013 Bonds, and the interest income therefrom, are free from taxation for purposes of personal income, corporate net income and personal property taxes within the Commonwealth of Pennsylvania. The residence of a holder of a Bond in a state other than Pennsylvania, or being subject to tax in a state other than Pennsylvania, may result in income or other tax liabilities being imposed by such other state or its political subdivisions based on the interest or other income from the 2013 Bonds. Federal Income Tax Matters In the opinion of Bond Counsel, based upon an analysis of existing laws, regulations, rulings and court decisions, interest on the 2013 Bonds (including, in the case of 2013 Bonds sold at an original issue discount, the difference between the initial offering price and par) is excluded from gross income for Federal income tax purposes. Bond Counsel is also of the opinion that interest on the 2013 Bonds is not a specific item of tax preference under Section 57 of the Internal Revenue Code of 1986, as amended (the Code ) for purposes of Federal individual or corporate alternative minimum taxes. 24

33 Original Issue Discount The 2013A Bonds that mature on September 1, 2026 through and including September 1, 2029 and on September 1, 2032 through and including September 1, 2033 and the 2013B Bonds that mature on September 1, 2026, September 1, 2028 and on September 1, 2032 (collectively, the "Tax-Exempt Discount Bonds") are being offered and sold to the public at an original issue discount ("OID") from the amounts payable at their maturity. OID is the excess of the stated redemption price of a bond at maturity (par) over the price to the public at which a substantial amount of 2013 Bonds of the same maturity are sold pursuant to the initial offering. Under the Code, OID on each Tax-Exempt Discount Bond will accrue over its term and the amount of accretion will be based on the yield to maturity, compounded semi-annually. The amount of OID that accrues during each semi-annual period will do so ratably within that period on a daily basis. With respect to an initial purchaser of a Tax-Exempt Discount Bond at its initial offering price, the portion of OID that accrues during the period that such purchaser owns such Bond is added to the purchaser's tax basis for purposes of determining gain or loss at the maturity, redemption, sale, or other disposition of that Tax-Exempt Discount Bond and thus, in practical effect, is treated as stated interest, which is excludable from gross income for federal income tax purposes. Holders of Tax-Exempt Discount Bonds should consult their own tax advisors as to the effect of OID with respect to their federal tax liability. Original Issue Premium The 2013A Bonds that mature on September 1, 2014 through and including September 1, 2025 and on September 1, 2030 through and including September 1, 2031 and the 2013B Bonds that mature on September 1, 2015 through and including September 1, 2025, on September 1, 2027, on September 1, 2029 through and including September 1, 2031 and on September 1, 2036 and September 1, 2040 (collectively, the Premium Bonds ) were sold at an original issue premium ("OIP ). Under the Code, OIP is an adjustment to basis and must be amortized. The method of amortization may be the method regularly employed by the taxpayer if such method is reasonable, or, in all other cases, must be the method prescribed by applicable Treasury Regulations, which provide that the amortizable bond premium is an amount which bears the same ratio to the OIP as the number of months in the taxable year during which the bond was held by the taxpayer bears to the number of months from the beginning of the taxable year (or, if the Premium Bond was acquired in the taxable year, from the date of acquisition) to the date of maturity. The basis of the Premium Bond is reduced by the amount of the amortizable bond premium. The amortized bond premium is treated as a reduction in the tax-exempt interest received on the Premium Bond. No deduction is allowed on account of OIP. Holders of Premium Bonds should consult their own tax advisors as to the effect of such OIP with respect to their federal tax liability. Continuing Compliance The Code imposes various terms, restrictions, conditions and requirements relating to the exclusion from gross income for Federal income tax purposes of interest on obligations such as the 2013 Bonds. The Authority has covenanted to comply with all such requirements, including non-arbitrage requirements under Section 148 of the Code, that are necessary to ensure that interest on the 2013 Bonds will not be includable in gross income for Federal income tax purposes. Failure to comply with these covenants could result in interest on the 2013 Bonds being includable in gross income for Federal income tax purposes and such inclusion could be required retroactively to the date of issuance of the 2013 Bonds. The opinion of Bond Counsel assumes compliance with the aforesaid covenants. Moreover, Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not 25

34 taken) or events occurring (or not occurring) after the date of issuance of the 2013 Bonds may adversely affect the tax-exempt status of the interest on the 2013 Bonds. Certain requirements and procedures contained or referred to in the Indenture and other relevant documents may be changed and certain actions (including, without limitation, defeasance of the 2013 Bonds) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. Such changes or actions could constitute an exchange or other tax event with respect to the 2013 Bonds, which could result in gain or loss to the holder of a 2013 Bond, and a consequent tax liability. Pursuant to its continuing disclosure certification made pursuant to SEC Rule 15c2-12 (See CONTINUING DISCLOSURE; DISCLOSURE DISSEMINATION herein), the Authority may be required to provide notice of such changes or actions, as Material Events under said Rule. However, holders of the 2013 Bonds should consult their own tax advisors as to the effect of such changes or actions with respect to their federal tax liability. Collateral Tax Liabilities Although Bond Counsel has rendered an opinion that interest on the 2013 Bonds is excludable from gross income for Federal and Pennsylvania income tax purposes, the ownership or disposition of, or the accrual or receipt of interest on, the 2013 Bonds may result in other collateral effects on a Bondholder s Federal, state or local tax liabilities. The nature and extent of these other tax consequences may depend upon the particular tax status of the Bondholder or the Bondholder s other items of income or deduction. Bond Counsel expresses no opinions regarding any tax consequences other than what is set forth in its opinion; each Bondholder or potential Bondholder is urged to consult with its own tax advisors with respect to the effects of purchasing, holding or disposing of the 2013 Bonds on its tax liabilities. For example, corporations are required to include all tax-exempt interest in determining adjusted current earnings under Section 56(c) of the Code, which may increase the amount of any alternative minimum tax owed. Other tax consequences for certain taxpayers include, without limitation, increasing the federal tax liability of certain foreign corporations subject to the branch profits tax imposed by Section 884 of the Code, increasing the federal tax liability of certain insurance companies under Section 832 of the Code, increasing the federal tax liability of certain S corporations subject to Sections 1362 and 1375 of the Code, increasing the federal tax liability of certain individual recipients of social security or railroad retirement benefits under Section 86 of the Code, limiting the use of the Earned Income Credit under Section 32 of the Code, and denying an interest expense deduction to certain financial institutions under Section 265 of the Code (unless, and in the circumstance when, the 2013 Bonds have been designated by the issuer as qualified tax-exempt obligations ). Change in Law; Adverse Determinations From time to time, certain legislative proposals may be introduced, or are pending, in the Congress of the United States, including some that carry retroactive effective dates, that, if, enacted, could alter or amend the federal tax matters described above or affect the market value of the 2013 Bonds. No prediction can be made whether or in what form any such proposal or proposals might be enacted into law or whether, if enacted, the same would apply to 2013 Bonds issued prior to enactment. Prospective purchasers of the 2013 Bonds should consult their own tax advisors regarding any pending or proposed federal tax legislation. Bond Counsel expresses no opinion regarding any pending or proposed federal tax legislation. 26

35 The Internal Revenue Service (the Service ) regularly audits tax-exempt obligations to determine whether, in the view of the Service, interest on such tax-exempt obligations is includible in the gross income of the owners thereof for federal income tax purposes. No prediction can be made whether or not the Service will commence an audit of the 2013 Bonds. If an audit is commenced, under current procedures, the Service may treat the Authority as a taxpayer and the Bondholders may have no right to participate in such procedure. The commencement of an audit could adversely affect the market value and liquidity of the 2013 Bonds until such time as the audit is concluded, regardless of the ultimate outcome. Payments of interest on, and proceeds of the sale, redemption or maturity of, tax-exempt obligations, such as the 2013 Bonds, are in certain cases required to be reported to the Service. Additionally, backup withholding may apply to any such payments to any Bondholder who fails to provide an accurate Form W-9 Request for Taxpayer Identification Number and Certification, or to any Bondholder who is notified by the Service of a failure to report any interest or dividends required to be shown on federal income tax returns. Circular 230 This Official Statement contains tax advice written to assist the marketing, distribution, sale and placement of the 2013 Bonds. Whether authored by Bond Counsel, the Authority, the Underwriters, counsel to either of the foregoing, or any other tax practitioner, such advice is not intended to be used, and may not be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. THE FOREGOING IS NOT INTENDED AS AN EXHAUSTIVE LIST OF THE PROVISIONS OF FEDERAL, STATE AND LOCAL TAX LAWS WHICH MAY HAVE AN EFFECT ON INDIVIDUALS AND CORPORATIONS HOLDING THE 2013 BONDS OR RECEIVING INTEREST THEREON. PROSPECTIVE PURCHASERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE EFFECT ON THEIR FEDERAL, STATE OR LOCAL TAX LIABILITY AND GENERAL FINANCIAL AFFAIRS OF HOLDING THE 2013 BONDS OR RECEIVING INTEREST THEREON. THE TRUSTEE The obligations and duties of the Trustee are described in the Indenture, and the Trustee has undertaken only those obligations and duties which are expressly set out in the Indenture. The Trustee has not independently passed upon the validity of the 2013 Bonds, the security therefor, the adequacy of the provisions for payment thereof or the tax-exempt status of the interest on the 2013 Bonds. The Trustee has relied upon the opinion of Bond Counsel for the validity and tax-exempt status of the interest on the 2013 Bonds. The Indenture expressly provides that the Trustee shall not be responsible for any loss or damage resulting from any action or inaction taken in good faith in reliance upon an opinion of counsel. Under the terms of the Indenture, the Trustee is liable only for those damages caused by its gross negligence or willful misconduct. Under the Indenture, the Trustee is not required to take notice and is not deemed to have notice, of any default under the indenture, except failure by the Authority to cause to be made any of the payments required to be made for payment of principal of the 2013 Bonds, when due at maturity or earlier redemption, or interest on the 2013 Bonds, or unless the Trustee has been specifically notified in writing of such default by the Authority or the owners of at least 25% in aggregate principal amount of the Outstanding Bonds affected by such default. All notices or other instruments required by the Indenture to be delivered to the Trustee must be delivered at the corporate trust office of the Trustee in Pittsburgh, Pennsylvania. In the absence of any such notice, the Trustee may conclusively assume no 27

36 Event of Default (as defined in the Indenture) exists, except as expressly stated above and in the Indenture. LEGAL OPINIONS The issuance of the 2013 Bonds by the Underwriters are subject to the receipt of the approving legal opinion of Dinsmore Shohl LLP, Pittsburgh, Pennsylvania, Bond Counsel. The unqualified approving opinion of Bond Counsel will be substantially in the form attached to this Official Statement as APPENDIX G. Certain legal matters for the Authority will be passed upon by its counsel, Clark Hill Thorp Reed, Pittsburgh, Pennsylvania, for the Underwriters by their counsel Schnader Harrison Segal & Lewis LLP, Pittsburgh, Pennsylvania. INDEPENDENT AUDITORS The audited financial statements of the Authority, as of and for the years ended December 31, 2012 and 2011, included in APPENDIX C AUTHORITY FINANCIAL STATEMENTS have been audited by Maher Duessel, independent certified public accountants, as indicated in their report with respect thereto, which report also appears in APPENDIX C. CONSULTING ENGINEERS The Authority has retained Chester Engineers of Pittsburgh, Pennsylvania as its Consulting Engineer. The Consulting Engineer undertakes an Annual Report for the Authority as required and the First Lien Indenture. The Consulting Engineer is to advise as to maintenance and repair of the Water and Sewer System, advice on capital additions, repairs, replacements and estimated Receipts and Revenues and Current Expenses of the Authority. The latest annual report of the Consulting Engineer can be found at the Authority s website at Chester Engineers has undertaken a report supporting the issuance of the 2013 Bonds and verifying the rate covenant with the issuance of the 2013 Bonds. This report also gives an explanation of the Capital Projects to be funded with the 2013B Bonds. (See APPENDIX E CONSULTING ENGINEER S REPORT ). RATINGS OF THE 2013 BONDS Standard & Poor s Rating Group and Moody s Investors Service have assigned their municipal bond ratings of A (with stable outlook) and A2 (with stable outlook), respectively, to the 2013 Bonds as underlying ratings without regard to municipal bond insurance. Standard & Poor s Rating Group and Moody s Investors Service are expected to assign their municipal bond rating of AA- (stable outlook), and A2 (stable outlook), respectively, to the Insured Bonds, with the understanding that upon delivery of the Insured Bonds, policies insuring the scheduled payment when due of the principal of and interest on the Insured Bonds will be issued by Bond Insurer. Each of the aforementioned ratings reflect only the respective views of such organizations, and an explanation of the significance of each of such ratings may be obtained from the rating agency furnishing the same at the following addresses: Standard & Poor s Rating Group, 55 Water Street, New York, New York 10041, and Moody s Investors Service, 7 World Trade Center at 250 Greenwich Street, New York, NY A rating is not a recommendation to buy, sell or hold securities. There is no assurance that such ratings will continue for any given period of time or that they may not be lowered or withdrawn entirely by the rating agencies, or any of them, if, in their or its judgment, circumstances so warrant. Any 28

37 such downward revision in or withdrawal of such ratings, or any of them, may have an adverse effect on the market price of the 2013 Bonds. The Underwriters, the Financial Advisor and the Authority have not undertaken any responsibility after issuance of the 2013 Bonds to oppose a revision or withdrawal of any rating assigned to the 2013 Bonds. CONTINUING DISCLOSURE; DISCLOSURE DISSEMINATION Pursuant to Securities and Exchange Commission Rule 15c2-12 under the Securities Exchange Act of 1934, as amended (the Rule ), the Authority undertook upon the issuance of the 2013 Bonds, for the benefit of the holders of such Bonds, to provide certain financial information and operating data on an annual basis (the Annual Report ) and to provide notice of certain enumerated events if such events are determined to be material under the federal securities laws. The Authority is entering into a Disclosure Dissemination Agent Agreement ( Disclosure Dissemination Agreement ) with Digital Assurance Certification, L.L.C. ( DAC ), under which the Authority designates DAC as Disclosure Dissemination Agent (the Disclosure Dissemination Agent ). The Annual Report is to be filed by the Disclosure Dissemination Agent not later than 200 days after the end of the Authority s fiscal year to the Municipal Securities Rulemaking Board ( MSRB ) through Electronic Municipal Market Access ( EMMA ). Notices of material events are to be filed with MSRB through EMMA and any State Information Depository established by the Commonwealth under the Rule, if any ( SID ) within ten (10) business days after the occurrence of such event. The Authority has complied with its continuing disclosure obligations under the Rule since Annual Information. The Annual Information concerning the Authority shall consist of (1) audited financial statements or the disclosure of the absence of such an audit, prepared in accordance with generally accepted accounting principles ( GAAP ), or accompanied by a quantified explanation of material deviations from GAAP or a full explanation of the accounting principles used, and a certificate regarding annual debt service coverage; (2) operating data regarding the Authority substantially of the type included in the tables appearing under the following headings and subheadings of this Official Statement or in APPENDIX A hereto entitled Water and Sewer Rates, Water Consumption by Customer Classification, and Survey of 10 Largest Users ; and (3) a narrative discussion that analyzes the Authority s financial condition and results of operations, as well as facts likely to have a material impact on the Authority. Notice of Material Events. The notices to be provided under the Rule, which the Authority will undertake to provide as described above, include written or notice of the occurrence of any of the following events with respect to the 2013 Bonds: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Principal and interest payment delinquencies; Non-payment related defaults, if material; Unscheduled draws on debt service reserves reflecting financial difficulties; Unscheduled draws on credit enhancements reflecting financial difficulties; Substitution of credit or liquidity providers, or their failure to perform; Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the 2013 Bonds, or other material events affecting the tax status of the 2013 Bonds; Modifications to rights of holders of the 2013 Bonds, if material; Bond calls, if material, and tender offers; 29

38 (ix) (x) (xi) (xii) (xiii) (xiv) Defeasances; Release, substitution or sale of property securing repayment of the 2013 Bonds, if material; Rating changes; Bankruptcy, insolvency, receivership or similar proceeding of the Authority; The consummation of a merger, consolidation, or acquisition involving the Authority or the sale of all or substantially all of the assets of the Authority, other than in the course of ordinary business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to such actions, other than pursuant to its terms, if material, and The appointment of a successor or additional trustee or the change of name of a trustee, if material. Amendments. The Disclosure Dissemination Agreement may be amended, without the consent of the holders of the 2013 Bonds, but only upon the Authority obtaining an opinion of counsel expert in federal securities laws acceptable to both the Authority and the Disclosure Dissemination Agent to the effect that such amendment, and giving effect thereto, will not materially impair the interests of the holders of the 2013 Bonds and would not, in and of itself, cause the undertakings therein to violate the Rule; provided neither the Authority nor the Disclosure Dissemination Agent shall be obligated to agree to any amendment modifying their respective duties or obligations without their consent thereto. Notwithstanding the foregoing, the Disclosure Dissemination Agent shall have the right to adopt amendments to the Disclosure Dissemination Agreement necessary to comply with modifications to and interpretations of the provisions of the Rule as announced by the Securities and Exchange Commission from time to time by giving not less than 20 days written notice of the intent to do so together with a copy of the proposed amendment to the Authority. Not such amendment shall become effective if the Authority shall, within 10 days following the giving of such notice, sends a notice to the Disclosure Dissemination Agent in writing that it objects to such amendment. Termination. The continuing obligation of the Authority and the Disclosure Dissemination Agent under the Disclosure Dissemination Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the 2013 Bonds, when the Authority is no longer an Obligated Person with respect to the 2013 Bonds, or upon delivery by the Authority to the Disclosure Dissemination Agent of an opinion of nationally recognized bond counsel to the effect that continuing disclosure is no longer required. Obligated Persons. At this time, only the Authority is an Obligated Person for annual reporting purposes under the criteria described in the Disclosure Dissemination Agreement. Any failure by the Authority to comply with the provisions of the Disclosure Dissemination Agreement shall not be an event of default with respect to the 2013 Bonds (although any available remedy in equity may be pursued to compel the Authority s compliance). Nevertheless such failure must be reported in accordance with the Rule and must be considered by any broker, dealer or municipal securities dealer before recommending the purchase or sale of the 2013 Bonds in the secondary market. Consequently, any such failure may adversely affect the transferability and liquidity of the 2013 Bonds and their market price. The Authority has not failed to comply with any prior such undertaking under the Rule within the past five years. A failure by the Authority to comply with the Disclosure Dissemination Agreement will not constitute an Event of Default under the Indenture (although Bondholders will have any available remedy at law or in equity). Nevertheless, such a failure must be reported in accordance with the Rule and must be considered by any broker, dealer or municipal securities dealer before recommending the 30

39 purchase or sale of the 2013 Bonds in the secondary market. Consequently, such a failure may adversely affect the transferability and liquidity of the 2013 Bonds and their market price. Bondholders are advised that the Disclosure Dissemination Agreement, copies of which are available at the office of the Authority, should be read in its entirety for more complete information regarding its contents. The Disclosure Dissemination Agent has only the duties specifically set forth in the Disclosure Dissemination Agreement. The Disclosure Dissemination Agent s obligation to deliver the information at the times and with the contents described in the Disclosure Dissemination Agreement is limited to the extent the Authority has provided such information to the Disclosure Dissemination Agent as required by the Disclosure Dissemination Agreement. The Disclosure Dissemination Agent has no duty with respect to the content of any disclosures or notice made pursuant to the terms of the Disclosure Dissemination Agreement. The Disclosure Dissemination Agent has no duty or obligation to review or verify any information in the Annual Report, Audited Financial Statements, notice of Notice Event or Voluntary Report (as defined in the Disclosure Dissemination Agreement), or any other information, disclosures or notices provided to it by the Authority and shall not be deemed to be acting in any fiduciary capacity for the Authority, the holders of the 2013 Bonds or any other party. The Disclosure Dissemination Agent has no responsibility for the Authority s failure to report to the Disclosure Dissemination Agent a Notice Event or a duty to determine the materiality thereof. The Disclosure Dissemination Agent shall have no duty to determine or liability for failing to determine whether the Authority has complied with the Disclosure Dissemination Agreement. The Disclosure Dissemination Agent may conclusively rely upon certifications of the Authority at all times. UNDERWRITING The 2013 Bonds are being purchased from the Authority by PNC Capital Markets LLC as Representative of itself and on behalf of the other Underwriters set forth on the cover page hereof (collectively, the Underwriters ) pursuant to a Bond Purchase Agreement between the Authority and the Underwriters (the Bond Purchase Agreement ). The Underwriters have agreed to purchase the 2013 Bonds for an aggregate purchase price of $230,892, (representing the aggregate principal amount of the 2013 Bonds plus the aggregate net original issue premium of $14,828,455.35, less the aggregate underwriter s discount of $845,949.00). The obligation of the Underwriters to pay for the 2013 Bonds is subject to certain terms and conditions set forth in the Bond Purchase Agreement. The Bond Purchase Agreement provides that the Underwriters will purchase all the 2013 Bonds, if any are purchased. Any obligations of the Underwriters are the sole obligation of the Underwriters and do not create any obligations on the part of any affiliates of the Underwriters, including any affiliated bank. The Underwriters may offer and sell the 2013 Bonds to certain dealers (including dealers depositing the 2013 Bonds into investment trusts) and others at prices lower than the offering prices set forth on the inside cover page hereof. FINANCIAL ADVISOR The Authority has retained Public Financial Management, Inc., Philadelphia, Pennsylvania as the financial advisor (the Financial Advisor ) in connection with the preparation, authorization and issuance of the Bonds. The Financial Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness, or fairness of the information contained in the Official Statement. Public Financial Management, Inc. is an independent advisory firm and is not engaged in the business of underwriting, trading or distributing municipal securities or other public securities. 31

40 SWAP ADVISOR Swap Financial Group, LLC has provided additional advisory services to the Authority with respect to the Swap Agreements referenced herein (the Swap Advisor ). The Swap Advisor is not obligated to undertake, and neither has undertaken to make an independent verification or to assume responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement. CERTAIN RELATIONSHIPS In its normal course of business, the Underwriters and/or their respective affiliates may have credit, investment banking, or other financial relationships and agreements with the Authority from time to time. MISCELLANEOUS The references, excerpts and summaries of all documents referred to herein do not purport to be complete statements of the provisions of such documents, and reference is made to all such documents for full and complete statements of all matters of fact relating to the 2013 Bonds, the security for the payment of the 2013 Bonds and the rights of the owners thereof. All capitalized terms used herein are used with the meaning set forth in the Indenture unless otherwise so specified. The information contained in this Official Statement has been compiled from official and other sources deemed to be reliable and, while not guaranteed as to completeness or accuracy, is believed to be correct as of its date. Any statement made in this Official Statement involving matters of opinion or of estimates, whether or not expressly so stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized. The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Authority since the date hereof. 32

41 This Official Statement has been duly executed and delivered on behalf of the Authority by an Authorized Representative. THE PITTSBURGH WATER AND SEWER AUTHORITY By /s/ Dan Deasy Dan Deasy, Chairman

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43 APPENDIX A DESCRIPTION OF THE AUTHORITY AND THE WATER AND SEWER SYSTEM

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45 The Authority The Pittsburgh Water and Sewer Authority (the Authority ) is a body corporate and politic, organized and existing under the Pennsylvania Municipal Authorities Act pursuant to Resolution No. 36 of the Council of the City of Pittsburgh (the City ), effective February 16, The Secretary of the Commonwealth of Pennsylvania approved the Authority s Articles of Incorporation and issued a Certificate of Incorporation February 17, Articles of Amendment were approved and a Certificate of Amendment was issued by the Pennsylvania Department of State on May 9, 2008 to extend the term of existence of the Authority to May 31, The Authority was originally established to implement the capital program and subsequently has been charged with the responsibility for the operation of the City s water supply and distribution and wastewater collection systems. Additional information about the Authority may be found at Agreements with the City of Pittsburgh In 1984, pursuant to a Lease and Management Agreement between the City and the Authority (the Lease and Management Agreement ), the Authority leased the Water and Sewer System from the City and assumed responsibility for establishing and collecting user fees and charges and for maintaining and improving the Water and Sewer System. This agreement further provided that the Water and Sewer System was to be operated and maintained for the Authority by the City, subject to the general supervision of the Authority. In 1995, the Authority and the City terminated the Lease and Management Agreement. On June 15, 1995 the Authority and City entered into a Capital Lease Agreement (the Capital Lease Agreement ) whereby the Authority operates the Water and Sewer System and the Authority has the option to acquire the Water and Sewer System. The Capital Lease Agreement, which has a term of thirty (30) years, provides for payments totaling $101,416,974.60, which payments were made to the City during the initial three (3) years of the agreement and further provides that on September 1, 2025, upon payment of $1.00, the Authority will acquire title to the Water and Sewer System. Concurrently with entering into the Capital Lease Agreement, the City and the Authority entered into a Cooperation Agreement, dated as of June 15, 1995 and effective January 1, 1995, (the Cooperation Agreement ). Pursuant to the Cooperation Agreement, the City provides certain specified communications, vehicle maintenance, information and financial services to the Authority on a fee for services basis and the Authority makes certain payments to the City to reimburse it for costs and capital expenses incurred by the City in regard to the operation and maintenance of the Water and Sewer System. The Cooperation Agreement may be terminated by either party upon 90 days written notice. The City and Authority are currently negotiating changes to the Cooperation Agreement to more accurately reflect services the City and the Authority provide to each other. The amount of the annual payment currently made by the Authority to the City under the Cooperation Agreement is $7,150,000 paid in equal quarterly payments of $1,787,500. Governance The Authority consists of seven (7) members with no fewer than six (6) members appointed by the Mayor of the City and approved by City Council. The terms of office of the members commence on the date of appointment, and the members serve staggered five (5) year terms from the first Monday in January next succeeding the date of appointment or until appointment of a successor, whichever is later. The present members of the Board and officers of the Authority and their principal private affiliations are as follows: Member Occupation Dan Deasy, Chairman Member, 27 th Legislative District, House of Representatives, PA Robert P. Jablonowski, Vice Chairman Retired Chemist, Duquesne Light Co. Scott Kunka, Treasurer Director of Finance, City of Pittsburgh Henry C. Blum, Secretary 1 st Vice President, Public Events Employees Union Local No. 188 Margaret L. Lanier, Asst. Sec./Asst. Treasurer Treasurer, City of Pittsburgh Patrick Bigley, Member Plumber Vacancy A-1

46 Organization Summary The Authority is organized into two operating divisions: Administration and Operations. The Pittsburgh Water and Sewer Authority 2013 Organizational Chart BOARD OF DIRECTORS Dan Deasy, Chairman Henry Blum Scott Kunka Robert Jablonowski Margaret Lanier Vacant Pat Bigley SOLICITOR INTERIM EXECUTIVE DIRECTOR CONSULTING ENGINEER Clark Hill Thorp Reed James Good Chester Engineers EXECUTIVE SECRETARY FINANCE OPERATIONS Joey Tolbert, HUMAN RESOURCES Antoine Boo/ COMMUNICATIONS COORDINATOR Interim Director Thomas Palmosina RISK SERVICES MANAGER ADMINISTRATIVE ASSISTANT SEWER OPERATIONS DEPARTMENT WATER OPERATIONS DEPARTMENT WATER QUALITY & PRODUCTION DEPARTMENT ENGINEERING & CONSTRUCTION DEPARTMENT Rick Obermeier, Director Thomas Palmosina, Director Ron Duray Robert Christian, Director The Finance Division is responsible for the various administrative and support functions within the Authority. These include: customer service, billing and collections, finance, procurement, and management and data information systems. The Operations Division consists of four Departments: Water Operations, responsible for the transmission of potable water; Sewer Operations, which manages the collection and transmission of wastewater; Water Quality and Production, which ensures that finished drinking water meets all health and safety requirements, and also includes the water treatment plant and storage facilities; and, the Engineering and Construction Department, which is responsible for developing, designing, initiating and monitoring all of the Authority s Capital Improvement Projects. In addition, this Department is responsible for reviewing plans prior to issuing permits for any connection into, or modification of, the Water and Sewer System; and for the maintenance and updating of the Authority s geographical information system. Key Management Personnel Interim Executive Director James Good joined the Authority as the Interim Executive Director in July 2012 and is an employee of Veolia Water (hereinafter defined). Mr. Good is responsible for the overall management of the Authority and reports to its Board of Directors. See Interim Management and Consulting Contract herein. Interim Director of Finance Joey Tolbert joined the Authority s Administrative Division in September 2012, as the Interim Director, and is a Veolia Water employee. Mr. Tolbert is responsible for various administrative operations of the Authority. As Interim Director of Finance, he oversees the Finance and Accounting Departments including Accounts Payable, Procurement, Receivables, Payroll, Budgets, Forecasts, Banking and Investor Relations and Collections. Effective April, 2010 the Director of Finance was also assigned oversight responsibilities of the Customer Service, Human Resource and Management Information System Departments. Mr. Tolbert came to the Authority with over 15 years experience in the finance and accounting field with Veolia Water and with over 12 years of municipal finance experience as City Treasurer and Director of Finance, including nearly five years as a City Manager. Mr. Tolbert has a Bachelor of Science Degree in Accountancy from Southern Illinois University at Edwardsville and Master of Science in Management Information Systems. While working in municipal finance, he was recognized as a Certified Illinois Municipal Treasurer. Interim Chief Operating Officer Antoine Boo, a Veolia Water employee, joined the Authority in July 2013 as interim Chief Operating Officer. He joins the Authority from New York City s Department of Environmental Protection where he served as Veolia s Water s working team leader. In that role, Antoine led the Veolia Water team analyzing all aspects of New York s Department of Environmental Protection s drinking water supply operations. As team leader, he was responsible for examining work processes including management costs, in-sourcing of work, and the overall efficiency and costeffectiveness of current operations. Prior to his work in New York City, Antoine was the Chief Operating Officer in Indianapolis, managing the largest drinking water partnership in the United States. He was responsible for serving the needs A-2

47 of nearly one million customers under a partnership with the City of Indianapolis. Antoine has more than 25 years of practice in the environmental and public services field focused on water supply operations. In addition to his recent work in the United States, his background includes managing major water utility operations with Veolia Water in Europe and Russia. Antoine holds degrees in Corporate Management, Environmental Management and Civil Engineering. Director of Operations Thomas Palmosina is responsible for managing the Operations Division. Mr. Palmosina began his employment with the City of Pittsburgh Water Department (later to become the Pittsburgh Water and Sewer Authority) in 1973 as a Laborer. He has held several positions including Pipeline Repairman, Repair Foreman, Service Foreman, Supervisor, Manager of Operations and served as Co-Executive Director of the Authority from 2010 through July 2012, when the Interim Executive Director position was awarded to Veolia Water. He holds an Associate s Degree in Liberal Arts from Robert Morris University and is a 25 year member of the American Water Works Association. Mr. Palmosina is a current board member for the Pa-One Call System and a five year member of PA Rural Waterworks Association. Mr. Palmosina has a current Pennsylvania Department of Environmental Protection ( PADEP ) Water Operator s License and is also a certified Emergency Responder for Water and Waste/Water Disasters. Director, Water Production Ron Duray has worked at the Authority for 37 years. He oversees 45 employees at the Water Treatment Facility including the laboratory. Ron began his career with the Authority in 1976 as an electrician. Ron has been promoted over the years holding several positions including: Plant Foreman, Maintenance Supervisor and Maintenance Superintendent before being promoted to his current position. Ron oversees water quality and quantity at the main water treatment facility and the Micro-Filtration Plant. Ron has become an integral part of numerous Capital Improvement Projects including: various pump station upgrades including, but not limited, to switch gears, SCADA and pump replacements at Brilliant Pumping Station, Lincoln Pumping Station, Howard Pumping Station and Saline Pumping Station. He spearheaded upgrades and optimization of the Micro Filtration Plant. Ron has an Associate Degree in Specialized Technology from Penn Technical Institute. He is a member of the American Water Works Association and the Water Works Operators Association of Pennsylvania and holds a class A Water Operators certification from the PADEP. Director, Sewer Operations Cyril Rick Obermeier is currently the Director of Sewer Operations for the Authority. He began working in the plumbing field installing plumbing in homes and commercial buildings in 1972, receiving a Journeyman Plumbing License with Allegheny County in In 1982 he became a Plumber with the Water Department of the City (which later became the Pittsburgh Water and Sewer Authority) until 1988 when he was promoted to the position of Service Foreman. In 1990 he accepted and served in the position of Service Supervisor until 2001 when he was promoted to Sewer Manager. In February 2010, he was appointed to the position of Director, Sewer Operations and continues to serve in that capacity. As Director of Sewer Operations, he is responsible for the daily maintenance of sewer operations as well as service of the water meters. Rick is an active member of American Water Works Association, ICC (International Building Code Council), NFPA (National Fire Protection Assoc.), Rural Water Works Association and holds an Allegheny County Master Plumbing license HP# 1453, PADEP Class E Water Operator s License certificate # W9566, PADEP Class E Wastewater Operator s License certificate # S16625, ASSE Certified Backflow Prevention Program Administrator Certification # Director of Engineering and Construction Robert Christian joined the Authority in September He brings two decades of engineering experience in the water/wastewater field to the Authority. Bob s career in the field began as a process engineer with Calgon Carbon Corporation. In 1996, he joined USFilter/Veolia Water as a project engineer later progressing into project management where he lead teams in the planning, design, and construction of water/wastewater treatment facilities. In 2006, Bob joined Arizona American Water Company where he was promoted to Operations Support Manager in Bob holds a BS in Mechanical Engineering from the University of Massachusetts, Dartmouth; a MS in Civil Engineering from the University of Pittsburgh; and, an MBA from Arizona State University s W.P. Carey School of Business. He is a licensed professional (mechanical) engineer in Pennsylvania and Arizona as well as a Board Certified Environmental Engineer (BCEE) as recognized by the American Academy of Environmental Engineers with specialty certification in water supply and wastewater engineering. Interim Executive Management and Consulting Contract On July 25, 2012, the Authority s Board of Directors approved an Agreement (the Agreement ) for Interim Executive Management Services with Veolia Water North America Northeast, LLC ( Veolia Water ). The Agreement provides for two types of services described below. On July 10, 2013, the Board voted unanimously to extend the Agreement through December 31, A-3

48 Veolia Water is providing the Authority with the services of a full time, on-site, interim executive director. That role is filled by Jim Good, President of Veolia Water North America West, LLC. As the General Manager of that entity, Mr. Good had direct financial responsibility for a $100 million budget and over 300 employees. Prior to joining Veolia Water in 2001, Mr. Good was a vice president of California Water Service Company, a publicly traded water utility (NYSE: CWT) that serves more than two million people in four states. With the Authority, Mr. Good reports to a steering committee made up of three Authority Board members and two individuals from Veolia Water upper management. Veolia Water is also providing the Authority with consulting services known as Peer Performance Solutions or PPS, led by a full time, on-site manager. The Agreement identifies various areas of consulting and implementation services to be provided including, general administration and management, financial and budgeting, operations and maintenance, and includes many specific deliverables. Since the Agreement commenced, Veolia Water has brought over 50 functional experts to Pittsburgh (including several from overseas), to work cooperatively with Authority personnel to identify and implement opportunities for efficiencies and other operational improvements. To date, these efforts have identified about $1,300,000 in additional recurring revenues, approximately $2,000,000 in recurring annual savings and avoided another approximately $1,000,000 in one-time costs through the resolution of several legacy disputes. Veolia Water is performing all services under the Agreement for a base compensation of $135,000 per month, plus additional incentive payments for the achievement of approved initiatives that identify new revenue, efficiencies and process changes. The Authority has paid to Veolia Water through October the amount of $450,000 for reaching certain key performance goals and $515,000 for improvement initiatives and agreed cost savings sharing for Veolia Water is also assisting in implementing best practices at the Authority and assisting in recruiting senior management positions. The Water Supply and Distribution System The water supply and distribution system (the Water System ) consists of a 117 million gallon per day rapid sand type treatment plant, approximately 1,000 miles of mains and service lines, more than 25,200 valves, 7,450 fire hydrants, 12 pumping stations, one membrane filtration plant, five reservoirs, and 12 storage tanks. Treatment facilities include the 117 million gallons per day capacity water filtration plant in Aspinwall and the 26 million gallons per day capacity membrane filtration plant at the Highland No. 1 reservoir. The total storage capacity of the reservoirs and tanks is approximately 455 million gallons. The Authority stores enough finished water to provide a two to three day uninterrupted supply to all customers should it temporarily be unable to treat additional water from the Allegheny River. In the opinion of the Authority's Consulting Engineer, Chester Engineers, Inc. (the Consulting Engineer ), the Water System's treated water quality exceeds all the current standards and levels of the federal Safe Drinking Water Act (the Act ) and the requirements of the PADEP. The sole source of water for the Water System is the Allegheny River for which the Authority and its predecessors have held withdrawal permits since In March 1989, the then Pennsylvania Department of Environmental Resources (now PADEP) issued the Authority a Water Allocation Permit under the 1939 Water Rights Act. This permit authorizes the withdrawal of up to 100 million gallons per day, which the PADEP determined would cause no major impact on navigation. The current average withdrawal of water from the Allegheny River is approximately 70.5 million gallons per day. The Authority's Consulting Engineer is of the opinion that the Allegheny River's water is of good quality, and that there is ample quantity to meet foreseeable demands given current allocation permit conditions and foreseeable river flow conditions. The Water System currently provides potable water and water for fire protection within the geographic boundaries of the City. The Authority services approximately 84 percent of the total population within the geographic boundaries of the City with the balance served by three independent water purveyors. In 2012 the Water System had 83,578 active service connections. Of these service connections, the Water System averaged approximately 66,413 billing units per month in 2012 with additional connections for approximately 7,600 fire hydrants, 3,400 private fire line accounts, 408 unbilled City accounts and 6,599 currently disconnected accounts. Another approximately 23,000 customers receive water service from Pennsylvania American Water Company ( PAWC ). In addition to PAWC, the Water System also has long-term wholesale contracts to provide water to 6 neighboring communities, the largest of which is Fox Chapel (783 million gallons), followed by Reserve Township (138 million gallons). In 2012, the water treatment plant treated and distributed over billion gallons of water. The Authority s water treatment plant is capable of providing more water than is currently being used by its existing customers. The Authority has undertaken a marketing effort to sell potable water to municipalities and municipal authorities within the region. It is also investigating the opportunity to purchase existing water systems located in municipalities adjacent to its current service area. Sale of this available water to additional regional communities would be a source of new revenue to the Authority. To realize this potential revenue the Authority may be required to construct water lines or improve A-4

49 pumping facilities to serve some regional communities; and those communities would need to obtain subsidiary water allocation permits from PADEP. The Authority's Consulting Engineer is of the opinion that the Water System is in adequate operating condition and has adequate capacity to meet demands in the foreseeable future, provided the Authority continues the rehabilitation and replacement program provided for in its ongoing Capital Improvement Program. See Capital Improvement Plan, page A-12. Drinking Water Quality Regulatory Requirements The Authority monitors water quality on a continuous basis, 365 days a year. Tests are conducted for contaminants that may be present in source water prior to treatment, during treatment and in finished water. The Authority meets or exceeds all current Federal and State water quality requirements and anticipates compliance with future proposed regulations, including the pending Stage 2 Disinfection Byproducts Rule and the Long-term Enhanced Surface Water Treatment Rule. Results of water quality measurements and regulatory compliance are reported annually in the Authority's Consumer Confidence Report. The Authority operates an on-site water quality laboratory capable of conducting analysis and detection on numerous contaminants. PADEP has certified the laboratory to conduct and certify results for a number of these contaminants. On July 27, 2012, the Authority and PADEP entered into a Consent Order and Agreement ( Consent Order ) relating to alleged regulatory violations in certain procedures at the water quality laboratory. Pursuant to the Consent Order, the Authority was required, within 30 days, to pay a $10,000 penalty, complete a corrective action report, and retain a consultant to assist with regulatory compliance. The Authority has complied with the requirements of this Consent Order. The Authority routinely provides analysis for other water providers and the Allegheny County Health Department ( ACHD ). The Act requires each state to prepare a comprehensive Source Water Protection Plan to identify potential sources of contaminants. The Authority, working with the PADEP, has prepared the plan for the Allegheny River. The Microfiltration Facility PADEP regulations based on the Act required all finished drinking water reservoirs to be covered by December 31, In order for Highland #1 reservoir to remain uncovered for aesthetic and limited recreational considerations, a 20 million gallons per day Microfiltration Facility was designed and constructed to provide further treatment before water is put into distribution. Microfiltration is a pressure-driven membrane process and consists of 0.1 micron membranes for removal of suspended matter, turbidity, algae, fungi, protozoa, some microorganisms and cysts (including Cryptosporidium and Giardia). In 2009, the Microfiltration Facility was expanded to produce 26 MGD and is currently optimized to run at approximately 9 million gallons per day. The Sewer System The wastewater collection and transmission system (the Sewer System ) is comprised of approximately 1,200 miles of sewer lines and four wastewater-pumping stations that serve all of Pittsburgh s nearly 310,000 residents. Seventyseven percent of the Sewer System is a combined system designed to carry both storm and sanitary flows. The average age of the sewer lines is between 60 and 70 years old, with some portions reaching nearly 150 years in age. The Sewer System conveys wastewater generated within the City boundaries to Allegheny County Sanitary Authority ( ALCOSAN ) interceptors along the rivers of the City for conveyance to ALCOSAN's wastewater treatment facility for processing prior to discharge into the Ohio River. The ALCOSAN treatment facility, which is not part of the Water and Sewer System, is operated by ALCOSAN. The Sewer System also is utilized by 24 suburban municipalities to convey their wastewater to the ALCOSAN treatment facility. Agreements with the suburban municipalities provide for the sharing of maintenance or reconstruction costs of the Sewer System. Typically, the sharing of maintenance costs applies only to the trunk sewer lines through which the wastewater flows to the ALCOSAN interceptor. The Sewer System is designed so that during wet weather, a portion of the collected storm water and diluted wastewater is discharged to natural water courses by diversion chambers located throughout the Sewer System and at connections to the ALCOSAN interceptors. The Sewer System is in satisfactory operating condition and has adequate capacity for the dry weather wastewater flows; however, in the past during wet weather, the Sewer System has often been taxed beyond its capacity resulting in overflows, bypassing and flooding. Some of these conditions have been or will be eliminated through the implementation of the Authority's ongoing Capital Improvement Program. See Capital Improvement Plan, page A-12. The Authority's Consulting Engineer is of the opinion that the Sewer System is in adequate operating A-5

50 condition but is in need of the ongoing Capital Improvement Program in order to correct existing deficiencies and maintain and upgrade the system to meet regulatory requirements (see discussion below under the heading Government Regulation ). With the continuation of the Capital Improvement Program, it is anticipated that the Sewer System will be sufficient to meet foreseeable future demands and provide uninterrupted service to its users. Description of Service Area The Water System and Sewer System provides water treatment, transmission and distribution, as well as wastewater collection and transmission service to customers within the Pittsburgh City limits. Based on U.S. Census figures Pittsburgh has seen increasing levels of Median Household Income to $49,632 in 2011 from $47,658 in 2007 and population to 311,647 in 2011 up from 305,704 in 2010, reversing a 30 year trend of decreasing population. Water and Sewer Rates 2013 Rate Study and Analysis In May 2013, Veolia Water and the Authority retained Sycamore Advisors LLC ( Sycamore ) to conduct a rate study of the Authority s water and sewer conveyance charges. (See APPENDIX E CONSULTING ENGINEER S REPORT AND APPENDIX C 2013 RATE STUDY FOR YEARS SYCAMORE ADVISORS LLC ). The Authority requested the study focus on developing a rate structure for a four year period ( ) that would achieve the following key objectives: 1. Fully fund the three year Capital Improvement Program (CIP) developed by the Authority; 2. Address the current subsidization of sewer utility cost by water utility customers; 3. Utilize American Water Works Association ( AWWA ) industry standard meter equivalency factors for setting minimum charges; 4. Achieve a rate increase that covers the utility s operational expenses, existing debt service costs, and provide funds for new capital while minimizing, to the extent practicable, the impact on customers; 5. Meet the test of reasonableness while meeting the objective of fully recovering operating costs from user rates; and 6. To the extent possible, maintain the Penn American Water Company ( PAWC ) subsidy at or below 2012 levels. Recommendations Sycamore made the following recommendations as part of the rate study: 1. Fully fund the proposed CIP, consistent with the engineer s assessment that the Water and Sewer Systems are in adequate operating condition and have adequate capacity to meet demands in the foreseeable future, provided the Authority continues the rehabilitation and replacement program provided for in its ongoing CIP. 2. Move toward reducing the subsidization of the sewer utility by the water utility. 3. Improve the stability of the revenue steam by increasing the relative percentage of fixed revenues versus volumetric revenues. 4. Utilize AWWA recognized meter equivalency factors n calculating the minimum water and sewer charges. 5. Conduct an audit of the PAWC subsidy calculations and verify them for a defined period. 6. Implement improved data collection and management to better link consumption data and billed revenue and enhance reporting capabilities. 7. Standardize wholesale contracts where possible and reduce term to 20 years or less, adding reopener and inflator provisions. 8. Closely monitor Authority s obligations under the wet weather feasibility study after approval by the PADEP and ACHD. Below is a summary of water consumption and billed revenue results from 2012 from the data inquiry conducted by Sycamore. This data has been reviewed and approved by the Authority. A-6

51 Retail Customers: 2012 WATER CONSUMPTION Minimum Bill Volumes Volumes Above Minimum Total Residential 858,374,000 2,489,560,000 3,347,934,000 Commercial 808,411,000 2,625,715,000 3,434,126,000 Industrial 35,871, ,230, ,101,000 Health & Educational Facilities 287,833,000 1,182,752,000 1,470,585,000 Fire 638,000 5,931,000 6,569,000 Total Retail: 1,991,127,000 6,612,188,000 8,603,315,000 Total Wholesale: 1,048,351,000 Retail + Wholesale: 9,651,666, BILLED REVENUE FIXED REVENUE Meter Size: Water Sewer TOTAL 5/8" $ 9,708,199 $ 1,756,430 $ 11,464,629 3/4" 859, ,571 1,042,719 1" 1,574, ,416 2,033, /2" 863, ,529 1,121,271 2" 1,343, ,380 1,793,422 3" 1,659, ,219 2,306,861 4" 2,382, ,923 3,294,257 6" 2,395, ,104 3,350,299 8" 485, , ,077 10" or greater 113,283 48, ,085 Total: $ 21,384,936 $ 5,881,896 $ 27,266,832 VARIABLE REVENUE Retail: Water Sewer TOTAL Residential $ 14,090,910 $ 7,021,222 $ 21,112,132 Commercial 14,493,947 6,851,976 21,345,922 Industrial 1,556, ,244 2,348,805 Health & Education 9,674,911 3,477,408 13,152,320 Fire 31,256 14,778 46,034 Total Retail Revenue: $ 39,847,586 $ 18,157,628 $ 58,005,213 Total Wholesale Revenue: $ 2,380,135 $ - $ 2,380,135 Total Retail & WHOLESALE: $ 63,612,657 $ 24,039,523 $ 87,652,180 A-7

52 Rate Increase On October 11, 2013 the Authority adopted revised rates, effective January 1, 2014 for calendar year 2014 and for the years 2015, 2016, 2017 and thereafter in accordance with the Authority s Rules and Regulations effective October 1, The revised rates not only increased rates but also adopted minimum charges which are consistent with the AWWA meter equivalency factors. The AWWA establishes relationships between minimum rates based on meter size. To move towards the AWWA standard for both water and sewer fixed charges, the adopted rate schedule increases neither the fixed or minimum rate for either 5/8 or 3/4 meters in 2014, nor the water variable (volume) rate for any customer through Sewer rates (combined fixed and variable) will increase $1.52/month for 5/8 meter residential customers in The average residential customer using 4000 gallons/month will see a combined rate increase of approximately 10.3% in 2014 (about $4.30/month), and a roughly 20% overall increase in their bill through 2017 (about $8.30/month over current 2013 charges.). On an annual basis rates increase in 2015 by 4.19% (about $1.94/month), in 2016 by 2.61% (about $1.26/month) and in 2017 by 1.55% (about $0.77/month). The Authority also adopted minimum charges for residential and commercial water customers whose use is not metered, and maintained the Distribution Infrastructure System Charge ( DISC ) as 7% of total water use and sewer conveyance charge. (See Financial Operations in this Appendix A.) The following tables present the Authority s water and sewer rates and certain data with respect thereto for the period of 2005 through YEAR Residential (1) Commercial (1) Industrial (1) Wholesale (2) Health & Education (1) DISC Rate Increase (3) Rate Increase (3) Rate Increase (3) Increase (3) Rate Increase (4) Rate $ % $ % $ % % $ % % TBD TBD TBD (1) Rate per 1,000 gallons over minimum use per month. (2) Up to 500,000 gallons (3) Represents percentage increase over prior year (4) New Rate Classification, rate per 1,000 gallons over minimum use per month. Source: Pittsburgh Water and Sewer Authority A-8

53 10 Largest Users User % of Total Usage for University of Pittsburgh 9.64% 2. UPMC 4.61% 3. Carnegie Mellon University 2.04% 4. Housing Authority of the City of Pittsburgh 1.62% 5. SCI Pittsburgh 1.41% 6. County of Allegheny 1.29% 7. Large Industrial Customer* 1.15% 8. ALCOSAN 1.14% 9. West Penn Hospital 0.70% 10. Allegheny General Hospital 0.48% Source: Pittsburgh Water and Sewer Authority *In January 2012, the water consumption of the largest volume user of water in 2011, materially declined due to the customer using water from its own water wells and processing their water through its own treatment facilities. The Authority has subsequently entered into a contract to provide water to this customer, beginning June 14, 2013 and continuing for an initial term of 10 years. PWSA Water Rate Comparison (2012 Survey) Rate 1,000 Gal. Minimum Monthly Charge Minimum Gallons Per Month Aspinwall Borough $6.86 Fox Chapel Authority 7.41 Monroeville Authority 5.15 $ ,000 Pittsburgh Water and Sewer Authority (1) ,000 Plum Borough Municipal authority ,870 Richland Township Municipal Authority Shaler Township Penn Hills (Oakmont Residents) Pennsylvania American Water Company Westmoreland County Municipal Authority ,000 (1) Excluding $2.82 for Sewer Use Rate Source: Pittsburgh Water and Sewer Authority Relations with Other Municipalities In addition to its sales to residential, commercial and industrial customers, the Authority has entered into agreements with seven adjacent municipalities and one wholesale customer for the sale of water. The Authority is the primary source of water for three municipalities, pursuant to long-term agreements expiring in 2016 through 2025, which establish pricing structures with each. Four municipalities and one wholesale customer have entered into agreements with the Authority for peak capacity needs. Three of these contracts require monthly minimum charges to be received by the Authority, and two are on an emergency basis only. The Authority purchased the neighboring Borough of Millvale s water system in 2010, adding nearly two thousand customers to the Authority s customer base. A-9

54 Prospective Water Sales and Sewer Services The Authority is capable of producing up to 100 million gallons of potable water each day. With current demand (including the requirements of other municipalities) at 70.5 million gallons per day, the Authority has available surplus capacity. Also, in order to comply with current regulatory requirements the Authority will be making enhancements to the Sewer System through the Capital Improvement Program. These Sewer System enhancements will involve interaction with other municipalities (See The Sewer System for additional detail) and in connection therewith the Authority is continuing an initiative to market its surplus water capacity and extend its sewer services to other municipalities and water authorities in the region. Capital Improvement Plan In 2010, the Authority conducted and developed a 40-year, $2.4 billion Capital Plan that will estimate the financial resources needed for capital improvements in rolling five-year plans. The 40-Year Plan is a road map for the future that estimates the financial resources needed for capital improvements to the Authority system. The 40-Year Plan identifies upgrades to maintain and enhance the performance of the Authority s Water and Sewer Systems. The website to the 40 Year Plan can be found at The Capital Improvement Program (CIP) is a series of eight 5-year plans that address repair and replacement needs. The capital plans provide the Authority with the tools to assess issues and to meet business objectives, maintain regulatory compliance, and address operational needs within the framework of practical capital funding capabilities. The 40-Year Plan will enable the Authority Staff and Board to plan future rate adjustments and develop capital borrowing needs. The Authority s most recent five (5) year capital improvement program encompassed the years 2008 to 2012 (the Capital Improvement Program ). The primary objectives of the Authority s Capital Improvement Program are to assure uninterrupted service to the Authority s customers and to enhance the Water System and Sewer System s capabilities. The Capital Improvement Program was designed to maintain a satisfactory level of service to Water System and Sewer System users, to improve operating efficiency, to address future requirements and to assure a safe supply of water to its users. The 40 Year Capital Plan estimates the financial resources needed for capital improvements. The Capital Improvement Program recommendations were presented as a staged program of eight 5-year capital plans. Prioritization of projects will be based on need and financial capabilities to design and construct the recommended improvements. The eight 5-year plans will provide the Authority with a plan of action to meet the business objectives of the Authority, maintain regulatory compliance and address operational needs within the framework of practical capital funding capabilities. The current capital improvement plan was presented to the Authority in the first quarter of The 40 Year Capital Plan was a source of data that was used to develop the current three year capital plan for the Authority. As more fully discussed under Certain Environmental Matters, the Authority is subject to a U.S. Environmental Protection Agency Combined Sewer Overflow Policy ( CSO Policy ) regarding overflows from combined sewers during events that result in the discharge to receiving water of untreated sanitary sewage. Pursuant to the January 2004 Consent Order and Agreement (the Order ), the Authority is currently developing a feasibility study in conjunction with ALCOSAN which entered into a Consent Decree with the United States Environmental Protection Agency ( EPA ), PADEP and the ACHD, to address combined sewer overflows and achieve compliance with water quality standards and the Clean Water Act. The Authority submitted its feasibility study to PADEP and the ACHD on July 31, The cost of the studies and construction activities included in this feasibility study to address sewage overflows are approximately $165,000,000. The ultimate scope and cost of improvements as a result of the feasibility study will not be known until the feasibility study is approved by PADEP and ACHD which is expected sometime in The final years of the most recent Capital Improvement Program ( ) supported additional expenditures for sewer compliance issues and infrastructure improvements. The bonds issued in 2008 funded approximately $100 million of the Authority s $125 million current Capital Improvement Program. The 5% Distribution Infrastructure System Charge (DISC), increasing to 7% in 2011 and 2012, is dedicated to system improvements and capital needs. For 2013 the Authority continued the 2008 to 2012 Capital Improvement Plan and no separate plan was developed due to a lack of funds available for capital projects. The Capital Improvement Plan equals $169.6 million. The 2013B Bonds are being issued to finance a portion of the Capital Improvement Plan. Approximately $8 million will be used to reimburse the Authority for funds used to finance capital improvements in Projects to be funded by the 2013 Bonds include improvements to water distribution network, pumping stations, storage tanks, sewer network and other improvements. The Authority expects to issue additional bonds to finance the remaining costs. For specific projects and additional information please see "Appendix E - Consulting Engineer's Report". Below is the expected expenditures over the next few years. A-10

55 Total 3-Year CIP + Wet Weather Task 1 Capital Needs, by Utility (in millions) Total Water $35.95 $39.17 $38.51 $ Sewer $18.17 $13.33 $15.33 $46.82 Wet Weather Task 1 $1.70 $3.73 $3.73 $9.15 Total CIP: $55.82 $56.22 $57.56 $ Source: Pittsburgh Water and Sewer Authority Outstanding Bonds First Lien Debt As of October 1, 2013, the Authority has $489,835,242 aggregate principal amount of First Lien Bonds Outstanding (of which $190,470,242 is Fixed Rate and $299,365,000 is Variable Rate) as follows: $68,970,000 (Fixed Rate) Water and Sewer System First Lien Revenue Refunding Bonds, Series A of 2008 Taxable (the Taxable 2008A Bonds ); $145,495,000 (Variable Rate Demand) Water and Sewer System First Lien Revenue Refunding Bonds, Series B1 of 2008 and Series B2 of 2008 $24,665,000 (Fixed Rate) Water and Sewer System First Lien Revenue Bonds, Series D-1 of 2008 (the 2008D- 1 Bonds ); $71,225,000 (Variable Rate Demand) Water and Sewer System First Lien Revenue Bonds, Series D-2 of 2008 (the 2008D-2 Bonds ); $102,980,000 (Variable Rate and Fixed Rate) Water and Sewer System First Lien Revenue Refunding Bonds, Series of 2007 (the 2007 Bonds )*; $44,100,000 (Fixed Rate) Water and Sewer System Revenue Refunding Bonds, Series of 2003 (the 2003 Bonds ); and **32,400,242 (Fixed Rate) Water and Sewer System First Lien Revenue Bonds, Series B of 1998 (the 1998B Bonds ). *The 2013A Bonds are being used to currently refund all the 2007 Bonds, Subseries B-1 and B-2. **1998B bonds are capital appreciation bonds with a maturity amount of $146,805,000. Subordinate Debt The Authority has $103,660,000 Subordinate Debt outstanding as follows: $10,000,000 (Index Interest Rate Mode) Water and Sewer System Subordinate Revenue Refunding Bonds, Series C-1A of 2008 (the Subordinate 2008 C-1A Bonds ); $10,000,000 (Index Interest Rate Mode) Water and Sewer System Subordinate Revenue Refunding Bonds, Series C-1B of 2008 (the Subordinate 2008 C-1B Bonds ); $5,000,000 (Index Interest Rate Mode) Water and Sewer System Subordinate Revenue Refunding Bonds, Series C-1C of 2008 (the Subordinate 2008 C-1C Bonds ); $26,840,000 (Term Mode) Water and Sewer System Subordinate Revenue Refunding Bonds, Series C-1D of 2008 (the Subordinate 2008 C-1D Bonds ); $51,820,000 (Variable Rate) Water and Sewer System Subordinate Revenue Refunding Bonds, Series C-2 of 2008 (the Subordinate 2008 C-2 Bonds ); A-11

56 Other Obligations In addition to its First Lien and Subordinate Bonds, the Authority has outstanding 14 loans (three of which were concluded in August, October and November of 2013) from the Pennsylvania Infrastructure Investment Authority ( PENNVEST ) which loans were made to finance certain capital improvements to the Water and Sewer System, mature on various dates and are subordinate to the First Lien and Subordinate Bonds. The outstanding aggregate amount of loans is $53,227,405 with PENNVEST. In addition the Authority has two (2) additional funding offers pending with PENNVEST which are to close in 2014 in the aggregate amount of $5,120,000. In the future, the Authority expects to issue additional bonds for the purposes of financing the costs of acquiring, constructing or completing capital additions or refunding outstanding indebtedness, including a borrowing anticipated in 2015 in the estimated amount of $75,000,000 to $100,000,000. Debt Service Requirements The schedule that follows sets forth the amount required during each Fiscal Year (ending December 31) shown below for the payment of the principal of and the interest on Outstanding First Lien Revenue Bonds with the issuance of the Series 2013 Bonds and Outstanding Subordinate Revenue Refunding Bonds assuming all variable rate bonds bear interest at applicable bank bond rate and swap rate through maturity. Debt Service Requirements on First Lien and Subordinate Bonds First Lien Subordinate Series 2013A Series 2013B Total Annual Date Debt Service 1, 2, 3 Debt Service 4, 5 Debt Service Debt Service Debt Service 6, ,305,442 4,657,587 15,862,409 2,987,785 43,813, ,302,492 4,657,587 16,898,200 6,066,394 47,924, ,305,517 4,657,587 16,791,650 6,056,944 47,811, ,609,517 4,657,587 6,166,850 6,061,144 47,495, ,411,399 4,657,587 12,353,450 6,059,344 47,481, ,745,384 4,657,587 14,953,200 6,059,544 47,415, ,018,411 4,657,587 11,738,700 6,060,794 47,475, ,024,182 4,657,587 11,518,200 6,056,794 47,256, ,047,648 4,657,587 11,448,700 6,057,544 47,211, ,195,175 4,657,587 11,377,200 6,057,544 47,287, ,249,865 4,657,587 9,437,950 6,056,544 47,401, ,710,025 4,657,587 9,518,450 6,059,294 47,945, ,832,525 4,657,587 1,636,450 6,060,294 48,186, ,832,525 4,657,587 1,647,888 6,058,494 48,196, ,832,525 4,657,587 1,617,888 6,056,744 48,164, ,832,525 4,657,587 1,628,038 6,060,363 48,178, ,562,525 7,597,587 10,761,675 6,059,363 47,981, ,237,525 19,870,543 10,514,925 6,056,400 47,679, ,037,450 29,341,050 3,121,675 6,058,150 47,558, ,182,603 29,165,065 3,087,975 6,059,900 47,495, ,246,396 29,145, ,058,588 47,450, ,498,817 6,008, ,056,250 47,563, ,563, ,057,363 47,621, ,690, ,056,138 47,746, ,820, ,057,050 47,877, ,913, ,059,313 47,972, ,099, ,057,138 48,156,391 Total 746,107, ,649, ,081, ,511,210 1,284,349,863 A-12

57 Notes to Debt Service Requirements on First Lien and Subordinate Bonds: Totals may not add due to rounding: (1) Interest on 2008D-2 First Lien Bonds are calculated at the associated swap rate of 4.103% (2) Interest on Series 1993A, 1998B, 2003, 2007A, 2008A taxable and 2008D1 First Lien (Fixed Rate) Bonds are calculated at fixed rate (3) Interest on 2008B-1and 2008B-2 First Lien Bonds are calculated at the associated swap rate of 4.038% for the Series 2008B-1 and Series 2008B-2 (4) Interest on the Series 2008C-1ABC bonds are calculated at the associated swap rate (3.998%) plus the Index Interest Rate pursuant to the Direct Placement with the Bank of America, N.A. Pursuant to future remarketing, the Series 2008C-1A,B and C bonds would be reoffered at a rate that may be higher or lower than the current index interest rate (5) Interest on the Series 2008C-1D bonds is calculated at the associated swap rate (3.998%) plus an assumed rate equal to the term mode rate from the 2012 remarketing of 1.40%. Pursuant to future remarketing, the Series 2008C-1D bonds would be reoffered at a rate that may be higher or lower than the assumed term mode rate (6) Interest on 2008C-2 Subordinate Lien Bonds are calculated at the associated swap rate of 3.998% (7) Does not include loans with PENNVEST Letter of Credit and Liquidity Agreements The Authority has entered into various letter of credit and standby agreements relating to the outstanding bonds of the Authority as provided in the following table: Variable Rate Bond Series Provider Agreement Term 2007 Series B-1 and B-2 JPMorgan Chase Bank* Standby Bond Purchase Agreement August 10, Series B-1 Bank of America, N.A. Direct Pay Letter of Credit October 21, Series B-2 Royal Bank of Canada Direct Pay Letter of Credit October 21, Series C-2 JPMorgan Chase Bank* Standby Bond Purchase Agreement August 9, Series D-2 PNC Bank, National Association* Standby Bond Purchase Agreement August 4, 2014 * The scheduled payment of the principal of and interest on the 2007 Series B-1 and B-2, the 2008 Series C-2, and the 2008 Series D-2 when due is insured by a municipal insurance policy issued at the time of original issuance of these bonds by Assured Guaranty Municipal Corp. (formerly known as Financial Security Assurance Inc.). Source: Pittsburgh Water and Sewer Authority [Remainder of this page intentionally left blank.] A-13

58 Interest Rate Swap Agreements The Authority has entered into other Qualified Interest Rate Swap Agreements relating to other outstanding bonds of the Authority. The following table sets forth the terms of all of the Swap Agreements as of October 1, 2013: Pittsburgh Water and Sewer Authority Interest Rate Swap Agreement Summary (as of October 1, 2013) Variable to Fixed Rate Swaps Counterparty Outstanding Notional Amount Effective Date Termination Date Fixed Rate Floating Index 2007 B1 & B2* JPMorgan Chase Bank $ 82,645,000 3/9/2007 9/1/ % SIFMA & Merrill Lynch Capital Services, Inc B JPMorgan Chase Bank $145,495,000 6/12/2008 9/1/ % SIFMA & Merrill Lynch Capital Services, Inc C JPMorgan Chase Bank $103,660,000 6/12/2008 9/4/ % SIFMA & Merrill Lynch Capital Services, Inc D JPMorgan Chase Bank $ 71,225,000 6/12/2008 9/4/ % SIFMA Total $403,025,000 *These Interest Rate Swap Agreements are to be terminated upon the issuance of the 2013B Bonds and the current refunding of the 2007 Refunded Bonds Source: Pittsburgh Water and Sewer Authority Financial Operation The Authority s income statement and annual debt service requirements are set forth in the following Financial History table. The table was prepared by the Authority using information contained in the audited financial statements for the years ended December 31, 2008 through December 31, The audited financial statements and management discussion and analysis for the years ended December 31, 2012 and 2011 are posted on the Authority s web site. In January of 2010, the Authority began assessing a (five) percent 5% Distribution Infrastructure System Charge (DISC) on all bills, increasing to seven percent 7% in 2011 and currently being assessed at7% for This charge is applied to the water and sewer conveyance components of the invoice and is dedicated to system improvements and capital needs. The DISC collection total in 2010 was $4.16 million, with no expenditures. It was decided to allow funds to accumulate the first year, and then budget expenditures for 2011 from the funds received in The 2012 budget for DISC expenditures was $6.72 million, of which $6.398 million was spent. The expenditures for 2012 included water and sewer relays, new vehicles, and security cameras for the Water Treatment Plant. Financial Results in 2012 In 2012, operating income increased by 8.1% or $2.84 million resulting in a net gain of $989,000, up from a $13,340,000 net loss in Below are the 2012 financial highlights: Total operating revenues in 2012 were up $3,620,000 or 3.4% to $144,140,000 when compared to Wastewater treatment revenues increased $3,880,000 to expected levels after a large credit adjustment in 2011 for a major commercial customer. Water and sewer conveyance revenues decreased $1,020,000 from 2011 primarily due to a major commercial customer greatly reducing their water purchases from the Authority. Total non-operating revenues increased by $12,360,000, mostly driven by stabilization in the fair market value of the 2008C2 investment swap as contrasted to a $12,380,000 loss in The loss related to this contract was only $361,000 for Donated property revenue was $2,533,000, an increase of $256,000 when compared to Non-operating revenue for grants was $75,000 and interest revenue decreased by $218,000 to $487,000 due to lower market rates. A-14

59 Total operating expenses increased in 2012 to $106,270,000, compared to $105,570,000 in Significant operating expenses included the following factors: Salary and employee benefit expenses were up $471,000 or 2.7%. The increase is attributed to an average overall salary increase of 3.2% and a 1.5% increase in benefit costs. Overall direct operating expenses, excluding salaries and benefits, decreased by $240,000 to $55,910,000 in 2012 or.4% from $56,150,000 in Wastewater treatment expense increased by $3,000,000 or 6.9% to $46,470,000 when compared to $43,470,000 in 2011 due to fewer adjustments. Chemicals expense decreased by $52,000. Equipment decreased by $791,000. Materials costs increased to $389,000 in 2012, from $373,000 in DISC relay items decreased by $2,190,000, as the majority of these relays are now recognized as construction in progress due to changes enabled by the new Cogsdale accounting system implemented by the Authority. Catch basin cleaning increased by $151,000 to $355,000 or 74.6% from Repairs & maintenance decreased by $429,000 from Computer hardware costs decreased 84.3% or $273,000 from previous year as the hardware items related to the new Cogsdale accounting system went into service. Overall G&A expenses increased 23.7%, to $11,850,000 from $9,580,000 in $2,120,000 of this $2,270,000 increase was due to the elimination of an expense contra account tied to fixed asset re-classing that is no longer used in the new accounting structure G&A expenses net of the above show a 1.4% or $130,000 increase from prior year. Significant expense reductions were a $1,310,000 drop in claims and deductibles and $151,000 reduction in natural gas. Significant expense increases were $1,180,000 in contingencies and $132,000 in legal. Overall other expenses decreased 1.9% or $1,230,000 to $61,850,000 in 2012 from $63,080,000 in Non-city water subsidy increased 34.5% or $564,000 to $2,190,000 in 2012 compared to $1,630,000 in This amount included the subsidy to Pennsylvania American Water Company ( PAWC ) which originated in 1973 by a vote of City Council. The subsidy is a payment to PAWC to subsidize its approximately 23,000 users so that the PAWC customers do not pay more than the Authority customers. This subsidy is paid directly to PAWC and is used by PAWC to off-set expenses. Interest expense on bond debt increased 1.5% or $574,000 to $39,540,000 in 2012 compared to $38,990,000 in Expenses related to the Cooperation Agreement with the City decreased by $2,000,000 in 2012, from $9,150,000 to $7,150,000. In 2012, cash collections increased by $1,690,000 or 1.2%. A loss of sales to a major commercial customer and a decrease in average water usage, as is occurring at water systems nationwide, precluded a larger net increase. The Authority collected approximately 99.3% of its billings for There was no change in bad debt reserve from [Remainder of this page intentionally left blank.] A-15

60 Financial History Table Statement of Revenues, Expenses and Changes in Net Assets (Dollars expressed in thousands) (Years Ended December 31, 2008, 2009, 2010, 2011 and 2012) * Operating revenues: Residential, commercial and $ 86,627 $ 86,271 $ 88,829 $ 95,290 $ 94,272 industrial water sales Wastewater treatment 39,439 45,514 49,223 43,548 47,429 Other 3,668 2,390 1,701 1,714 2,437 Total operating revenues $ 129,734 $ 134,175 $ 139,753 $ 140,552 $ 144,138 Operating Expenses: Direct operating expenses $ 38,346 $ 38,770 $ 36,393 $ 37,976 $ 37,490 Cooperation agreement operating expenses: Wastewater direct expenses 40,096 44,795 48,788 43,468 46,468 Indirect cost allocation - wastewater 4,415 4,500 4,500 4,400 3,192 Indirect cost allocation - water 5,235 4,131 4,150 4,750 3,958 Transfer costs, net Expense of water provided by other entities: Subsidy of customers located in the City $ 1,070 $ 1,603 $ 2,326 $ 1,633 $ 2,197 Depreciation 13,914 10,317 10,929 11,810 12,967 Amortization of capitalized lease assets 2,557 1,491 1,491 1,490 0 Total operating expenses 105, , , , ,272 Operating income $ 24,101 $ 28,568 $ 31,176 $ 35,025 $ 37,866 Other revenues (expenses): Federal Grants Donated Property ,819 15,100 2,277 2,533 Interest revenue 5, Inv. Inc. Change Fr. Mkt. Swap Value -- 7,187 (309) (12,380) (362) Interest expense - bonds (29,362) (37,984) (39,202) (36,747) (37,243) Interest Expense - other (153) (149) (185) (422) (520) Amortization of bond issue costs (1,202) (1,633) (1,811) (1,800) (1,781) Total other revenue (expense) (24,495) (16,822) (25,805) (48,363) (36,877) Increase/(Decrease) in Net Assets $ (394) $ 11,746 $ 5,371 $ (13,338) $ 989 Net Asset Surplus/(Deficit): Beginning of year (34,603) (47,284) (35,538) (30,167) (43,505) End of year $ (34,997) $ (35,538) $ (30,167) $ (43,505) $ (42,516) Annual debt service requirement Principal $ 15,531 $14,625 $16,435 $16,748 $15,064 Interest 24,223 30,435 30,190 27,721 27,865 Total annual debt service $ 39,754 $45,060 $46,625 $44,469 $42, was restated in accordance with GASB 53 (derivatives) as part of the 2010 Audit. The 2009 numbers also include an adjustment for Source: Pittsburgh Water and Sewer Authority A-16

61 The Financial History table reflects the results of past operations and is not necessarily indicative of results of future operations. Future operations will be affected by various factors, including, but not limited to, regulatory mandates, rate changes, weather, labor contracts, population changes, business environment and other matters, the nature and effect of which cannot now be determined. Expenses of Operation Salaries and related expenses account for 19.28% of total operating expenses in the 2013 budget. In 2013 the Authority s budget provides for 276 positions as follows: 40 in billing and collections; 26 in administrative and accounting positions; 189 in water and sewer operations and 21 in engineering. Payments to the City for services to be provided to the Authority under the Cooperation Agreement are 7.4% of the 2013 total operating expenses. In addition, utility fees and the cost of chemicals account for 9.97% of the 2013 total operating expenses. Historical Debt Service Coverage The Authority is required to satisfy one of the two debt service coverage tests under the Indenture. Under Test 1 receipts, revenues and unrestricted revenue fund cash must be sufficient to provide for payment of (a) current expenses of the Authority and (b) 120% of debt service on the first lien debt and subordinate debt. Under Test 2, receipts and revenues, including construction fund earnings with certain limitation, together with debt service reserve fund earnings must be sufficient to provide for payment of (a) current expenses of the Authority and (b) 100% of debt service on the first lien debt and the subordinate debt. Below is the historical debt service coverage from 2008 to 2012 for Test 1. Debt Service Coverage Calculations (in $1000s) Receipts and Revenues $129,734 $ 134,175 $ 139,753 $ 140,552 $ 145,004 Unrestricted Cash 35,024 41,914 42,937 37,403 41,676 Total $164,758 $ 176,089 $ 182,690 $ 177,955 $ 186,680 Operating Expenses $ 89,162 $ 93,799 $ 96,157 $ 92,227 $ 93, % Debt Service 47,576 54,072 52,412 51,026 51,515 Total $136,738 $ 147,871 $ 148,569 $ 143,253 $ 144,820 Funds in Excess of Test $28,020 $ 28,218 $ 34,121 $ 34,702 $ 41,860 Test 1 Debt Service Coverage 159% 152% 165% 168% 181% Source: Pittsburgh Water and Sewer Authority Projected Debt Service Coverage The Chester Engineers, as Consulting Engineers to the Authority has undertaken a report to review and verify the rate covenant of the Authority set forth in the First Lien Indenture and to verify sufficient Revenues and Receipts to pay debt service on the 2013 Bonds. Based on the forecast of (1) water sales, (2) interest earnings, (3) operating expenses and (4) Debt Service Requirements on all the Bonds outstanding, including the 2013 Bonds, the project debt service coverage is as set forth in APPENDIX E. (See APPENDIX E Table 3 on Page 5 OF THE ENGINEERS REPORT ). A-17

62 Budget The Authority is in the process of compiling the 2014 budget. The 2014 budget is proposed to be presented to the Board of the Authority at its December 13, 2013 meeting. Please see the Authority s website for the 2013 Budget and updates at Billings, Collections and Enforcement All bills are due 20 days after the billing date, and interest is applied on the next invoicing date. Dunning notices are generated and mailed to customers with any past due balances, and all unpaid balances, including interest, are reflected on the next regularly scheduled monthly statement. In addition, accounts with past due balances in excess of 90 days are also submitted to a collection agency as part of the overall collections process. Collection calls are made to customers of any accounts that are eligible to be terminated. If the customer is unable to be reached via telephone, their property is posted for non-payment. Water services are terminated when necessary. Historically, uncollectable water bills have been less than 2% of total billings. In October 2008, the Authority partnered with Paymentus Corporation to bring a one-time telephone and internet payment solution to its customers. A full Electronic Billing Payment and Presentment (EBPP) solution was installed and was made available to customers in the fourth quarter of 2009, via the Authority s mailing services vendor, Pittsburgh Mailing Services, Inc. The mailing services contract was awarded to Level One, LLC in the fourth quarter of 2010, making Level One the EBPP provider for the Authority. Employee Relations The majority of employees of the Authority are represented by a labor organization under Act 195 of 1970 of the Commonwealth of Pennsylvania. The Pittsburgh Joint Collective Bargaining Committee (PJCBC) represents blue-collar employees, and the American Federation of State, County and Municipal Employees (AFSCME), Local 2719 represents white-collar employees while, Local 2037 represents the foremen. Act 195 requires that bargaining start at least six months prior to the date on which the Authority s budget is adopted and that mediation be used if an impasse is reached. Since the time they were certified, the Authority has concluded numerous negotiations with these bargaining units without any labor stoppages. A five year agreement with AFSCME which provided for a salary increase effective January 1, 2009, 2010, 2011, 2012, and 2013, remains in place until the end of Negotiations are underway to extend this agreement. The Pittsburgh Joint Collective Bargaining Committee reached a four year agreement with the Authority which provides for a salary increase effective January 1, 2013, 2014, 2015, and Pension Employees of the Authority participate in the City s Municipal Pension Fund Plan (the Plan ). Employees who became members of the Plan prior to January 1, 1988 are required to contribute five percent (5%) of pre-tax pay. Those joining thereafter are required to contribute four percent (4%). Substantially all of the Authority s 2011 payroll of $12,796,000 was covered by the Plan. Employee contributions for the year amounted to approximately $497,000. For more information, please refer to Authority s Financial Statements as of December 31, The Mayor-Elect William Peduto proposed changes to the City s pension eligibility rules for those City employees (including for this purpose the Authority employees) who have not yet reached sixty (60) or attained twenty (20) years of service. Those employees whose combined age and years of service exceeds seventy (70) and elect to retire before January 31, 2014 would be able to retire without a reduction on benefits. The City estimates this change would affect 132 employees. The ordinance approving this proposed amendment has been introduced to City Council. There is no way to predict at this time if the proposal will be passed by City Council or if passed how many eligible employees will avail themselves of the benefits. City Pension Funding and Act 44* The assets of the Plan are administered by the Comprehensive Municipal Pension Trust Fund (the Fund ) together with two other pension plans maintained by the City, the Policemen's Relief and Pension Plan of the City of Pittsburgh, and the Firemen's Relief and Pension Plan of the City of Pittsburgh (collectively with the Municipal Pension Plan, the Pension Plans ). A-18

63 The Commonwealth of Pennsylvania enacted pension legislation ( Act 44 ) that mandated that the City reach a funding level of at least 50% by December 31, In the event that the City was not able to reach such mandated level of funding, the Pension Plans would be merged into the Pennsylvania Municipal Retirement System ( PMRS ) per the provisions of Act 44. The City developed a plan to address the problem, which was adopted on December 31, This plan required the deposit of $45,000,000 from the City's reserves to the Fund and of dedicated parking taxes of $13,400,000 annually from 2012 through 2017, and $26,800,000 from 2018 through In accordance with the terms of Act 44 the dedication of the parking taxes is irrevocable without further legislative action. The deposit of the $45,000,000 million was completed prior to the end of The City's most recent actuarial report, dated September 12, 2011, reflecting valuations as of January 1, 2011 reflect the Fund carrying an actuarial liability of $1,012,072,241. The Fund's assets of the same date were valued at $631,991,453. This corresponds to a funding level of approximately 62%, which is in excess of the minimum mandated 50% funding level. On September 19, 2011, the Pennsylvania Public Employees Retirement Commission accepted this plan and declared that the Fund was 62% funded, which avoided a state takeover of the Pension Plans. * Source: City of Pittsburgh Government Regulation The Authority is subject to Federal, State and County regulations in connection with water treatment, water distribution, wastewater collection, construction activities, storage tank use and air emissions. At the Federal level, regulatory oversight is provided by the EPA; at the State level, oversight is provided by PADEP; and at the local level, oversight is provided by the ACHD. The system currently meets all applicable regulations, permits and licenses. The Authority continuously studies, plans, designs, and implements improvements to maintain compliance with existing and new environmental regulations. The major regulatory programs governing the Authority s operations are discussed below, grouped by subject matter: Drinking Water, Water Quality, Storage Tanks and Air Quality. Drinking Water Virtually all entities in the United States that provide water for human consumption, do so in accordance with the Federal Safe Drinking Water Act (SDWA), which was passed in 1974 and amended in 1986 and The SDWA gives EPA the authority to establish drinking water standards to control the level of contaminants in drinking water, rules prescribing minimum methods of drinking water treatment, and requirements for monitoring and reporting of drinking water quality. Pennsylvania adopted a corresponding Pennsylvania Safe Drinking Water Act in 1984, and the state regulatory program has received EPA primary approval, meaning that PADEP primarily administers the permitting and regulatory program in Pennsylvania. The Authority holds permits issued by PADEP for the operation of a public water supply system, and is required to comply with federal and state requirements for treatment, monitoring of water quality, reporting of monitoring results and notification of exceeding events, and issuance of consumer confidence reports to its customers. Water Quality Federal regulations adopted under the Federal Clean Water Act (the CWA ), and State rules enacted under the Pennsylvania Clean Streams Law, govern discharges of wastewater and storm water. Any facility which discharges sewage, process wastewater, non-contact cooling water, storm water from municipal separate storm sewer systems or storm water associated with an industrial activity must obtain a National Pollutant Discharge Elimination System ( NPDES ) Permit. Under program approval from EPA, PADEP administers the NPDES Permit program in Pennsylvania. The Authority and the City have been issued an NPDES Permit for discharge from the municipal separate storm sewer systems within the City. The Authority s Water Treatment Plant has received an NPDES Permit to allow treated process water discharges to the Allegheny River. A-19

64 A NPDES permit is also required for discharges from sewage treatment facilities and combined sewer overflows ( CSO ). Such a permit establishes discharge limitations, monitoring, and reporting requirements and compliance schedules. The Authority has been issued its NPDES CSO Permit for its combined sewer overflows. On January 29, 2004, the Authority entered into a Consent Order and Agreement which contains detailed requirements for addressing wet weather sewer overflows. The feasibility study for the reduction of such overflows was submitted to PADEP on July 31, Final approval of the feasibility study by PADEP is not expected until mid- to late The City, ACHD and the Authority have rules and regulations prohibiting the introduction of hazardous chemicals or materials, including industrial byproducts, into the sewer collection and conveyance system. Enforcement is through the ACHD, the City of Pittsburgh Department of Public Safety, and PADEP. Under EPA requirements governing pre-treatment of industrial wastewaters discharged to publicly owned treatment works, pretreatment regulations and monitoring of those regulations are the responsibility of ALCOSAN and the ACHD. Section 303(d) of the CWA requires Pennsylvania to identify all impaired waters within the Commonwealth where technology-based treatment requirements for point and non-point sources of pollution are not stringent enough to attain and or maintain applicable water quality standards. This is an ongoing evaluation program being conducted by PADEP. At this time, the Authority has not been notified of any identified problems. Storage Tanks The Pennsylvania Storage Tank and Spill Prevention Act (the Tank Act ) established a comprehensive regulatory program for both aboveground and underground storage tanks and facilities. The Tank Act allows PADEP to develop environmental protection programs to prevent and clean up storage tank product releases and spills. The Tank Act includes both enforcement provisions and a strong reliance on the private sector to implement the major program elements. PADEP has received approval to administer the state storage tank program in lieu of most corresponding provisions of the Federal Resource Conservation and Recovery Act underground storage tank program. The Authority currently has 12 tanks requiring frequent inspections under the regulatory provisions. All Authority storage tanks have been upgraded to meet current regulatory requirements for protection, monitoring and containment. Air Quality ACHD administers the air quality permitting program under the provisions of the Federal Clean Air Act and the Pennsylvania Air Pollution Control Act. Under Article XXI of the ACHD Air Pollution Control Regulations, pollution prevention is recognized as the preferred strategy (over pollution control) for reducing risk to air resources. Stack emission standards are set for specific air quality parameters and enforced by permit. On January 29, 1996 the Allegheny Health Department, Air Quality Program, issued the Authority an Annual Air Quality Operating Permit, # This permit covers emissions generated at the Water Treatment Plant and is reviewed and renewed annually. The Authority is required to periodically sample and meet stack air emission standards at the treatment plant from its boilers. Certain Environmental Matters The Authority is subject to a variety of federal, state and local environmental laws and regulations governing discharges to air and water, conveyance of sanitary/storm wastewaters and possibly the storage and disposal of solid waste materials. The Sewer System conveys wastewater generated within the City boundaries, and from certain other municipalities connected to it to ALCOSAN interceptors located along the rivers and streams of the City for conveyance to ALCOSAN s wastewater treatment facility for processing prior to discharge into the Ohio River. Approximately 75% of the Sewer System is a combined system designed so that during wet weather, a portion of the collected storm water and diluted wastewater is discharged to natural watercourses by diversion chambers located throughout the PWSA Sewer Systems and at connections to the ALCOSAN interceptors. The Sewer System operates satisfactorily and has adequate capacity for the dry weather wastewater flows; during wet weather, however, the Sewer System is often taxed beyond its capacity, resulting in certain overflows, bypassing and flooding. A-20

65 The EPA has adopted regulations governing discharges to surface bodies of water under the Act, coupled with a CSO Policy regarding overflows from combined sewers during wet weather events that result in the discharge to receiving water of untreated sanitary sewage. These CSOs contain pollutants that are present in domestic and industrial wastewater, as well as those in the urban storm water runoff that enter the combined sewer system. There are 194 permitted CSOs within the Authority s Sewer System including connections to ALCOSAN s interceptors of these the Authority operates and maintains 40 of the CSOs. The remaining CSOs are operated by the regional treatment provider, ALCOSAN. The CSO Policy requires owners of any sewer system having CSOs to hold NPDES discharge permits for each overflow site. On January 29, 2004, pursuant to a resolution adopted by its Board on December 19, 2003, the Authority entered into a Consent Order and Agreement (the Order ) regarding alleged wet weather sewer overflows within the City. The other signatories to the Order are the City, PADEP and the ACHD. After the Order was entered into PADEP issued an NPDES permit covering the CSOs. The Order was developed as part of a two-year process of negotiation and consensus-building among the PADEP, the ACHD, the Authority and eighty-two other municipalities and municipal authorities whose sewage is ultimately treated by ALCOSAN at its Woods Run Sewage Treatment Plant. In the negotiations and consensus-building, the participants developed proposed orders to be used by the municipalities served by ALCOSAN to address regional concerns regarding wet weather sewer overflows. Generally, the Order requires the Authority and the City to assess the combined and separate sanitary sewers within the City in order to develop a plan to address alleged wet weather sewer overflows within the City. The assessment activities required under the Order include performing: (1) a physical survey and visual inspection of manholes; (2) sewer line cleaning and closed circuit television internal inspections; (3) sewer system mapping; (4) sewer system dye testing; (5) a system of hydraulic characterization; and (6) flow monitoring. The Order provides a very specific schedule for the completion of assessment activities. Most assessment activities for critical sewers and the separate sanitary portion of the sewer system were completed by Most assessment activities for non-critical sewers were substantially completed in In addition to assessment activities, the Order requires the Authority and the City to implement the Nine Minimum Controls for the control of CSOs, and to perform repairs and maintenance to the deficiencies in the sewer system revealed by the assessment activities. Such deficiency corrections include eliminating the conveyance of streams by the sewer system and repairing or replacing sewer lines that restrict flows causing unpermitted overflows. Generally, deficiency corrections in the critical sewers and the separate sanitary sewer system were completed by Most deficiency corrections in the assessed, non-critical sewers were substantially completed by The Order called for collection system investigations, repairs and further studies. The collection system investigation and repairs are reflected in the Capital Improvement Program. The Authority has completed its wet weather feasibility study which it submitted to PADEP and ACHD on July 31, The Authority is waiting a response from the PADEP but does not anticipate such until mid to late Ultimately, an ALCOSAN Regional Wet Weather Plan must be implemented for the elimination of sanitary sewer overflows and the reduction of combined sewer overflows to acceptable levels. The Regional Wet Weather Plan developed by ALCOSAN was submitted to the regulatory agencies in January According to ALCOSAN s Consent Decree, ALCOSAN s approved Regional Wet Weather Plan must be implemented by PADEP and ACHD will review the Authority s final feasibility study in conjunction with ALCOSAN s Regional Wet Weather Plan and final feasibility studies submitted by other authorities and municipalities. The feasibility study submitted by the Authority proposes approximately $165 million in system upgrades and improvements, spread over a 20- year period. However, Phase I also includes almost $10 million for investment in a large scale green infrastructure (GI) demonstration project to demonstrate the efficacy of this approach to reduce wet weather overflows and improve water quality. The findings from this study will be used to modify the proposed feasibility study to include GI on a broader scale, reduce wet weather overflows and potentially reduce the overall expense of the improvements. The Authority has a NPDES permit that authorizes wastewater discharges from its water treatment plant. On July 9, 2010, the Authority and PADEP entered into a Consent Order and Agreement that required modifications to wastewater discharges covered by the permit. The Authority paid a penalty of $110,000 based on failure to implement the modifications by the deadline in the Consent Order. The non-compliance resulted from a failure by an engineering contractor to properly A-21

66 design the required modifications, resulting in a delay in construction. The Authority and PADEP entered into an amendment to the Consent Order in July 2013 which requires the modifications to be made within twenty-three months. The Contractor has agreed to make the modifications. There are no additional penalties unless the new deadline is not met in which event there will be a penalty of $1,000 per day. [Remainder of this page intentionally left blank.] A-22

67 APPENDIX B SUMMARY OF THE INDENTURES

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69 The Water and Sewer System First Lien Revenue Bonds, Series of 2013 (the "2013 Bonds") are being issued and secured under the Trust Indenture dated as of October 15, 1993 (the "Original Indenture"), as amended and supplemented by the First Supplemental Indenture, dated as of July 15, 1995, the Second Supplemental Indenture, dated as of March 1, 1998, the Third Supplemental Indenture, dated as of March 1, 2002, the Fourth Supplemental Indenture, dated as of September 15, 2003, the Fifth Supplemental Indenture, dated as of June 1, 2005, the Sixth Supplemental Indenture, dated as of March 1, 2007 and the Seventh Supplemental Indenture, dated as of June 1, 2008 (the "Seventh Supplemental Indenture"), as amended by the Amending Supplement to the Initial First Lien Indenture and the Seventh Supplemental Indenture dated as of October 15, 2009, as further amended by the Second Amendment to the Seventh Supplemental Indenture, dated as of August 1, 2010 and as further amended by the Second Amending Supplement to the Initial First Lien Indenture and Third Amending Supplement to the Seventh Supplemental Indenture, dated as of October 22, 2013 and as supplemented by an Eight Supplemental First Lien Indenture dated as of December 1, 2013 (collectively, the "First Lien Indenture). SUMMARY OF FIRST LIEN INDENTURE This summary of the First Lien Indenture is qualified in all respects by specific reference to the First Lien Indenture. A copy of the First Lien Indenture may be reviewed at the offices of the Authority or the Trustee. Capitalized terms and phrases, not otherwise defined herein, shall have the meanings ascribed to them in the First Lien Indenture. Defined Terms Authority Bonds. Means Bonds owned by the Authority. Authority Long Term Indebtedness. The term Authority Long Term Indebtedness shall mean any and all obligations for the payment of money having an original maturity of greater than one year. Authorized Investments. The funds of the First Lien Indenture may be invested in the following: (a) Direct obligations of the United States of America and securities fully and unconditionally guaranteed as to the timely payment of principal and interest by the United States of America, provided, that the full faith and credit of the United States of America must be pledged to any such direct obligation or guarantee ("Direct Obligations"). (b) Direct obligations and fully guaranteed certificates of beneficial interest of the Export-Import Bank of the United States; consolidated debt obligations and letter of credit-backed issues of the Federal Home Loan Banks; participation certificates and senior debt obligations of the Federal Home Loan Mortgage Corporation ("FHLMCs"); debentures of the Federal Housing Administration; mortgagebacked securities (except stripped mortgage securities which are valued greater than par on the portion of unpaid principal) and senior debt obligations of the Federal National Mortgage Association ("FNMAs"); participation certificates of the General Services Administration; guaranteed mortgagebacked securities and guaranteed participation certificates of the Government National Mortgage Association ("GNMAs"); guaranteed participation certificates and guaranteed pool certificates of the Small Business Administration; debt obligations and letter of credit-backed issues of the Student Loan Marketing Association; local authority bonds of the U.S. Department of Housing and Urban Development; guaranteed Title XI financings of the U.S. Maritime Administration; guaranteed transit bonds of the Washington Metropolitan Area Transit Authority; Resolution Funding Corporation securities. (c) Direct obligations of any state of the United States of America or any subdivision or agency thereof whose unsecured, uninsured and unguaranteed general obligation debt is rated, at the time of purchase, "A" or better by Moody's and "A" or better by S&P, or any obligation fully and unconditionally guaranteed by any state, subdivision or agency whose unsecured, uninsured and 1

70 unguaranteed general obligation debt is rated, at the time of purchase, "A" or better by Moody's and "A" or better by S&P. (d) Commercial paper (having original maturities of not more than 270 days) rated, at the time of purchase, "P-1" by Moody's and "A-1" or better by S&P. (e) Federal funds, unsecured certificates of deposit, time deposits or bankers acceptances (in each case having maturities of not more than 365 days) of any domestic bank including a branch office of a foreign bank which branch office is located in the United States, provided legal opinions are received to the effect that full and timely payment of such deposit or similar obligation is enforceable against the principal office or any branch of such bank, which, at the time of purchase, has a short-term "Bank Deposit" rating of "P-1" by Moody's and a "Short-Term CD" rating of "A-1" or better by S&P. (f) Deposits of any bank or savings and loan association which has combined capital, surplus and undivided profits of not less than $3 million, provided such deposits are continuously and fully insured by the Bank Insurance Fund or the Saving Association Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"). (g) Investments in money-market funds rated "AAAm" or "AAAm-G" by S&P. (h) Repurchase agreements collateralized by Direct Obligations, GNMAs, FNMAs or FHLMCs with any registered broker/dealer subject to the Securities Investors' Protection Corporation jurisdiction or any commercial bank insured by the FDIC, if such broker/dealer or bank has an uninsured, unsecured and unguaranteed obligation rated "P-1" or "A3" or better by Moody's and "A-1" or "A-" or better by S&P, provided: (i) a master repurchase agreement or specific written repurchase agreement governs the transactions; and (ii) the securities are held free and clear of any lien by the Trustee or an independent third party acting solely as agent ("Agent") for the Trustee, and such third party is (i) a Federal Reserve Bank, (ii) a bank which is a member of the Federal Deposit Insurance Corporation and which has combined capital, surplus and undivided profits of not less than $50 million, or (iii) a bank approved in writing for such purpose by the Bond Insurer, and the Trustee shall have received written confirmation from such third party that it holds such securities, free and clear of any lien, as agent for the Trustee; and (iii) a perfected first security interest under the Uniform Commercial Code, or book entry procedures prescribed at 31 C.F.R et seq. or 31 C.F.R et seq. in such securities is created for the benefit of the Trustee; and (iv) the repurchase agreement has a term of 180 days or less, and the Trustee or the Agent will value the collateral securities no less frequently than weekly and will liquidate the collateral securities if any deficiency in the required collateral percentage is not restored within two Business Days of such valuation; and (v) the fair market value of the securities in relation to the amount of the repurchase obligation, including principal and interest, is equal to at least 103%. (i) Investment agreements approved by the Bond Insurers. Bond Insurer. The term Bond Insurer or Insurer shall mean any insurance company or bank, if any, guaranteeing the payment of principal and interest on any Bonds issued pursuant to the First Lien Indenture with respect to any Bonds, or any successor thereto. 2

71 Bonds. The term Bonds shall mean any Bond and Additional Bonds issued, authenticated and delivered in accordance with the First Lien Indenture. Capital Additions. The term Capital Additions shall mean all new or additional property, which the Authority has authority to, or is required to, construct or acquire (including, without limiting the generality of the foregoing, lands, rights of way, easements and similar interests in real property and all buildings, improvements, standpipes, reservoirs, wells, flumes, sluices, canals, basins, cribs, machinery, mains, conduits, hydrants, pipes, pipe lines, service pipes, water and sewer plants and systems, dams, tanks, shops, structures, purification systems, pumping stations, fixtures, engines, boilers, pumps, meters, facilities for cogeneration and transportation and other equipment) and any and all permanent improvements, replacements, additions, extensions and betterments to real or fixed property of the Authority, which new or additional property and permanent improvements, replacements, additions, extensions and betterments shall be hereafter constructed or otherwise acquired by the Authority, but shall not include the Construction Project. Current Expenses. The term "Current Expenses" shall mean the reasonable, proper and necessary costs of operation, maintenance and repair of the Water and Sewer System and Capital Additions and shall include, but without limiting the generality of the foregoing, administrative, engineering, legal, auditing and insurance expenses, liquidity facility fees and expenses, fees and expenses of the Trustee, any Paying Agent, and authorized depositaries, an allowance for depreciation, any payments to pension or retirement funds and taxes, and payments payable by the Authority to the City under the Cooperation Agreement. Debt Service Requirements. The term "Debt Service Requirements" shall mean, in respect of any Fiscal Year, the sum of the amount required to be paid in such Fiscal Year by the Authority in respect of the interest on and the principal of the Bonds outstanding or to be outstanding, as the case may be, and the amounts required to be paid to any sinking, purchase or analogous fund established for such Bonds and any Periodic Payments to be paid in connection with any Qualified Interest Rate Swap Agreement to the extent not taken into account in calculating the Debt Service Requirements on Bonds bearing interest at a variable rate pursuant to the immediately following sentence; provided, however, that the Debt Service Requirements in respect of any Fiscal Year for a series of Bonds for which there shall have been established a sinking, purchase or analogous fund shall be determined after projecting the operation of such fund to the retirement of Bonds by redemption and giving effect to the reduction in the payments to be made in such Fiscal Year in respect of the principal of and interest on such Bonds by reason of such redemption. To the extent any Bonds under consideration bear interest at a variable rate, and a Qualified Interest Rate Swap Agreement is in place with respect to such Bonds, the Debt Service Requirements on those Bonds shall be calculated by substituting the fixed rate used to determine amounts payable by the Authority under the Qualified Interest Rate Swap Agreement in lieu of the variable rate on the Bonds (except as such calculation relates to amounts to be deposited into the Debt Service Reserve Fund); provided, the Counterparty to such Qualified Interest Rate Swap Agreement maintains a rating by Standard & Poor's of at least "AA-" and by Moody's of at least "Aa3", otherwise the Debt Service Requirements for such Bonds shall be assumed to bear interest at the highest of: (i) the actual rate on the date of calculation, or if the indebtedness is not yet outstanding, the initial rate (if established and binding); (ii) if the indebtedness has been outstanding for at least twelve (12) months, the average rate over the twelve (12) months immediately preceding the date of calculation; and (iii) (1) if the interest on the indebtedness is excludable from gross income under the applicable provisions of the Internal Revenue Code of 1986, as amended, the most recently published Bond Buyer 25 Bond Revenue Index (or comparable index if no longer published) plus fifty (50) basis points, or (2) if interest is not so excludable, the interest rate on direct U.S. Treasury Obligations with comparable maturities plus fifty (50) basis points. Fiscal Year. The term Fiscal Year shall mean the period of twelve months beginning on January 1 of each year or such other twelve month period as may be designated by the Authority. Insurance Policy. The term Insurance Policy shall mean any insurance policy issued by an Insurer with respect to any Bonds. 3

72 Letter of Credit. The term "Letter of Credit" shall mean an irrevocable transferable direct-pay letter of credit issued for a series or subseries of Bonds by a Letter of Credit Bank for the account of the Authority in favor of the Trustee supporting a series or subseries of Bonds as set forth in a Reimbursement Agreement between the Letter of Credit Bank and the Authority. Letter of Credit Bank. The term "Letter of Credit Bank" shall mean the issuer of an irrevocable transferable direct-pay Letter of Credit pursuant to a Reimbursement Agreement. Maximum Annual Debt Service Requirements. The term Maximum Annual Debt Service Requirements means the highest Debt Service Requirements required to be paid in any Fiscal Year. To the extent any Bonds under consideration bear interest at a variable rate, the Maximum Annual Debt Service Requirements for such Bonds shall be assumed to bear interest at the highest of: (i) the actual rate on the date of calculation, or if the indebtedness is not yet outstanding, the initial rate (if established and binding), (ii) if the indebtedness has been outstanding for at least twelve months, the average rate over the twelve months immediately preceding the date of calculation, and (iii) (1) if interest on the indebtedness is excludable from gross income under the applicable provisions of the Internal Revenue Code of 1986, as amended, the most recently published Bond Buyer 25 Bond Revenue Index (or comparable index if no longer published) plus fifty (50) basis points, or (2) if interest is not so excludable, the interest rate on direct U.S. Treasury Obligations with comparable maturities plus fifty (50) basis points. Paying Agent. The term Paying Agent shall mean any paying agent or co-paying agent, and its successors, appointed by the Authority with respect to the Bonds. Periodic Payment Date. The term "Periodic Payment Date" shall mean the date on which a Periodic Payment is required under any Qualified Swap Agreement until the termination or maturity of the Qualified Interest Rate Swap Agreement. Periodic Payments. The term "Periodic Payments" shall mean any regularly scheduled fixed payment payable by the Authority to the Counterparty pursuant to the terms of any Qualified Interest Rate Swap Agreement(s); however, Periodic Payments shall not include any termination payments, costs and fees or any other sums payable under the Qualified Swap Agreement that arc not regularly scheduled payments payable by the Authority. Pledged Bonds. The term Pledged Bonds means Bonds purchased with the proceeds of a drawing on a Letter of Credit and not remarketed and either held in pledge by the Letter of Credit Bank or its designee or held by the Letter of Credit Bank, its designee or transferee in accordance with the applicable Reimbursement Agreement. Qualified Interest Rate Swap Agreement. The term "Qualified Interest Rate Swap Agreement" or "Qualified Swap Agreement" shall mean any agreement relating to any Bonds issued or to be issued under the Indenture with a Counterparty whereby the Authority will pay to the Counterparty periodic fixed amounts based upon a fixed percentage of a notional amount specified in such agreement and such Counterparty will pay to the Authority certain periodic floating amounts based upon a variable percent of the same notional amount; provided, that (i) the underwriter or the Authority's financial advisor shall certify to the Authority and the Trustee that (based upon then current market conditions) such Qualified Swap Agreement creates an overall lower Debt Service Requirement than would be attained through the issuance of Additional Bonds in an amount equal to such notional amounts at a Fixed Rate without such Qualified Interest Rate Swap Agreement and (ii) there is in place a municipal bond insurance policy, letter of credit or other credit enhancement instrument with respect to the Bonds to which the agreement relates guaranteeing payments of amounts owed on the Bonds and a swap insurance policy guaranteeing the payment of Periodic Payments due pursuant to such agreement respectively. Periodic Payments under a Qualified Interest Rate Swap Agreement may be on parity with the Bonds to which the Qualified Interest Rate Swap Agreement relates. Receipts and Revenues. The term "Receipts and Revenues" shall mean any and all rates, fees, payments received by the Authority from a counterparty pursuant to the terms of a Qualified Interest Rate 4

73 Swap Agreement, rents and charges established or to he established, levied and collected in connection with, and all other payments, receipts and revenues of whatever kind or character arising from, the operation or ownership of any property of the Authority or any part thereof (except tap or connection fees and charges to the extent such fees or charges are pledged in accordance with the Act as a refund to such person who has paid for the construction of any extension of the Water and Sewer System or assessment revenues which are subject to the lien of assessment bonds then outstanding), any income earned on the moneys or investments on deposit in the Debt Service Fund, Debt Service Reserve Fund, Construction Fund, Revenue Fund, Operation and Maintenance Fund and any sinking, purchase or analogous fund created under the First Lien Indenture. Reimbursement Agreement. The term "Reimbursement Agreement" shall mean a Reimbursement Agreement between the Authority and the respective Letter of Credit Bank, which may be amended from time to time in accordance with the terms thereof. Reimbursement Obligations. The term "Reimbursement Obligations" shall mean the obligations of the Authority to reimburse the Letter of Credit Bank for draws on such Letter of Credit Bank's Letter of Credit and to pay all other amounts due or to become due under the Reimbursement Agreement. Sewer System. The term Sewer System shall mean and include, as of any particular time, (i) all tangible property, fixed or moveable, then owned or operated by the Authority and used in the rendering of sewer service by the Authority, (ii) all Capital Additions then constructed or otherwise acquired relating to sewer service, and (iii) all franchises used or useful to the Authority at such particular time in the rendering of sewer service by the Authority. Water and Sewer System. The term Water and Sewer System shall mean and include as of any particular time the Sewer System, the Water System and any Capital Additions of the Authority. Water System. The term Water System shall mean and include, as of any particular time, (i) all tangible property, fixed or moveable, then owned or operated by the Authority and used in the rendering of water service by the Authority, (ii) all Capital Additions then constructed or otherwise acquired relating to water service, and (iii) all franchises used or useful to the Authority at such particular time in the rendering of water service by the Authority. Pledge and Security Pursuant to the First Lien Indenture, the Receipts and Revenues after payment of the Authority's Current Expenses, together with all cash and investments from time to lime held in any fund (other than the Rebate Fund) by the Trustee, is pledged by the Authority to the Trustee, its successors and assigns, to secure the payment of principal of and interest on all Bonds issued under the First Lien Indenture, the observance and performance of all the terms, provisions and conditions of the First Lien Indenture, and for the equal and ratable benefit and security of all and singular the present and future holders of the Bonds, Letter of Credit Banks and Qualified Interest Rate Swap Agreement without preference, priority or distinction as to lien or otherwise, except as otherwise provided in the First Lien Indenture, of any one Bond, Reimbursement Agreement or Qualified Interest Rate Swap Agreement over any other Bond Reimbursement Agreement or Qualified Interest Rate Swap Agreement by reason of priority in the issue, sale or authentication thereof or otherwise. The municipal bond insurance policy issued with respect to a particular series of the Bonds is for the sole benefit and security of the holders of the particular series of Bonds to which such policy relates. Holders of Bonds of another series shall have no rights or protection under a bond insurance policy issued with respect to another series of the Bonds. Additional Bonds The Authority may issue Additional Bonds, on a parity with the 1998 Bonds, the 2007 Bonds, the 2008 Bonds and the 2013 Bonds, for the purpose of financing the cost of acquiring or constructing capital additions or improvements, or for the purpose of refunding outstanding Bonds upon the conditions and terms set forth in the First Lien Indenture. In addition to the foregoing, the Authority 5

74 may incur or assume additional debt provided that the security for such debt is subordinate to the lien of and security interests granted by the First Lien Indenture. Funds Established Under the Indenture Construction Fund. There is established a Construction Fund into which the Authority shall deposit proceeds of Bonds for the purposes of constructing Capital Additions. Funds held in the Construction Fund shall be held in trust by the Trustee as security under the First Lien Indenture and shall be disbursed by the Trustee pursuant to the terms of the First Lien Indenture. Revenue Fund. All Receipts and Revenues and all other amounts received by the Authority from any source (except as otherwise provided in the First Lien Indenture) shall be deposited in the Revenue Fund established by the Authority with one or more Authorized Depositaries. Operation and Maintenance Fund. On or before the first day of each month, the Authority shall transfer from the Revenue Fund to the Operation and Maintenance Fund an amount equal to the amount budgeted by the Authority for that month for payment of the Current Expenses as the same become due. The Authority shall pay out of the Operation and Maintenance Fund its Current Expenses as the same shall become due. There is a special account within the Operation and Maintenance Fund called the "Operating Reserve Account." There shall be maintained in the Operating Reserve Account one-sixth of the amount equal to the Authority's budgeted Current Expenses for the current Fiscal Year. Amounts in the Operating Reserve Account shall be applied to pay the Current Expenses of the Authority to the extent that the amounts on deposit in the Operation and Maintenance Fund are insufficient. Debt Service Fund. On or before each interest payment date, the Authority will transfer from the Revenue Fund for deposit in the Debt Service Fund an amount equal to the amount of interest accrued and payable to date and an amount equal to the Reimbursement Obligations and pursuant to Reimbursement Agreement and an amount equal to the Periodic Payments for that Periodic Payment Date, and on or before the first day of each month, the Authority shall transfer from the Revenue Fund to the Trustee for deposit in the Debt Service Fund an amount equal to 1/12th of the principal due on the Bonds or 1/12th of the amount representing draws to he paid by the applicable Letter of Credit Bank for payment of principal on the next following principal payment date. Debt Service Reserve Fund. There shall be maintained in the Debt Service Reserve Fund an amount equal to the maximum annual debt service requirements on the Bonds, subject to restrictions of federal tax laws. The amount required to be maintained in the Debt Service Reserve Fund may be in the form of cash, a letter of credit or other credit instrument, a surety bond, or a combination thereof. Redemption Fund. The Authority may transfer to the Trustee for deposit to the credit of the Redemption Fund such amounts as it may elect for the purchase or redemption of Bonds at the option of the Authority and the Trustee shall apply such moneys to the purchase or redemption of Bonds in the amounts directed by the Authority. Upon any such purchase or redemption, the Trustee shall transfer from the Debt Service Fund to the Redemption Fund any amount deposited to the Debt Service Fund with respect to interest on the Bonds being redeemed and shall pay the interest due on the redemption date out of such moneys. Renewal and Replacement Fund. On the dates and in the amounts set forth in the consulting engineer's report, money is transferred to the Renewal and Replacement Fund. The moneys at any time on deposit to the credit of the Renewal and Replacement Fund may be used by the Authority for extraordinary maintenance and repair of the Water and Sewer System or to pay the cost of capital additions or construction, or, to the extent of any insufficiency therein, to the Debt Service Fund or to any sinking, purchase or analogous fund. 6

75 Rebate Fund. Separate and apart from the pledge of the First Lien Indenture is a Rebate Fund. Within the Rebate Fund there is a separate account for each series of Outstanding Bonds. Deposits, transfers and payments from the particular rebate accounts shall be made in accordance with tax regulatory agreements entered into with respect to the respective series of Bonds. Rate Covenant The Authority covenants that it will comply with (1) or (2) below in any fiscal year: 1)The Authority will maintain, charge and collect, so long as any Bonds are outstanding, reasonable rates, rentals and other charges for the use of the facilities of the Water and Sewer System which (after making due and reasonable allowances for contingencies and a margin of error in the estimates) together with other Receipts and Revenues, including any unrestricted cash and investments accumulated in the Revenue Fund at the beginning of each Fiscal Year, shall be at all times at least sufficient to provide annually: (a) Amounts sufficient to pay all of the Current Expenses of the Authority; and (b) An amount equal to 120% of the Debt Service Requirements with respect to the Authority Bonds (i.e., the Bonds and any bonds issued under the Subordinate Indenture) and other Authority Long Term Indebtedness during the then current fiscal year of the Authority. 2) The Authority will maintain, charge and collect, so long as any Bonds arc outstanding, reasonable rates, rentals and other charges for the use of the facilities of the Water and Sewer System which (after making due and reasonable allowances for contingencies and a margin of error in the estimates), together with other Receipts and Revenues, for the then current fiscal year (exclusive of interest income earned by the Authority on funds other than the Debt Service Reserve Fund; provided, however, that earnings on the construction/acquisition funds may also be included during any construction period, but only to the extent such earnings are expressly required to be either retained in the construction/acquisition funds and may be used to pay debt service on the Authority Bonds or other Authority Long Term Indebtedness or are applied directly to payment of debt service on the Authority Bonds or other Authority Long Term Indebtedness), shall be at all times at least sufficient to provide annually: (a) Funds to pay all of the Current Expenses of the Authority; and (b) An amount equal to 100% of the debt service requirements with respect to the Authority Bonds and other Authority Long Term Indebtedness during the then current fiscal year of the Authority. Calculation of compliance with the covenant shall be made on the following basis: (a) operating revenue, construction/acquisition fund income, earnings on the Debt Service Reserve Fund, expenses, required deposits to replenish any withdrawals from the Debt Service Reserve Fund and the Renewal and Replacement Fund which have not been capitalized shall be accounted for on the accrual basis; (b) costs of issuance of the Authority Bonds and other Authority Long Term Indebtedness may be treated as if such amounts are amortized over the life of the Authority Bonds and other Authority Long Term Indebtedness irrespective of any shorter period over which such costs are actually amortized; and (c) depreciation is specifically excluded from the calculation. In the event that any Policy Costs are due and owing at the time of the calculation of the rate covenant, Gross Revenues of the Authority shall be reduced by the amount of any Policy Costs then due and owing. The Authority also covenants with the holders of the Bonds that if at any time the revenues collected shall not be sufficient to enable the Authority to comply with the provisions set forth above, it will promptly revise its water or sewer rates, rents and other charges so that the Authority will be in 7

76 compliance and so that any deficiencies in transfers of funds required to be made pursuant to the First Lien Indenture will be remedied before the end of the next ensuing Fiscal Year. Insurance of Water and Sewer System. The Authority will at all times cause all the property of the Water and Sewer System which is of a character usually insured by persons operating properties of a similar nature to be properly insured and kept insured by a reputable insurance company or companies against loss or damage by fire or other hazards to the extent that such properties are usually insured by persons operating properties of a similar nature in the same or similar localities. Such policies of insurance shall be for the benefit of the Trustee and the Authority, as their respective interests may appear. All claims in excess of $500,000 shall be made payable to the Trustee and shall be held by the Trustee as additional security until paid out by it as provided therein. All claims of $500,000 or less shall be paid to the Authority. Employment of Independent Accountant; Annual Financial Report. The Authority covenants to employ an independent auditor to perform such duties as are imposed on the independent auditor by the First Lien Indenture, including preparation of an audit report for the preceding fiscal year. Events of Default. Each of the following events is hereby declared an "Event of Default" for any Bond issued under the First Lien Indenture: (a) failure by the Authority to pay the principal of, or the premium (if any) payable upon the redemption of, any Bond when due and payable either at maturity, declaration, or by proceedings for redemption, or otherwise (no effect being given to payments made under any Bond Insurance Policy); or (b) failure by the Authority to pay any installment of interest on any Bond when due and payable (no effect being given to payments made under any Bond Insurance Policy); or (c) the entry of an order or decree appointing a receiver or receivers of the Water and Sewer System or of the Receipts and Revenues with the consent or acquiescence of the Authority, or, if such order or decree shall have been entered without the acquiescence or consent of the Authority, the failure of the Authority to cause such order or decree to be vacated or discharged or stayed on appeal within 90 days after entry; or (d) the institution of any proceeding with the consent or acquiescence of the Authority for the purpose of effecting a composition between the Authority and its creditors, or for the purpose of adjusting the claims of such creditors pursuant to any Federal or State statute now or hereafter enacted, if the claims of such creditors are under any circumstances payable out of the Receipts and Revenues, or if such proceeding shall have been instituted without the consent or acquiescence of the Authority, the failure of the Authority to have such proceeding withdrawn, or any order entered therein vacated or discharged, within 90 days after the institution of such proceeding or the entry of such order; or (e) the entry of a final judgment against the Authority, which judgment constitutes or could result in a lien or charge upon the Water and Sewer System or the Receipts and Revenues, or which materially and adversely affects the ownership, control or operation of the Water and Sewer System, if such judgment shall not be discharged within 90 days from the entry thereof, or if an appeal shall not be taken therefrom, or from the order, decree or process upon which or pursuant to which such judgment was granted or entered, in such manner as to conclusively set aside the execution or levy under such judgment, order, decree or process, or the enforcement thereof; or (f) the failure of the Authority to repair or replace, with reasonable dispatch, any part of the Water and Sewer System necessary for its efficient operation which shall have been destroyed or damaged (whether such failure promptly to repair or replace the same be due to the impracticability of such repair or replacement or the lack of funds therefor or for any other reason); or 8

77 (g) the failure or refusal of the Authority to comply with any provisions of the Municipality Authorities Act, as amended and supplemented, or the rendering of the Authority, for any reason, incapable of fulfilling its obligations thereunder or under the First Lien Indenture; or (h) the failure of the Authority to observe any other covenant, condition or agreement of the Authority contained in the Bonds or in the First Lien Indenture and the continuation of such failure for a period of 60 days after written notice of such failure from the Trustee, which may give such notice in its discretion and shall give such notice at the written request of the holders of not less than 25% in aggregate principal amount of the Bonds then outstanding, provided that (except as summarized under "Rate Covenant") the failure of the Authority to meet the rate covenant set forth in the First Lien Indenture shall not constitute an event of default thereunder, and provided further that if such failure is not capable of being remedied within 60 days after such notice, no Event of Default shall exist if the Authority commences the actions necessary for the cure of such failure within such 60 day period and diligently pursues such actions thereafter; or (i) failure by the Authority to pay principal of, or premium (if any) payable upon the redemption of any Subordinate Bond when due and payable either at maturity or otherwise or to pay any installment of interest on any such Subordinate Bond when due and payable (no effect being given to payments made under a bond insurance policy) or any default under the Subordinate Indenture; or (j) the Trustee shall have received written notice from a Letter of Credit Bank that an Event of Default shall have occurred under the Reimbursement Agreement, with a direction from the Letter of Credit Bank to the Trustee to accelerate the principal and interest on the respective series or subseries of Bonds secured by such Letter of Credit Bank's Letter of Credit; or (k) any acceleration of the payment of principal of any series or subseries of Bonds or the payment of Reimbursement Obligations shall have occurred; or (l) failure by the Authority to pay the principal of any Reimbursement Obligation when due or within any applicable grace period, if any, set forth in the applicable Reimbursement Agreement; or (m) failure by the Authority to pay any installment of interest on any Reimbursement Obligation when due or under any applicable grace period, if any, set forth in the applicable Reimbursement Agreement. Notwithstanding the provisions contained hereinabove, failure by the Authority to meet at least one of the tests contained in the Rate Covenant section will constitute a breach requiring the Authority to engage a consultant, the identity and scope of engagement of which shall be satisfactory to the Bond Insurer, within sixty (60) days of the determination that such breach has occurred. Failure to engage and follow the recommendations of the consultant in a prompt manner shall constitute an Event of Default under the Initial Indenture. Further, failure to meet the test contained in Section 7.01(1) when substituting 100% for 120% in Section 7.01(1)(b) of the Indenture shall constitute an Event of Default under the Indenture. 9

78 Acceleration of Principal. Upon the occurrence and continuance of any Event of Default, the Trustee may, and at the written request of Bondholders of not less than 25% in principal amount of the Bonds then outstanding shall, by written notice to the Authority, declare the Bonds to be immediately due and payable, whereupon they shall, without further action, become and be immediately due and payable. Upon the occurrence and continuance of an Event of Default as described above, at the written direction of the applicable Letter of Credit Bank, the Trustee shall, by written notice to the Authority, declare the series or subseries of Bonds secured by such Letter of Credit Bank's Letter of Credit to be due and payable five (5) Business Days after delivery of such written notice by the Trustee to the Authority, whereupon such series or subseries of Bonds shall, without further action, become and be due and payable five (5) Business Days after the provision of such notice by the Trustee to the Authority. The Trustee shall give written notice thereof to the Authority and shall give notice thereof by first class mail to all holders of such series or subseries of Outstanding Bonds and to all other holders of Outstanding Bonds and to any Letter of Credit Bank, Insurer or other provider of credit or credit enhancement to any series or subseries of Bonds (each a "Provider"). No later than one (1) Business Day of receiving written direction of acceleration from the applicable Letter of Credit Bank, the Trustee shall give written notice to each Provider of the Trustee's receipt of such written direction of acceleration. Such written notice may be electronic. In the case of electronic notice, such electronic notice shall be sent to any address or addresses as directed by a Provider. Upon the occurrence and continuance of an Event of Default as described in Section 8.01(l) or Section 8.01(m), at the written direction of the applicable Letter of Credit Bank, the Trustee shall, by written notice of the Authority, declare the principal and accrued interest and all other Reimbursement Obligations owed to the applicable Letter of Credit Bank to be immediately due and payable whereupon such Reimbursement Obligations shall, without further action, be immediately due and payable. The Trustee shall give notice thereof by first class mail to all holders of Outstanding Bonds and to each Provider, no later than one (1) Business Day of receiving written direction of acceleration from the applicable Letter of Credit Bank, in the same manner as provided in the previous paragraph. The above provision, however, is subject to the condition that if, after the principal of said Bonds shall have been so declared to be due and payable, all arrears of interest, if any, upon the Bonds and interest on overdue installments of interest at the rate of interest specified therein, and the principal of all Bonds which have matured other than by reason of such declaration, shall have been paid by the Authority, and the Authority shall also have performed all other things in respect to which it may have been in default hereunder, and shall have paid the reasonable charges of the Trustee and its counsel and of the holders of said Bonds, including reasonable attorneys' fees paid or incurred, then, and in every such case, the holders of not less than a majority in aggregate principal amount of the Bonds then outstanding, by written notice to the Authority and to the Trustee, may waive such default and its consequences and such waiver shall be binding upon the Trustee and upon all holders of Bonds; but no such waiver shall extend to or affect any subsequent default or impair any rights or remedy consequent thereon. In no event, so long as a Bond insurance policy is in effect and the Bond insurer is not in default thereunder, shall the Trustee waive a default without the prior written consent of the bond insurer with respect to the series of Bonds it insures. In no event, so long as a Letter of Credit is in effect and the applicable Letter of Credit Bank is not in default of its obligations pursuant to the applicable Letter of Credit, shall the Trustee waive a default or an Event of Default without prior written consent of the applicable Letter of Credit Bank. Prior to waiving a default or an Event of Default pertaining to an applicable series or subseries of Bonds, the Trustee must receive from the applicable Letter of Credit Bank written notice that the applicable Letter of Credit is still in effect if not drawn upon pursuant a default or an Event of Default hereunder, or if drawn upon pursuant to a default or an Event of Default hereunder, that the applicable Letter of Credit has been fully reinstated. In the event that the principal and interest on any series or subseries of Bonds is declared due and payable, when such Bonds are then supported by a Letter of Credit, the interest on those Bonds shall cease to accrue on the date to which the principal and interest on such Bonds has been accelerated. Remedies of Trustee and Bondholders; Right of Entry. Subject to the acceleration of principal provision above, upon the happening and during the continuance of any Event of Default, the Trustee may and, upon written request of the holders of not less than 25% in aggregate principal amount of the Bonds then Outstanding, shall enter into and upon and take possession of the Water and Sewer System and each and every part thereof as for a condition broken and may exclude the Authority, its agents and employees and all persons claiming under them wholly therefrom and have, hold, use, operate, manage and control the same and each and every part thereof, and in the name of the Authority or otherwise as 10

79 the Trustee shall deem best, conduct the business thereof and exercise all the rights and powers of the Authority with respect to the Water and Sewer System and use all its then existing property, assets and franchises for that purpose and out of the Receipts and Revenues, maintain, restore, insure and keep insured, the Water and Sewer System against such hazards as are ordinarily insured against by a person operating a water and sewer system similar to the Water and Sewer System and from time to time may make all such necessary or proper repairs as to it may seem expedient, and establish, levy, maintain and collect such rates, rents and charges in connection with the Water and Sewer System as it may deem necessary, proper, desirable and reasonable, and collect and receive Receipts and Revenues, and after deducting therefrom the expenses of operation, maintenance and repair and all expenses incurred thereunder and all other proper outlays herein authorized and all such payments which may be made for insurance and other proper charges, including just and reasonable compensation for its own services, and for the services of such attorneys, agents and employees as it may, in the exercise of its discretion, employ for any of the purposes aforesaid, the Trustee shall apply the rest and residue of the moneys received by it, as well as all cash and investments held by the Trustee in any fund under the First Lien Indenture subject to the provisions thereof with respect to claims for principal and interest, to the payment of the principal of and interest on the Bonds. Whenever all that is due upon such Bonds and installments of interest and under any of the terms of the First Lien Indenture have been paid or deposited with the Trustee and all defaults made good, the Trustee in possession shall surrender possession to the Authority, its successors or assigns. However, the same right of entry shall exist upon any subsequent default or defaults. For purposes of this section, the bond insurer shall, so long as no default has occurred under its respective insurance policy, be deemed to be the owner of the series of Bonds which it insures. Judicial Action. So long as any series or subseries of Bonds are supported by a Letter of Credit, and the Letter of Credit Bank issuing such Letter of Credit is not in default of its obligations pursuant to the applicable Letter of Credit, the applicable Letter of Credit Bank shall be deemed to be the Bondholder of the series or subseries of Bonds secured by such Letter of Credit with respect to the taking of each remedy provided in this Section and the Trustee shall not take any action directed by the registered owners of the Bonds of the series or subseries of Bonds supported by such Letter of Credit Bank's Letter of Credit. If a Letter of Credit has been drawn to pay principal and interest or purchase price and there are unpaid Reimbursement Obligations, the respective Letter of Credit Bank shall be deemed to be a Bondholder in the amount of the unpaid Reimbursement Obligations, provided that nothing herein shall be interpreted as providing for the double-counting of principal. So long as the Bond Insurance Policy is in effect and the Bond Insurer is not in default thereunder, the Bond Insurer may direct the Trustee with respect to the taking of each remedy and the Trustee may not take any action directed by the respective series of the Bondholders without the prior written consent of the Bond Insurer. Limitations on Bondholders. No holder of any Bonds shall have any right to institute any suit, action, or proceeding in equity or at law for the enforcement of the First Lien Indenture or for the execution of any trust thereof or for the appointment of a receiver or to exercise any other remedy thereunder, unless such holder shall have previously given to the Trustee written notice of an event of default and of the continuance thereof nor unless also the holders of at least 25% in aggregate principal amount of the Bonds then Outstanding shall have made written request of the Trustee and shall have offered it reasonable opportunity either to proceed to exercise the powers hereinbefore granted or to institute such action, suit or proceeding in its own name nor unless also they shall have offered to the Trustee adequate security and indemnity against the costs, expenses and liability to be incurred therein or thereby; and such notification, request and offer of indemnity are, at the option of the Trustee, conditions precedent to the execution of the powers and trusts of the First Lien Indenture or for the appointment of a receiver or for any other remedy thereunder; no one or more holders or registered owners of Bonds, however, have any right to affect, disturb or prejudice the lien of the First Lien Indenture by their action or to enforce any right thereunder except in the manner therein provided. Subject to the following paragraph, nothing shall affect or impair the right of any Bondholder, which is absolute and unconditional, to enforce the payment of the principal of and interest on its Bonds, or the obligation of the Authority, which is also absolute and unconditional, to pay the principal of and interest on the Bonds to the respective holders or registered owners thereof at the time and place in said Bonds expressed. 11

80 So long as any series or subseries of the Bonds are supported by a Letter of Credit, and the Letter of Credit Bank issuing such Letter of Credit is not in default of its obligations pursuant to the applicable Letter of Credit, the applicable Letter of Credit Bank shall be deemed to be the holder of the series or subseries of Bonds supported by such Letter of Credit Bank's Letter of Credit with respect to any direction to the Trustee with respect to the taking of each remedy provided above with respect to such series or subseries of the Bonds and the Trustee shall not take any direction by the registered owners of the Bonds of the series or subseries of Bonds supported by such Letter of Credit Bank's Letter of Credit. So long as a Bond Insurance Policy is in effect and the Bond Insurer is not in default thereunder, the Bond Insurer may direct the Trustee with respect to the taking of each remedy and the Trustee shall not take any action directed by the respective series of the Bondholders without the prior written consent of the Bond Insurer. Waivers and Supplemental Indentures Not Requiring Consent of Bondholders. In addition to any supplemental indenture otherwise authorized by the First Lien Indenture, the Authority (with the prior written consent of the Bond Insurer), and the Trustee may, from time to time and at any time, enter into such indentures or agreements supplemental to the First Lien Indenture as shall not be inconsistent with the terms and provisions thereof and which shall not adversely affect the rights of the holders of the Bonds (which supplemental indentures or agreements shall thereafter form a part thereof) for the following purposes: (a) to cure any ambiguity, formal defect or omission in the First Lien Indenture or any supplemental indenture; (b) to grant or confer upon the Trustee for the benefit of the Bondholders any additional rights, remedies, powers, authority or security that may lawfully be granted to or conferred upon the Bondholders or the Trustee; (c) to add to the covenants and agreements of the Authority in the First Lien Indenture other covenants and agreements thereafter to be observed, or to surrender any right or power therein reserved to or conferred upon the Authority; (d) to modify any of the provisions of the First Lien Indenture or to relieve the Authority of any of the obligations, conditions or restrictions contained in the First Lien Indenture, provided that such modification or relief shall not, by the express terms of the particular supplemental indenture, become effective until all Bonds outstanding on the date of the execution and delivery of such supplemental indenture shall no longer be outstanding; (e) to make such provision in regard to matters or questions arising under the First Lien Indenture as may be necessary or desirable and not inconsistent with the First Lien Indenture; or (f) to close the First Lien Indenture against, or to restrict, in addition to the limitations and restrictions therein contained, the issue of additional bonds thereunder, by imposing additional conditions and restrictions to be thereafter observed, whether applicable in respect of all Bonds issued and to be issued thereunder or in respect of one or more series of Bonds, or otherwise. Supplemental Indentures Requiring Consent of Bondholders. With the consent of the holders of not less than 66-2/3% in aggregate principal amount of the Bonds then outstanding or, in the case one or more but less than all of the series of the Bonds then Outstanding are affected, then, in addition, with the consent of the holders of not less than 66-2/3% of the principal amount of the Bonds of each series so affected then Outstanding, and with the consent of any guarantor of principal of and interest on any series of Bonds, the Authority and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental to the First Lien Indenture for the purpose of eliminating any of the provisions of the First Lien Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Bonds so affected; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity date of any Bond, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, 12

81 without the consent of the holder of each Bond so affected, or (ii) permit the creation by the Authority of any lien prior to the lien of the First Lien Indenture upon any part of the Receipts and Revenues, or reduce the aforesaid percentage of Bonds, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of all Bonds then outstanding; provided, however, that in no event shall the provisions on Authorized Investments be amended. No supplemental indenture shall be effective unless it has been consented to in writing by the Bond Insurers. Discharge of First Lien Indenture. If the Authority, its successors or assigns, shall pay or cause to be paid unto the holders of all Bonds outstanding the principal and interest to become due thereon and the premium thereon, if any, then the First Lien Indenture and the estate and rights therein granted shall cease, determine and be void, and the Trustee shall, upon the request of the Authority, deliver to the Authority such instruments as shall be requisite to satisfy the lien thereof, and reconvey to the Authority the estate and title thereby conveyed, and assign and deliver to the Authority any property at the time subject to the lien of the First Lien Indenture which may then be in the possession of the Trustee. Bonds for the payment or redemption of which there shall have been deposited with the Trustee cash or direct non-callable obligations of the United States of America and securities fully and unconditionally guaranteed as to the timely payment of principal and interest by the United States of America, to which direct obligation or guarantee the full faith and credit of the United States of America has been pledged, Refcorp interest strips, CATS, TIGRS, STRPS, or defeased municipal bonds rated "AAA" by S&P or "Aaa" by Moody's, any combination thereof or any other security approved by the Bond insurer), the principal of and interest on which when due will, without reinvestment of principal or interest, provide sufficient moneys to pay the Bonds in full at maturity or the date fixed for redemption, shall be deemed to be paid. In the event of an advance refunding, the Authority shall cause to be delivered a verification report of an independent nationally recognized certified public accountant. Removal of Trustee. The Trustee may be removed at any time by an instrument in writing signed by not less than a majority in aggregate principal amount of Bonds outstanding and filed with the Authority. No such removal shall become effective until a successor trustee is appointed and has accepted the duties of Trustee. 13

82 SUMMARY OF SUBORDINATE INDENTURE A summary of the Subordinate Indenture follows. Such summary is qualified in all respects by specific reference to the Subordinate Indenture. A copy of the Subordinate Indenture may be reviewed at the offices of the Authority or the Trustee. Capitalized terms and phrases, not otherwise defined herein, shall have the meaning ascribed to them in the First Lien Indenture or Subordinate Indenture, as appropriate. Defined Terms Pledge and Security. Pursuant to the Subordinate Indenture, the Receipts and Revenues after the payment of (1) the Authority's Current Expenses; (2) the debt service on bonds issued from time to time under the First Lien Indenture; (3) the funding of the Debt Service Reserve Fund, the Operating Reserve Fund and the Renewal and Replacement Fund held pursuant to and as required by the First Lien Indenture; and (4) policy costs under the First Lien Indenture, together with all cash and investments held in any fund other than the Rebate Fund by the Trustee is pledged by the Authority to the Trustee, its successors, to secure the payment of principal of, and interest and premium (if any) on, all Subordinate Bonds issued and Outstanding under the Subordinate Indenture, to secure the performance and observance of all covenants, agreements and conditions under the Subordinate Indenture, including the payment of Reimbursement Obligations and the payment of Periodic Payments owed under any Qualified Interest Rate Swap Agreement. Additional Bonds. The Authority may issue Additional Bonds from time to time under the Subordinate Indenture for any lawful purpose including refunding. Any such Additional Bonds will not be secured by or afforded the benefits of the Bond Insurance Policy issued in connection with the Subordinate Bonds. In addition to the foregoing, the Authority may incur or assume additional debt provided that the security for such debt is subordinate to the lien of and security interests granted by the Subordinate Indenture. Acquisition Fund. Proceeds deposited in the Acquisition Fund shall be disbursed by the Trustee to pay the costs of the acquisition by the Authority of the capital assets of the Water and Sewer System from the City of Pittsburgh pursuant to a Capital Lease Agreement (the "Acquisition"). Funds may be withdrawn from the Acquisition Fund to pay the costs of Acquisition as provided in the Capital Lease Agreement. Investment earnings on the amounts on deposit in the Acquisition Fund shall be retained in the Acquisition Fund. Any monies remaining in the Acquisition Fund after all amounts due in respect of the Acquisition are paid shall be transferred by the Trustee to the Debt Service Fund. Debt Service Requirements. The term "Debt Service Requirements" shall mean, in respect of any Fiscal Year, the sum of the amount required to be paid in such Fiscal Year by the Authority in respect of the interest on and the principal of the Bonds outstanding or to be outstanding, as the case may be, and the amounts required to be paid to any sinking, purchase or analogous fund established for such Bonds and any Periodic Payments to be paid in connection with any Qualified Interest Rate Swap Agreement to the extent not taken into account in calculating the Debt Service Requirements on Bonds bearing interest at a variable rate pursuant to the immediately following sentence; provided, however, that the Debt Service Requirements in respect of any Fiscal Year for a series of Bonds for which there shall have been established a sinking, purchase or analogous fund shall be determined after projecting the operation of such fund to the retirement of Bonds by redemption and giving effect to the reduction in the payments to be made in such Fiscal Year in respect of the principal of and interest on such Bonds by reason of such redemption. To the extent any Bonds under consideration bear interest at a variable rate, and a Qualified Interest Rate Swap Agreement is in place with respect to such Bonds, the Debt Service Requirements on those Bonds shall be calculated by substituting the fixed rate used to determine amounts payable by the Authority under the Qualified Interest Rate Swap Agreement in lieu of the variable rate on the Bonds (except as such calculation relates to amounts to be deposited into the Debt Service Reserve Fund); provided, the Counterparty to such Qualified Interest Rate Swap Agreement maintains a rating by Standard & Poor's of at least "AA-" and by Moody's of at least "Aa3", otherwise the Debt Service Requirements for such Bonds shall be assumed to bear interest at the highest of: (i) the actual rate on the date of calculation, or if the indebtedness is not yet outstanding, the initial rate (if established and 14

83 binding); (ii) if the indebtedness has been outstanding for at least twelve (12) months, the average rate over the twelve (12) months immediately preceding the date of calculation; and (iii) (1) if the interest on the indebtedness is excludable from gross income under the applicable provisions of the Internal Revenue Code of 1986, as amended, the most recently published Bond Buyer 25 Bond Revenue Index (or comparable index if no longer published) plus fifty (50) basis points, or (2) if interest is not so excludable, the interest rate on direct U.S. Treasury Obligations with comparable maturities plus fifty (50) basis points. Debt Service Fund. The Trustee of the First Lien Indenture will transfer to the Trustee, under the Subordinate Indenture, moneys sufficient to pay the debt service on the Subordinate Bonds, Periodic Payments or obligations pursuant to a Reimbursement Agreement, and/or other amounts due regarding any Subordinate Bonds. Debt Service Reserve Fund. There shall be maintained in the Debt Service Reserve Fund an amount which when added to the amounts on hand in the Debt Service Reserve Fund of the First Lien Indenture is equal to the Maximum Annual Debt Service on all Authority Bonds. The amount required to be maintained in the Debt Service Reserve Fund may be in the form of cash, a letter of credit or other credit instrument, a surety bond, or a combination thereof. Letter of Credit. The term "Letter of Credit" shall mean an irrevocable transferable direct-pay letter of credit issued for a series or subseries of Bonds by a Letter of Credit Bank for the account of the Authority in favor of the Trustee supporting a series or subseries of Bonds as set forth in a Reimbursement Agreement between the Letter of Credit Bank and the Authority. Letter of Credit Bank. The term "Letter of Credit Bank" shall mean the issuer of an irrevocable transferable direct-pay Letter of Credit pursuant to a Reimbursement Agreement. Periodic Payment Date. The term "Periodic Payment Date means the date on which a Periodic Payment is required under any Qualified Swap Agreement until the termination or maturity of the Qualified Interest Rate Swap Agreement. Periodic Payments. The term "Periodic Payments" means any regularly scheduled fixed payment payable by the Authority to the Counterparty pursuant to the terms of any Qualified Interest Rate Swap Agreement(s); however, Periodic Payments shall not include any termination payments, costs and fees or any other sums payable under the Qualified Swap Agreement that are not regularly scheduled payments payable by the Authority. Qualified Interest Rate Swap Agreement. The term "Qualified Interest Rate Swap Agreement" or "Qualified Swap Agreement" means any agreement relating to any Bonds issued or to be issued under the Subordinate Indenture with a Counterparty whereby the Authority will pay to the Counterparty periodic fixed amounts based upon a fixed percentage on a notional amount specified in such agreement and such Counterparty will pay to the Authority certain periodic floating amounts based upon a variable percent of the same notional amount; provided, that (i) the underwriter for the applicable Bonds or the Authority's financial advisor shall certify to the Authority and the Trustee that (based on current market conditions) such Qualified Swap Agreement creates an overall lower Debt Service Requirement than would be attained through the issuance of Additional Bonds in an amount equal to such notional amounts at a fixed rate without such Qualified Swap Agreement and (ii) there is in place a municipal bond insurance policy, letter of credit or other credit enhancement with respect to the Bonds to which the agreement relates guaranteeing payment of amounts owed on the Bonds and a swap insurance policy guaranteeing the payment of Periodic Payments due with respect to such agreement respectively. Periodic Payments under a Qualified Interest Rate Swap Agreement may be on parity with the Bonds to which the agreement relates. Rebate Fund. Separate and apart from the pledge of the Subordinate Indenture is a Rebate Fund. Deposits, transfers and payments from the Rebate Fund shall be made in accordance with a tax regulatory agreement entered into in connection with the Subordinate Bonds. 15

84 Redemption Fund. The Authority may transfer to the Trustee for deposit to the credit of the Redemption Fund such amounts as it may elect for the purchase or redemption of Subordinate Bonds at the option of the Authority and the Trustee shall apply such monies placed in the Redemption Fund to the purchase or redemption of the Subordinate Bonds in the amounts directed by the Authority. Upon any such purchase or redemption, the Trustee shall transfer from the Debt Service Fund to the Redemption Fund any amount deposited in the Debt Service Fund with respect to interest on the Subordinate Bonds being redeemed and shall pay the interest due on the redemption date out of such moneys. Reimbursement Agreement. The term "Reimbursement Agreement" shall mean a Reimbursement Agreement between the Authority and the respective Letter of Credit Bank, which may be amended from time to time in accordance with the terms thereof. Reimbursement Obligations. The term "Reimbursement Obligations" shall mean the obligations of the Authority to reimburse the Letter of Credit Bank for draws on such Letter of Credit Bank's Letter of Credit and to pay all other amounts due or to become due under the Reimbursement Agreement. Investment of Funds The funds of the Subordinate Indenture may be invested in any of the following (each, a Qualified Investment ): (a) (1)Direct obligations (other than an obligation subject to variation in principal repayment) of the United States of America ("United States Treasury Obligations"), (2) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by the United States of America, (3) obligations fully and unconditionally guaranteed as to timely payment of principal and interest by any agency or instrumentality of the United States of America when such obligations are backed by the full faith and credit of the United States of America, or (4) evidences of ownership of proportionate interests in future interest and principal payments on obligations described above held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying government obligations are not available to any person claiming through the custodian or to whom the custodian may be obligated. (b) Federal Housing Administration debentures. (c) The listed obligations of government-sponsored agencies which are not backed by the full faith and credit of the United States of America: (1) Federal Home Loan Mortgage Corporation (FHLMC) participation certificates (excluded are stripped mortgage securities which are purchased at prices exceeding their principal amounts) and senior debt obligations; (2) Farm Credit Banks (formerly: Federal Land Banks, Federal Intermediate Credit Banks and Banks for Cooperatives) consolidated system-wide bonds and notes; (3) Federal Home Loan Banks (FHL Banks) consolidated debt obligations; (4) Federal National Mortgage Association (FNMA) senior debt obligations and mortgage-backed securities (excluded are stripped mortgage securities which are purchased at prices exceeding their principal amounts); (5) Student Loan Marketing Association (SLMA) senior debt obligations (excluded are securities that do not have a fixed par value and/or whose terms do not promise a fixed dollar amount at maturity or call date); (6) Financing Corporation (FICO) debt obligations; and (7) Resolution Funding Corporation (REFCORP) debt obligations. (d) Unsecured certificates of deposit, time deposits, and bankers' acceptance (having maturity of not more than 30 days) of any bank the short-term obligations of which are rated "A-1" or better by S&P. (e) Deposits the aggregate amount of which are fully insured by the Federal Deposit Insurance Corporation (FDIC), in banks which have capital and surplus of at least $5 million. (1) Commercial paper (having original maturities of not more than 270 days) rated "A-1+" by S&P and "Prime-1" by Moody's. 16

85 (m) Money market funds rated "AAm" or "AAm-G" by S&P, or better. (n) "State Obligations", which mean: (1) Direct general obligations of any state of the United States of America or any subdivision or agency thereof to which is pledged the full faith and credit of a state the unsecured general obligation debt of which is rated "A3" by Moody's and A by S&P, or better, or any obligation fully and unconditionally guaranteed by any state, subdivision or agency whose unsecured general obligation debt is so rated; (2) Direct general short-term obligations of any state agency or subdivision or agency thereof described in (1) above and rated "A-1+" by S&P and "Prime-1" by Moody's; and (3) Special Revenue Bonds (as defined in the United States Bankruptcy Code) of any state, state agency or subdivision described in (1) above and rated "AA" or better by S&P and "Aa" or better by Moody's. (o) Pre-refunded municipal obligations rated "AAA" by Standard & Poor's Ratings Group and "Aaa" by Moody's Investors Service meeting the following requirements: (1) the municipal obligations are (i) not subject to redemption prior to maturity or (ii) the trustee for the municipal obligations has been given irrevocable instructions concerning their call and redemption and the issuer of the municipal obligations has covenanted not to redeem such municipal obligations other than as set forth in such instructions; (2) the municipal obligations are secured by cash or United States Treasury Obligations which may be applied only to payment of the principal of, interest and premium on such municipal obligations; (3) the principal of and interest on the United States Treasury Obligations (plus any cash in the escrow) has been verified by the report of independent certified public accountants to be sufficient to pay in full all principal of, interest, and premium, if any, due and to become due on the municipal obligations; (4) the cash or United States Treasury Obligations serving as security for the municipal obligations are held by an escrow agent or trustee in trust for owners of the municipal obligations; (5) no substitution of a United States Treasury Obligation shall be permitted except with another United States Treasury Obligation and upon delivery of a new Verification; and (6) the cash or United States Treasury Obligations are not available to satisfy any other claims, including those by or against the trustee or escrow agent. (p) Repurchase agreements: with (1) any domestic bank the long term debt of which is rated at least "AA" by S&P and "Aa" by Moody's; (2) any foreign bank the long term debt of which is rated at least "AA" by S&P and "Aa" by Moody's; (3) any broker-dealer with "retail customers" which has, or the parent company (which guarantees the broker dealer) of which has, long-term debt rated at least "AA" by S&P and "Aa" by Moody's, which broker-dealer falls under the jurisdiction of the Securities Investors Protection Corporation (SIPC); or (4) any other entity described above rated "A" or better and acceptable to the Bond Insurer, provided that: (A) The market value of the collateral is maintained at levels and upon such conditions as would be acceptable to S&P and Moody's in an "A" rated structured financing (with a market value approach); (B) Failure to maintain the requisite collateral percentage will require the Authority or the Trustee to liquidate the collateral; (C) The Trustee or a third party acting solely as agent therefor (the "Holder of the Collateral") has possession of the collateral or the collateral has been transferred to the Holder of the Collateral in accordance with applicable state and federal laws (other than by means of entries on the transferor's books); (D) The repurchase agreement shall state and an opinion of counsel shall be rendered that the Holder of the Collateral has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this means the Holder of the Collateral is in possession); (E) The transferor represents that the collateral is free and clear of any thirdparty liens or claims; (F) The repurchase agreement is a "repurchase agreement" as defined in the United States Bankruptcy Code and, if the provider is a domestic bank, a "qualified financial contract" as defined in the Financial Institutions Reform Recovery and Enforcement Act of 1989 ("FIRREA") and such bank is subject to FIRREA; (G) There is or will be a written agreement governing every repurchase transaction; (H) The Authority and the Trustee each represents that it has no knowledge of any fraud involved in the repurchase transaction; (I) The Authority and the Trustee receive the opinion of counsel (which opinion shall be addressed to the Authority and the Bond Insurer) that such repurchase agreement is legal, valid, binding and enforceable upon the provider in accordance with its terms; (J) The repurchase agreement shall provide that if during its term (i) the provider's rating by either S&P or Moody's falls below "AA-" or "Aa3", respectively, the provider must, at the direction of the Authority or the Trustee (who shall give such direction if so directed by the Bond Insurer), within 10 days of receipt of such direction, either (a) maintain collateral at levels and of the type as shall be reasonably acceptable to the Bond Insurer; or (b) repurchase all collateral and terminate the agreement, and (ii) the provider's rating by either Moody's or S&P is withdrawn 17

86 or suspended or falls below "A" by S&P or "Aa" Moody's, as appropriate, the provider must, at the direction of the Authority or the Trustee (who shall give such direction if so directed by the Bond Insurer), within 10 days of receipt of such direction, repurchase all collateral and terminate the agreement, in either case with no penalty or premium to the Authority or Trustee. Notwithstanding the above, if a repurchase agreement has a term of 270 days of less (with no evergreen provision), collateral levels need not be as specified in (a) above, so long as such collateral levels are 103% or better and the provider is rated at least "AA" and "Aa" by S&P and Moody's, respectively. (q) Investment agreements with a domestic or foreign bank the long-term debt of which is rated at least "AA" by S&P and "Aa" by Moody's; provided that, by the terms of the investment agreement (1) interest payments are to be made to the Trustee at times and in amounts as necessary to pay debt service (or, if the investment agreement is for the construction fund, construction draws) on the Bonds; (2) the invested funds are available for withdrawal without penalty or premium, at any time upon not more than seven days' prior notice (which notice may be amended or withdrawn at any time prior to the specified withdrawal date); provided that the Subordinated Indenture specifically requires the Authority or the Trustee to give notice in accordance with the terms of the investment agreement so as to receive funds thereunder with no penalty or premium paid; (3) the investment agreement shall state that is the unconditional general obligation of, and is not subordinated to any other obligation of, the provider thereof; (4) a fixed guarantee rate of interest is to be paid on invested funds and all future deposits, if any required to be made to restore the amount of such funds to the level specified under the Subordinate Indenture; (5) the Authority or the Trustee receives the opinion of domestic counsel (which opinion shall be addressed to the Authority and the Bond Insurer) that such investment agreement is legal, valid, binding and enforceable upon the provider in accordance with its terms and of foreign counsel (if applicable) in form and substance acceptable, and addressed to, the Bond Insurer; (6) the investment agreement shall provide that if during its term (a) the provider's rating by either S&P or Moody's falls below "AA" or "Aa", respectively, the provider must, at the direction of the Authority or the Trustee (who shall give such direction if so directed by the Bond Insurer), within 10 days of receipt of such direction, either (i) collateralize the investment agreement by delivering or transferring in accordance with applicable state and federal laws (other than by means of entries on the provider's books) to the Authority, the Trustee or a third party acting solely as agent therefor (the "Holder of the Collateral') collateral free and dear of any third-party liens or claims the market value of which collateral is maintained at levels and upon such conditions as would be acceptable to S&P and Moody's in an "A" rated structured financing (with a market value approach); or (ii) repay the principal of and accrued but unpaid interest on the investment, (b) the provider's rating by either S&P or Moody's is withdrawn or suspended or falls below "A" or "Aa", respectively, the provider must, at the direction of the Authority or the Trustee (who shall give such direction if so directed by the Bond Insurer), within 10 days of receipt of such direction, repay the principal of an accrued but unpaid interest on the investment, in either case with no penalty or premium to the Authority or Trustee; (7) The investment agreement shall state and an opinion of counsel shall be rendered that the Holder of the Collateral has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof (in the case of bearer securities, this means the Holder of the Collateral is in possession); and (8) the investment agreement must provide that if during its term (a) the provider shall default in its payment obligations, the provider's obligations under the investment agreement shall, at the direction of the Authority or the Trustee (who shall give such direction if so directed by the Bond Insurer), be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the Authority or Trustee, as appropriate, and (b) the provider shall become insolvent, not pay its debts as they become due, be declared or petition to be declared bankrupt, etc. ("event of insolvency"), the provider's obligations shall automatically be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the Authority or Trustee, as appropriate. Rate Covenant The Authority covenants that it will comply with one of the following in any Fiscal Year: 1) The Authority will maintain, charge and collect, so long as any of the Bonds shall remain outstanding, reasonable rates, rentals and other charges for the use of the facilities of the Water and Sewer System which (after making due and reasonable allowances for contingencies and a margin of error in the estimates) together with other Receipts and Revenues, including any unrestricted cash and investments 18

87 accumulated in the Revenue Fund at the beginning of each Fiscal Year, shall be at all times at least sufficient to provide annually: (a) Funds to pay all of the Current Expenses of the Authority; and (b) An amount equal to 120% of the debt service requirements with respect to the Authority Bonds during the then current fiscal year of the Authority. 2) The Authority will maintain, charge and collect, so long as any of the Subordinate Bonds shall remain outstanding, reasonable rates, rentals and other charges for the use of the facilities of the Water and Sewer System which (after making due and reasonable allowances for contingencies and a margin of error in the estimates), together with other Receipts and Revenues, for the then current fiscal year (exclusive of interest income earned by the Authority on funds other than the Debt Service Reserve Fund; provided, however, that earnings on the construction funds may also be included during any construction period, but only to the extent such earnings are expressly required to be either retained in the construction funds and may be used to pay debt service on Authority Bonds or are applied directly to payment of debt service on Authority Bonds), shall be at all times at least sufficient to provide annually: (a) Funds to pay all of the Current Expenses of the Authority; and (b) An amount equal to 100% of the debt service requirements with respect to Authority Bonds during the then current fiscal year of the Authority, The Authority also covenants with the holders of the Subordinate Bonds that if at any time the revenues collected shall not be sufficient to enable the Authority to comply with the provisions as set forth above, it will promptly revise its water or sewer rates, rents and other charges so that the Authority will be in compliance and so that any deficiencies in transfers of funds required to be made pursuant to the Subordinate Indenture will be remedied before the end of the next ensuing fiscal year. Failure by the Authority to meet at least one of the tests contained in the Rate Covenant section will constitute a breach requiring the Authority to engage a consultant, the identity and scope of engagement of which shall be satisfactory to the Bond Insurer, within sixty (60) days of the determination that such breach has occurred. Failure to engage and follow the recommendations of the consultant in a prompt manner shall constitute an Event of Default under the Subordinate Indenture. Further, failure to meet the test contained in Section 7.01(1) of the Subordinate Indenture when substituting 100% for 120% in Section 7.01(1)(b) of the Subordinate Indenture shall constitute an Event of Default under the Subordinate Indenture. Insurance Covenant The Authority will at all times cause all of the property of the Water and Sewer System which is of a character usually insured by persons operating properties of a similar nature to be properly insured and kept insured by a reputable insurance company or companies against loss or damage by fire or other hazards to the extent such properties are usually insured by persons operating properties of similar nature in the same or similar localities. Such policies of insurance shall be for the benefit of the Trustee and the Authority, as their respective interests may appear. All claims in excess of $500,000 shall be made payable to the Trustee and shall be held by the Trustee as additional security until paid out by it as provided therein. All claims of $500,000 or less shall be paid to the Authority. Annual Audit The Authority covenants to employ an Independent Auditor to perform such duties as are imposed on the independent auditors by the Subordinate Indenture, including preparation of an audit report for the preceding fiscal year. 19

88 Events of Default Each of the following events is hereby declared an "Event of Default" for any Subordinate Bond issued under the Subordinate Indenture: (a) failure by the Authority to pay the principal of, or the premium (if any) payable upon the redemption of, any Subordinate Bond when due and payable either at maturity, declaration, or by proceedings for redemption, or otherwise (no effect being given to payments made under the Bond insurance policy); or (b) failure by the Authority to pay any installment of interest on any Subordinate Bond when due and payable (no effect being given to payments made under the Bond insurance policy); or (c) the entry of an order or decree appointing a receiver or receivers of the Water and Sewer System, the Receipts and Revenues or the Pledged Revenues with the consent or acquiescence of the Authority, or, if such order or decree shall have been entered without the acquiescence or consent of the Authority, the failure of the Authority to cause such order or decree to be vacated or discharged or stayed on appeal within 90 days after entry; or (d) the institution of any proceeding with the consent or acquiescence of the Authority for the purpose of effecting a composition between the Authority and its creditors, or for the purpose of adjusting the claims of such creditors pursuant to any Federal or State statute now or hereafter enacted, if the claims of such creditors are under any circumstances payable out of the Receipts and Revenues, or the Pledged Revenues or if such proceeding shall have been instituted without the consent or acquiescence of the Authority, the failure of the Authority to have such proceeding withdrawn, or any order entered therein vacated or discharged, within 90 days after the institution of such proceeding or the entry of such order; or (e) the entry of a final judgment against the Authority, which judgment constitutes or could result in a lien or charge upon the Water and Sewer System, the Receipts and Revenues, or the Pledged Revenues or which materially and adversely affects the ownership, control or operation of the Water and Sewer System, if such judgment shall not be discharged within 90 days from the entry thereof, or if an appeal shall not be taken therefrom, or from the order, decree or process upon which or pursuant to which such judgment was granted or entered, in such manner as to conclusively set aside the execution or levy under such judgment, order, decree or process, or the enforcement thereof; or (f) the failure of the Authority to repair or replace, with reasonable dispatch, any part of the Water and Sewer System necessary for its efficient operation which shall have been destroyed or damaged (whether such failure promptly to repair or replace the same may be due to the impracticability of such repair or replacement or the lack of funds therefor or for any other reason); or (g) the failure or refusal of the Authority to comply with any provisions of the Municipality Authorities Act, as amended and supplemented, or the rendering of the Authority, for any reason, incapable of fulfilling its obligations under the Subordinate Indenture or the Municipality Authorities Act; or (h) the failure of the Authority to observe any other covenant, condition or agreement of the Authority contained in the Subordinate Bonds or in the Subordinate Indenture and the continuation of such failure for a period of 60 days after written notice of such failure from the Trustee, which may give such notice in its discretion and shall give such notice at the written request of the holders of not less than 25 % in aggregate principal amount of the Subordinate Bonds then outstanding or the bond insurer, provided that, the failure of the Authority to meet the rate covenant in the Subordinate Indenture shall not constitute such an event of default thereunder and provided further that if such failure is not capable of being remedied within 60 days after such notice, no event of default shall exist if the Authority commences the actions necessary for the cure of such failure within such 60 day period and diligently pursues such actions thereafter, or 20

89 (i) there has been declared a default with respect to bonds issued pursuant to the First Lien Indenture. Notwithstanding anything above, failure by the Authority to meet at least one of the tests contained in the Rate Covenant section will constitute a breach requiring the Authority to engage a consultant, the identity and scope of engagement of which shall be satisfactory to the Bond Insurer, within sixty (60) days of the determination that such breach has occurred. Failure to engage and follow the recommendations of the consultant in a prompt manner shall constitute an Event of Default under the Subordinate Indenture. Further, failure to meet the test contained in Section 7.01(1) when substituting 100% for 120% in Section 7.01(1)(b) of the Subordinate Indenture shall constitute an Event of Default under the Subordinate Indenture. Remedies Subject to First Lien Indenture Upon the occurrence or continuance of an Event of Default, the Trustee may judicially seek specific performance with respect to the rate covenant. Notwithstanding any other provision hereto, however, for so long as the First Lien Indenture is operative, the Trustee may not exercise rights or remedies hereunder with respect to the Receipts and Revenues until and unless the trustee of the First Lien Indenture shall have instituted proceedings to exercise its rights under the First Lien Indenture. Remedies Acceleration or Principal. Subject to the Section entitled "Remedies Subject to First Lien Indenture," upon the occurrence and continuance of any event of default, the Trustee may, and at the written request of Bondholders of not less than 25% in principal amount of the Subordinate Bonds then Outstanding shall by written notice to the Authority, declare the Subordinate Bonds to be immediately due and payable, whereupon they shall, without further action, become and be immediately due and payable, anything in the Subordinate Indenture or in the Subordinate Bonds to the contrary notwithstanding, and the Trustee shall give notice thereof to the Authority and shall give notice thereof by certified mail to all holders of outstanding Subordinate Bonds. In addition, the Trustee shall be entitled to exercise any or all of the remedies granted to a trustee or under the insurance policy or the Municipality Authorities Act. In no event, so long as a Bond Insurance Policy is in effect and the bond Insurer is not in payment default thereunder, shall the Trustee accelerate the payment of the Subordinate Bonds without the written consent of any Bond Insurer. The above provision, however, is subject to the condition that if, after the principal of said Subordinate Bonds shall have been so declared to be due and payable, all arrears of interest, if any, upon the Subordinate Bonds and interest on overdue installments of interest at the rate of interest specified therein, and the principal of all Subordinate Bonds which have matured other than by reason of such declaration, shall have been paid by the Authority, and the Authority shall also have performed all other things in respect to which it may have been in default hereunder, and shall have paid the reasonable charges of the Trustee and its counsel and of the holders of said Subordinate Bonds, including reasonable attorneys' fees paid or incurred, then, and in every such case, the holders of not less than a majority in an aggregate principal amount of the Subordinate Bonds then outstanding, by written notice to the Authority and to the Trustee, may waive such default and its consequences and such waiver shall be binding upon the Trustee and upon all holders of Subordinate Bonds issued hereunder; but no such waiver shall extend to or affect any subsequent default or impair any rights or remedy consequent thereon. In no event, so long as a Bond Insurance Policy is in effect and the Bond Insurer is not in default thereunder, shall the Trustee waive a default without the prior written consent of any Bond Insurer. Remedies of Trustee and Bondholders; Rights of Entry Subject to the Sections entitled "Remedies Subject to First Lien Indentures" and "Acceleration of Principal," upon the happening and during the continuance of any Event of Default, the Trustee may and, upon written request of the holders of not less than 25 % in aggregate principal amount of the Subordinate Bonds then outstanding, shall enter into and upon and take possession of the Water and 21

90 Sewer System and each and every part thereof as for a condition broken and may exclude the Authority, its agents and employees and all persons claiming under them wholly therefrom and have, hold, use, operate, manage and control the same and each and every part thereof, and in the name of the Authority or otherwise as the Trustee shall deem best, conduct the business thereof and exercise all the rights and powers of the Authority with respect to the Water and Sewer System and use all its then existing property, assets and franchises for that purpose and out of the Receipts and Revenues, maintain, restore, insure and keep insured, the Water and Sewer System against such hazards as are ordinarily insured against by a person operating a water and sewer system similar to the Water and Sewer System and from time to time may make all such necessary or proper repairs as to it may seem expedient, and establish, levy, maintain and collect such rates, rents and charges in connection with the Water and Sewer System as it may deem necessary, proper, desirable and reasonable, and collect and receive all Receipts and venues, and after deducting therefrom the expenses of operation, maintenance and repair and all expenses incurred hereunder and all other proper outlays hereto authorized and all such payments which may be made for insurance and other proper charges, including just and reasonable compensation for its own services, and for the services of such attorneys, agents and employees as it may, in the exercise of its discretion, employ for any of the purposes aforesaid, the Trustee shall apply the rest and residue of the moneys received by it, as well as all cash and investments held by the Trustee in any fund hereunder, subject to the provisions hereof with respect to claims for principal and interest, to the payment of the principal of and interest on the Subordinate Bonds. Whenever all that is due upon such Subordinate Bonds and installments of interest and under any of the terms of the Subordinate Indenture have been paid or deposited with the Trustee and all defaults made good, the Trustee in possession shall surrender possession to the Authority, its successors or assigns. However, the same right of entry shall exist upon any subsequent default or defaults. For purposes of the article of the Subordinate Indenture entitled "Remedies," the Bond Insurer shall, so long as no payment default has occurred under its insurance policy, be deemed to be the sole owner of the Subordinate Bonds. Judicial Action In case of the breach of any of the covenants or conditions of the Subordinate Indenture, the Trustee shall have the right and power to take appropriate judicial proceedings for the enforcement of its rights and the right of the Bondholders thereunder. Upon the happening of an Event of Default under the Subordinate Indenture, the Trustee may either after entry, or without entry, proceed by suit or suits, actions or special proceedings at laws or ill equity to enforce its rights and the rights of the Bondholders hereunder, and it will be obligatory upon the Trustee to take action to that end, either by such proceedings or by the exercise of its powers with respect In entry or otherwise, as it may determine, upon being requested to do so by the holders of 25% in aggregate principal amount of the Subordinate Bonds then outstanding and upon being indemnified. For purposes of the article of the Subordinate Indenture entitled Remedies, the Bond Insurer shall, so long as no event of payment default has occurred under its Bond Insurance Policy, be deemed to be the sole owner of the Subordinate Bonds. Anything in the Subordinate Indenture to the contrary notwithstanding, so long as a Bond Insurance Policy is in effect and the Bond is not in payment default, the Bond Insurer may direct the Trustee with respect to the taking of each remedy provided in the Subordinate Indenture under the article entitled "Remedies," and the Trustee shall not take any action directed by the Bondholders without the prior written consent of the Bond Insurer. Waivers and Supplemental Indentures Not Requiring Consent of Bondholders In addition to any supplemental subordinate indenture otherwise by the Subordinate Indenture, the Authority (with prior written consent of the Bond Insurer), and the Trustee may, from time to time and at any time, enter into such indentures or agreements supplemental hereto as shall not be inconsistent with the terms and provisions hereof and which shall not adversely affect the rights of the holders of the Subordinate Bonds hereunder (which supplemental indentures or agreements shall thereafter form a part thereof) for the following purposes: 22

91 (a) to cure any ambiguity, formal defect or omission in the Subordinate Indenture or any supplemental subordinate indenture; (b) to grant or confer upon the Trustee for the benefit of the Bondholders any additional rights, remedies, powers, Authority or security that may lawfully be granted to or conferred upon the Bondholders, or the Trustee; (c) to add to the covenants and agreements of the Authority in the Subordinate Indenture, other covenants and agreements thereafter to be observed, or to surrender any right or power herein reserved to or conferred upon the Authority; (d) to modify any of the provisions of the Subordinate Indenture or to relieve the Authority of any of the obligations, conditions or restrictions contained in the Subordinate Indenture, provided that such modification or relief shall not, by the express terms of the particular supplemental subordinate indenture, become effective until all Subordinate Bonds outstanding on the date of the execution and delivery of such supplemental subordinate indenture shall no longer be outstanding; (e) to make such provision in regard to matters or questions arising under the Subordinate Indenture as may be necessary or desirable and not inconsistent with the Subordinate Indenture; or (f) to close the Subordinate Indenture against, or to restrict, in addition to the limitations and restrictions therein contained, the issue of Additional Bonds thereunder, by imposing additional conditions and restrictions to be thereafter observed, whether applicable in respect to all Subordinate Bonds issued and to be issued thereunder or in respect of one or more series of Subordinate Bonds, or otherwise. Supplemental Subordinate Indentures Requiring Consent of Bondholders With the consent of the holders of not less than 66-2/3 % in aggregate principal amount of the Subordinate Bonds then outstanding or, in the case one or more but less than all of the series of the Subordinate Bonds then outstanding are affected, then, in addition, with the consent of the holders of not less than 66-2/3 % of the principal amount of the Subordinate Bonds of each series so affected then outstanding, and with the consent of any guarantor of principal and interest of any series of Subordinate Bonds, the Authority and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental to the Subordinate Indenture for the purpose of eliminating any of the provisions of the Subordinate Indenture or of any supplemental subordinate indenture or of modifying in any manner the rights of the holders of the Subordinate Bonds so affected; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity date of any Bond, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, without the consent of the holder of each Bond so affected, or (ii) permit the creation by the Authority of any lien prior to the lien of the Subordinate Indenture upon any part of the Pledged Revenues, or reduce the aforesaid percentage of Subordinate Bonds, the holders of which are required to consent to any such supplemental subordinate indenture, without the consent of the holders of all Subordinate Bonds then outstanding. No supplemental subordinate indenture shall be effective unless it has been consented to in writing by the Bond Insurer. Discharge of Subordinate Indenture If the Authority, its successors or assigns, shall pay or cause to be paid unto the holders of all Subordinate Bonds outstanding the principal and interest to become due thereon and the premium thereon, if any, and to the bond insurer any and all amounts due and owing under the Subordinate Indenture, then the Subordinate Indenture, and the estate and rights therein granted shall cease, determine and be void, and the, Trustee shall, upon the request of the Authority, deliver to the Authority such instruments as shall be requisite to satisfy the lien thereof, and reconvey to the Authority the estate and title thereby conveyed, and assign and deliver to the Authority any property at the time subject to the lien of the Subordinate Indenture which may then be in the possession of the Trustee. Subordinate Bonds for the payment or redemption of which there shall have been deposited with the Trustee cash or direct non callable obligations of the United States of America and securities fully and 23

92 unconditionally guaranteed as to the timely payment of principal and interest by the United States of America, to which direct obligation or guarantee the full faith and credit of the United States of America has been pledged, Refcorp interest strips, CATS, TIGRS, STRPS, or defeased municipal bonds rated "AAA" by S&P or "Aaa" by Moody's, any combination thereof or any other security approved by the bond insurer), the principal of and interest on which when due, will, without reinvestment of principal or interest, provide sufficient moneys to pay the Subordinate Bonds in full at maturity or the date fixed for redemption, shall be deemed to be paid. In the event of an advance refunding, the Authority shall cause to be delivered: (i) a verification report of an independent nationally recognized certified public accountant verifying the sufficiency of the escrow established to pay the Subordinate Bonds in full on the maturity date in form and substance satisfactory to the Bond Insurer; (ii) an escrow agreement in form and substance satisfactory to the Bond Insurer; and (iii) an opinion of bond counsel that the Subordinate Bonds are no longer outstanding under the Subordinate Indenture. Removal of Trustee The Trustee may be removed at any time by an instrument in writing signed by the Authority, without cause, so long as no Event of Default has occurred and is continuing, or by the holders of not less than a majority in aggregate principal amount of Subordinate Bonds outstanding if an Event of Default has occurred and is continuing, or by the Bond Insurer, without cause, so long as no Event of Default has occurred and is continuing. No such removal shall become effective until a successor (or temporary) trustee is appointed and has accepted the duties of Trustee. Claims Upon the Bond Insurance Policy The Trustee shall receive any amount paid under the Bond Insurance Policy in trust on behalf of holders of the Subordinate Bonds and shall deposit any such amount in a Policy Payments Account established by the Trustee and distribute such amount only for purposes of making the payments for which a claim was made. Such amounts shall be disbursed by the Trustee to holders of the Subordinate Bonds in the same manner as principal and interest payments are to be made with respect to the Subordinate Bonds. Subject to and conditioned upon payment of any interest or principal with respect to the Subordinate Bonds by or on behalf of the bond insurer, each Subordinate Bondholder, by its purchase of Subordinate Bonds, assigns to the bond insurer, all rights to the payment of interest or principal on the Subordinate Bonds, including, without limitation, any amounts due to the Subordinate Bondholders in respect of securities law violations arising from the offer and sale of the bonds, which are then due for payment. The bond insurer may exercise any option, vote, right, power or the like with respect to the Subordinate Bonds to the extent it has made a principal payment pursuant to the bond insurance policy. The foregoing assignment is in addition to, and not in limitation of, rights of subrogation otherwise available to the bond insurer to respect of such payments. Each Subordinate Bondholder, by its purchase of bonds, and the Trustee hereby agrees that the bond insurer may at any time during the continuation of an insolvency proceeding direct all matters relating to such insolvency proceeding, including, without limitation, (i) all matters relating to any preference claim, (ii) the direction of any appeal of any order relating to any preference claim, and (iii) the posting of any surety, supersedeas or performance bond pending any such appeal. In addition, and without limitation of the foregoing, the bond insurer shall be subrogated to the rights of the Trustee and each Subordinate Bondholder in any insolvency proceeding to the extent it is subrogated pursuant to the bond insurance policy, including, without limitation, any rights of any party to an adversary proceeding action with respect to any court order issued in connection with any such insolvency proceeding. 24

93 APPENDIX C AUTHORITY FINANCIAL STATEMENTS AS OF DECEMBER 31, 2012 AND DECEMBER 31, 2011

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95 Pittsburgh Water and Sewer Authority Single Audit 2012

96 PITTSBURGH WATER AND SEWER AUTHORITY YEARS ENDED DECEMBER 31, 2012 AND 2011 TABLE OF CONTENTS Independent Auditor s Report Management s Discussion and Analysis i Financial Statements: Statements of Net Position 1 Statements of Revenues, Expenses, and Changes in Net Position 3 Statements of Cash Flows 4 Notes to Financial Statements 5 Supplementary Information: Schedule of Expenditures of Federal Awards 37 Notes to Schedule of Expenditures of Federal Awards 38 Independent Auditor s Reports in Accordance with OMB Circular A-133: Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 39 Independent Auditor s Report on Compliance for the Major Federal Program and Report on Compliance Required by OMB Circular A Schedule of Findings and Questioned Costs 43 Summary Schedule of Prior Audit Findings 44

97 Independent Auditor s Report Board of Directors Pittsburgh Water and Sewer Authority Report on the Financial Statements We have audited the accompanying financial statements of the Pittsburgh Water and Sewer Authority (Authority), a component unit of the City of Pittsburgh (City), Pennsylvania, as of and for the years ended December 31, 2012 and 2011, and the related notes to the financial statements, which collectively comprise the Authority s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Authority s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Authority as of December 31, 2012 and 2011, and the respective changes in financial position and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

98 Board of Directors Pittsburgh Water and Sewer Authority Independent Auditor s Report Page 2 Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on page i through vi be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to obtain an opinion or provide any assurance. Other Information Our audits were conducted for the purpose of forming opinions on the financial statements that collectively comprise the Authority s basic financial statements. The schedule of expenditures of federal awards, as required by Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non- Profit Organizations is presented for purposes of additional analysis and is not a required part of the basic financial statements. The schedule of expenditures of federal awards is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated, in all material respects, in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated April 29, 2013 on our consideration of the Authority s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Authority s internal control over financial reporting and compliance. Maher Duessel Pittsburgh, Pennsylvania April 29, 2013

99 THE PITTSBURGH WATER AND SEWER AUTHORITY 2012 Financial Statements Management Discussion and Analysis The Pittsburgh Water and Sewer Authority (Authority) comparative 2012 and 2011 fiscal year financial statements enclosed have been conformed to meet the requirements of Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments. The financial statements incorporate three basic statements: the Statements of Net Position, the Statements of Revenues, Expenses and Changes in Net Position, and the Statements of Cash Flows. This Management s Discussion and Analysis (MD&A) is based upon facts, decisions, and conditions known as of the date of the audit report. Please note that the historical information provided in the financial statements and MD&A reflects the results of past operations and is not necessarily indicative of results of future operations. Future operations will be affected by various factors, including, but not limited to, regulatory mandates, rate changes, weather, labor contracts, population changes, business environment and other matters, the nature and effect of which cannot now be determined. Using This Financial Report Overview of Reporting Changes The Statements of Net Position present information about the resources which are available to the Authority and claims against these resources. Both assets and liabilities are classified in a format which segregates current from long-term. In addition, assets available for special purposes labeled restricted assets - are segregated from those assets available for operations. The Authority s restricted assets represent money on deposit with the bond trustee to meet indenture, debt service, and construction program requirements. Liabilities have a similar classification segregating claims on restricted assets from claims on assets available for operations. The net position section of the Statements of Net Position classifies the total net position as net investment in capital assets, restricted for capital activity and debt service, and unrestricted. The Statements of Revenues, Expenses, and Changes in Net Position summarize operating and nonoperating activity for the fiscal year and the resulting impact on the Authority s net position. The Statements of Revenues, Expenses, and Changes in Net Position include wastewater treatment revenues and expenses for services provided by the Allegheny County Sanitary Authority (ALCOSAN). There are no outstanding bond issues associated directly or indirectly with wastewater revenue streams. The Statements of Cash Flows have been prepared using the direct method. The statements provide an analysis of the Authority s cash by operating, investing, and capital and related financing activities over the respective fiscal year. Financial Highlights In 2012, operating income increased by 8.1% or $2.84 million, resulting in a net gain of $.989 million, up from a $13.34 million net loss in Below are the 2012 financial highlights: Total operating revenues in 2012 were up $3.59 million or 2.6% to $ million when compared to Wastewater treatment revenues increased $3.88 million to expected levels after a large credit adjustment in 2011 for a major commercial customer. Water and sewer conveyance revenues decreased $1.02 million from 2011, primarily due to a major commercial customer greatly reducing their water usage. Total non-operating expenses decreased by $11.49 million, mostly driven by stabilization in the fair market value of the 2008C2 investment swap as contrasted to a $12.38 million loss in The loss related to this contract was only $.362 million for Donated property revenue was $2.533 million, an increase of $.256 million when compared to Non-operating revenue for grants was $.075 million and interest revenue decreased by $.213 million to $.496 million, due to lower market rates. i

100 Total operating expenses increased in 2012 to $ million compared to $ million in Significant operating expenses included the following factors:! Salary and employee benefit expenses were up $.469 million or 2.7%. The increase is attributed to an average overall salary increase of 3.2% and a 1.4% increase in benefit costs. The majority of Authority employees are represented by one of three labor unions. The Pittsburgh Joint Collective Bargaining Committee (PJCBC) represents blue-collar employees. The American Federation of State, County and Municipal Employees (AFSCME) represents Local 2719 [white-collar] employees and Local 2037 [foremen]. A new five-year agreement with AFSCME became effective January 1, 2009 and will expire December 31, A five-year agreement with the PJCBC became effective January 1, 2008, and expired December 31, The PJCBC agreement was extended to allow further negotiations into early 2013.! Overall direct operating expenses, excluding salaries and benefits, decreased by $.240 million to $55.91 million in 2012 or.4% from $56.15 million in Wastewater treatment expense increased by $3.00 million or 6.9% to $46.47 million when compared to $43.47 million in 2011, due to fewer adjustments. Chemicals expense decreased by $.053 million. Equipment decreased by $.790 million. Materials costs increased to $.389 million in 2012, from $.373 million in DISC relay items decreased by $2.19 million, as the majority of these relays are now recognized as construction in progress due to accounting changes enabled by the new ERP system. Catch basin cleaning increased by $.151 million to $.354 million or 74.4% from Repairs & maintenance decreased by $.426 million from Computer hardware costs decreased 84.2% or $.272 million from the previous year as the hardware items related to the new ERP system went into service.! Overall G&A expenses increased 11.7%, to $11.85 million from $9.58 million in $2.12 million of this $2.27 million increase was due to the elimination of an expense contra account tied to fixed asset reclassing that is no longer used in the new accounting structure. The Authority now capitalizes all costs related to the DISC funding when purchased G&A expenses net of the above show a 1.4% or $.13 million increase from prior year. Significant expense reductions were a $1.31 million drop in claims and deductibles and $.151 million reduction in natural gas. Significant expense increases were $1.18 million in contingencies and $.132 million in Legal.! Overall other expenses decreased 1.9% or $1.23 million to $61.85 million in 2012 from $63.08 million in Non-city water subsidy to Pennsylvania American Water Company (PAWC) increased 34.5% or $.564 million to $2.19 million in 2012 compared to $1.63 million in Interest expense on bond debt increased 1.5% or $.575 million to $39.54 million in 2012 compared to $38.97 million in Expenses related to the cooperation agreement with the City of Pittsburgh decreased by $2.00 million in 2012, from $9.15 million to $7.15 million.! In 2012, cash collections increased by $1.69 million or 1.2%. A loss of sales to a major commercial customer and a decrease in average water usage, as is occurring at water systems nationwide, precluded a larger net increase. The Authority collected approximately 99.3% of its billings for There was no change in bad debt reserve from ii

101 Other 2012 highlights include:! In early 2012, after having been without an Executive Director since December of 2010, the Authority decided to engage an outside management company to direct its operations. After an extensive search, the Authority selected and engaged Veolia Water North America (Veolia), a subsidiary of Veolia Environnement S.A., the world's largest supplier of water services. Veolia was engaged for a one-year period beginning in July 2012, with an optional six-month renewal available at the Authority s discretion.! As part of the engagement of Veolia to manage the Authority, a diagnostic study was performed by Veolia of operations and expenditures. As a result of these fast-tracked evaluations, a number of operational improvement initiatives (known as Key Performance Indicators) and monetary efficiency initiatives (known as Opex Initiatives) have been developed and presented to the Authority. It is felt that with implementation of these initiatives, as approved by the Authority, significant operational efficiencies and cost savings may be reached in 2013.! In 2010, it was decided to award a new Enterprise Resource Program (ERP) contract to Cogsdale Corporation, a Microsoft Dynamics Gold partner. The implementation proceeded in 2011, with the Finance module going live in January Work was ongoing in 2012 for implementing Cogsdale s CSM module, now due to go live in late Implementation in 2012 for this module was delayed while the Authority reviewed an offer to join in on the combined City/County Oracle platform. With a final decision on said offer deferred until mid-2013 at the earliest, it was decided to continue with the CSM package.! The Authority continued its relationship with Jordan Tax Service, Inc. (JTS) as its Collector and the law firm of Goehring, Rutter & Boehm, P.C. as Special Legal Counsel for the collection of delinquent water, sewer, and sewage treatment charges. The agreement calls for a collection commission, plus other administrative and legal proceeding costs, to be added to all Authority delinquent claims not paid within 90 days of the initial billing date. If fully collected, the Authority stands to collect 100% of delinquent balances without incurring a collection agency fee. The Authority is reimbursing JTS for commissions lost and expenses for certain accounts that have been recalled from collections. Said reimbursements totaled $.040 million in JTS collected $1.903 million, of which the Authority received $1.614 million during 2012.! In January of 2010, the Authority began assessing a 5% Distribution Infrastructure System Charge (DISC) on all bills, increasing to 7% in This charge is applied to the water and sewer conveyance components of the invoice and is dedicated to system improvements and capital needs. The DISC collection total in 2010 was $4.16 million, with no expenditures. It was decided to allow funds to accumulate the first year, and then budget expenditures for 2011 from the funds received in The 2012 budget for DISC expenditures was $6.72 million, of which $6.398 million was spent. This leaves a reserve of $4.013 million in DISC fund revenues at year-end. The expenditures for 2012 included water and sewer relays, new vehicles, and security cameras for the Water Treatment Plant. iii

102 ! Also in 2010, the Authority implemented a change in its water and sewer line warranty program, engaging a new provider, Utility Line Security, LLC, and changing from an optin to an opt-out program. In March of 2011, it was determined in the Court of Common Pleas of Allegheny County that this program unfairly competed with those offered by private line warranty vendors and the program was ordered to be shut down. In final settlement with ULS, which declared bankruptcy in 2011, $.350 million was paid to ULS by PWSA in January of 2012 in settlement of outstanding issues.! The Authority in June of 2010 entered into an agreement with Iron City Brewing to settle the outstanding account receivable balance from operations at its former Lawrenceville plant. The Authority received $.45 million in January of 2011 pursuant to said agreement and received the payment of a remaining $.20 million balance in January 2012, settling the account in full.! In July of 2010, the Authority approved development of a 40-year Capital Plan and Water & Sewer Master Plan (plan). The plan will be developed in order to assist the Authority in assessing its long-range infrastructure and financing needs. Such planning should enable the Authority over time to mitigate CSO issues, rehabilitate its aging infrastructure and clearwell, reduce non-revenue water, and comply with new THM regulations. Plan development continued in 2012 into 2013.! In anticipation of more stringent EPA regulations regarding Trihalomethane (THM) in drinking water for 2013, the Authority in 2012 entered into a pilot program with PAX Water Technologies to fit three water storage tanks with a THM Removal Sprinkler Aeration system to reduce THMs in distributed water. The tanks affected are Squirrel Hill, Allentown, and Brashear Tank #2. This system should allow the Authority to more than meet the new EPA standards.! Debt service coverage in 2012 and 2011 was 2.18 in 2012 and 1.87 in These coverage factors exceed the 1.2 coverage factor required under the bond covenant.! The Authority expended $28.53 million on Bond and Pennvest capital projects in 2012, a decrease of $7.03 million over the $35.56 million expended in In December of 2012, $6.6 million remained in the 2008 construction fund. Of $36.80 million budgeted in Pennvest loans, $2.84 million was spent in 2012, with $5.3 million remaining. It should be noted that the DISC program is now funding projects and assets that would have historically been paid for with capital dollars. The projects totaled $2.917 million in 2012 and the capital assets purchased totaled $.985 million, adding $3.902 million to total capital expenditures.! There was a limited amount of bond related activity for the Authority in The only occurrences of note were the renewal of standby purchase agreements on two issues, the reoffering of an expiring three-year put bond, and the renewal of a securitizing letter of credit. This activity was on bond series totaling $ million. The Authority renewed the standby purchase agreements on the Series 2007 B1 (face $41.32 million) and 2007 B2 (face $41.33 million) bonds, expiring August of The Authority reoffered the Series 2008 C-1D (face $26.91 million) put bonds for another three-year term at the expiration of its initial term. The Authority also renewed a line of credit on the Series 2008 C1 (A, B, &C) (face $25.00 million) bonds with FHLB.! The City of Pittsburgh is the largest of the 83 municipalities that convey raw sewage to ALCOSAN for treatment. In January 2004, the Authority and the City of Pittsburgh executed a Consent Order and Agreement (Order) regarding sanitary and combined sewer overflows within the City of Pittsburgh. The other signatories to the Order are the Pennsylvania Department of Environmental Protection and Allegheny County Health Department, which executed the Order on April 21, The intent of the Order is to develop a regional Long-Term Control Plan to address combined and sanitary sewer overflows and ultimately improve water quality. iv

103 The Order does not contain fines or penalties for past non-compliance, but does propose binding obligations for work on a going forward basis. The Authority continues to meet the requirements of the Order. See note 12 - Commitments and Contingencies for additional details.! The City of Pittsburgh remained under financial stress in The Authority has three agreements with the City of Pittsburgh. The Authority leases the water and sewer system under the Capital Lease, which was fully funded in The Authority makes payment to the City of Pittsburgh for direct and indirect services under the Cooperation Agreement. Under this Agreement, the Authority also funds, on behalf of the City of Pittsburgh, a rate equalization subsidy to other City water companies. Under a separate agreement, the Authority also, on behalf of the City of Pittsburgh, is required to purchase delinquent wastewater treatment receivables. The Authority is financially self-sufficient and should not be adversely affected by the financial status of the City of Pittsburgh. Any other actions by the City of Pittsburgh to increase Authority funding would require Board approval. CONDENSED FINANCIAL STATEMENTS CONDENSED STATEMENT OF NET POSITION (Dollars expressed in thousands) December 31, Variance Dollars % Capital assets: Increase (Decrease) Producing assets $ 514,924 $ 481,142 $ 33, % Construction in progress 50,870 62,461 (11,591) -18.6% Restricted assets 23,785 50,208 (26,423) -52.6% Current assets and bond costs 90,405 91,953 (1,548) -1.7% Total Assets $ 679,984 $ 685,764 $ (5,780) -0.8% Total Deferred Outflows of Resources $ 100,872 $ 100,118 $ % Liabilities: Current liabilities $ 61,626 $ 58,654 $ 2, % Long-term liabilities 761, ,733 (9,077) -1.2% Total Liabilities 823, ,387 (6,105) -0.7% Net Position: Net investment in capital assets (43,740) (52,350) 8, % Restricted for capital activity and debt service 9,121 9, % Unrestricted (7,897) (267) (7,630) % Total Net Position (42,516) (43,505) % v

104 CONDENSED STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION (Dollars expressed in thousands) Year Ended December 31, Variance Dollars % Increase (Decrease) Operating Revenues $ 144,138 $ 140,552 $ 3, % Operating Expenses: Direct operating 37,490 37,976 (486) -1.3% Wastewater treatment 46,468 43,468 3, % Cooperation Agreement 7,150 9,150 (2,000) -21.9% Subsidy of non-customer City residents 2,197 1, % Depreciation and amortization 12,967 13,300 (333) -2.5% Total Operating Expenses 106, , % Operating Income 37,866 35,025 2, % Non-operating revenues (expenses): Donated property 2,533 2, % Interest revenue 134 (11,671) 11, % Interest expense and other (39,544) (38,969) (575) 1.5% Total Non-operating Revenues (Expenses) (36,877) (48,363) 11, % Net Gain/(Loss) $ 989 $ (13,338) $ 14, % Financial Condition The Authority s financial condition in 2012 remained stable for a tenth consecutive year despite continuing issues in the national economy. Water utility revenues decreased slightly to $94.27 million from $95.29 million. This reduction is primarily due to the issue described above with a large commercial customer switching to primarily private well use in early 2012 and also reduced consumption in line with the nationwide trend toward water conservation. Total cash and cash equivalents dropped $2.63 million, reducing cash reserves to $ million. Investment interest rates remain historically low, impacting return on reserves invested. The agreement mentioned above in 2012 highlights with a major customer for 2013 will help in generating additional cash in The Authority s strategic plan continues to focus on improving its financial condition, customer service, improving internal efficiencies, maintaining regulatory compliance and security, while providing an environment that encourages employee development. Requests for Information This financial report is designed to provide a general overview of the Authority s finances for all those with an interest in the government s finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Executive Director, Penn Liberty Plaza I, 1200 Penn Ave., Pittsburgh, PA vi

105 PITTSBURGH WATER AND SEWER AUTHORITY STATEMENTS OF NET POSITION (Dollars expressed in thousands) DECEMBER 31, 2012 AND 2011 Assets Current assets: Cash and cash equivalents $ 39,361 $ 41,676 Accounts receivable, net: Water: Billed 7,062 8,557 Unbilled 5,091 5,414 Total water 12,153 13,971 Wastewater treatment: Billed 4,824 2,679 Unbilled 3,304 2,800 Total wastewater treatment 8,128 5,479 Other receivables 5,497 4,722 Total accounts receivable, net 25,778 24,172 Prepaid expenses Inventory 1,752 1,718 Total current assets 67,163 67,777 Noncurrent assets: Restricted assets: Cash and cash equivalents 3,164 3,479 Investments 20,621 46,729 Total restricted assets 23,785 50,208 Capital assets, not being depreciated 50,870 62,461 Capital assets, net of accumulated depreciation 514, ,142 Bond issue costs, net of accumulated amortization 23,242 24,176 Total noncurrent assets 612, ,987 Total Assets 679, ,764 Deferred Outflows of Resources Accumulated decrease in fair value of hedging derivatives 100, ,118 The notes to financial statements are an integral part of this statement. 1 (Continued)

106 PITTSBURGH WATER AND SEWER AUTHORITY STATEMENTS OF NET POSITION (Dollars expressed in thousands) DECEMBER 31, 2012 AND 2011 (Continued) Liabilities Current liabilities: Bonds and loans payable, current portion $ 16,615 $ 14,888 Accrued payroll and related obligations Accounts payable wastewater treatment 17,241 16,305 Accounts payable and other accrued expenses 12,974 10,195 Accounts payable from restricted assets 2,872 5,325 Accrued interest payable from restricted assets 11,218 11,279 Total current liabilities 61,626 58,654 Noncurrent liabilities: Deferred revenue Accrued payroll and related obligations Swap liability 118, ,907 Bonds and loans payable, net of current portion 641, ,562 Total noncurrent liabilities 761, ,733 Total Liabilities 823, ,387 Net Position Net investment in capital assets (43,740) (52,350) Restricted for capital activity and debt service 9,121 9,112 Unrestricted (7,897) (267) Total Net Position $ (42,516) $ (43,505) (Concluded) The notes to financial statements are an integral part of this statement. 2

107 PITTSBURGH WATER AND SEWER AUTHORITY STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION (Dollars expressed in thousands) YEARS ENDED DECEMBER 31, 2012 AND Operating Revenues: Residential, commercial, and industrial water sales $ 94,272 $ 95,290 Wastewater treatment 47,429 43,548 Other 2,437 1,714 Total operating revenues 144, ,552 Operating Expenses: Direct operating expenses 37,490 37,976 Wastewater treatment 46,468 43,468 Cooperation agreement operating expenses: Indirect cost allocation - sewer conveyance 3,192 4,400 Indirect cost allocation - water 3,958 4,750 Expense of water provided by other entities: Subsidy of customers located in the City 2,197 1,633 Depreciation 12,967 11,810 Amortization of capitalized lease assets - 1,490 Total operating expenses 106, ,527 Operating Income 37,866 35,025 Non-operating Revenues (Expenses): Donated property 2,533 2,277 Interest revenue Investment income - change in fair market value of swap (362) (12,380) Interest expense - bonds (37,243) (36,747) Interest expense - other (520) (422) Amortization of bond issue costs (1,781) (1,800) Total non-operating revenues (expenses) (36,877) (48,363) Net Income (Loss) 989 (13,338) Net Position: Beginning of year (43,505) (30,167) End of year $ (42,516) $ (43,505) The notes to financial statements are an integral part of this statement. 3

108 PITTSBURGH WATER AND SEWER AUTHORITY STATEMENTS OF CASH FLOWS (Dollars expressed in thousands) YEARS ENDED DECEMBER 31, 2012 AND Cash Flows From Operating Activities: Cash received from customers $ 142,532 $ 148,136 Cash paid to suppliers and employees and customer refunds (36,006) (43,208) Cash paid to City of Pittsburgh under the Cooperation Agreement (7,150) (9,150) Cash paid to other water companies for subsidy of customers located in the City of Pittsburgh (2,197) (1,633) Cash paid to ALCOSAN for wastewater treatment (45,532) (44,794) Net cash provided by (used in) operating activities 51,647 49,351 Cash Flows From Investing Activities: Purchase of investment securities (100,832) (116,844) Proceeds from sale and maturities of investment securities 124, ,846 Interest income Net cash provided by (used in) investing activities 23,971 6,789 Cash Flows From Capital and Related Financing Activities: Purchase/construction of property, plant, and equipment (32,742) (16,766) Proceeds from Pennvest Loans 1,916 15,506 Payment made for bond reoffering costs (807) (965) Principal payments on debt (15,064) (16,748) SWAP receipts SWAP payments (17,012) (17,016) Liquidity and remarketing fees (3,686) (5,232) Interest paid on borrowings (11,507) (11,506) Net cash provided by (used in) capital and related financing activities (78,248) (51,926) Increase (Decrease) in Cash and Cash Equivalents (2,630) 4,214 Cash and Cash Equivalents: Beginning of year 45,155 40,941 End of year $ 42,525 $ 45,155 Consists of: Restricted cash and cash equivalents $ 3,164 $ 3,479 Unrestricted cash and cash equivalents 39,361 41,676 $ 42,525 $ 45,155 Reconciliation of Operating Income to Net Cash Provided by (Used in) Operating Activities: Operating income $ 37,866 $ 35,025 Adjustments to reconcile operating income to net cash provided by (used in) operating activities: Depreciation and amortization 12,967 13,300 Reserve for uncollectible amounts (934) (393) Change in: Accounts receivable - water and wastewater 103 1,034 Other accounts receivable (775) 3,131 Wastewater accounts payable 936 (1,326) Accounts payable and other accrued expenses 1,204 (1,505) Other Net cash provided by (used in) operating activities $ 51,647 $ 49,351 The notes to financial statements are an integral part of this statement. 4

109 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND ORGANIZATION The Pittsburgh Water and Sewer Authority (Authority) provides water to approximately 80,000 residential, commercial, and industrial customers located in the City of Pittsburgh (City), Pennsylvania, and collects wastewater throughout the City. A Board of Directors (Board) appointed by the Mayor of the City governs the Authority. The Authority is a body politic and corporate, organized and existing under the Pennsylvania Municipalities Authorities Act. The Authority was established by the City in 1984 to assume responsibility from the City for management, operation, maintenance, and improvement of virtually the entire City water supply, distribution, and wastewater collection systems (the "Water and Wastewater System" or "System"). The Authority s term of existence is through At inception, the City contributed $5.3 million to the Authority in the form of customer accounts receivable. The Authority has the right to establish user fees and charges without being subject to the approval of any department, board, or agency of Pennsylvania or the City. The Authority is also authorized to issue bonds and notes payable solely from the Authority's revenues. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reporting Entity These financial statements present the financial position, income, changes in net position, and cash flows of the Authority. The Authority is a component unit of the City as defined in Governmental Accounting Standards Board (GASB) Statement No. 14, Financial Reporting Entity. The Authority's financial statements are not intended to present the financial position or results of operations of the City taken as a whole. Basis of Accounting and Measurement Focus The accompanying financial statements have been prepared using the economic resources measurement focus and the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America, as prescribed by GASB. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. 5

110 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 The Authority functions as a Business-Type Activity, as defined by GASB. Classification of Net Position In accordance with the provision of GASB Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, net position is classified into three components net investment in capital assets; restricted; and unrestricted. These classifications are defined as follows:! Net investment in capital assets This component of net position consists of capital assets net of accumulated depreciation and reduced by the outstanding balances of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets net of bond issue costs, premiums and discounts and remaining deferred refunding losses.! Restricted This component of net position consists of constraints placed on net position use through external restrictions.! Unrestricted This component of net position consists of net position that does not meet the definition of restricted or net investment in capital assets. When an expense is incurred that can be paid using either restricted or unrestricted resources, the Authority s policy is to first apply the expense towards restricted resources and then towards unrestricted resources. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments, both restricted and unrestricted, with maturity of three months or less at date of purchase. Bond Issue and Reoffering Costs, Premiums, and Discounts Bond issue and reoffering costs are deferred and amortized over the life of the related bonds using the effective interest method. The unamortized balance is an asset on the statements of net position. Original issue bond premiums and discounts are amortized over the life of the related bonds using the effective interest method of amortization. The unamortized balance of premiums and discounts is presented net on the statements of net position as a decrease to bonds payable. 6

111 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 Deferred Refunding Loss In accordance with GASB Statement No. 23, Accounting and Reporting for Refunding of Debt by Proprietary Activities, the excess of the reacquisition price over the net carrying amount of debt refunded with proceeds from the Series 1993, 1998, 2003, 2007, and 2008 Bonds were recorded as deferred refunding losses. The deferred refunding losses are being amortized using the effective interest method over the originally scheduled life of the defeased issues which extend to The unamortized balances are reflected as a reduction of bonds payable. Remarketing, Liquidity, and Letter of Credit Fees Associated with the Authority s variable rate bonds, the Authority pays various fees to periodically remarket the bonds and to third parties to provide liquidity in the event that the Authority is unable to remarket the variable rate bonds and needs to repurchase the bonds on a temporary basis until they can be later remarketed. These fees are generally paid quarterly and are calculated as a percentage of the outstanding par amount of the variable rate bonds. Capital Assets Capital assets owned by the Authority are recorded at cost including that portion of deferred interest that is ultimately capitalized. Depreciation of fixed assets owned by the Authority is provided on the straight-line method based on the estimated useful lives of the various classes of assets. Utility assets have estimated useful lives ranging from 30 to 70 years. Non-utility assets have estimated useful lives ranging from 5 to 10 years. The Authority also receives donated property relating mostly to dedicated water and sewer lines. These assets are capitalized at their estimated fair market value and depreciated in accordance with the estimated useful lives noted above. The water and sewer system represents assets leased from the City. Amortization of capital lease assets is provided on the straight-line basis applying an estimated average remaining useful life from the inception of the lease. Maintenance and repairs are charged to expense as incurred. 7

112 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 Deferred Outflows/Inflows of Resources In addition to assets, the statement of financial position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resources (expense) until then. The Authority currently only has one item that qualifies for reporting in this category: the accumulated decrease in fair value of hedging derivatives on the statements of net position. In addition to liabilities, the statement of financial position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflow of resources, represents an acquisition of net position that applies to a future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. Clarification of Revenues The Authority has classified its revenues as either operating or non-operating revenues according to the following criteria:! Operating revenues Operating revenues include activities that have the characteristics of exchange transactions, such as residential, commercial, industrial water sales and wastewater treatment.! Non-operating revenues Non-operating revenues include activities that have the characteristics of non-exchange transactions, such as interest income and other revenue sources. Compensated Absences A liability for vacation, personal, and sick days is accrued when related benefits are attributable to services rendered and to the extent it is probable that the Authority will ultimately compensate employees. Inventory Inventory is stated at cost, on a moving average price basis. 8

113 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Adoption of Pronouncements The Authority has adopted the following statements:! GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. This statement establishes accounting and financial reporting standards for the financial reporting statements of state and local governments and by bringing together reporting literature in one place, with the guidance modified as necessary.! GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. This statement provides guidance for reporting deferred outflows of resources, deferred inflows of resources, and net position in a statement of position and related disclosures. The primary impact of this on the Authority s 2012 financial statements relates to reporting the residual of assets, plus deferred outflows of resources, less liabilities and deferred inflows of resources, as net position rather than as net assets.! GASB Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provisions. This statement clarifies whether an effective hedging relationship continues after the replacement of a swap counterparty or a swap counterparty's credit support provider. This statement amends GASB Statement No. 53 and sets forth criteria that establish when the effective hedging relationship continues and hedge accounting should continue to be applied. Pending Pronouncements GASB has issued Statement No. 61, The Financial Reporting Entity: Omnibus, effective for periods beginning after June 15, The objective of this statement is to improve financial reporting for a governmental financial reporting entity by modifying existing 9

114 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 requirements for the assessment of potential component units. The effect of implementation of this statement has not yet been determined. GASB has issued Statement No. 65, Items Previously Reported as Assets and Liabilities, effective for periods beginning after December 15, The objective of this statement is to improve financial reporting for a governmental financial reporting entity by reclassifying certain items currently being reported as assets and liabilities as deferred outflows of resources and deferred inflows of resources. In addition, this statement recognizes certain items currently being reported as assets and liabilities as outflows of resources and inflows of resources. The effect of implementation of this statement has not yet been determined. GASB has issued Statement No. 67, Financial Reporting for Pension Plans, effective for financial statements for periods beginning after June 15, 2013, and has also issued Statement No. 68, Accounting and Financial Reporting for Pensions, effective for fiscal years beginning after June 15, These statements revise existing guidance for the financial reports of most pension plans, and establish new financial reporting requirements for most governments that provide their employees with pension benefits. 3. TRANSACTIONS WITH THE CITY OF PITTSBURGH In 1984, pursuant to a Lease and Management Agreement, the Authority leased the System from the City and assumed responsibility for establishing and collecting user fees and charges and for maintaining and improving the System. The Lease and Management Agreement provided for the City to operate and maintain the System for the Authority subject to the general supervision of the Authority. The City and the Authority agreed to terminate the Lease and Management Agreement in July 1995 and concurrently entered into a Capital Lease Agreement and a Cooperation Agreement (collectively referred to as the "Agreements"). Cooperation Agreement Under the terms of the Cooperation Agreement, City water department employees became employees of the Authority. As a result, the Authority assumed various personnel-related obligations from the City's water department. Other direct costs of the System's water operations are now generally paid directly by the Authority under the Cooperation Agreement, rather than paid by the City and reimbursed by the Authority. The City provides the Authority with various services in accordance with the Cooperation Agreement and the 10

115 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 Authority reimburses the City for direct and indirect costs attributed by the City to the operation and maintenance of the System. Under the Agreements, the Authority provides up to 600 million gallons of water annually for the City's use without charge. Also, the Authority assumes the City s obligation for the cost of subsidizing water service to residents of the City situated beyond the Authority's service area so that those water users pay charges that mirror the rates of the Authority. System Leases The Capital Lease Agreement stipulates minimum lease payments of approximately $101 million, all of which were satisfied during the initial three years of the capital lease. The Capital Lease Agreement has a term of thirty years and provides the Authority with the option to purchase the System for one dollar in Pension Employees of the Authority participate in the City's Municipal Pension Fund Plan (Plan). Employees who became members of the Plan prior to January 1, 1988 are required to contribute 5% of pre-tax pay. Those joining thereafter are required to contribute 4%. Substantially all the Authority's 2012 payroll of $13,201 was covered by the Plan. Employee contributions for the year amounted to approximately $499. The City's obligations relative to the Plan are determined in accordance with various Pennsylvania statutes. The extent of the Authority's participation in such obligations with respect to those former City employees whose membership continued upon becoming employees of the Authority is determined by the shared interpretation of the City and Authority of the intent of the Cooperation Agreement. The 2012 Minimum Municipal Obligation calculated for the City s Plan indicated a 2012 normal cost of $786 associated with those former City employees whose participation continued upon becoming employees of the Authority as provided by the Cooperation Agreement. The Authority estimates that the normal cost for 2012, together with other elements of expense for employee service during 2012 would not exceed the sum of the 2012 contributions made by the Authority and employees. Uncertainty exists about the future obligation of the Authority and its employees to make contributions to the Plan. Such contributions are contingent upon the continuing eligibility of 11

116 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 the Authority's employees to participate in the City's Plan. Eligibility for ongoing employee participation in the City's Plan could end if the Authority were to introduce another pension plan. At this time, the Authority and City have no definite plans to establish another pension plan for the Authority, other than an agreement in principle that the Authority should have its own plan in the future. Future obligations of the Authority to make contributions to the Plan may also be subject to other amendments of the existing arrangement agreed-upon by the Authority and the City. Normal retirement benefits are available upon attainment of age sixty and completion of twenty service years. Early retirement benefits are available upon attainment of age fifty and completion of eight service years. Early retirement benefits may be deferred until age sixty or may be obtained upon retirement at a reduced level. A member who terminates employment after attaining age forty and completing eight service years can sustain eligibility for benefits by continuing contributions through age fifty. A member who terminates employment after attaining fifteen service years, but has been a member since before January 1, 1975, can be vested by continuing contributions through age fifty. Retirement benefits for employees who were members of the Plan are based upon a percentage of either three-year or four-year average pay, depending on date of hire, subject to certain specified minimum monthly benefit amounts. Special membership and benefit rules apply to those experiencing disability. The "pension benefit obligation," which is an actuarial present value of credited projected benefits, is a standardized measure for financial statement disclosure of the present value of pension benefits, adjusted for the effects of projected salary increases, estimated to be payable in the future by the Plan as a result of members' service to date. The measure is intended to help users assess the Plan's funding status on a going concern basis, assess progress made in accumulating sufficient assets to pay benefits when due and make comparisons among public employee retirement systems. The Plan has not reported or attributed measurements of assets or the pension benefit obligation on the basis of the group of members who are Authority employees. Additional information about the Plan and ten-year historical trend information showing the Plan's progress in accumulating sufficient assets to pay benefits when due is presented in the City's Comprehensive Annual Financial Report. 12

117 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND REVENUE AND ACCOUNTS RECEIVABLE Water Water sales revenue is recognized as earned during the period when water is supplied to customers. Customers are billed on a monthly billing cycle by the Authority based on actual or estimated meter readings. The Authority recognizes unbilled accounts receivable for water service provided prior to year-end that is billed during the following year. Water accounts receivable are presented net of a reserve for uncollectible amounts. This reserve, based upon historical experience, is recognized coincident with recognition of revenue. At December 31, 2012 and 2011, the reserve for uncollectible water accounts was approximately $13.78 million and $13.95 million, respectively. The Authority has rights to utilize collection agencies, service terminations, liens, and real property sales to protect its interests, limit further losses, and motivate payments from delinquent customers. Wastewater Treatment Although the Authority does not provide wastewater treatment, it assumed responsibility for certain wastewater treatment revenue and expenses beginning in Pursuant to a 1955 agreement, the City was responsible for paying the Allegheny County Sanitary Authority (ALCOSAN) face amounts for delinquent wastewater treatment receivables. Until 1996, the City undertook to bill and collect these delinquent accounts directly. In 1996, the City and the Authority entered into a memorandum of understanding (MOU) whereby the Authority received assets including rights to wastewater treatment receivables assigned by the City and assumed the City's obligation to pay ALCOSAN for delinquencies. During 2004, the Authority and ALCOSAN executed a first amendment to the 1955 agreement whereby the Authority elected to change the billing structure. Effective May 2004, the Authority began direct billing City residents for current and delinquent wastewater treatment charges and remitting to ALCOSAN the aggregate amount of service charges billed. Wastewater treatment activity and the related assets and liabilities appear on the statements of revenue, expenses and changes in net position and the statements of net position, respectively. At December 31, 2012 and 2011, the reserve for uncollectible wastewater accounts was approximately $5.95 million and $6.71 million, respectively. 5. CAPITAL ASSETS Capital assets consisted of the following at December 31, 2012 and 2011: 13

118 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 Balance at Balance at January 1, Reclassifications/ December 31, 2012 Additions Transfers 2012 Capital assets not being depreciated: Construction in progress $ 62,461 $ 35,152 $ (46,743) $ 50,870 Capital assets being depreciated: Water and sewer system 102,167 - (102,167) - Utility assets 581,354 46, , ,275 Non-utility assets 18, ,954 20,038 Total capital assets being depreciated 701,564 46, ,313 Total capital assets 764,025 81,901 (46,743) 799,183 Accumulated depreciation (220,422) (12,967) - (233,389) Capital assets, net $ 543,603 $ 68,934 $ (46,743) $ 565,794 Balance at Balance at January 1, Reclassifications/ December 31, 2011 Additions Transfers 2011 Capital assets not being depreciated: Construction in progress $ 41,328 $ 36,913 $ (15,780) $ 62,461 Capital assets being depreciated: Water and sewer system 102, ,167 Utility assets 563,550 17, ,354 Non-utility assets 17, ,043 Total capital assets being depreciated 682,823 18, ,564 Total capital assets 724,151 55,654 (15,780) 764,025 Accumulated depreciation (207,122) (13,300) - (220,422) Capital assets, net $ 517,029 $ 42,354 $ (15,780) $ 543,603 During 2012 and 2011, the Authority received donated utility assets of $2,533 and $2,277, respectively, related to various development projects. 14

119 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND PAYROLL AND RELATED OBLIGATIONS Payroll and related obligations presented on the statements of net position are comprised of: Balance at Balance at December 31, December 31, Current 2011 Change 2012 Portion Compensated absences $ 757 $ (96) $ 661 $ 5 Workers' compensation 341 (76) Payroll, withholdings, and taxes $ 1,634 $ (171) $ 1,463 $ 706 Balance at Balance at December 31, December 31, Current 2010 Change 2011 Portion Compensated absences $ 767 $ (10) $ 757 $ 4 Workers' compensation 402 (61) Payroll, withholdings, and taxes 548 (12) $ 1,717 $ (83) $ 1,634 $ BONDS AND LOANS PAYABLE To finance its initial capital improvement program, the Authority issued Daily Adjustable Demand Water and Wastewater System Revenue Bonds of $93,600 in 1984 ("1984 Bonds"). In 1985, the Authority issued Water and Wastewater System Adjustable Rate Tender Revenue Bonds ("1985 Bonds") that accomplished an advance refunding which defeased the 1984 Bonds. In 1986, the Authority issued $134,700 Water and Wastewater System Adjustable Rate Tender Revenue Bonds ("1986 Bonds") to finance the next phase of its capital improvement program. In July 1991, the Authority issued $248,329 Water and Wastewater System Revenue Refunding Bonds, Series A of 1991 ("1991 Bonds") which refunded the outstanding 1985 and 1986 Bonds. The principal of defeased 1986 Bonds still outstanding at December 31, 2012 and 2011 is $77,320 and $93,565, respectively. 15

120 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 Series 1993 In November 1993, the Authority issued $278,970, Series A Refunding Bonds, ("Series A Bonds") and $10,785 Series B Revenue Bonds, ("Series B-1993 Bonds") to finance additional capital improvements. Series A-1993 Bond proceeds of $276,613 (net of $3,402 in underwriting fees, FGIC insurance, and other issuance costs) defeased the 1991 Bonds through an advance refunding. In October of 2008, the bond insurance company and a financial institution entered into a reinsurance agreement whereby the financial institution reinsured certain bond insurance risks of the bond insurance company. During 2009, the bond insurance company for the Series 1993 Bonds had their rating withdrawn by Standard & Poor s and is currently unrated. The Series A-1993 Bonds bear interest at a fixed rate of 6.5%, payable semi-annually at March 1 and September 1. The outstanding 1993 Bonds are not subject to optional or mandatory redemption. Fair value of the 1993 Bonds at December 31, 2012 and 2011, with carrying amounts of $9 million and $17 million, respectively, based on quoted market prices, is approximately $9 million and $18 million, respectively. Series 1998 In March 1998, the Authority issued $93,355, Series A First Lien Revenue Bonds ("1998 Series A Bonds"), the proceeds of which were used to defease through an advance refunding the entire balance of 1995 Series A Bonds outstanding ($89,850); $36,440 Series B First Lien Revenue Bonds ( 1998 Series B Bonds ), the proceeds of which are dedicated to a capital improvements program; and $101,970 Series C Subordinate Revenue Bonds ( 1998 Series C Bonds ), the proceeds of which were used to defease through an advance refunding the entire balance of the 1995 Series B Bonds outstanding ($98,410). At December 31, 2012 and 2011, the remaining unamortized deferred refunding loss of $435 and $466, respectively, on the transaction is shown as a reduction of the long-term debt and will be amortized through Fair value of the 1998 Bonds at December 31, 2012 and 2011, with carrying amounts of $69 million and $62 million, respectively, based on quoted market prices, is approximately $69 million and $62 million, respectively. The 1998 Series B Bonds are capital appreciation bonds with an original issuance amount of $36,440. The 1998 Series B Bonds have maturity values of $2.3 million to $31.8 million 16

121 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 from 2017 to The bonds were issued to yield rates from 5.18% to 5.3%. The 1998 Series B Bonds accrue and compound interest on a semi-annual basis and are carried at cost plus accrued interest. Total maturity value of the 1998 Series B Bonds is $146.8 million. A portion of the 1998 Bonds is subject to optional redemption in various face amounts beginning March 1, Series 2003 On September 23, 2003, the Authority issued $167,390 of Water and Sewer System Revenue Refunding Bonds ( 2003 Bonds ). The proceeds of the 2003 Bonds were used to provide funds for the current refunding of a portion of the 1993 Bond Series. In connection with the 2003 debt refundings, the Authority recorded a deferred refunding loss of $3,162, which is being amortized as an adjustment to interest expense over the life of the bonds using the effective interest method. The unamortized balance of the deferred refunding adjustment is $1,123 and $1,203 at December 31, 2012 and 2011, respectively. The 2003 Bonds were issued at a bond discount of $830, which is being amortized as an adjustment to interest expense over the life of the bonds using the effective interest method. The 2003 Bonds bear interest at rates ranging from 1.45% to 4.75%. Interest is payable in semi-annual installments on March 1 and September 1 until maturity. Stated maturities for the 2003 Bonds are at various face amounts on September 1 of each year beginning September 1, 2004 through The 2003 Bonds which mature after September 1, 2014, are subject to redemption prior to maturity at the option of the Authority. The fair market value of the 2003 Bonds at December 31, 2012 and 2011, with carrying amounts of $45 million and $45 million, respectively, based on quoted market prices, is approximately $46 million and $47 million, respectively. Series 2007 During March 2007, the Authority issued $158,895 Series 2007 First Lien Water and Sewer Revenue Bonds ( 2007 Bonds ): $43,720 Series A of 2007 (fixed rate), $57,585 Series B-1 of 2007 (variable rate demand), and $57,590 Series B-2 of 2007 (variable rate demand). The purpose of this bond issue was to refund the Series 2002 and Series 2005 Bonds (the refunded bonds). Proceeds of the 2007 Bonds were invested in an escrow account to pay principal and interest on the refunded bonds from the time of refunding through the bonds earliest optional call dates. In connection with the debt refundings, the Authority recorded a 17

122 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 deferred refunding loss of $6,032, which is being amortized as an adjustment to interest expense over the life of the bonds using the effective interest method. At December 31, 2012 and 2011, the remaining unamortized deferred refunding loss is $4,424 and $4,734, respectively. At December 31, 2012, the principal of the defeased 2005 Bonds outstanding was $43,225. The 2007 Bonds were issued at a bond premium of $2,660, which is being amortized as an adjustment to interest expense over the life of the bonds using the effective interest method. Bond issuance costs of $598 are also being amortized over the life of the 2007 Bonds using the effective interest method. The 2007 Series A Bonds bear interest at rates ranging from 4.00% to 5.00%. Interest is payable in semi-annual installments on March 1 and September 1 until maturity. The 2007 Series A Bonds are subject to extraordinary redemption prior to maturity at the option of the Authority in the event of a condemnation, damage or destruction of the water and sewer system. The 2007 Series B Bonds bear interest at a variable rate with interest payments due on the first business day of each month. The 2007 Series B Bonds that mature on September 1 of are subject to mandatory sinking fund redemption. The fair market value of the 2007 Bonds at December 31, 2012 and 2011, with carrying amounts of $107 million and $112 million, respectively, based on quoted market prices, is approximately $110 million and $115 million, respectively. In conjunction with the issuance of the 2007 Variable Rate Bonds, the Authority entered into various pay fixed/receive variable interest rate swaps to effectively change the Bonds variable interest rates to synthetic fixed rates. These swap transactions are discussed in Note 8: Interest Rate Swaps. Series 2008 During May 2008, the Authority issued $93,635 Series 2008 Water and Sewer System First Lien Revenue Bonds ( 2008 Fixed Rate Bonds ): $68,970 Series A of 2008 (fixed rate, taxable) and $24,665 Series D-1 of 2008 (fixed rate). The purpose of this bond issue was to advance refund portions of certain maturities of the Series 1993A and Series 2003 Bonds, to fund the costs of certain capital additions, to fund the premium for the Bond Insurance Policy securing payments on 2008 Fixed Rate Bonds, and to fund termination payments on certain interest rate swaps. 18

123 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 During June 2008, the Authority issued $320,515 Series 2008 Water and Sewer System First Lien Revenue Bonds ( 2008 Variable Rate Demand Bonds ): $145,495 Series B of 2008 (variable rate demand), $51,910 Series C-1 of 2008 (variable rate demand), $51,885 Series C-2 of 2008 (variable rate demand), and $71,225 Series D-2 of 2008 (variable rate demand). The purpose of this bond issue was to currently refund the Series 1998A and Series 1998C, to currently refund certain maturities of the Series 2007 B-1 and Series 2007 B-2 Bonds, to advance refund certain maturities of the Series 1998B Bonds, to fund approximately $98 million of certain capital additions, to fund the premium for the Bond Insurance Policy securing payments on 2008 Variable Rate Demand Bonds, and to fund termination payments on certain interest rate swaps. In connection with these advance refundings, portions of the proceeds of the 2008 Bonds were deposited into irrevocable trusts with an escrow agent to provide for certain debt service payments on the refunded bonds. The advance refunding resulted in a deferred refunding loss of $18,119, which is amortized as an adjustment to interest expense over the life of the 2008 Bonds using the effective interest method. At December 31, 2012 and 2011, the remaining unamortized deferred refunding loss was $13,348 and $14,305, respectively, and the transaction is shown as a reduction of long-term debt and will be amortized through At December 31, 2012, the principal of the defeased Series 1993A Bonds outstanding was $8,215 and the defeased 2003 Bonds outstanding was $26,130. The maturity value of defeased 1998B compound interest bonds outstanding at December 31, 2012 was $19,800. The Taxable 2008 Series A Bonds bear interest at rates ranging from 6.36% to 6.61%. Interest is payable in semi-annual installments on March 1 and September 1 until maturity. The Taxable 2008 Series A Bonds are subject to optional redemption, in whole or in part, on any date, at the option of the Authority. The Taxable 2008 Series A Bonds that mature in 2018 and 2024 are subject to mandatory sinking fund payments beginning in 2017 and continuing through The 2008 Series D-1 Bonds (together with the Taxable 2008 Series A Bonds are the 2008 Fixed Rate Bonds) bear interest at rates ranging from 4.50% to 5.00%. Interest is payable in semi-annual installments on March 1 and September 1 until maturity. The 2008 Series D-1 Bonds which mature on or after September 1, 2019 are subject to optional redemption, in whole or in part, on any date, at the option of the Authority at any time on or after September 1, 2018, at 100% of the principal amount plus accrued interest. The 2008 Series B, C, and D-2 Bonds (2008 Variable Rate Bonds) as originally offered bear interest at a variable rate with interest payments due on the first business day of each month. 19

124 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 Interest rates are reset weekly; the fluctuating rate per annum to be determined by the respective remarketing agents. The weekly rate is subject to a cap of 12% per annum. During the second part of 2009, the Authority reoffered the 2008 Series B Bonds and the 2008 Series C-1 variable rate bonds. The 2008 Series B Bonds had an outstanding principal amount of $145,495,000 and the 2008 C-1 bonds had an outstanding principal balance of $51,910,000 at the time of reoffering. The Series B Bonds were reoffered on October 16, The reason for this reoffering was the replacement of expiring standby bond purchase agreements on these variable rate bonds with letters of credit. Bank of America is the letter of credit provider on the Series B-1 Bonds ($72,750,000) and PNC is the letter of credit provider on the Series B-2 Bonds ($72,745,000). The reoffering did not change the interest rate mode on these variable rate bonds. Both the Bank of America and the PNC letters of credit have been renewed and are set to expire on October 22, During August 2011, the 2008 Series C-1-A, B and C bonds were reoffered. The bonds were reoffered at a term rate of.45% through September During August 2012, the 2008 Series C-1-A, B and C bonds were again reoffered. The bonds were reoffered at a term rate of.40% through September The new reoffered bonds are as follows: Series C1-A $10,000,000; Series C1-B $10,000,000, and Series C1-C $5,000,000. During November 2009, the remaining C-1 Bonds were reoffered as the C1-D Series of $26,910,000. These bonds were also issued in a term interest rate mode, fixing the interest rate at 2.625% through September of During August 2012, the C1-D Series were again reoffered. The bonds were reoffered at a term rate of 1.40% through August Credit facilities for the 2008 Series C1-A, C1-B, and C1-C bonds are provided by the Federal Home Loan Bank. Liquidity facilities provided by JP Morgan Chase on the 2007 B-1, 2007 B-2, and 2008 C-2 Series bonds have been renewed and are set to expire on June 10, 2014 for the 2007 B-1 and B-2 Series and June 9, 2014 for the 2008 C-2 Series. The Authority renewed the standby purchase agreements on the Series 2007 B-1 (face $41.32 million) and 2007 B-2 (face $41.33 million) bonds for two years, expiring August of During 2011, the Authority renewed the Series 2008 C-2 (face $51.89 million) and Series 2008 D-2 (face $71.23 million) for two years, expiring June 2014, with JP Morgan Chase and PNC Bank, respectively. Variable Rate Bonds are subject to optional redemption, in whole or in part, on any date, at the option of the Authority. The 2008 Series B Bonds that mature on September 1 of

125 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 are subject to mandatory sinking fund redemption. The 2008 Series C Bonds that mature on September 1 of 2035 are subject to mandatory sinking fund redemption. The 2008 Series D- 2 Bonds that mature on September 1 of 2040 are subject to mandatory sinking fund redemption. The 2008 Series Bonds are subject to extraordinary redemption prior to maturity at the option of the Authority in the event of a condemnation, damage or destruction of the water and sewer system. The 2008 Fixed Rate Bonds were issued at a bond premium of $824, which is being amortized as an adjustment to interest expense over the life of the bonds using the effective interest method. Bond issuance costs of $7,459, including $5,036 of swap termination fees, are also being amortized over the life of the Bonds using the effective interest method. The 2008 Variable Rate Bonds issuance costs of $9,337, including $594 of swap termination fees, are being amortized over the life of the Bonds using the effective interest method. The fair market value of the 2008 Bonds at December 31, 2012 and 2011, with carrying amounts of $414 million and $414 million, respectively, based on quoted market prices, is approximately $434 million and $431 million, respectively. Variable rate bonds require a liquidity facility and/or a letter of credit. The Authority is subject to the risk that the bank does not renew the credit facility and/or that the pricing changes throughout the life of the bonds. Additionally, the Authority purchased insurance as a credit enhancement on the variable rate bonds. Trading spreads on the bonds and the preservation of the liquidity facility may be largely linked to the credit quality of the insurance provider. Therefore, if there is an event that would adversely affect the investor s perception of the credit quality of the insurer, the Authority could be subject to paying higher credit spreads on the bonds and risk losing the liquidity facility. In conjunction with the issuance of the 2008 Variable Rate Bonds, the Authority entered into various pay fixed/receive variable interest rate swaps to effectively change the Bonds variable interest rates to synthetic fixed rates. These swap transactions are discussed in Note 8: Interest Rate Swaps. Bonds and state loans payable (PENNVEST) consisted of the following at December 31, 2012 and 2011: 21

126 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 Balance at Balance at December 31, December 31, 2011 Additions Reductions 2012 Bonds and loans payable: Revenue bonds $ 653,455 $ 3,555 $ (12,465) $ 644,545 State loans (PENNVEST) 34,747 1,916 (2,600) 34, ,202 5,471 (15,065) 678,608 Less: deferred refunding loss (23,700) - 1,589 (22,111) Unamortized bond (discount) premium 1,948 - (135) 1,813 Total bonds and loans $ 666,450 $ 5,471 $ (13,611) $ 658,310 Balance at Balance at December 31, December 31, 2010 Additions Reductions 2011 Bonds and loans payable: Revenue bonds $ 664,963 $ 3,377 $ (14,885) $ 653,455 State loans (PENNVEST) 21,104 15,506 (1,863) 34, ,067 18,883 (16,748) 688,202 Less: deferred refunding loss (25,363) - 1,663 (23,700) Unamortized bond (discount) premium 2,086 - (138) 1,948 Total bonds and loans $ 662,790 $ 18,883 $ (15,223) $ 666,450 Debt service payments of the State Loans at December 31, 2012 are as follows: State Loans Principal Interest Total 2013 $ 2,585 $ 551 $ 3, , , , , , , , , ,364 1,518 15, , ,634 $ 34,063 $ 4,359 $ 38,422 22

127 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 Debt service payments on the 1993, 1998, 2003, 2007, and 2008 Bonds at December 31, 2012 are as follows: Revenue Bonds Principal Interest Total 2013 $ 14,155 $ 26,881 $ 41, ,250 26,042 41, ,995 25,361 41, ,755 24,647 41, ,709 25,376 41, , , , , , , , , , ,085 42, , ,200 8, , ,650 $ 564,188 $ 1,171,838 Accretion 36,895 Total $ 644,545 Interest payments were calculated for the Variable Rate Bonds using the synthetic fixed rate interest rates as described in Note 8. Interest incurred for the years ended December 31, 2012 and 2011 on bonds payable, exclusive of capitalized interest and amortization of refunding losses, was approximately $32 million and $33 million, respectively. Interest costs for 2012 and 2011 included $1.6 and $1.7 million, respectively, of amortization of the deferred refunding losses. In accordance with the provisions of the trust indentures for the 1993, 1998, 2003, 2007, and 2008 Bonds, the Authority has created a number of funds that are restricted for specific purposes. The complement of these restricted funds, collectively referred to on the statements of net position as Restricted Assets at December 31, 2012 and 2011, was: 23

128 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND Capital project funds $ 6,316 $ 33,106 Debt service and reserve funds 8,348 7,990 Operating reserve account 8,542 8,537 Other funds $ 23,785 $ 50,208 Among the Authority s debt covenants is one which requires that rates charged by the Authority will be sufficient to satisfy a formula which is intended to ensure that the Authority will be able to satisfy debt service requirements. The trust indenture also requires that revenue collections be deposited into a Revenue Fund and disbursed therefrom as provided for in the trust indenture. This Revenue Fund constitutes the vast majority of unrestricted funds cash and cash equivalents. At December 31, 2012, the Authority was in compliance with this covenant. 8. INTEREST RATE SWAPS Interest rate swaps disclosures (not in thousands) as of December 31, 2012 and 2011 are presented below: 24

129 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 Interest rate swaps at December 31, 2012 and 2011: Interest Interest Counterparty Notional Effective Maturity Rate Rate Credit Underlying Amount Date Date Paid Received Rating Bonds Hedging derivatives, Cash flow hedges, Receive variable - pay fixed, Interest rate swaps: $ 41,325,000 3/9/2007 9/1/ % SIFMA A- Series 2007 B-2 41,320,000 3/9/2007 9/1/ % SIFMA A+ Series 2007 B-1 72,747,500 6/12/2008 9/1/ % SIFMA A- Series 2008 B-1 41,518,000 6/12/2008 9/1/ % SIFMA A- Series 2008 C 72,747,500 6/12/2008 9/1/ % SIFMA A+ Series 2008 B-2 71,225,000 6/12/2008 9/1/ % SIFMA A+ Series 2008 D-2 Investment derivatives, Receive variable - pay fixed, Interest rate swap: 62,277,000 6/12/2008 9/1/ % SIFMA A+ Series 2008 C Interest Rate Swap Market Value Information: 12/31/2010 Change 12/31/2011 Change 12/31/2012 Notional Market in Market Market in Market Market Amount Value * Value Value * Value Value * Hedging derivatives, Cash flow hedges, Receive variable - pay fixed, Interest rate swaps: $ 41,325,000 $ (4,025,540) $ (5,341,685) $ (9,367,225) $ (736,868) $ (10,104,093) 41,320,000 (3,989,427) (5,383,814) (9,373,241) (737,105) (10,110,346) 72,747,500 (6,493,396) (16,260,801) (22,754,197) 223,150 (22,531,047) 41,518,000 (3,648,973) (8,210,370) (11,859,343) (241,135) (12,100,478) 72,747,500 (6,415,332) (16,338,865) (22,754,197) 223,150 (22,531,047) 71,225,000 (6,874,398) (17,135,256) (24,009,654) 604,343 (23,405,311) Investment derivatives, Receive variable - pay fixed, Interest rate swap: (31,447,066) (68,670,791) (100,117,857) (664,465) (100,782,322) 62,277,000 (5,409,302) (12,379,713) (17,789,015) (361,702) (18,150,717) Total $ (36,856,368) $ (81,050,504) $ (117,906,872) $ (1,026,167) $ (118,933,039) * The market value is an estimated net present value of the expected cash flows calculated using relevant mid-market data inputs and based on the assumption of no unusual market conditions or forced liquidation. 25

130 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 Description of 2008 Swaps During fiscal year 2008, the Authority entered into five pay-fixed, receive-variable interest rate swap contracts. The interest rate swaps were effective June 12, Beginning September 1, 2008, the Authority began to make semi-annual interest payments on the 1 st of each March and September through September 1, 2035 (two swaps); September 1, 2039 (two swaps); and, September 1, 2040 (for one swap), respectively. The Counterparties make monthly interest payments on the 1 st of each calendar month, which began July 1, 2008 through September 1, 2035 for two of the swaps; September 1, 2039 for two of the swaps; and September 1, 2040 for one swap. The intention of the 2008 swaps is to effectively change the Authority s variable interest rate on the $145,495 Water and Sewer System (Variable Rate Demand) First Lien Revenue Refunding Bonds Series B of 2008, on the $71,225 Water and Sewer System (Variable Rate Demand) First Lien Revenue Bonds Series D-2 of 2008, and on the $103,795 Water and Sewer System (Variable Rate Demand) Subordinate Revenue Refunding Bonds Series C of 2008 (the bonds) to synthetic fixed rates of 4.038%, 4.103%, and 3.998%, respectively. The bonds will accrue interest at a weekly rate that is determined by a remarketing agent on each effective rate date. The interest rate on the bonds may not exceed 12%. Per the interest rate swap agreements, the Authority will receive SIFMA Municipal Swap Index while paying fixed rates of 4.038%, 4.103%, and 3.998%, respectively. The interest payments on the interest rate swaps are calculated based on notional amounts, all of which reduce, beginning on September 1, 2012 for the 2008 C Bonds, September 1, 2032 for the 2008 D2 Bonds and September 1, 2035 for the 2008 B Bonds, so that the notional amounts approximate the principal outstanding on the respective bonds. The interest rate swaps expire consistent with the final maturity of the respective bonds. Description of 2007 Swaps During fiscal year 2007, the Authority entered into two pay-fixed, receive-variable interest rate swap contracts. The interest rate swaps were effective March 9, Beginning September 1, 2007, the Authority began to make semi-annual interest payments on the 1 st of each March and September through September 1, The Counterparties makes monthly interest payments on the 1 st of each calendar month, beginning April 1, 2007 through September 1,

131 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 The intention of the 2007 swaps is to effectively change the Authority s variable interest rate on the $41,320,000 Water and Sewer System (Variable Rate Demand) First Lien Revenue Refunding Bonds Series B-1 of 2007 and on the $41,325,000 Water and Sewer System (Variable Rate Demand) First Lien Revenue Refunding Bonds Series B-2 of 2007 (the bonds) to synthetic fixed rates of 3.932%, respectively. The bonds will accrue interest at a weekly rate that is determined by a remarketing agent on each effective rate date. The interest rate on the bonds may not exceed 12%. Per the interest rate swap agreements, the Authority will receive SIFMA Municipal Swap Index while paying a fixed rate of 3.932%. The interest payments on the interest rate swaps are calculated based on notional amounts, both of which reduce, beginning on September 1, 2018, so that the notional amounts approximate the principal outstanding on the respective bonds. The interest rate swaps expire on September 1, 2033 consistent with the final maturity of the bonds. Accounting and Risk Disclosures During the years ended December 31, 2012 and 2011, the Authority paid $17,012 and $17,016, respectively, fixed and received $654 and $801, respectively, variable related to their outstanding swap agreements. As noted in the tables above, current period changes in market value for the interest rate swaps that are accounted for as hedges are recorded on the statements of net position as an adjustment to deferred outflows. Additionally, current period changes in market value for the interest rate swap accounted for as an investment is recorded on the statements of revenues, expenses and changes in net position as a component of investment income. The cumulative fair market value of the outstanding interest rate swaps of December 31, 2012 and 2011 are reported on the statements of net position as a swap liability. The Authority has the ability to early terminate the interest rate swaps and to cash settle the transaction on any business day by providing at least two business days written notice to the counterparty. Evidence that the Authority has sufficient funds available to pay any amount payable to the counterparty must be provided at the time notice is given. At early termination, the Authority will be required to pay or receive a settlement amount which is comprised of the market value of the terminated transaction(s) based on market quotations and any amounts accrued under the contract(s). 27

132 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 Through the use of derivative instruments such as interest rate swaps, the Authority is exposed to a variety of risks, including credit risk, interest rate risk, termination risk, basis risk, and rollover risk.! Credit risk is the risk that a counterparty will not fulfill its obligations. The credit ratings by Moody s Investors Service, Inc., a nationally recognized statistical rating organization for the respective counterparties are listed in the table above. If a counterparty failed to perform according to the terms of the interest rate swap agreement, there is some risk of loss to the Authority, up to the fair market value of the swaps. The Authority currently does not enter into master netting arrangements with its counterparties as such each derivative instrument should be evaluated on an individual basis for credit risk. As the Authority's derivative instruments currently have a negative fair market value position to the Authority at year-end, the Authority is not exposed to credit risk at December 31, Concentration of credit risk: The Authority currently has two counterparties, with four and three outstanding interest rate swaps respectively. The Authority s outstanding market value as of December 31, 2012 and 2011, respectively, is $(74,197,421) and $(73,926,107) with one counterparty and $(44,735,618) and $(43,980,765) with the second counterparty. Both counterparties operate in the same markets and could be similarly impacted by changes in economic or other conditions. It is the Authority s policy to require counterparty collateral posting provisions in its non-exchange traded derivative instruments. Their terms require collateral to be posted if the respective counterparty s credit rating falls below BBB+ by Standard & Poor s and the swap insurer becomes bankrupt. The amount of collateral to be posted is calculated based on derivatives in asset positions to the Authority. As of year-end, the counterparties had not and were not required to post collateral for these transactions.! Termination risk is the risk that a derivative s unscheduled end will affect the Authority s asset/liability strategy or will present the Authority with potentially significant unscheduled termination payments to the counterparty. The counterparties to the interest rate swaps do not have the ability to voluntarily terminate the interest rate swap; however, the Authority is exposed to termination risk in the event that one or more of the counterparties default. 28

133 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011! Interest rate risk is the risk that changes in interest rates will adversely affect the fair values of a government s financial instruments or cash flows. The interest rate swap that is accounted for as an investment exposes the Authority to interest rate risk. The interest rate swap is highly sensitive to changes in interest rates; changes in the variable rate will have a material effect on the swap s fair market value. The interest rate swap will terminate on September 4, 2035.! Basis risk is the risk that arises when variable interest rates on a derivative and an associated bond or other interest-paying financial instrument are based on different indexes. The Authority is subject to basis risk as the interest index on the variable rate arm of the swaps is based on the SIFMA Municipal Swap Index and the variable interest rate on the bonds is based on a different index, a weekly rate that is determined by a remarketing agent. Although expected to correlate, the relationships between different indexes vary and that variance could adversely affect the Authority s calculated payments, and as a result cost savings or synthetic interest rates may not be realized. The Authority is further subject to basis risk in the event that the underlying bonds become fixed rate Bank Bonds or that the maturity of the underlying bonds is accelerated as discussed in Note 7: Bonds and Loans Payable.! Rollover risk is the risk that a derivative associated with the Authority s debt does not extend to the maturity of that debt. When the derivative terminates, the associated debt will no longer have the benefit of the derivative. The Authority is not exposed to rollover risk as the swap agreements terminate on the same day the last payment is due on the respective bonds. Contingencies All of the Authority s derivative instruments include provisions that require the Authority to post collateral in the event that the credit ratings of its credit support provider s senior long term, unsecured debt credit rating falls below BBB+ by Standard & Poor s and FSA, the swap insurer, becomes bankrupt. The amount of collateral to be posted is calculated based on derivatives in negative market value positions to the Authority. The collateral is to be posted in the form of cash, U.S. Treasuries or other approved securities. As of year-end, the Authority had not and was not required to post collateral for these transactions. 29

134 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND INVESTMENTS AND DEPOSITS WITH FINANCIAL INSTITUTIONS The Authority is authorized to invest in: obligations of the U.S. Government and government-sponsored agencies and instrumentalities; fully insured or collateralized certificates of deposits; commercial paper of the highest rating; repurchase agreements collateralized by government obligations or securities; highly rated bank promissory notes or investment funds or trusts; and, as to trusteed assets, as otherwise permitted by the trust indenture as supplemented and amended in Throughout the years ended December 31, 2012 and 2011, the Authority invested its funds in such authorized investments. The Authority does not have a formal investment policy which addresses custodial credit risk, interest rate risk, credit risk, or concentration of credit risk. GASB Statement No. 40, Deposit and Investment Risk Disclosures, requires disclosures related to the following deposit and investment risks: credit risk (including custodial credit risk and concentration of credit risk), interest rate risk, and foreign currency risk. The following is a description of the Authority s deposit and investment risks: Custodial Credit Risk Custodial credit risk is the risk that in the event of a bank failure, the Authority s deposits may not be returned to it. As of December 31, 2012 and 2011, $28,647 and $32,889, respectively, of the Authority s bank balance of $35,797 and $39,115, respectively, was exposed to custodial credit risk. These amounts are collateralized in accordance with Act 72 of the Pennsylvania state legislature, which requires the institution to pool collateral for all governmental deposits and have the collateral held by an approved custodian in the institution s name. These deposits have carrying amounts of $39,361 and $41,676 as of December 31, 2012 and 2011, respectively, all of which is reported as current assets in the statements of net position. In addition to the deposits noted above, included in cash and cash equivalents as noncurrent restricted assets on the statements of net position are the following short-term investments at December 31, 2012 and 2011: money market funds of $3,135 and $2,901, respectively, and repurchase agreements of $29 and $578, respectively. Of the Authority s $29 and $578 investment in repurchase agreements, at December 31, 2012 and 2011, respectively, all of the underlying securities are held by the investment s counterparty, not in the name of the Authority. At December 31, 2012, the Authority held the following investment balances: 30

135 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 Carrying value Maturity in years Less than 1 year Commonwealth of PA Revenue Bonds (Guaranteed Investment Contracts) $ 8,541 $ 8,541 Money market 3,135 3,135 Repurchase agreements Fixed income 2,082 2,082 Commercial paper 9,998 9,998 Total Investments $ 23,785 $ 23,785 At December 31, 2011, the Authority held the following investment balances: Carrying value Maturity in years Less than 1 year Commonwealth of PA Revenue Bonds (Guaranteed Investment Contracts) $ 8,536 $ 8,536 Money market 2,901 2,901 Repurchase agreements Commercial paper 38,193 38,193 Total Investments $ 50,208 $ 50,208 With the exception of the guaranteed investment contracts, the carrying value of the Authority s investments is the same as their fair market value amount. The Guaranteed investment contracts are carried at amortized cost. Investments of $20,621 and $46,729 are included as noncurrent restricted investments on the statements of net position at December 31, 2012 and 2011, respectively. Investments of $3,164 consisting of money market funds of $3,135 and repurchase agreements of $29 are included as noncurrent restricted cash and cash equivalents on the statement of net position at December 31, Investments of $3,479, consisting of money market funds of $2,901 and repurchase agreements of $578 are included as noncurrent restricted cash and cash equivalents on the statement of net position at December 31,

136 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 Interest Rate Risk Interest rate risk is the risk that changes in the interest rates will adversely affect the fair market value of the Authority s investments. The Authority is not subject to interest rate risk as all of its investments at December 31, 2012 and 2011 had maturities of less than one year. Credit Risk Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligation. As of December 31, 2012, the Authority s investments in the guaranteed investment contracts were rated AAA by Standard & Poor s. The counterparty to the Authority s guaranteed investment contracts is the Commonwealth of Pennsylvania. The Authority s investments in money markets were rated AAA by Standard & Poor s. The Authority s investments in commercial paper at December 31, 2012 were rated A-1 by Standard & Poor s. Not all of the investments in commercial paper were rated. Additionally, at December 31, 2012, the Authority had various repurchase agreements. The underlying securities of these repurchase agreements consist primarily of U.S. Treasuries, and are therefore not subject to credit risk. Concentration of Credit Risk Concentration of credit risk is the risk of loss attributed to the magnitude of a government s investments in a single issuer. The Authority places no limit on the amount it may invest in any one issuer. More than five percent of the Authority s investments are in Fidelity Institutional Money Market, Federal National Mortgage Association, Natixis U.S. Finance Company, and Commonwealth of Pennsylvania. These investments are 13.0%, 8.7%, 17.5%, and 35.4% respectively, of the Authority s total investments at December 31, As further described in Note 8, the Authority has a derivative instrument that is accounted for as an investment. Credit and interest rate risks related to this investment are described in Note NET POSITION Net position represents the difference between assets and liabilities. An analysis of net position amounts is as follows: 32

137 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 December 31, Net investment in capital assets Net property, plant, and equipment in service $ 565,794 $ 543,603 Debt subject to capital improvements (603,175) (613,935) Swap liability net of deferred outflow (18,151) (17,789) Accounts payable for capital items (2,872) (5,325) Funded debt from restricted assets: Unspent debt proceeds: Capital projects 6,316 33,106 Debt service and reserve funds 8,348 7,990 (43,740) (52,350) Restricted for capital activity and debt service: Restricted cash and cash equivalents 3,164 3,479 Restricted investments 20,621 46,729 Liabilities payable from restricted assets: Unspent debt proceeds: Capital projects (6,316) (33,106) Debt service and reserve funds (8,348) (7,990) 9,121 9,112 Unrestricted (7,897) (267) Total net position $ (42,516) $ (43,505) 11. OPERATING LEASE The Authority leases office space. The term of the lease is for twenty years commencing on August 1, 2007 and ending on July 31, The lease is subject to an automatic roll-over for five years, if the Authority does not communicate in writing one year prior to expiration that is desires not to extend the lease. The general terms of the lease requires the lessor to provide for utilities, building repairs, maintenance, and real estate taxes. The total minimum future commitments under the lease for year ending December 31, 2012 are as follows: 33

138 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND $ , $ 3,250 9,654 The total annual rental for office space was approximately $616 and $599 for 2012 and 2011 respectively. 12. COMMITMENTS AND CONTINGENCIES The Authority is proceeding with a capital improvement program which the Authority's independent engineer has estimated will entail expenditure of the existing construction funds and potential future bond issues. As of December 31, 2012, $72 million of the program is complete and $65.5 million is under active contract. During July 2012, the Authority contracted with Veolia Water North America (Veolia), an outside management company to direct is operations. The term of the contract is for one year with an optional 6 month extension. Veolia will be paid $150,572 per month. In addition, there are various Key Performance Indicators (KPIs) which if met will earn Veolia a maximum aggregate of $450,000. Each KPI will have a well-defined and measurable objective against which achievement may be measured. As of December 31, 2012, there have not been any payments relating to KPIs. In addition to the matters discussed in below and in Note 13, Consent Agreement, various other claims and lawsuits are pending against the Authority. The ultimate outcome of these claims and lawsuits cannot presently be determined and, accordingly, no provision for amounts arising from settlements has been made in these financial statements. In the opinion of management, the effect on the financial statements of potential losses associated with any such claim and/or lawsuit should not be material. The Authority was insured for general liability coverage through 2001; however, effective January 1, 2002, it became self-insured. In previous years, the Authority established a fund to pay for deductibles, small claims, and other litigation costs. At year-end, the balance in this fund was approximately $579. This fund is grouped with "Restricted Assets" on the 34

139 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 statements of net position. During 2012 and 2011, the Authority paid $0 from this fund for claims, and there is $0 and $0 accrued as of December 31, 2012 and 2011, respectively. Also in 2010, the Authority implemented a change in its water and sewer line warranty program, engaging a new provider, Utility Line Security, LLC (ULS), and changing from an opt-in to an opt-out program. In March of 2011, it was determined in the Court of Common Pleas of Allegheny County that this program unfairly competed with those offered by private line warranty vendors and the program was ordered to be shut down. In final settlement with ULS, which declared bankruptcy in 2011, $350,000 was paid to ULS by the Authority in January of 2012 in settlement of outstanding issues. During 2013, a complaint was filed against the Authority arising out of a flooding incident that occurred in August 2011 on Washington Boulevard, at the intersection of Negley Run Road and Allegheny River Boulevard in the City of Pittsburgh. The plaintiffs have asserted the Authority was negligent in the maintenance and operations of the sewer lines beneath Washington Boulevard. The Authority plans to file a response. The Authority has recorded a provision for their liability limitation on the Statement of Net Position. 13. CONSENT AGREEMENT The Authority is subject to federal regulation under the Clean Water Act (1977) and regulations adopted under that Act. Among the specific requirements applicable to the Authority s system are those imposed by the United States Environmental Protection Agency s Combined Sewer Overflow (CSO) Policy (1994). On January 29, 2004, the Authority and the City of Pittsburgh executed a Consent Order and Agreement (Order) regarding wet weather sewer overflows within the City. The other signatories to the Order are the Pennsylvania Department of Environmental Protection (DEP) and the Allegheny County Health Department (ACHD). Generally, the Order requires the Authority and the City to assess the City sewers in order to develop a plan with ALCOSAN to address wet weather sewer overflows within the City. The Order is part of a sewer assessment program for all municipalities served by ALCOSAN. To date, assessment activities have been completed for all accessible critical sewers and separate sanitary sewers with the exception of any additional sewers discovered through continued research and investigation. Ongoing pipe and manhole repairs are being completed in order to provide CCTV access to remaining inaccessible critical/sanitary sewer pipes. Assessment activities for non-critical sewers are to be completed on a longer schedule, including completing CCTV at an annual average rate that was utilized to complete the critical/sanitary televising. The majority of accessible non-critical manholes have been 35

140 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2012 AND 2011 inspected with ongoing efforts to complete any remaining or newly identified. In addition to the assessment, the Order requires the Authority and the City to implement the Nine Minimum Controls to reduce combined sewer overflows, and to perform repairs and maintenance of deficiencies revealed by the assessment. The Authority maintains an expedited response to significant structural failures of the sewer system where imminent structural failures are determined by a professional engineer and prioritized for repair. Ongoing sewer line replacement, point repair, lining, point lining, and Gunite projects have been implemented to address structural deficiencies. Given the scope of the Order, the size of the City sewer system, and the various conditions and/or deficiencies that may be discovered by the assessment, it is difficult to predict the total cost of compliance with the Order. Moreover, it is difficult to predict what, if any, largescale and/or regional capital improvements may be required after the completion of the assessment to address wet weather sewer overflows in the City and in the ALCOSAN service area. The Authority has hired two engineering firms to assess and model the sewer system, and it is moving forward with its plans to comply with the Order which are due to DEP in July, Costs associated with Order compliance will be reflected in the capital improvement program and funded by proceeds of potential future bond issuances. 14. SUBSEQUENT EVENT During January 2013, the Authority was awarded a $7 million low-interest loan from the Pennsylvania Infrastructure Investment Authority for maintenance and repairs project. Approximately $3 million of the loan will go towards repairs, maintenance, and replacement of valves in the water distribution lines and replacement of fire hydrants. The remainder of the loan will be used for sewer maintenance and reconstruction at several sites throughout the city. The loans are being funded through the Commonwealth of Pennsylvania and a federal portion from the United States Department of Environmental Protection. 36

141 Supplementary Information

142 PITTSBURGH WATER AND SEWER AUTHORITY SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS YEAR ENDED DECEMBER 31, 2012 Federal CFDA Federal Grantor/Pass-Through Grantor/Program Title Number Expenditures United States Department of Environmental Protection: Passed through the Pennsylvania Department of Environmental Protection: ARRA - Capitalization Grants for Drinking Water State Revolving Funds $ 1,617,269 Total Expenditures of Federal Awards $ 1,617,269 See accompanying notes to schedule of expenditures of federal awards. 37

143 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS YEAR ENDED DECEMBER 31, BASIS OF PRESENTATION The accompanying schedule of expenditures of federal awards of the Pittsburgh Water and Sewer Authority is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts may differ from amounts presented in, or used in the preparation of the basic financial statements. 2. BASIS OF ACCOUNTING The information in this schedule is presented using the accrual method of accounting. 3. DETERMINATION OF FEDERAL EXPENDITURES The amount of federal expenditures for the United States Department of Environmental Protection loan represents the expenditures incurred under the loan during the year ended December 31,

144 Pittsburgh Water and Sewer Authority Independent Auditor s Reports in Accordance with OMB Circular A-133 Year Ended December 31, 2012

145 Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Board of Directors Pittsburgh Water and Sewer Authority We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the Pittsburgh Water and Sewer Authority (Authority) as of and for the year ended December 31, 2012, and the related notes to the financial statements, which collectively comprise the Authority s basic financial statements, and have issued our report thereon dated April 29, Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Authority s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Authority s internal control. Accordingly, we do not express an opinion on the effectiveness of the Authority s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the Authority s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Authority's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. 39

146 Board of Directors Pittsburgh Water and Sewer Authority Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Others Matters Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Authority s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Maher Duessel Pittsburgh, Pennsylvania April 29,

147 Independent Auditor s Report on Compliance for the Major Federal Program and Report on Internal Control over Compliance Required by OMB Circular A-133 Board of Directors Pittsburgh Water and Sewer Authority Report on Compliance for the Major Federal Program We have audited the Pittsburgh Water and Sewer Authority s (Authority) compliance with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that could have a direct and material effect on the Authority s major federal program for the year ended December 31, The Authority s major federal program is identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal program. Auditor s Responsibility Our responsibility is to express an opinion on compliance for the Authority s major federal program based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on the major federal program occurred. An audit includes examining, on a test basis, evidence about the Authority s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for the major federal program. However, our audit does not provide a legal determination of the Authority s compliance. Opinion on the Major Federal Program In our opinion, the Authority complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended December 31, Report on Internal Control over Compliance Management of the Authority is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Authority s internal control over compliance with 41

148 Board of Directors Pittsburgh Water and Sewer Authority Independent Auditor s Report on Compliance for the Major Federal Program and Report on Internal Control Over Compliance the types of requirements that could have a direct and material effect on the major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for the major federal program and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Authority s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of OMB Circular A-133. Accordingly, this report is not suitable for any other purpose. Maher Duessel Pittsburgh, Pennsylvania April 29,

149 PITTSBURGH WATER AND SEWER AUTHORITY SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED DECEMBER 31, 2012 I. Summary of Audit Results 1. Type of auditor s report issued: Unqualified 2. Internal control over financial reporting: Material weakness(es) identified? yes no Significant deficiencies identified that are not weakness(es)? yes none reported considered to be material 3. Noncompliance material to financial statements noted? yes no 4. Internal control over major programs: Material weakness(es) identified? yes no Significant deficiencies identified that are not considered to be material weakness(es)? yes none reported 5. Type of auditor s report issued on compliance for major programs: Unqualified 6. Any audit findings disclosed that are required to be reported in accordance with Section 510(a) of Circular A-133? yes no 7. Major Programs: CFDA Number(s) Name of Federal Program or Cluster ARRA - Capitalization Grants for Drinking Water State Revolving Funds 8. Dollar threshold used to distinguish between type A and type B programs: $300, Auditee qualified as low-risk auditee? yes no II. Findings related to the financial statements which are required to be reported in accordance with GAGAS. No matters were reported. III. Findings and questioned costs for federal awards. No matters were reported. 43

150 PITTSBURGH WATER AND SEWER AUTHORITY SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS YEAR ENDED DECEMBER 31, 2012 No Findings in Prior Year 44

151 Pittsburgh Water and Sewer Authority Single Audit 2011

152 PITTSBURGH WATER AND SEWER AUTHORITY YEARS ENDED DECEMBER 31, 2011 AND 2010 TABLE OF CONTENTS Independent Auditor s Report Management s Discussion and Analysis i Financial Statements: Statements of Net Assets 1 Statements of Revenues, Expenses, and Changes in Net Assets 3 Statements of Cash Flows 4 Notes to Financial Statements 5 Supplementary Information: Schedule of Restricted Assets Composition Schedule I 38 Schedule of Restricted Assets Activity Schedule II 40 Schedule of Expenditures of Federal Awards 42 Notes to Schedule of Expenditures of Federal Awards 43 Independent Auditor s Reports in Accordance with OMB Circular A-133: Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 44 Independent Auditor s Report on Compliance with Requirements that Could Have a Direct and Material Effect on its Major Program and on Internal Control over Compliance in Accordance with OMB Circular A

153 PITTSBURGH WATER AND SEWER AUTHORITY YEARS ENDED DECEMBER 31, 2011 AND 2010 TABLE OF CONTENTS (Continued) Schedule of Findings and Questioned Costs 48 Summary Schedule of Prior Audit Findings 49

154 Board of Directors Pittsburgh Water and Sewer Authority Independent Auditor s Report We have audited the financial statements of the Pittsburgh Water and Sewer Authority (Authority), a component unit of the City of Pittsburgh (City), Pennsylvania, as of and for the years ended December 31, 2011 and 2010, which collectively comprise the Authority s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the Authority's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Authority as of December 31, 2011 and 2010, and the changes in financial position, and cash flows, where applicable, thereof for the years then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated April 24, 2012 on our consideration of the Authority s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages i through vi be presented to supplement the basic financial statements. Such information, although not part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

155 Board of Directors Pittsburgh Water and Sewer Authority Independent Auditor s Report Page 2 Our audits were conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Authority s financial statements as a whole. The supplementary information listed in the table of contents is presented for purposes of additional analysis and is not a required part of the basic financial statements. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is also not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. Maher Duessel Pittsburgh, Pennsylvania April 24, 2012

156 THE PITTSBURGH WATER AND SEWER AUTHORITY 2011 Financial Statements Management s Discussion and Analysis The Pittsburgh Water and Sewer Authority (Authority) comparative 2011 and 2010 fiscal year financial statements enclosed have been conformed to meet the requirements of Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments. The financial statements incorporate three basic statements: the Statements of Net Assets, the Statements of Revenues, Expenses, and Changes in Net Assets, and Statements of Cash Flows. This Management s Discussion and Analysis (MD&A) is based upon facts, decisions, and conditions known as of the date of the audit report. Please note that the historical information provided in the financial statements and MD&A reflect the results of past operations and is not necessarily indicative of results of future operations. Future operations will be affected by various factors, including, but not limited to, regulatory mandates, rate changes, weather, labor contracts, population changes, business environment and other matters, the nature and effect of which cannot now be determined. Using This Financial Report Overview of Reporting Changes The Statements of Net Assets present information about the resources which are available to the Authority and claims against these resources. Both assets and liabilities are classified in a format which segregates current from long-term. In addition, assets available for special purposes labeled restricted assets are segregated from those assets available for operations. The Authority s restricted assets represent money on deposit with the bond trustee to meet indenture, debt service, and construction program requirements. Liabilities have a similar classification segregating claims on restricted assets from claims on assets available for operations. The net asset section of the balance sheet classifies the total net asset (deficit), as invested in capital assets, restricted for capital activity, and unrestricted. The Statements of Revenues, Expenses, and Changes in Net Assets summarize operating and nonoperating activity for the fiscal year and the resulting impact on the Authority s net assets. The Statements of Revenues, Expenses, and Changes in Net Assets include wastewater treatment revenues and expenses for services provided by the Allegheny County Sanitary Authority (ALCOSAN). There are no outstanding bond issues associated directly or indirectly with wastewater revenue streams. The Statements of Cash Flows have been prepared using the direct method. The statements provide an analysis of the Authority s cash by operating, investing and capital and related financing activities over the respective fiscal year. Financial Highlights In 2011, operating income increased by 12.3% or $3.85 million and non-operating income decreased by $22.56 million resulting in a net loss of $13.34 million, down from a $5.31 million net gain in Below are the 2011 financial highlights: Total operating revenues in 2011 were up $.799 million or.6% to $ million when compared to For 2011, the Board of ALCOSAN did not change its rate structure and wastewater treatment revenues dropped $5.68 million due to a significant credit adjustment to a major industrial user and reduced consumption. Water and sewer conveyance revenues increased $6.46 million from 2010, due to a rate increase of 7.7% and an increase to 7% from 5% in the Distribution Infrastructure System Charge (DISC) on total water and sewer conveyance bills. Total non-operating revenues (expenses) decreased by $22.56 million, mostly driven by a $12.38 million reduction in the fair market value of the 2008C2 swap contract as contrasted to a $.309 million decrease in Donated property revenue was $2.277 million, a decrease of $ million when compared to 2010, a year in which $7.75 million in assets finished in prior years were recognized. Non-operating i

157 revenues for grants declined to zero and interest revenue increased by $.159 million to $.709 million due to higher market rates. Total operating expenses decreased in 2011 to $ million compared to $ million in Significant operating expenses included the following factors:! Salary and employee benefit expenses were up $.431 million or 2.6%. The increase is attributed to an average overall salary increase of 2.9% and a 1.7% increase in benefit costs. The majority of Authority employees are represented by one of three labor unions. The Pittsburgh Joint Collective Bargaining Committee (PJCBC) represents blue-collar employees. The American Federation of State, County, and Municipal Employees (AFSCME) represent Local 2719 [white-collar] employees and Local 2037 [foremen]. A new five-year agreement with AFSCME became effective January 1, 2009 and will expire December 31, A five-year agreement with the PJCBC became effective January 1, 2008 and expires December 31, 2012.! Overall direct operating expenses, excluding salaries and benefits, decreased by $3.75 million to $56.15 million in 2011 or 6.3% from $59.90 million in Wastewater treatment expense decreased by $5.32 million or 11% to $43.47 million when compared to $48.79 million in 2010 due to adjustments and reduced consumption. Chemicals expense increased by $.125 million. Equipment increased by $.905 million. Sewer repairs increased to $.586 million in 2011, from $.55 million in Vactor debris removal expense increased slightly to $.314 million. Emergency water line repairs decreased by $.224 million to $.325 million or 41% from $.548 million in Catch basin cleaning increased by $.91 million to $.203 million or 81.6% from Building repairs increased by $.139 million due primarily to work done at the main warehouse and several pumping stations. Annual software support decreased $.355 million as support needs for SAP declined in preparation for a new ERP implementation of Microsoft s Dynamics GP Systems developed by Cogsdale.! Overall G&A expenses increased 13.2%, to $9.58 million from $8.46 million in Significant expense reductions were a $.286 million drop in legal expenses and $.170 million reduction in consultants. Significant expense increases were $.114 million in postage, $.100 million in Miscellaneous Services, and $1.33 million in claims and deductibles.! Overall other expenses decreased 2.4% or $1.54 million to $63.05 million in 2011 from $64.59 million in Non-city water subsidy to Pennsylvania American Water Company (PAWC) decreased 29.7% or $.693 million to $1.63 million in 2011 compared to $2.33 million in 2010 due to the 2011 PWSA rate increase. Interest expense on bond debt decreased 5.4% or $2.23 million to $38.99 million in 2011 compared to $41.2 million in Expenses related to the cooperation agreement with the City of Pittsburgh increased by $.500 million in 2011.! In 2011, cash collections increased by $2.39 million or 1.7%. Increases in the Authority s DISC charge by 2% and a 7.7% on water and sewer conveyance provided most of the increase, while a decrease in water usage, as is occurring at water systems nationwide, precluded a larger net increase. This was the third year in a row that the Authority collected more than 100% of its billings. These continuing improvements in collections resulted in a drop in bad debt reserve of $.493 million from ii

158 Other 2011 highlights include:! After an extensive review process lasting over a year, the Authority committed in 2010 to the purchase of a new Enterprise Resource Program (ERP) to serve its business computing needs. From a list of three strong final candidates, it was decided to award the contract to Cogsdale Corporation, a Microsoft Dynamics Gold partner. The implementation proceeded in 2011, with finance scheduled to go live in January 2012 and other departments to phase in shortly after. The Authority is projected to save significant programming costs and achieve numerous operating efficiencies with this new system.! The Authority continued its relationship with Jordan Tax Service, Inc. (JTS) as its Collector and the law firm of Goehring, Rutter & Boehm, P.C. as Special Legal Counsel for the collection of delinquent water, sewer, and sewage treatment charges. The agreement calls for a collection commission, plus other administrative and legal proceeding costs to be added to all Authority delinquent claims not paid within 90 days of the initial billing date. If fully collected, the Authority stands to collect 100% of delinquent balances without incurring a collection agency fee. The Authority is reimbursing JTS for commissions lost and expenses for certain accounts that have been recalled from collections. Said reimbursements totaled $.035 million in 2011, but the Authority and JTS are in negotiation on this sum. The JTS collected $2.789 million, of which the Authority received $2.425 million during 2011.! In January of 2010, the Authority began assessing a 5% Distribution Infrastructure System Charge (DISC) on all bills, which increased to 7% in This charge is applied to the water and sewer conveyance components of the invoice and is dedicated to system improvements and capital needs. The DISC collection total in 2010 was $4.16 million, with no expenditures. It was decided to allow funds to accumulate the first year, and then budget expenditures for 2011 from the funds received in The 2011 budget for DISC expenditures was $6.38 million, of which $5.114 million was spent. This leaves a reserve of $5.104 million in DISC fund revenues at year-end. The expenditures for 2011 included water and sewer relays, new vehicles, flocculation equipment, and computer switching.! Also in 2010, the Authority implemented a change in its water and sewer line warranty program, engaging a new provider, Utility Line Security, LLC, and changing from an optin to an opt-out program. In March of 2011, it was determined in the Court of Common Pleas of Allegheny County that this program unfairly competed with those offered by private line warranty vendors and the program was ordered to be shut down. In final settlement with ULS, which declared bankruptcy in 2011, $.350 million was paid to ULS by PWSA in January of 2012 in settlement of outstanding issues.! The Authority in June of 2010 entered into an agreement with Iron City Brewing to settle the outstanding account receivable balance from operations at its former Lawrenceville plant. The Authority received $.45 million in January of 2011 pursuant to said agreement and received the payment of a remaining $.20 million balance in January 2012, settling the account in full.! In July of 2010, the Authority approved development of a 40-year Capital Plan and Water & Sewer Master Plan (plan). The plan will be developed in order to assist the Authority in assessing its long range infrastructure and financing needs. Such planning should enable the Authority over time to mitigate CSO issues, rehabilitate its aging infrastructure and clearwell, reduce non-revenue water, and comply with new THM regulations. Plan development continued in 2011 with a final version to be issued in iii

159 ! The Authority, in an attempt to reduce water system material costs related to its operating and DISC repairs contracts decided in 2010 to directly purchase pipe, valves, and fittings to be used in said contracts. It is felt that the discounts achieved through bulk purchase of these items and the elimination of contractor markup from these items if purchased by the contracting firms could generate substantial savings. This process started in early 2011.! In July of 2010, the Authority contracted with Wachs Valve & Hydrant, LLC to test and map all valves 12 and above for defects and to make needed repairs. The contract was completed in September of This project generated direct savings of roughly $.250 million in repair of valves that had been targeted for replacement and generated vital valve location and condition data for future capital planning.! Debt service coverage in 2011 and 2010 was 1.87 for both years. These coverage factors exceed the 1.2 coverage factor required under the bond covenant.! The Authority expended $35.56 million on capital projects in 2011, a decrease of $6.21 million over the $41.77 million expended in In December of 2011, $36.34 million remained in the 2008 construction fund. Of $36.80 million budgeted in PennVest loans, $12.87 million was spent in 2011, with $7.73 million remaining. It should be noted that the DISC program is now funding some larger projects that would have historically been paid for with capital dollars. These projects totaled $1.461 million in 2011.! There was a limited amount of bond related activity for the Authority in The only occurrences of note were the renewal of two standby purchase agreements and the renewal of three securitizing letters of credit. These agreement renewals were on bond series totaling $ million. The Authority renewed the standby purchase agreements on the Series 2008 C2 (face $51.89 million) and 2008 D2 (face $71.23 million) bonds for two years, expiring August of 2014 with JP Morgan Chase and PNC Bank, respectively. The Authority renewed lines of credit on the Series 2008 B1 (face $72.75 million) with Bank of America, Series 2008 B2 (face $72.75 million) with PNC Bank, and Series 2008 C1 (A, B, & C) bonds with FHLB. It should be noted that these credit facilities were all renewed at better rates than in recent years, reflecting a return to relative stability in the bond financing markets! The City of Pittsburgh is the largest of the 83 municipalities that convey raw sewage to ALCOSAN for treatment. In January 2004, the Authority and the City of Pittsburgh executed a Consent Order and Agreement (Order) regarding sanitary and combined sewer overflows within the City of Pittsburgh. The other signatories to the Order are the Pennsylvania Department of Environmental Protection and Allegheny County Health Department which executed the Order on April 21, The intent of the Order is to develop a regional Long-Term Control Plan to address combined and sanitary sewer overflows and ultimately improve water quality. The Order does not contain fines or penalties for past non-compliance, but does propose binding obligations for work on a going forward basis. The Authority continues to meet the requirements of the Order. See Note 12 - Commitments and Contingencies for additional details.! The City of Pittsburgh remained under financial stress in The Authority has three agreements with the City of Pittsburgh. The Authority leases the water and sewer system under the Capital Lease, which was fully funded in The Authority makes payment to the City of Pittsburgh for direct and indirect services under the Cooperation iv

160 Agreement. Under this Agreement, the Authority also funds, on behalf of the City of Pittsburgh, a rate equalization subsidy to other City of Pittsburgh water companies. Under a separate agreement the Authority also, on behalf of the City of Pittsburgh, is required to purchase delinquent wastewater treatment receivables. The Authority is financially selfsufficient and should not be adversely affected by any bankruptcy filing by the City of Pittsburgh. Any other actions by the City of Pittsburgh to increase Authority funding would require Board approval. CONDENSED FINANCIAL STATEMENTS CONDENSED STATEMENTS OF NET ASSETS (Dollars expressed in thousands) December 31, Variance Dollars % Capital assets: Increase (Decrease) Producing assets $ 481,142 $ 475,701 $ 5, % Construction in progress 62,461 41,328 21, % Restricted assets 50,208 78,070 (27,862) -35.7% Current assets and bond costs 192, ,613 68, % Total Assets $ 785,882 $ 718,712 $ 67, % Liabilities: Current liabilities $ 58,654 $ 63,585 $ (4,931) -7.8% Long-term liabilities 770, ,294 85, % Total Liabilities 829, ,879 80, % Net Assets (Deficit): Invested in capital assets, net of related liabilities (52,350) (35,080) (17,270) 49.2% Restricted for capital activity and debt service 9,112 11,053 (1,941) -17.6% Unrestricted (267) (6,140) 5, % Total Net Assets (Deficit) (43,505) (30,167) (13,338) 44.2% Total Liabilities and Net Assets (Deficit) $ 785,882 $ 718,712 $ 67, % v

161 CONDENSED STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS (Dollars expressed in thousands) Year Ended December 31, Variance Dollars % Increase (Decrease) Operating Revenues $ 140,552 $ 139,753 $ % Operating Expenses: Direct operating 37,976 36,393 1, % Wastewater treatment 43,468 48,788 (5,320) -10.9% Cooperation Agreement 9,150 8, % Subsidy of non-customer City residents 1,633 2,326 (693) -29.8% Depreciation and amortization 13,300 12, % Total Operating Expenses 105, ,577 (3,050) -2.8% Operating Income 35,025 31,176 3, % Non-operating revenues (expenses): Federal grants - 52 (52) % Donated property 2,277 15,100 (12,823) -84.9% Interest revenue (11,671) 241 (11,912) % Interest expense and other (38,969) (41,198) 2, % Total Non-operating Revenues (Expenses) (48,363) (25,805) (22,558) 87.4% Net Gain/(Loss) $ (13,338) $ 5,371 $ (18,709) % Financial Condition The Authority s financial condition in 2011 remained stable for an eighth consecutive year despite the continuing issues in the national economy. Water utility revenues increased significantly to $95.29 million from $88.83 million. The 7.7% rate increase passed for 2011, receipt of cash payments for funds advanced related to PennVest projects, and continuing improvement in the financial markets remedied the 2010 cash reduction, resulting in an increase in cash reserves of $4.214 million to $ million. The Authority s strategic plan continues to focus on improving its financial condition, customer service, improving internal efficiencies, maintaining regulatory compliance and security, while providing an environment that encourages employee development. Requests for Information This financial report is designed to provide a general overview of the Authority s finances for all those with an interest in the government s finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Executive Director, Penn Liberty Plaza I, 1200 Penn Avenue, Pittsburgh, PA vi

162 PITTSBURGH WATER AND SEWER AUTHORITY STATEMENTS OF NET ASSETS (Dollars expressed in thousands) DECEMBER 31, 2011 AND 2010 Assets Current assets: Cash and cash equivalents $ 41,676 $ 37,129 Accounts receivable, net: Water: Billed 8,557 9,581 Unbilled 5,414 4,115 Total water 13,971 13,696 Wastewater treatment: Billed 2,679 4,194 Unbilled 2,800 2,201 Total wastewater treatment 5,479 6,395 Other receivables 4,722 7,853 Total accounts receivable, net 24,172 27,944 Prepaid expenses Inventory 1,718 1,649 Total current assets 67,777 67,155 Noncurrent assets: Restricted assets: Accrued interest receivable - 78 Cash and cash equivalents 3,479 3,812 Investments 46,729 74,180 Total restricted assets 50,208 78,070 Capital assets, not being depreciated 62,461 41,328 Capital assets, net of accumulated depreciation 481, ,701 Deferred outflow 100,118 31,447 Bond issue costs, net of accumulated amortization 24,176 25,011 Total noncurrent assets 718, ,557 Total Assets $ 785,882 $ 718,712 The notes to financial statements are an integral part of this statement. (Continued) 1

163 PITTSBURGH WATER AND SEWER AUTHORITY STATEMENTS OF NET ASSETS (Dollars expressed in thousands) DECEMBER 31, 2011 AND 2010 (Continued) Liabilities and Net Assets (Net Deficits) Liabilities: Current liabilities: Bonds and loans payable, current portion $ 14,888 $ 15,711 Accrued payroll and related obligations Accounts payable wastewater treatment 16,305 17,631 Accounts payable and other accrued expenses 10,195 11,700 Accounts payable from restricted assets 5,325 6,308 Accrued interest payable from restricted assets 11,279 11,563 Total current liabilities 58,654 63,585 Noncurrent liabilities: Deferred revenue Accrued payroll and related obligations 972 1,045 Swap liability 117,907 36,856 Bonds and loans payable, net of current portion 651, ,079 Total noncurrent liabilities 770, ,294 Total Liabilities 829, ,879 Net Assets (Deficit): Invested in capital assets, net of related debt (52,350) (40,489) Restricted for capital activity and debt service 9,112 11,053 Unrestricted (267) (731) Total Net Assets (Deficit) (43,505) (30,167) Total Liabilities and Net Assets (Deficit) $ 785,882 $ 718,712 (Concluded) The notes to financial statements are an integral part of this statement. 2

164 PITTSBURGH WATER AND SEWER AUTHORITY STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS (Dollars expressed in thousands) YEARS ENDED DECEMBER 31, 2011 AND Operating Revenues: Residential, commercial, and industrial water sales $ 95,290 $ 88,829 Wastewater treatment 43,548 49,223 Other 1,714 1,701 Total operating revenues 140, ,753 Operating Expenses: Direct operating expenses 37,976 36,393 Wastewater treatment 43,468 48,788 Cooperation agreement operating expenses: Indirect cost allocation - sewer conveyance 4,400 4,500 Indirect cost allocation - water 4,750 4,150 Expense of water provided by other entities: Subsidy of customers located in the City 1,633 2,326 Depreciation 11,810 10,929 Amortization of capitalized lease assets 1,490 1,491 Total operating expenses 105, ,577 Operating Income 35,025 31,176 Non-operating Revenues (Expenses): Federal grants - 52 Donated property 2,277 15,100 Interest revenue Investment income - change in fair market value of swap (12,380) (309) Interest expense - bonds (36,747) (39,202) Interest expense - other (422) (185) Amortization of bond issue costs (1,800) (1,811) Total non-operating revenues (expenses) (48,363) (25,805) Net Income (Loss) (13,338) 5,371 Net Assets (Deficit): Beginning of year (30,167) (35,538) End of year $ (43,505) $ (30,167) The notes to financial statements are an integral part of this statement. 3

165 PITTSBURGH WATER AND SEWER AUTHORITY STATEMENTS OF CASH FLOWS (Dollars expressed in thousands) YEARS ENDED DECEMBER 31, 2011 AND Cash Flows From Operating Activities: Cash received from customers $ 148,136 $ 140,650 Cash paid to suppliers and employees and customer refunds (43,208) (35,529) Cash paid to City of Pittsburgh under the Cooperation Agreement (9,150) (8,650) Cash paid to other water companies for subsidy of customers located in the City of Pittsburgh (1,633) (2,326) Cash paid to ALCOSAN for wastewater treatment (44,794) (46,860) Net cash provided by (used in) operating activities 49,351 47,285 Cash Flows From Investing Activities: Purchase of investment securities (116,844) (329,022) Proceeds from sale and maturities of investment securities 122, ,090 Interest income Net cash provided by (used in) investing activities 6,789 26,618 Cash Flows From Capital and Related Financing Activities: Purchase/construction of property, plant, and equipment (16,766) (43,997) Proceeds from federal grants - 52 Proceeds from Pennvest Loans 15,506 9,359 Payment made for bond reoffering costs (965) (1,062) Principal payments on debt (16,748) (16,435) SWAP receipts 801 1,057 SWAP payments (17,016) (18,680) Liquidity and remarketing fees (5,232) (4,381) Interest paid on borrowings (11,506) (12,460) Net cash provided by (used in) capital and related financing activities (51,926) (86,547) Increase (Decrease) in Cash and Cash Equivalents 4,214 (12,644) Cash and Cash Equivalents: Beginning of year 40,941 53,585 End of year $ 45,155 $ 40,941 Consists of: Restricted cash and cash equivalents $ 3,479 $ 3,812 Unrestricted cash and cash equivalents 41,676 37,129 $ 45,155 $ 40,941 Reconciliation of Operating Income to Net Cash Provided by (Used in) Operating Activities: Operating income $ 35,025 $ 31,176 Adjustments to reconcile operating income to net cash provided by (used in) operating activities: Depreciation and amortization 13,300 12,420 Reserve for uncollectible amounts (393) (1,746) Change in: Accounts receivable - water and wastewater 1,034 2,570 Other accounts receivable 3,131 (6,776) Wastewater accounts payable (1,326) 1,928 Accounts payable and other accrued expenses (1,505) 7,599 Other Net cash provided by (used in) operating activities $ 49,351 $ 47,285 The notes to financial statements are an integral part of this statement. 4

166 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND ORGANIZATION The Pittsburgh Water and Sewer Authority (Authority) provides water to approximately 80,000 residential, commercial, and industrial customers located in the City of Pittsburgh (City), Pennsylvania, and collects wastewater throughout the City. A Board of Directors (Board) appointed by the Mayor of the City governs the Authority. The Authority is a body politic and corporate, organized and existing under the Pennsylvania Municipalities Authorities Act. The Authority was established by the City in 1984 to assume responsibility from the City for management, operation, maintenance, and improvement of virtually the entire City water supply, distribution, and wastewater collection systems (the "Water and Wastewater System" or "System"). The Authority s term of existence is through At inception, the City contributed $5.3 million to the Authority in the form of customer accounts receivable. The Authority has the right to establish user fees and charges without being subject to the approval of any department, board, or agency of Pennsylvania or the City. The Authority is also authorized to issue bonds and notes payable solely from the Authority's revenues. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reporting Entity These financial statements present the financial position, income, changes in net assets, and cash flows of the Authority. The Authority is a component unit of the City as defined in Governmental Accounting Standards Board (GASB) Statement No. 14, Financial Reporting Entity. The Authority's financial statements are not intended to present the financial position or results of operations of the City taken as a whole. Basis of Accounting and Measurement Focus The accompanying financial statements have been prepared using the economic resources measurement focus and the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America, as prescribed by GASB. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. 5

167 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Private-sector standards of accounting and financial reporting issued prior to December 1, 1989 generally are followed in the proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the GASB. Governments also have the option of following subsequent private-sector guidance for their business-type activities and enterprise funds, subject to this same limitation. The Authority has elected not to follow subsequent private-sector guidance. The Authority functions as a Business-Type Activity, as defined by GASB. Classification of Net Assets In accordance with the provision of GASB Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, net assets are classified into three components invested in capital assets, net of related debt; restricted; and unrestricted. These classifications are defined as follows:! Invested in capital assets, net of related debt This component of net assets consists of capital assets net of accumulated depreciation and reduced by the outstanding balances of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets net of bond issue costs, premiums and discounts and remaining deferred refunding losses.! Restricted This component of net assets consists of constraints placed on net asset use through external restrictions.! Unrestricted This component of net assets consists of net assets that do not meet the definition of restricted or invested in capital assets, net of related debt. When an expense is incurred that can be paid using either restricted or unrestricted resources, the Authority s policy is to first apply the expense towards restricted resources and then towards unrestricted resources. Deferred Interest Interest expense, net of related earnings on funds restricted for the purpose of capital improvements, is deferred and allocated to the cost of capital assets. Accordingly, during 2011, the Authority s interest expense of $1,185, net of deferred interest earnings of $0, resulted in net capitalized interest expense of $1,185. During 2010, the Authority s interest expense of $1,140, net of deferred interest earnings of $24, resulted in net capitalized interest expense of $1,116. 6

168 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments, both restricted and unrestricted, with maturity of three months or less at date of purchase. Bond Issue and Reoffering Costs, Premiums, and Discounts Bond issue and reoffering costs are deferred and amortized over the life of the related bonds using the effective interest method. The unamortized balance is an asset on the statements of net assets. Original issue bond premiums and discounts are amortized over the life of the related bonds using the effective interest method of amortization. The unamortized balance of premiums and discounts is presented net on the statements of net assets as a decrease to bonds payable. Deferred Refunding Loss In accordance with GASB Statement No. 23, Accounting and Reporting for Refunding of Debt by Proprietary Activities, the excess of the reacquisition price over the net carrying amount of debt refunded with proceeds from the Series 1993, 1998, 2003, 2007, and 2008 Bonds were recorded as deferred refunding losses. The deferred refunding losses are being amortized using the effective interest method over the originally scheduled life of the defeased issues which extend to The unamortized balances are reflected as a reduction of bonds payable. Remarketing, Liquidity, and Letter of Credit Fees Associated with the Authority s variable rate bonds, the Authority pays various fees to periodically remarket the bonds and to third parties to provide liquidity in the event that the Authority is unable to remarket the variable rate bonds and needs to repurchase the bonds on a temporary basis until they can be later remarketed. These fees are generally paid quarterly and are calculated as a percentage of the outstanding par amount of the variable rate bonds. Capital Assets Capital assets owned by the Authority are recorded at cost including that portion of deferred interest that is ultimately capitalized. Depreciation of fixed assets owned by the Authority is provided on the straight-line method based on the estimated useful lives of the various 7

169 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 classes of assets. Utility assets have estimated useful lives ranging from 30 to 70 years. Non-utility assets have estimated useful lives ranging from 5 to 10 years. The Authority also receives donated property relating mostly to dedicated water and sewer lines. These assets are capitalized at their estimated fair market value and depreciated in accordance with the estimated useful lives noted above. The water and sewer system represents assets leased from the City. Amortization of capital lease assets is provided on the straight-line basis applying an estimated average remaining useful life from the inception of the lease. Maintenance and repairs are charged to expense as incurred. Clarification of Revenues The Authority has classified its revenues as either operating or non-operating revenues according to the following criteria:! Operating revenues Operating revenues include activities that have the characteristics of exchange transactions, such as residential, commercial, industrial water sales and wastewater treatment.! Non-operating revenues Non-operating revenues include activities that have the characteristics of non-exchange transactions, such as interest income and other revenue sources. Compensated Absences A liability for vacation, personal, and sick days is accrued when related benefits are attributable to services rendered and to the extent it is probable that the Authority will ultimately compensate employees. Inventory Inventory is stated at cost, on a moving average price basis. 8

170 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Pending Pronouncements GASB has issued Statement No. 61, The Financial Reporting Entity: Omnibus, effective for periods beginning after June 15, The objective of this statement is to improve financial reporting for a governmental financial reporting entity by modifying existing requirements for the assessment of potential component units. The effect of implementation of this statement has not yet been determined. GASB has issued Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, effective for periods beginning after December 15, This statement establishes accounting and financial reporting standards for the financial reporting statements of state and local governments by bringing together reporting literature in one place with the guidance modified as necessary. The effect of implementation of this statement has not yet been determined. GASB has issued Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, effective for the year ending December 31, This statement establishes guidance for reporting deferred outflows of resources, deferred inflows of resources, and net position in a statement of financial position. The effect of implementation of this statement has not yet been determined. GASB has issued Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provisions, effective for periods beginning after June 15, The objective of this statement is to clarify whether an effective hedging relationship continues after the replacement of a swap counterparty or a swap counterparty's credit support provider. This statement is an amendment of GASB Statement No. 53 and sets forth criteria that establish when the effective hedging relationship continues and hedge accounting should continue to be applied. The effect of implementation of this statement has not yet been determined. 9

171 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND TRANSACTIONS WITH THE CITY OF PITTSBURGH In 1984, pursuant to a Lease and Management Agreement, the Authority leased the System from the City and assumed responsibility for establishing and collecting user fees and charges and for maintaining and improving the System. The Lease and Management Agreement provided for the City to operate and maintain the System for the Authority subject to the general supervision of the Authority. The City and the Authority agreed to terminate the Lease and Management Agreement in July 1995 and concurrently entered into a Capital Lease Agreement and a Cooperation Agreement (collectively referred to as the "Agreements"). Cooperation Agreement Under the terms of the Cooperation Agreement, City water department employees became employees of the Authority. As a result, the Authority assumed various personnel-related obligations from the City's water department. Other direct costs of the System's water operations are now generally paid directly by the Authority under the Cooperation Agreement, rather than paid by the City and reimbursed by the Authority. The City provides the Authority with various services in accordance with the Cooperation Agreement and the Authority reimburses the City for direct and indirect costs attributed by the City to the operation and maintenance of the System. Under the Agreements, the Authority provides up to 600 million gallons of water annually for the City's use without charge. Also, the Authority assumes the City s obligation for the cost of subsidizing water service to residents of the City situated beyond the Authority's service area so that those water users pay charges that mirror the rates of the Authority. System Leases The Capital Lease Agreement stipulates minimum lease payments of approximately $101 million, all of which were satisfied during the initial three years of the capital lease. The Capital Lease Agreement has a term of thirty years and provides the Authority with the option to purchase the System for one dollar in

172 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Pension Employees of the Authority participate in the City's Municipal Pension Fund Plan (Plan). Employees who became members of the Plan prior to January 1, 1988 are required to contribute 5% of pre-tax pay. Those joining thereafter are required to contribute 4%. Substantially, all the Authority's 2011 payroll of $12,796 was covered by the Plan. Employee contributions for the year amounted to approximately $497. The City's obligations relative to the Plan are determined in accordance with various Pennsylvania statutes. The extent of the Authority's participation in such obligations with respect to those former City employees whose membership continued upon becoming employees of the Authority is determined by the shared interpretation of the City and Authority of the intent of the Cooperation Agreement. The 2011 Minimum Municipal Obligation calculated for the City s Plan indicated a 2011 normal cost of $733 associated with those former City employees whose participation continued upon becoming employees of the Authority as provided by the Cooperation Agreement. The Authority estimates that the normal cost for 2011, together with other elements of expense for employee service during 2011 would not exceed the sum of the 2011 contributions made by the Authority and employees. Uncertainty exists about the future obligation of the Authority and its employees to make contributions to the Plan. Such contributions are contingent upon the continuing eligibility of the Authority's employees to participate in the City's Plan. Eligibility for ongoing employee participation in the City's Plan could end if the Authority were to introduce another pension plan. At this time, the Authority and City have no definite plans to establish another pension plan for the Authority, other than an agreement in principle that the Authority should have its own plan in the future. Future obligations of the Authority to make contributions to the Plan may also be subject to other amendments of the existing arrangement agreed-upon by the Authority and the City. Normal retirement benefits are available upon attainment of age sixty and completion of twenty service years. Early retirement benefits are available upon attainment of age fifty and completion of eight service years. Early retirement benefits may be deferred until age sixty or may be obtained upon retirement at a reduced level. A member who terminates employment after attaining age forty and completing eight service years can sustain eligibility for benefits by continuing contributions through age fifty. A member who terminates employment after attaining fifteen service years, but has been a member since before January 1, 1975, can be vested by continuing contributions through age fifty. 11

173 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Retirement benefits for employees who were members of the Plan are based upon a percentage of either three-year or four-year average pay, depending on date of hire, subject to certain specified minimum monthly benefit amounts. Special membership and benefit rules apply to those experiencing disability. The "pension benefit obligation," which is an actuarial present value of credited projected benefits, is a standardized measure for financial statement disclosure of the present value of pension benefits, adjusted for the effects of projected salary increases, estimated to be payable in the future by the Plan as a result of members' service to date. The measure is intended to help users assess the Plan's funding status on a going concern basis, assess progress made in accumulating sufficient assets to pay benefits when due and make comparisons among public employee retirement systems. The Plan has not reported or attributed measurements of assets or the pension benefit obligation on the basis of the group of members who are Authority employees. Additional information about the Plan and ten-year historical trend information showing the Plan's progress in accumulating sufficient assets to pay benefits when due is presented in the City's Comprehensive Annual Financial Report. 4. REVENUE AND ACCOUNTS RECEIVABLE Water Water sales revenue is recognized as earned during the period when water is supplied to customers. Customers are billed on a monthly billing cycle by the Authority based on actual or estimated meter readings. The Authority recognizes unbilled accounts receivable for water service provided prior to year-end that is billed during the following year. Water accounts receivable are presented net of a reserve for uncollectible amounts. This reserve, based upon historical experience, is recognized coincident with recognition of revenue. At December 31, 2011 and 2010, the reserve for uncollectible water accounts was approximately $13.95 million and $14.2 million, respectively. The Authority has rights to utilize collection agencies, service terminations, liens, and real property sales to protect its interests, limit further losses, and motivate payments from delinquent customers. 12

174 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Wastewater Treatment Although the Authority does not provide wastewater treatment, it assumed responsibility for certain wastewater treatment revenue and expenses beginning in Pursuant to a 1955 agreement, the City was responsible for paying the Allegheny County Sanitary Authority (ALCOSAN) face amounts for delinquent wastewater treatment receivables. Until 1996, the City undertook to bill and collect these delinquent accounts directly. In 1996, the City and the Authority entered into a memorandum of understanding (MOU) whereby the Authority received assets including rights to wastewater treatment receivables assigned by the City and assumed the City's obligation to pay ALCOSAN for delinquencies. During 2004, the Authority and ALCOSAN executed a first amendment to the 1955 agreement whereby the Authority elected to change the billing structure. Effective May 2004, the Authority began direct billing City residents for current and delinquent wastewater treatment charges and remitting to ALCOSAN the aggregate amount of service charges billed. Wastewater treatment activity and the related assets and liabilities appear on the statements of revenue, expenses and changes in net assets and the statements of net assets, respectively. At December 31, 2011 and 2010, the reserve for uncollectible wastewater accounts was approximately $6.71 million and $6.84 million, respectively. 5. CAPITAL ASSETS Capital assets consisted of the following at December 31, 2011 and 2010: 13

175 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Balance at Balance at January 1, December 31, 2011 Additions Transfers 2011 Capital assets not being depreciated: Construction in progress $ 41,328 $ 36,913 $ (15,780) $ 62,461 Capital assets being depreciated: Water and sewer system 102, ,167 Utility assets 563,550 17, ,354 Non-utility assets 17, ,043 Total capital assets being depreciated 682,823 18, ,564 Total capital assets 724,151 55,654 (15,780) 764,025 Accumulated depreciation (207,122) (13,300) - (220,422) Capital assets, net $ 517,029 $ 42,354 $ (15,780) $ 543,603 Balance at Balance at January 1, December 31, 2010 Additions Transfers 2010 Capital assets not being depreciated: Construction in progress $ 25,548 $ 48,700 $ (32,920) $ 41,328 Capital assets being depreciated: Water and sewer system 102, ,167 Utility assets 520,811 43,132 (393) 563,550 Non-utility assets 16, ,106 Total capital assets being depreciated 639,506 43,710 (393) 682,823 Total capital assets 665,054 92,410 (33,313) 724,151 Accumulated depreciation (194,702) (12,420) - (207,122) Capital assets, net $ 470,352 $ 79,990 $ (33,313) $ 517,029 During 2011 and 2010, the Authority received donated utility assets of $2,277 and $15,100, respectively, related to various development projects. 14

176 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND PAYROLL AND RELATED OBLIGATIONS Payroll and related obligations presented on the statements of net assets are comprised of: Balance at Balance at December 31, December 31, Current 2010 Change 2011 Portion Compensated absences $ 767 $ (10) $ 757 $ 4 Workers' compensation 402 (61) Payroll, withholdings, and taxes 548 (12) $ 1,717 $ (83) $ 1,634 $ 662 Balance at Balance at December 31, December 31, Current 2009 Change 2010 Portion Compensated absences $ 896 $ (129) $ 767 $ 2 Workers' compensation 486 (84) Payroll, withholdings, and taxes $ 1,832 $ (115) $ 1,717 $ BONDS AND LOANS PAYABLE To finance its initial capital improvement program, the Authority issued Daily Adjustable Demand Water and Wastewater System Revenue Bonds of $93,600 in 1984 ("1984 Bonds"). In 1985, the Authority issued Water and Wastewater System Adjustable Rate Tender Revenue Bonds ("1985 Bonds") that accomplished an advance refunding which defeased the 1984 Bonds. In 1986, the Authority issued $134,700 Water and Wastewater System Adjustable Rate Tender Revenue Bonds ("1986 Bonds") to finance the next phase of its capital improvement program. In July 1991, the Authority issued $248,329 Water and Wastewater System Revenue Refunding Bonds, Series A of 1991 ("1991 Bonds") which refunded the outstanding 1985 and 1986 Bonds. The principal of defeased 1986 Bonds still outstanding at December 31, 2011 and 2010 is $93,565 and $108,860, respectively. 15

177 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Series 1993 In November 1993, the Authority issued $278,970, Series A Refunding Bonds, ("Series A Bonds") and $10,785 Series B Revenue Bonds, ("Series B-1993 Bonds") to finance additional capital improvements. Series A-1993 Bond proceeds of $276,613 (net of $3,402 in underwriting fees, FGIC insurance, and other issuance costs) defeased the 1991 Bonds through an advance refunding. During 2009, the bond insurance company for the Series 1993 Bonds had their rating withdrawn by Standard & Poor s and is currently unrated. In October of 2008, the bond insurance company and a financial institution entered into a reinsurance agreement whereby the financial institution reinsured certain bond insurance risks of the bond insurance company. The Series A-1993 Bonds bear interest at a fixed rate of 6.5%, payable semi-annually at March 1 and September 1. The outstanding 1993 Bonds are not subject to optional or mandatory redemption. Fair value of the 1993 Bonds at December 31, 2011 and 2010, with carrying amounts of $17 million and $27 million, respectively, based on quoted market prices, is approximately $18 million and $30 million, respectively. Series 1998 In March 1998, the Authority issued $93,355, Series A First Lien Revenue Bonds ("1998 Series A Bonds"), the proceeds of which were used to defease through an advance refunding the entire balance of 1995 Series A Bonds outstanding ($89,850); $36,440 Series B First Lien Revenue Bonds ( 1998 Series B Bonds ), the proceeds of which are dedicated to a capital improvements program; and $101,970 Series C Subordinate Revenue Bonds ( 1998 Series C Bonds ), the proceeds of which were used to defease through an advance refunding the entire balance of the 1995 Series B Bonds outstanding ($98,410). At December 31, 2011 and 2010, the remaining unamortized deferred refunding loss of $466 and $498, respectively, on the transaction is shown as a reduction of the long-term debt and will be amortized through Fair value of the 1998 Bonds at December 31, 2011 and 2010, with carrying amounts of $62 million and $62 million, respectively, based on quoted market prices, is approximately $62 million and $62 million, respectively. 16

178 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 The 1998 Series B Bonds are capital appreciation bonds with an original issuance amount of $36,440. The 1998 Series B Bonds have maturity values of $2.3 million to $31.8 million from 2017 to The bonds were issued to yield rates from 5.18% to 5.3%. The 1998 Series B Bonds accrue and compound interest on a semi-annual basis and are carried at cost plus accrued interest. Total maturity value of the 1998 Series B Bonds is $146.8 million. A portion of the 1998 Bonds is subject to optional redemption in various face amounts beginning March 1, Series 2003 On September 23, 2003, the Authority issued $167,390 of Water and Sewer System Revenue Refunding Bonds ( 2003 Bonds ). The proceeds of the 2003 Bonds were used to provide funds for the current refunding of a portion of the 1993 Bond Series. In connection with the 2003 debt refundings, the Authority recorded a deferred refunding loss of $3,162 which is being amortized as an adjustment to interest expense over the life of the bonds using the effective interest method. The unamortized balance of the deferred refunding adjustment is $1,203 and $1,287 at December 31, 2011 and 2010, respectively. The 2003 Bonds were issued at a bond discount of $830, which is being amortized as an adjustment to interest expense over the life of the bonds using the effective interest method. The 2003 Bonds bear interest at rates ranging from 1.45% to 4.75%. Interest is payable in semi-annual installments on March 1 and September 1 until maturity. Stated maturities for the 2003 Bonds are at various face amounts on September 1 of each year beginning September 1, 2004 through The 2003 Bonds which mature after September 1, 2014, are subject to redemption prior to maturity at the option of the Authority. The fair market value of the 2003 Bonds at December 31, 2011 and 2010, with carrying amounts of $45 million and $45 million, respectively, based on quoted market prices, is approximately $47 million and $47 million, respectively. Series 2007 During March 2007, the Authority issued $158,895 Series 2007 First Lien Water and Sewer Revenue Bonds ( 2007 Bonds ): $43,720 Series A of 2007 (fixed rate), $57,585 Series B-1 of 2007 (variable rate demand), and $57,590 Series B-2 of 2007 (variable rate demand). The purpose of this bond issue was to refund the Series 2002 and Series 2005 Bonds (the refunded bonds). Proceeds of the 2007 Bonds were invested in an escrow account to pay 17

179 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 principal and interest on the refunded bonds from the time of refunding through the bonds earliest optional call dates. In connection with the debt refundings, the Authority recorded a deferred refunding loss of $6,032, which is being amortized as an adjustment to interest expense over the life of the bonds using the effective interest method. At December 31, 2011 and 2010, the remaining unamortized deferred refunding loss of $4,734 and $5,060, respectively. At December 31, 2011, the principal of the defeased Series 2002 Bonds outstanding was $89,830, and the defeased 2005 Bonds outstanding was $44,355. The 2007 Bonds were issued at a bond premium of $2,660, which is being amortized as an adjustment to interest expense over the life of the bonds using the effective interest method. Bond issuance costs of $598 are also being amortized over the life of the 2007 Bonds using the effective interest method. The 2007 Series A Bonds bear interest at rates ranging from 4.00% to 5.00%. Interest is payable in semi-annual installments on March 1 and September 1 until maturity. The 2007 Series A Bonds are subject to extraordinary redemption prior to maturity at the option of the Authority in the event of a condemnation, damage or destruction of the water and sewer system. The 2007 Series B Bonds bear interest at a variable rate with interest payments due on the first business day of each month. The 2007 Series B Bonds that mature on September 1 of are subject to mandatory sinking fund redemption. The fair market value of the 2007 Bonds at December 31, 2011 and 2010, with carrying amounts of $112 million and $116 million, respectively, based on quoted market prices, is approximately $115 million and $118 million, respectively. In conjunction with the issuance of the 2007 Variable Rate Bonds, the Authority entered into various pay fixed/receive variable interest rate swaps to effectively change the Bonds variable interest rates to synthetic fixed rates. These swap transactions are discussed in Note 8: Interest Rate Swaps. Series 2008 During May 2008, the Authority issued $93,635 Series 2008 Water and Sewer System First Lien Revenue Bonds ( 2008 Fixed Rate Bonds ): $68,970 Series A of 2008 (fixed rate, taxable) and $24,665 Series D-1 of 2008 (fixed rate). The purpose of this bond issue was to advance refund portions of certain maturities of the Series 1993A and Series 2003 Bonds, to fund the costs of certain capital additions, to fund the premium for the Bond Insurance Policy 18

180 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 securing payments on 2008 Fixed Rate Bonds, and to fund termination payments on certain interest rate swaps. During June 2008, the Authority issued $320,515 Series 2008 Water and Sewer System First Lien Revenue Bonds ( 2008 Variable Rate Demand Bonds ): $145,495 Series B of 2008 (variable rate demand), $51,910 Series C-1 of 2008 (variable rate demand), $51,885 Series C-2 of 2008 (variable rate demand), and $71,225 Series D-2 of 2008 (variable rate demand). The purpose of this bond issue was to currently refund the Series 1998A and Series 1998C, to currently refund certain maturities of the Series 2007 B-1 and Series 2007 B-2 Bonds, to advance refund certain maturities of the Series 1998B Bonds, to fund approximately $98 million of certain capital additions, to fund the premium for the Bond Insurance Policy securing payments on 2008 Variable Rate Demand Bonds, and to fund termination payments on certain interest rate swaps. In connection with these advance refundings, portions of the proceeds of the 2008 Bonds were deposited into irrevocable trusts with an escrow agent to provide for certain debt service payments on the refunded bonds. The advance refunding resulted in a deferred refunding loss of $18,119 which is amortized as an adjustment to interest expense over the life of the 2008 Bonds using the effective interest method. At December 31, 2011 and 2010, the remaining unamortized deferred refunding loss was $14,305 and $15,307, respectively, and the transaction is shown as a reduction of long-term debt and will be amortized through At December 31, 2011, the principal of the defeased Series 1993A Bonds outstanding was $16,875 and the defeased 2003 Bonds outstanding was $26,130. The maturity value of defeased 1998B compound interest bonds outstanding at December 31, 2011 was $19,300. The Taxable 2008 Series A Bonds bear interest at rates ranging from 6.36% to 6.61%. Interest is payable in semi-annual installments on March 1 and September 1 until maturity. The Taxable 2008 Series A Bonds are subject to optional redemption, in whole or in part, on any date, at the option of the Authority. The Taxable 2008 Series A Bonds that mature in 2018 and 2024 are subject to mandatory sinking fund payments beginning in 2017 and continuing through The 2008 Series D-1 Bonds (together with the Taxable 2008 Series A Bonds are the 2008 Fixed Rate Bonds) bear interest at rates ranging from 4.50% to 5.00%. Interest is payable in semi-annual installments on March 1 and September 1 until maturity. The 2008 Series D-1 Bonds which mature on or after September 1, 2019 are subject to optional redemption, in whole or in part, on any date, at the option of the Authority at any time on or after September 1, 2018, at 100% of the principal amount plus accrued interest. 19

181 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 The 2008 Series B, C, and D-2 Bonds (2008 Variable Rate Bonds) as originally offered bear interest at a variable rate with interest payments due on the first business day of each month. Interest rates are reset weekly; the fluctuating rate per annum to be determined by the respective remarketing agents. The weekly rate is subject to a cap of 12% per annum. During the second part of 2009, the Authority reoffered the 2008 Series B Bonds and the 2008 Series C-1 variable rate bonds. The 2008 Series B Bonds had an outstanding principal amount of $145,495,000 and the 2008 C-1 bonds had an outstanding principal balance of $51,910,000 at the time of reoffering. The Series B Bonds were reoffered on October 16, The reason for this reoffering was the replacement of expiring standby bond purchase agreements on these variable rate bonds with letters of credit. Bank of America is the letter of credit provider on the Series B-1 Bonds ($72,750,000) and PNC is the letter of credit provider on the Series B-2 Bonds ($72,745,000). The reoffering did not change the interest rate mode on these variable rate bonds. Both the Bank of America and the PNC letters of credit have been renewed and are set to expire on October 22, The 2008 Series C-1 bonds were reoffered in two separate reofferings. On November 10, 2009, $25,000,000 was reoffered in a term interest rate mode. The interest rate on these bonds is fixed at 2% for two years. After the two-year period, the interest rate will reset. During August 2011, the 2008 Series C-1-A, B and C bonds were again reoffered. The bonds were reoffered at a term rate of.45% through September The new reoffered bonds are as follows: Series C1-A $10,000,000; Series C1-B $10,000,000, and Series C1-C $5,000,000. During November 2009, the remaining C-1 Bonds were reoffered as the C1-D Series of $26,910,000. These bonds were also issued in a term interest rate mode, fixing the interest rate at 2.625% through September of Credit facilities for the 2008 Series C1-A, C1-B, and C1-C bonds are provided by the Federal Home Loan Bank. Liquidity facilities provided by JP Morgan Chase on the 2007 B-1, 2007 B-2 and 2008 C-2 Series bonds have been renewed and are set to expire on June 10, 2014 for the 2007 B-1 and B-2 Series and June 9, 2014 for the 2008 C-2 Series. The Authority renewed the standby purchase agreements on the Series 2007 B-1 (face $41.32 million) and 2007 B-2 (face $41.33 million) bonds for two years, expiring June of During 2011, the Authority renewed the Series 2008 C-2 (face $51.89 million) and Series 2008 D-2 (face $71.23 million) for two years, expiring June 2014, with JP Morgan Chase and PNC Bank, respectively. 20

182 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Variable Rate Bonds are subject to optional redemption, in whole or in part, on any date, at the option of the Authority. The 2008 Series B Bonds that mature on September 1 of 2039 are subject to mandatory sinking fund redemption. The 2008 Series C Bonds that mature on September 1 of 2035 are subject to mandatory sinking fund redemption. The 2008 Series D- 2 Bonds that mature on September 1 of 2040 are subject to mandatory sinking fund redemption. The 2008 Series Bonds are subject to extraordinary redemption prior to maturity at the option of the Authority in the event of a condemnation, damage or destruction of the water and sewer system. The 2008 Fixed Rate Bonds were issued at a bond premium of $824, which is being amortized as an adjustment to interest expense over the life of the bonds using the effective interest method. Bond issuance costs of $7,459, including $5,036 of swap termination fees, are also being amortized over the life of the Bonds using the effective interest method. The 2008 Variable Rate Bonds issuance costs of $9,337, including $594 of swap termination fees, are being amortized over the life of the Bonds using the effective interest method. The fair market value of the 2008 Bonds at December 31, 2011 and 2010, with carrying amounts of $414 million and $414 million, respectively, based on quoted market prices, is approximately $431 million and $419 million, respectively. Variable rate bonds require a liquidity facility and/or a letter of credit. The Authority is subject to the risk that the bank does not renew the credit facility and/or that the pricing changes throughout the life of the bonds. Additionally, the Authority purchased insurance as a credit enhancement on the variable rate bonds. Trading spreads on the bonds and the preservation of the liquidity facility may be largely linked to the credit quality of the insurance provider. Therefore, if there is an event that would adversely affect the investor s perception of the credit quality of the insurer, the Authority could be subject to paying higher credit spreads on the bonds and risk losing the liquidity facility. In conjunction with the issuance of the 2008 Variable Rate Bonds, the Authority entered into various pay fixed/receive variable interest rate swaps to effectively change the Bonds variable interest rates to synthetic fixed rates. These swap transactions are discussed in Note 8: Interest Rate Swaps. Bonds and state loans payable (PENNVEST) consisted of the following at December 31, 2011 and 2010: 21

183 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Balance at Balance at December 31, December 31, 2010 Additions Reductions 2011 Bonds and loans payable: Revenue bonds $ 664,963 $ 3,377 $ (14,885) $ 653,455 State loans (PENNVEST) 21,104 15,506 (1,863) 34, ,067 18,883 (16,748) 688,202 Less: deferred refunding loss (25,363) - 1,663 (23,700) Unamortized bond (discount) premium 2,086 - (138) 1,948 Total bonds and loans $ 662,790 $ 18,883 $ (15,223) $ 666,450 Balance at Balance at December 31, December 31, 2009 Additions Reductions 2010 Bonds and loans payable: Revenue bonds $ 677,383 $ 3,200 $ (15,620) $ 664,963 State loans (PENNVEST) 12,560 9,359 (815) 21, ,943 12,559 (16,435) 686,067 Less: deferred refunding loss (27,106) - 1,743 (25,363) Unamortized bond (discount) premium 2,233 - (147) 2,086 Total bonds and loans $ 665,070 $ 12,559 $ (14,839) $ 662,790 Debt service payments of the State Loans at December 31, 2011 are as follows: State Loans Principal Interest Total 2012 $ 2,422 $ 714 $ 3, , , , , , , , , ,112 3,297 16, ,741 1,903 10,644 Thereafter, $ 34,747 $ 8,590 $ 43,337 22

184 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Debt service payments on the 1993, 1998, 2003, 2007, and 2008 Bonds at December 31, 2011 are as follows: Revenue Bonds Principal Interest Total 2012 $ 12,466 $ 26,226 $ 38, ,155 25,538 39, ,250 24,699 39, ,995 24,018 40, ,755 23,304 40, , , , , , , , , , ,130 47, , ,718 14, , ,115 $ 563,054 $ 1,183,169 Accretion 33,340 Total $ 653,455 Interest payments were calculated for the Variable Rate Bonds using the synthetic fixed rate interest rates as described in Note 8. Interest incurred for the years ended December 31, 2011 and 2010 on bonds payable, exclusive of capitalized interest and amortization of refunding losses, was approximately $33 million and $30 million, respectively. Interest costs for 2011 and 2010 included $1.7 and $1.8 million, respectively, of amortization of the deferred refunding losses. In accordance with the provisions of the trust indentures for the 1993, 1998, 2003, 2007, and 2008 Bonds, the Authority has created a number of funds that are restricted for specific purposes. The complement of these restricted funds, collectively referred to on the statements of net assets as Restricted Assets at December 31, 2011 and 2010, was: 23

185 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND Capital project funds $ 33,106 $ 57,097 Debt service and reserve funds 7,990 9,920 Operating reserve account 8,537 8,532 Capitalized interest fund - 1,946 Other funds $ 50,208 $ 78,070 Among the Authority s debt covenants is one which requires that rates charged by the Authority will be sufficient to satisfy a formula which is intended to ensure that the Authority will be able to satisfy debt service requirements. The trust indenture also requires that revenue collections be deposited into a Revenue Fund and disbursed therefrom as provided for in the trust indenture. This Revenue Fund constitutes the vast majority of unrestricted funds cash and cash equivalents. At December 31, 2011, the Authority was in compliance with this covenant. 8. INTEREST RATE SWAPS Interest rate swaps disclosures (not in thousands) as of December 31, 2011 and 2010 are presented below: 24

186 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Interest rate swaps at December 31, 2011 and 2010: Interest Interest Counterparty Notional Effective Maturity Rate Rate Credit Underlying Amount Date Date Paid Received Rating Bonds Hedging derivatives, Cash flow hedges, Receive variable - pay fixed, Interest rate swaps: $ 41,325,000 3/9/2007 9/1/ % SIFMA Aaa Series 2007 B-2 41,320,000 3/9/2007 9/1/ % SIFMA Aa1 Series 2007 B-1 72,747,500 6/12/2008 9/1/ % SIFMA Aaa Series 2008 B-1 41,518,000 6/12/2008 9/1/ % SIFMA Aaa Series 2008 C 72,747,500 6/12/2008 9/1/ % SIFMA Aa1 Series 2008 B-2 71,225,000 6/12/2008 9/1/ % SIFMA Aa1 Series 2008 D-2 Investment derivatives, Receive variable - pay fixed, Interest rate swaps: 62,277,000 6/12/2008 9/1/ % SIFMA Aa1 Series 2008 C Interest Rate Swap Market Value Information: 12/31/2009 Change 12/31/2010 Change 12/31/2011 Notional Market in Market Market in Market Market Amount Value * Value Value * Value Value * Hedging derivatives, Cash flow hedges, Receive variable - pay fixed, Interest rate sw aps: $ 41,325,000 $ (3,383,386) $ (642,154) $ (4,025,540) $ (5,341,685) $ (9,367,225) 41,320,000 (3,317,718) (671,709) (3,989,427) (5,383,814) (9,373,241) 72,747,500 (6,455,578) (37,818) (6,493,396) (16,260,801) (22,754,197) 41,518,000 (3,459,995) (188,978) (3,648,973) (8,210,370) (11,859,343) 72,747,500 (6,428,956) 13,624 (6,415,332) (16,338,865) (22,754,197) 71,225,000 (6,911,571) 37,173 (6,874,398) (17,135,256) (24,009,654) Investment derivatives, Receive variable - pay fixed, Interest rate swaps: (29,957,204) (1,489,862) (31,447,066) (68,670,791) (100,117,857) 62,277,000 (5,099,925) (309,377) (5,409,302) (12,379,713) (17,789,015) Total $ (35,057,129) $ (1,799,239) $ (36,856,368) $ (81,050,504) $ (117,906,872) * The market value is an estimated net present value of the expected cash flows calculated using relevant mid-market data inputs and based on the assumption of no unusual market conditions or forced liquidation. 25

187 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Description of 2008 Swaps During fiscal year 2008, the Authority entered into five pay-fixed, receive-variable interest rate swap contracts. The interest rate swaps were effective June 12, Beginning September 1, 2008, the Authority began to make semi-annual interest payments on the 1 st of each March and September through September 1, 2035 (two swaps); September 1, 2039 (two swaps); and, September 1, 2040 (for one swap), respectively. The Counterparties make monthly interest payments on the 1 st of each calendar month, which began July 1, 2008 through September 1, 2035 for two of the swaps; September 1, 2039 for two of the swaps; and September 1, 2040 for one swap. The intention of the 2008 swaps is to effectively change the Authority s variable interest rate on the $145,495 Water and Sewer System (Variable Rate Demand) First Lien Revenue Refunding Bonds Series B of 2008, on the $71,225 Water and Sewer System (Variable Rate Demand) First Lien Revenue Bonds Series D-2 of 2008, and on the $103,795 Water and Sewer System (Variable Rate Demand) Subordinate Revenue Refunding Bonds Series C of 2008 (the bonds) to synthetic fixed rates of 4.038%, 4.103%, and 3.998%, respectively. The bonds will accrue interest at a weekly rate that is determined by a remarketing agent on each effective rate date. The interest rate on the bonds may not exceed 12%. Per the interest rate swap agreements, the Authority will receive SIFMA Municipal Swap Index while paying fixed rates of 4.038%, 4.103%, and 3.998%, respectively. The interest payments on the interest rate swaps are calculated based on notional amounts, all of which reduce, beginning on September 1, 2012 for the 2008 C Bonds, September 1, 2032 for the 2008 D2 Bonds and September 1, 2035 for the 2008 B Bonds, so that the notional amounts approximate the principal outstanding on the respective bonds. The interest rate swaps expire consistent with the final maturity of the respective bonds. Description of 2007 Swaps During fiscal year 2007, the Authority entered into two pay-fixed, receive-variable interest rate swap contracts. The interest rate swaps were effective March 9, Beginning September 1, 2007, the Authority began to make semi-annual interest payments on the 1 st of each March and September through September 1, The Counterparties makes monthly interest payments on the 1 st of each calendar month, beginning April 1, 2007 through September 1,

188 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 The intention of the 2007 swaps is to effectively change the Authority s variable interest rate on the $41,320,000 Water and Sewer System (Variable Rate Demand) First Lien Revenue Refunding Bonds Series B-1 of 2007 and on the $41,325,000 Water and Sewer System (Variable Rate Demand) First Lien Revenue Refunding Bonds Series B-2 of 2007 (the bonds) to synthetic fixed rates of 3.932%, respectively. The bonds will accrue interest at a weekly rate that is determined by a remarketing agent on each effective rate date. The interest rate on the bonds may not exceed 12%. Per the interest rate swap agreements, the Authority will receive SIFMA Municipal Swap Index while paying a fixed rate of 3.932%. The interest payments on the interest rate swaps are calculated based on notional amounts, both of which reduce, beginning on September 1, 2018, so that the notional amounts approximate the principal outstanding on the respective bonds. The interest rate swaps expire on September 1, 2033 consistent with the final maturity of the bonds. Accounting and Risk Disclosures During the years ended December 31, 2011 and 2010, the Authority paid $17,016 and $18,680, respectively, fixed and received $801 and $1,057, respectively, variable related to their outstanding swap agreements. As noted in the tables above, current period changes in market value for the interest rate swaps that are accounted for as hedges are recorded on the statements of net assets as an adjustment to deferred outflows. Additionally, current period changes in market value for the interest rate swap accounted for as an investment is recorded on the statements of revenues, expenses and changes in net assets as a component of investment income. The cumulative fair market value of the outstanding interest rate swaps of December 31, 2011 and 2010 are reported on the statements of net assets as a swap liability. The Authority has the ability to early terminate the interest rate swaps and to cash settle the transaction on any business day by providing at least two business days written notice to the counterparty. Evidence that the Authority has sufficient funds available to pay any amount payable to the counterparty must be provided at the time notice is given. At early termination, the Authority will be required to pay or receive a settlement amount which is comprised of the market value of the terminated transaction(s) based on market quotations and any amounts accrued under the contract(s). 27

189 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Through the use of derivative instruments such as interest rate swaps, the Authority is exposed to a variety of risks, including credit risk, interest rate risk, termination risk, basis risk, and rollover risk.! Credit risk is the risk that a counterparty will not fulfill its obligations. The credit ratings by Moody s Investors Service, Inc., a nationally recognized statistical rating organization for the respective counterparties are listed in the table above. If a counterparty failed to perform according to the terms of the interest rate swap agreement, there is some risk of loss to the Authority, up to the fair market value of the swaps. The Authority currently does not enter into master netting arrangements with its counterparties as such each derivative instrument should be evaluated on an individual basis for credit risk. As the Authority's derivative instruments currently have a negative fair market value position to the Authority at year-end, the Authority is not exposed to credit risk at December 31, Concentration of credit risk: The Authority currently has two counterparties, with four and three outstanding interest rate swaps respectively. The Authority s outstanding market value as of December 31, 2011 and 2010, respectively, is $(73,926,107) and $(22,688,459) with one counterparty and $(43,980,765) and $(14,167,909) with the second counterparty. Both counterparties operate in the same markets and could be similarly impacted by changes in economic or other conditions. It is the Authority s policy to require counterparty collateral posting provisions in its non-exchange traded derivative instruments. Their terms require collateral to be posted if the respective counterparty s credit rating falls below BBB+ by Standard & Poor s and the swap insurer becomes bankrupt. The amount of collateral to be posted is calculated based on derivatives in asset positions to the Authority. As of year-end, the counterparties had not and were not required to post collateral for these transactions.! Termination risk is the risk that a derivative s unscheduled end will affect the Authority s asset/liability strategy or will present the Authority with potentially significant unscheduled termination payments to the counterparty. The counterparties to the interest rate swaps do not have the ability to voluntarily terminate the interest rate swap; however, the Authority is exposed to termination risk in the event that one or more of the counterparties default. 28

190 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010! Interest rate risk is the risk that changes in interest rates will adversely affect the fair values of a government s financial instruments or cash flows. The interest rate swap that is accounted for as an investment exposes the Authority to interest rate risk. The interest rate swap is highly sensitive to changes in interest rates; changes in the variable rate will have a material effect on the swap s fair market value. The interest rate swap will terminate on September 4, 2035.! Basis risk is the risk that arises when variable interest rates on a derivative and an associated bond or other interest-paying financial instrument are based on different indexes. The Authority is subject to basis risk as the interest index on the variable rate arm of the swaps is based on the SIFMA Municipal Swap Index and the variable interest rate on the bonds is based on a different index, a weekly rate that is determined by a remarketing agent. Although expected to correlate, the relationships between different indexes vary and that variance could adversely affect the Authority s calculated payments, and as a result cost savings or synthetic interest rates may not be realized. The Authority is further subject to basis risk in the event that the underlying bonds become fixed rate Bank Bonds or that the maturity of the underlying bonds is accelerated as discussed in Note 7: Bonds and Loans Payable.! Rollover risk is the risk that a derivative associated with the Authority s debt does not extend to the maturity of that debt. When the derivative terminates, the associated debt will no longer have the benefit of the derivative. The Authority is not exposed to rollover risk as the swap agreements terminate on the same day the last payment is due on the respective bonds. Contingencies All of the Authority s derivative instruments, include provisions that require the Authority to post collateral in the event that the credit ratings of its credit support provider s senior long term, unsecured debt credit rating falls below BBB+ by Standard & Poor s and FSA, the swap insurer, becomes bankrupt. The amount of collateral to be posted is calculated based on derivatives in negative market value positions to the Authority. The collateral is to be posted in the form of cash, U.S. Treasuries or other approved securities. As of year-end, the Authority had not and was not required to post collateral for these transactions. 29

191 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND INVESTMENTS AND DEPOSITS WITH FINANCIAL INSTITUTIONS The Authority is authorized to invest in: obligations of the U.S. Government and government-sponsored agencies and instrumentalities; fully insured or collateralized certificates of deposits; commercial paper of the highest rating; repurchase agreements collateralized by government obligations or securities; highly rated bank promissory notes or investment funds or trusts; and, as to trusteed assets, as otherwise permitted by the trust indenture as supplemented and amended in Throughout the years ended December 31, 2011 and 2010, the Authority invested its funds in such authorized investments. The Authority does not have a formal investment policy which addresses custodial credit risk, interest rate risk, credit risk, or concentration of credit risk. GASB Statement No. 40, Deposit and Investment Risk Disclosures, requires disclosures related to the following deposit and investment risks: credit risk (including custodial credit risk and concentration of credit risk), interest rate risk, and foreign currency risk. The following is a description of the Authority s deposit and investment risks. Custodial Credit Risk Custodial credit risk is the risk that in the event of a bank failure, the Authority s deposits may not be returned to it. As of December 31, 2011 and 2010, $32,889 and $32,289, respectively, of the Authority s bank balance of $39,115 and $33,539, respectively, was exposed to custodial credit risk. These amounts are collateralized in accordance with Act 72 of the Pennsylvania state legislature, which requires the institution to pool collateral for all governmental deposits and have the collateral held by an approved custodian in the institution s name. These deposits have carrying amounts of $41,676 and $37,129 as of December 31, 2011 and 2010, respectively, all of which is reported as current assets in the statements of net assets. In addition to the deposits noted above, included in cash and cash equivalents as noncurrent restricted assets on the statements of net assets are the following short-term investments at December 31, 2011 and 2010: money market funds of $2,901 and $3,812, respectively, and repurchase agreements of $578 and $0, respectively. Of the Authority s $578 and $0 investment in repurchase agreements, at December 31, 2011 and 2010, respectively, all of the underlying securities are held by the investment s counterparty, not in the name of the Authority. At December 31, 2011, the Authority held the following investment balances: 30

192 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Carrying value Maturity in years Less than 1 year Commonwealth of PA Revenue Bonds (Guaranteed Investment Contracts) $ 8,536 $ 8,536 Money market 2,901 2,901 Repurchase agreements Commercial paper 38,193 38,193 Total Investments $ 50,208 $ 50,208 At December 31, 2010, the Authority held the following investment balances: Carrying value Maturity in years Less than 1 year Commonwealth of PA Revenue Bonds (Guaranteed Investment Contracts) $ 8,531 $ 8,531 Money market 3,812 3,812 Commercial paper 65,649 65,649 Total Investments $ 77,992 $ 77,992 With the exception of the guaranteed investment contracts, the carrying value of the Authority s investments is the same as their fair market value amount. The Guaranteed investment contracts are carried at amortized cost. Investments of $46,729 and $74,180 are included as noncurrent restricted investments on the statements of net assets at December 31, 2011 and 2010, respectively. Investments of $3,479 consisting of money market funds of $2,901 and repurchase agreements of $578 are included as noncurrent restricted cash and cash equivalents on the statements of net assets at December 31, Investments of $3,812, consisting of money market funds of $3,812 are included as noncurrent restricted cash and cash equivalents on the statements of net assets at December 31,

193 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Interest Rate Risk Interest rate risk is the risk that changes in the interest rates will adversely affect the fair market value of the Authority s investments. The Authority is not subject to interest rate risk as all of its investments at December 31, 2011 and 2010 had maturities of less than one year. Credit Risk Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligation. As of December 31, 2011, the Authority s investments in the guaranteed investment contracts were rated AA by Standard & Poor s. The counterparty to the Authority s guaranteed investment contracts is the Commonwealth of Pennsylvania. The Authority s investments in money markets were rated AA by Standard & Poor s. The Authority s investments in commercial paper at December 31, 2011 were rated A-1 by Standard & Poor s. Not all of the investments in commercial paper were rated. Additionally, at December 31, 2011, the Authority had various repurchase agreements. The underlying securities of these repurchase agreements consist primarily of U.S. Treasuries, and are therefore not subject to credit risk. Concentration of Credit Risk Concentration of credit risk is the risk of loss attributed to the magnitude of a government s investments in a single issuer. The Authority places no limit on the amount it may invest in any one issuer. More than five percent of the Authority s investments are in Fidelity Institutional Money Market, Wells Fargo/BLB Investment Agent, and Commonwealth of Pennsylvania. These investments are 5.8%, 65.2%, and 17.0%, respectively, of the Authority s total investments at December 31, As further described in Note 8, the Authority has a derivative instrument that is accounted for as an investment. Credit and interest rate risks related to this investment are described in Note NET ASSETS Net assets represent the difference between assets and liabilities. An analysis of net asset amounts is as follows: 32

194 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 December 31, Invested in capital assets, net of related liabilities: Net property, plant, and equipment in service $ 543,603 $ 517,029 Debt subject to capital improvements (613,935) (612,818) Swap liability net of deferred outflow (17,789) (5,409) Accounts payable for capital items (5,325) (6,308) Funded debt from restricted assets: Unspent debt proceeds: Capital projects 33,106 57,097 Debt service and reserve funds 7,990 9,920 (52,350) (40,489) Restricted for capital activity and debt service: Restricted cash and cash equivalents 3,479 3,812 Restricted investments 46,729 74,180 Restricted receivables - 78 Liabilities payable from restricted assets: Unspent debt proceeds: Capital projects (33,106) (57,097) Debt service and reserve funds (7,990) (9,920) 9,112 11,053 Unrestricted (267) (731) Total net assets $ (43,505) $ (30,167) 11. OPERATING LEASE During 2007, the Authority entered into a new lease for office space. The term of the lease is for twenty years commencing on August 1, 2007 and ending on July 31, The lease is subject to an automatic roll-over for five years, if the Authority does not communicate in writing one year prior to expiration that is desires not to extend the lease. The general terms of the lease requires the lessor to provide for utilities, building repairs, maintenance, and real estate taxes. The total minimum future commitments under the lease for year ending December 31, 2011 are as follows: 33

195 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND $ , , $ ,253 The total annual rental for office space was approximately $599 and $598 for 2011 and 2010 respectively. 12. COMMITMENTS AND CONTINGENCIES The Authority is proceeding with a capital improvement program which the Authority's independent engineer has estimated will entail expenditure of the existing construction funds and potential future bond issues. As of December 31, 2011, $70 million of the program is complete and $69 million is under active contract. In addition to the matters discussed in Note 13, Consent Agreement, various other claims and lawsuits are pending against the Authority. The ultimate outcome of these claims and lawsuits cannot presently be determined and, accordingly, no provision for amounts arising from settlements has been made in these financial statements. In the opinion of management, the effect on the financial statements of potential losses associated with any such claim and/or lawsuit should not be material. The Authority was insured for general liability coverage through 2001; however, effective January 1, 2002, it became self-insured. In previous years, the Authority established a fund to pay for deductibles, small claims, and other litigation costs. At year-end, the balance in this fund was approximately $578. This fund is grouped with "Restricted Assets" on the statements of net assets. During 2011 and 2010, the Authority paid $0 from this fund for claims, and there is $0 and $0 accrued as of December 31, 2011 and 2010, respectively. Line Warranty Program The Authority instituted an opt-out warranty line insurance program. Utility Line Security, LLC ( ULS ) operated the program providing for the repair of water and sewer lines for 34

196 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 ratepayers. Dominion Products and Services, Inc., Dominion Retail, Inc., The Manchester Group, LLC and Pamela Post (collectively, Dominion ) filed a lawsuit in the Common Pleas Court of Allegheny County (the Court ). Dominion sought no monetary damages, but rather an injunction and declaratory judgment. The injunction was denied in June However, on March 14, 2011, the Court found that while the program was a good program, it violated the Municipal Authority Act. As a result, PWSA ended the program as of March 18, On March 18, 2011, ULS filed for bankruptcy protection in the United States Bankruptcy Court for the Western District of Pennsylvania (the Bankruptcy Court ) at Case No JKF (the Bankruptcy Case ). On April 6, 2011, an appealable order was entered in the Dominion case. ULS appealed said Order on April 7, 2011, and Dominion filed a cross-appeal on April 14, On April 15, 2011, ULS filed its Schedules of Assets and Liabilities in the Bankruptcy Court at Docket No. 69 and listed a potential claim against the Authority for breach of contract in the amount of $3 million. On December 2, 2011, ULS filed its Plan of Liquidation (the Plan ) in the Bankruptcy Case at Docket 206. Pursuant to Section 7.2 of the Plan, ULS agreed to fully and finally release the Authority of any and all claims and to withdraw the aforementioned appeal upon confirmation of the Plan by the Bankruptcy Court and the Authority's payment of $350,000. Pursuant to Section of the Plan, any mechanic s liens that arose in connection with the ULS program are deemed released upon confirmation of the Plan by the Bankruptcy Court. On March 5, 2012, the Pennsylvania Supreme Court dismissed the appeal. On February 9, 2011, two class action lawsuits were filed in the Court. These actions were seeking undetermined monetary damages and a determination that the opt-out program was not permitted. Counsel for the class and the Authority have reached a settlement in principal and have submitted a motion stipulation and a proposed notice to the class. The Authority will pay counsel fees in the amount of $125,000 for the allegations related to the legality of the opt-out program. Additionally, the Authority will credit members of the class in the amount of approximately $300,000 for DISC fees that were prematurely collected from the ratepayers. Counsel for the class will receive $25,000 in attorneys fees for this portion of the settlement. At a hearing on April 3, 2012, the court declined to approve the notices for the class. Counsel for the parties is discussing revisions to the settlement proposal to make it acceptable to the Court. Subsequent to year-end, the Authority was assessed a penalty of $110,000 by the Pennsylvania Department of Environmental Protection (DEP) under a consent order related to modifications to wastewater discharges at its water treatment plant. The non-compliance resulted from a failure by an engineering contractor to properly design required modifications, resulting in a delay in construction. Action is in process to correct the noncompliance; however, the potential exists for further penalties to be assessed by DEP. The 35

197 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Authority is exploring a claim against the engineering contractor that is responsible for the delay. 13. CONSENT AGREEMENT The Authority is subject to federal regulation under the Clean Water Act (1977) and regulations adopted under that Act. Among the specific requirements applicable to the Authority s system are those imposed by the United States Environmental Protection Agency s Combined Sewer Overflow (CSO) Policy (1994). On January 29, 2004, the Authority and the City of Pittsburgh executed a Consent Order and Agreement (Order) regarding wet weather sewer overflows within the City. The other signatories to the Order are the Pennsylvania Department of Environmental Protection (DEP) and the Allegheny County Health Department (ACHD). Generally, the Order requires the Authority and the City to assess the City sewers in order to develop a plan with ALCOSAN to address wet weather sewer overflows within the City. The Order is part of a sewer assessment program for all municipalities served by ALCOSAN. To date, assessment activities have been completed for all accessible critical sewers and separate sanitary sewers with the exception of any additional sewers discovered through continued research and investigation. Ongoing pipe and manhole repairs are being completed in order to provide CCTV access to remaining inaccessible critical/sanitary sewer pipes. Assessment activities for non-critical sewers are to be completed on a longer schedule, including completing CCTV at an annual average rate that was utilized to complete the critical/sanitary televising. The majority of accessible non-critical manholes have been inspected with ongoing efforts to complete any remaining or newly identified. In addition to the assessment, the Order requires the Authority and the City to implement the Nine Minimum Controls to reduce combined sewer overflows, and to perform repairs and maintenance of deficiencies revealed by the assessment. The Authority maintains an expedited response to significant structural failures of the sewer system where imminent structural failures are determined by a professional engineer and prioritized for repair. Ongoing sewer line replacement, point repair, lining, point lining, and Gunite projects have been implemented to address structural deficiencies. Given the scope of the Order, the size of the City sewer system, and the various conditions and/or deficiencies that may be discovered by the assessment, it is difficult to predict the total cost of compliance with the Order. Moreover, it is difficult to predict what, if any, largescale and/or regional capital improvements may be required after the completion of the assessment to address wet weather sewer overflows in the City and in the ALCOSAN service area. Large-scale and/or regional capital improvements are not covered by the Order. The 36

198 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO FINANCIAL STATEMENTS (Dollars expressed in thousands unless otherwise indicated) YEARS ENDED DECEMBER 31, 2011 AND 2010 Authority has hired two engineering firms to assess and model the sewer system, and it is moving forward with its plans to comply with the Order. Costs associated with Order compliance will be reflected in the capital improvement program and funded by proceeds of potential future bond issuances. 37

199 Supplementary Information

200 PITTSBURGH WATER AND SEWER AUTHORITY SCHEDULE OF RESTRICTED ASSETS COMPOSITION - SCHEDULE I (Dollars expressed in thousands) DECEMBER 31, 2011 Cash Equivalents Investments *(1) Fidelity Inst *(7) Overnight Commonwealth *(2) BTM CAP *(3)GE Unrealized Accrued M Mkt Prime Tri-Party of PA CORP DISC CAP CORP Total Gain/(Loss) Interest Receivable #690 Class 1 Repo GNMA Revenue Bonds CP CPDS Capital project and construction funds: 2005 Capital Project Fund $ - $ - $ - $ - $ - $ - $ - $ Construction Fund 33, , Debt service funds: 1993 Debt Service Fund 3, Debt Service Fund A Debt Service Fund 1, B-1 Var Debt Service Fund B-2 Var Debt Service Fund A Debt Service Fund 1, B1 Debt Service Fund B2 Debt Service Fund C1A Debt Service Fund C1D Debt Service Fund C1C Debt Service Fund C1D Debt Service Fund C2 Debt Service Fund D1 Debt Service Fund D2 Debt Service Fund , , , Operating Reserve Fund 9, , Capitalized Interest Fund Self-Insured Escrow Fund $ 50,208 $ 570 $ - $ 2,901 $ 578 $ 8,524 $ 1,773 $ 742 (1) Fidelity Institutional M Market Prime #690 Class 1, yielding 0.10%. (2) BTM Cap Corp Disc Commercial Paper, yielding 0.00% with a maturity date of 02/21/2012 (3) General Electric Cap Corp CPDs, yielding 0.00% with a maturity date of 02/29/2012 (4) Private Expt FDG Corp DISC C/P, yielding 0.0% with a maturity date of 02/29/2012 (5) Westpac BKG Corp CPDS, yielding 0.0% with a maturity date of 05/03/2012 (6) Wells Fargo/BLB Investment Agreement, yielding 0.00% with a maturity date of 6/30/2012 (7) Overnight Tri-Party Repo GNMA, yielding 0.0% (Continued) 38

201 PITTSBURGH WATER AND SEWER AUTHORITY SCHEDULE OF RESTRICTED ASSETS COMPOSITION - SCHEDULE I (Dollars expressed in thousands) DECEMBER 31, 2011 (Continued) Investments *(4) PRVT EXCPT *(5)WESTPAC *(6) Wells Fargo/BLB FDG CORP BKG CORP CPDS Investment DISC CP DISC C/P Agreement Capital project and construction funds: 2005 Capital Project Fund $ - $ - $ Construction Fund , ,314 Debt service funds: 1993 Debt Service Fund Debt Service Fund A Debt Service Fund B-1 Var Debt Service Fund B-2 Var Debt Service Fund A Debt Service Fund B1 Debt Service Fund B2 Debt Service Fund C1A Debt Service Fund C1D Debt Service Fund C1C Debt Service Fund C1D Debt Service Fund C2 Debt Service Fund D1 Debt Service Fund D2 Debt Service Fund ,775 1, Operating Reserve Fund Capitalized Interest Fund Self-Insured Escrow Fund $ 1,775 $ 1,031 $ 32,314 (1) Fidelity Institutional M Market Prime #690 Class 1, yielding 0.10%. (2) BTM Cap Corp Disc Commercial Paper, yielding 0.00% with a maturity date of 02/21/2012 (3) General Electric Cap Corp CPDs, yielding 0.00% with a maturity date of 02/29/2012 (4) Private Expt FDG Corp DISC C/P, yielding 0.0% with a maturity date of 02/29/2012 (5) Westpac BKG Corp CPDS, yielding 0.0% with a maturity date of 05/03/2012 (6) Wells Fargo/BLB Investment Agreement, yielding 0.00% with a maturity date of 6/30/2012 (7) Overnight Tri-Party Repo GNMA, yielding 0.0% (Concluded) 39

202 PITTSBURGH WATER AND SEWER AUTHORITY SCHEDULE OF RESTRICTED ASSETS ACTIVITY - SCHEDULE II (Dollars expressed in thousands) YEAR ENDED DECEMBER 31, 2011 Series 1993 Bonds Series 2003 Bonds Series 2005 Bonds Series 2007 Bonds Debt Operating Debt Capital 2007A 2007 B B2 Service Reserve Service Project Debt Service Debt Service Debt Service Fund Account Fund Fund Fund Fund Fund Subtotal Increases: Interest $ 181 $ 8 $ (11) $ 3 $ 79 $ - $ - $ 260 Total increases (11) Decreases: Capital projects , ,135 Interest 1,769-1,858-1,625 1,640 1,643 8,535 Bond principal/refunding escrow 10, , ,885 Other Total decreases 12,119-2,263 4,135 5,755 1,640 1,643 27,555 Interfund Transfers: Nontrusteed accounts 10,770-2,236-5,649 1,634 1,640 21, B Debt Svc Fund C1 Debt Svc Fund D1 Debt Svc Fund D2 Debt Svc Fund Capital Projects Fund Total interfund transfers 10,770-2,236-5,649 1,634 1,640 21,929 Net activity (1,168) 8 (38) (4,132) (27) (6) (3) (5,366) Balance: Beginning of year 4,172 8, ,132 1, ,649 End of year $ 3,004 $ 8,536 $ 765 $ - $ 1,961 $ 7 $ 10 $ 14,283 (Continued) 40

203 PITTSBURGH WATER AND SEWER AUTHORITY SCHEDULE OF RESTRICTED ASSETS ACTIVITY - SCHEDULE II (Dollars expressed in thousands) YEAR ENDED DECEMBER 31, 2011 (Continued) Series 2008 Bonds Self-Insured A 2008B1 2008B2 2008C1A 2008C1B 2008C1C 2008C1D 2008C2 2008D1 2008D Escrow Cap. Int. Debt Svc Debt Svc Debt Svc Debt Svc Debt Svc Debt Svc Debt Svc Debt Svc Debt Svc Debt Svc Cap. Proj. Account Fund Fund Fund Fund Fund Fund Fund Fund Fund Fund Fund Fund Total Increases: Interest $ 3 $ 1 $ 24 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 398 $ 686 Total increases Decreases: Capital projects ,934 27,069 Interest - - 4,531 2,946 2, ,728 2,098 1,222 2,946-27,990 Bond principal/refunding escrow ,885 Other Total decreases - 1 4,531 2,946 2, ,728 2,098 1,222 2,946 23,900 70,911 Interfund Transfers: Nontrusteed accounts - - 4,494 2,933 2, ,728 2, ,061-38, Capitalized Interest Fund - (1,947) (1,947) 2008B Debt Svc Fund C1 Debt Svc Fund D1 Debt Svc Fund D2 Debt Svc Fund ,767-1, Capital Projects Fund (432) (432) Total interfund transfers - (1,947) 4,494 2,933 2, ,728 2, ,828 (432) 38,231 Net activity 3 (1,947) (13) (13) (11) (4) (592) (118) (23,934) (31,994) Balance: Beginning of year 575 1,947 1, ,036 82,202 End of year $ 578 $ - $ 1,525 $ 9 $ 8 $ 15 $ 15 $ 9 $ 235 $ 12 $ 407 $ 10 $ 33,102 $ 50,208 (Concluded) 41

204 PITTSBURGH WATER AND SEWER AUTHORITY SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS YEAR ENDED DECEMBER 31, 2011 Federal CFDA Federal Grantor/Pass-Through Grantor/Program Title Number Expenditures United States Department of Environmental Protection: Passed through the Pennsylvania Department of Environmental Protection: ARRA - Capitalization Grants for Drinking Water State Revolving Funds $ 4,283,028 Total Federal Expenditures $ 4,283,028 See accompanying notes to schedule of expenditures of federal awards. 42

205 PITTSBURGH WATER AND SEWER AUTHORITY NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS YEAR ENDED DECEMBER 31, BASIS OF PRESENTATION The accompanying schedule of expenditures of federal awards of the Pittsburgh Water and Sewer Authority is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts may differ from amounts presented in, or used in the preparation of the basic financial statements. 2. BASIS OF ACCOUNTING The information in this schedule is presented using the accrual method of accounting. 3. DETERMINATION OF FEDERAL EXPENDITURES The amount of federal expenditures for the United States Department of Environmental Protection loan represents the expenditures incurred under the loan during the year ended December 31,

206 Pittsburgh Water and Sewer Authority Independent Auditor s Reports in Accordance with OMB Circular A-133 Year Ended December 31, 2011

207 Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Board of Directors Pittsburgh Water and Sewer Authority We have audited the financial statements of the Pittsburgh Water and Sewer Authority (Authority) as of and for the year ended December 31, 2011, and have issued our report thereon dated April 24, We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control over Financial Reporting In planning and performing our audit, we considered the Authority s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Authority s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Authority s internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the Authority s financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Authority's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. We noted certain matters that we reported to management of the Authority in a separate letter dated April 24, * * * * * * * * * * 44

208 Board of Directors Pittsburgh Water and Sewer Authority Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Others Matters This report is intended solely for the information and use of the Board of Directors, management, and others within the Authority, and applicable federal and state agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. Maher Duessel Pittsburgh, Pennsylvania April 24,

209 Independent Auditor s Report on Compliance with Requirements that Could Have a Direct and Material Effect on its Major Program and on Internal Control over Compliance in Accordance with OMB Circular A-133 Board of Directors Pittsburgh Water and Sewer Authority Compliance We have audited the Pittsburgh Water and Sewer Authority s (Authority) compliance with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that could have a direct and material effect on its major federal program for the year ended December 31, The Authority s major federal program is identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts, and grants applicable to its major federal program is the responsibility of the Authority s management. Our responsibility is to express an opinion on the Authority's compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Authority's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination on the Authority s compliance with those requirements. In our opinion, the Authority complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended December 31, Internal Control over Compliance Management of the Authority is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, we considered the Authority's internal control over compliance with requirements that could have a direct and material effect on a major federal program to determine the auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Authority s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a 46

210 Board of Directors Pittsburgh Water and Sewer Authority Independent Auditor's Report on Compliance with Requirements that Could Have a Direct and Material Effect on its Major Program federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. * * * * * * * * * * This report is intended solely for the information and use of the Board of Directors, management, others within the Authority, federal awarding agencies, and pass-through entities, and is not intended to be and should not be used by anyone other than these specified parties. Maher Duessel Pittsburgh, Pennsylvania April 24,

211 PITTSBURGH WATER AND SEWER AUTHORITY SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED DECEMBER 31, 2011 I. Summary of Audit Results 1. Type of auditor s report issued: Unqualified 2. Internal control over financial reporting: Material weakness(es) identified? yes no Significant deficiencies identified that are not considered to be material weakness(es)? yes none reported 3. Noncompliance material to financial statements noted? yes no 4. Internal control over major programs: Material weakness(es) identified? yes no Significant deficiencies identified that are not considered to be material weakness(es)? yes none reported 5. Type of auditor s report issued on compliance for major programs: Unqualified 6. Any audit findings disclosed that are required to be reported in accordance with Section 510(a) of Circular A-133? yes no 7. Major Programs: CFDA Number(s) Name of Federal Program or Cluster ARRA - Capitalization Grants for Drinking Water State Revolving Funds 8. Dollar threshold used to distinguish between type A and type B programs: $300, Auditee qualified as low-risk auditee? yes no II. Findings related to the financial statements which are required to be reported in accordance with GAGAS. No matters were reported. III. Findings and questioned costs for federal awards. No matters were reported. 48

212 PITTSBURGH WATER AND SEWER AUTHORITY SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS YEAR ENDED DECEMBER 31, 2011 No Findings in Prior Year 49

213 APPENDIX D CITY OF PITTSBURGH

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215 CITY OF PITTSBURGH, PENNSYLVANIA The City of Pittsburgh (the City ) located in western Pennsylvania, is the county seat of Allegheny County. As of the 2010 census, the City had a total population of 305,704 (2,388,076 metropolitan) making Pittsburgh the second-largest city in the State. The City s mailing address is 526 City County Building, 414 Grant Street, Pittsburgh, PA with a facsimile number of The Government of Pittsburgh Three principal government entities provide services in the Pittsburgh area: the City, the County of Allegheny (the County ) and The School District of Pittsburgh (the School District ). The City was incorporated in 1816 and became a home rule community on January 5, Its powers are set forth in the Charter which became effective January 5, The Charter was adopted by the electorate pursuant to Article IX, Section 2 of the Constitution of the Commonwealth and the Home Rule Charter and Optional Plans Law, Act of April 13, 1972, P.L. 184, No Under the Charter, the City has all home rule powers and may perform any function and exercise any power not denied by the Constitution of the Commonwealth, the laws of the Commonwealth or the Charter. The Charter provides, among other things, for the election of the Mayor and the powers and duties of the executive and administrative branch; the election, organization, powers and duties of the legislative branch; the method by which the City s capital and operating budgets are adopted; the rules which govern City personnel; and the financial disclosure requirements for elected officials. Under the Charter, the executive, administrative and law enforcement powers of the City are vested in the Mayor, who is directed to control and be accountable for the executive branch of the City government. The Charter establishes a strong mayor form of government in which the Mayor controls and has wide powers of appointment over the units of the City government and has the power to initiate and veto legislation and to propose the City s operating and capital budgets, to which proposals the City s legislative body, the City Council, must react within a definite time period. The Mayor is elected to a four-year term and may be reelected for subsequent consecutive terms without limitation. The Controller of the City is elected to a four-year term in a different municipal election year from the mayoral election, and may be re-elected for subsequent consecutive terms without limitation. As provided in the Charter, the Controller audits all units of City government, countersigns all City contracts, controls all City disbursements and prepares reports on revenues, expenditures, debt and the financial condition of the City. The Controller serves ex-officio as controller of the School District. The City s financial management functions are carried out by the Department of Finance, headed by the Director of Finance who is appointed by the Mayor, subject to confirmation by City Council. The Department of Finance is responsible for the treasury functions of revenue and tax collection, certain real estate functions, the investment of City funds and debt management, and for preparing and monitoring the operating and capital budgets. The legislative power of the City is vested by the Charter in the City Council, which consists of nine members, all of whom are elected by district to four-year terms that are staggered so that four members are elected at the same time as the Mayor. Members may be re-elected for subsequent and consecutive terms without limitation. Under the Charter, the members of the City Council elect, by majority vote, one member to serve as President. The President of Council presides at meetings of City Council, appoints all committees, and refers proposed legislation to the proper committee. D-1

216 CITY OF PITTSBURGH OFFICIALS LUKE RAVENSTAHL Mayor - Mr. Ravenstahl became the 59th Mayor of Pittsburgh on September 1, 2006 following the death of Mayor Bob O Connor and was elected to a full term as Mayor on November 3, Mr. Ravenstahl was elected to City Council on November 4, 2003 and was elected President of City Council in December Mayor Ravenstahl is a graduate of North Catholic High School and received his B.A. Degree in Business Administration from Washington and Jefferson College in December Mr. Ravenstahl s term in office ends in January WILLIAM PEDUTO Mayor Elect On November 5, 2013 Mr. Peduto was elected as the 60 th Mayor of the City of Pittsburgh. He will take office in January Prior to being elected Mayor Mr. Peduto was elected to City Council in 2001, and was re-elected to an additional four year term in 2005 and again in Mr. Peduto has a Master Degree in Public Policy from the University of Pittsburgh. MICHAEL LAMB City Controller - Mr. Lamb was elected Controller of the City of Pittsburgh in November of 2007, and took office on January 7, Mr. Lamb was re-elected City Controller in November 2011, and he commenced his new term in January Prior to being elected City Controller, Michael was the Prothonotary of Allegheny County, the chief record keeper of the Court of Common Pleas. Prior to working in the Prothonotary's office, Michael Lamb served as a research and legislative assistant to Pittsburgh City Council and was the Assistant Regional Director of the Pennsylvania Higher Education Assistance Agency. SCOTT KUNKA DANIEL REGAN, ESQUIRE Director of Finance - Mr. Kunka was appointed Director of the Office of Management and Budget in March 2006 and as Director of Finance in November He is responsible for overseeing the operating and capital budgets. Previously, Mr. Kunka held positions in the Controller s Office, Office of Management and Budget and Department of General Services, and as the Budget Director for City Council. City Solicitor - Mr. Regan serves as counsel for the City of Pittsburgh. He is responsible for rendering legal opinions and advice to the Mayor, City officials, City Council and the administrative units of City government. The City Solicitor also functions as Solicitor for the Comprehensive Municipal Trust Fund Board. Mr. Regan was appointed to his position in December 18, He was a partner in the Pittsburgh law firm Caputo & Caputo, P.C. prior to such appointment. LOURDES SANCHEZ RIDGE City Solicitor Successor - Mr. Peduto has indicated his appointment as City Solicitor to be Ms. Ridge. She specializes in white collar defense, and will also serve as chief legal officer of the City. She is a native of Cuba who was raised in the United States. She was a prosecutor in Florida and most recently with the Pittsburgh firm of Clark Hill Thorp Reed. D-2

217 MEMBERS AND MEMBERS ELECT OF CITY COUNCIL DARLENE M. HARRIS President of City Council - Ms. Harris was elected in a special election in November 2006 to represent District 1 following the appointment of Mr. Ravenstahl as Mayor in She was reelected in November 2011, and she commenced her new term in January Ms. Harris was elected President of City Council in January Councilwoman Harris serves as the Chairperson for the Committee on Hearings (held by the President of Council). THERESA KAIL-SMITH Member of City Council - Mrs. Kail-Smith was elected to represent District 2 in a special election and took office on February 19, Councilwoman Kail-Smith is currently the President Pro-Tempore for City Council, and serves as the Chairperson for the Committee on Public Safety Services. BRUCE KRAUS Member of City Council - Mr. Kraus was elected to represent District 3 and took office on January 7, He was re-elected in November 2011, and he commenced his new term in January Councilman Kraus serves as the Chairman for the Committee on Public Works. NATALIA RUDIAK Member of City Council - Ms. Rudiak was elected to represent District 4 and took office on January 5, Councilwoman Rudiak serves as the Chairperson for the Committee on Performance and Asset Management. COREY O CONNNOR Member of City Council - Mr. O Connor was elected to represent City Council District 5 and took office on January 3, Mr. O Connor serves as the Chairman for the Committee on Urban Recreation. R. DANIEL LAVELLE Member of City Council - Mr. Lavelle was elected to represent District 6 and took office on January 5, Councilman Lavelle serves as the Chairman for the Committee for Land Use and Economic Development. DEBORAH GROSS Member of City Council - Ms. Gross was elected to District 7 and will take office December 9, Ms. Gross was elected to this position by a special election. DANIEL GILMAN This District seat is currently held by the Mayor-Elect William Peduto. Daniel Gilman will succeed Mr. Peduto to this District seat. Mr. Gilman will take office in January RICKY V. BURGESS Member of City Council - Mr. Burgess was elected to represent District 9 and took office on January 7, He was re-elected in November 2011, and he commenced his new term in January Councilman Burgess serves as the Chairman for the Committee on Finance and Law. D-3

218 City Departments and Services The Charter provides that all units of the City government, except those mandated by the Charter as described below, may be established, revised, or abolished by ordinance, which may be introduced by the Mayor or City Council. Under the Charter, the Mayor appoints the heads of all major administrative units, subject to the approval of City Council. The Charter also provides that the Mayor shall, subject to the approval of City Council, appoint the City Solicitor, the members of all boards and commissions and, except as otherwise required by law, all board members of authorities. Under the Charter, a member of City Council must serve on each authority board, but no member may serve concurrently on more than one board. The Charter mandates the establishment of a 15-member Human Relations Commission, which is directed to investigate, report, hold hearings and otherwise enforce the rights of citizens in connection with unlawful discrimination. The City Solicitor acts as counsel for the City and its officials, although the City Controller, City Council and the Human Relations Commission are empowered to retain their own counsel. The Department of Personnel and the Civil Service Commission administers all the City s personnel policies, civil service requirements and the City s Workforce Investment Act (formerly JTPA) Program. The Department of Personnel and the Civil Service Commission is also responsible for City payroll, benefits and workers compensation matters. The Department of City Planning makes recommendations to the Mayor and City Council regarding the allocation of resources for the orderly development and redevelopment of the City. It also assists the Department of Finance in formulating the City s Capital Improvement Program, undertakes planning studies and administers zoning requirements. The Department of Public Safety, created in 1985, carries out the traditional police, fire and emergency medical service functions, as well as the enforcement of building codes. The Department of Public Works exercises responsibility for the maintenance of all the City s streets, sewers, parks, bridges and steps, for the construction of minor public works capital improvements, and operates sanitation services and is responsible for engineering and the design of projects in the City s Capital Improvement Program. The Department of Parks and Recreation provides recreational opportunities to City residents. Financial Management Council is required to adopt a final operating and capital budget for the next year by the last day of the current fiscal year, which is December 31. The annual budget is the basis of the City's financial planning and control. The operating budget is prepared on a departmental basis. The department heads may spend within a budget classification (e.g., salaries, supplies, rentals, miscellaneous) as they see fit. Any transfers between classifications or departments have to be approved by Council. The Mayor's Office also prepares a five year plan annually. Internal Control. Management of the City is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City are protected from loss, theft, or misuse and to ensure that adequate accounting information is compiled to prepare financial statements in accordance with accounting principles generally accepted in the United States of America. The internal control structure is designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of reasonable assurance recognizes that: (1) the cost of a control should not exceed the benefits likely to be derived and (2) the evaluation of costs and benefits requires estimates and judgments by management. Budget Control. Budget control is maintained at the line item level on a departmental basis. Activities of the General Fund, the Special Revenue Fund (Community Development Fund only), and the Capital Projects Fund are controlled by an annual legally appropriated budget. Capital Projects and Community Development Funds are also controlled on a multi-year basis. D-4

219 Revenues of the City General During 2012, Real Estate Taxes accounted for approximately 28.5% of the receipts of the General Fund, followed by Earned Income Tax with 15.2%, Payroll Preparation Tax at 11.3%, and Parking Tax at 10.3%. RAD Sales Tax is 2.7% and Deed Transfer Tax comprises 3.2%. The remaining receipts were from miscellaneous non-tax revenue. Under the City s new tax structure, it is expected that Real Estate Taxes will continue to be the City s most significant source of revenue. See "Revenues of the City" " Non-Real Estate Taxes" below. As noted below, the Business Privilege Tax was eliminated in Payroll Preparation Tax revenues are expected to offset the loss of Business Privilege Tax revenues in the coming years. Real Estate Taxes The City has the power to levy and collect ad valorem taxes on all taxable real estate within its boundaries. Real estate is assessed by Allegheny County Office of Property Assessment pursuant to the terms of the General County Assessment Law and the Second Class County Assessment Law, which require property to be assessed at actual market value. Property is assessed by the Board at 100% of fair market value. The taxable assessed value for 2012 was $13,642,162,362. A unified tax levy for land and buildings is made annually on January 1 and collected by the City. Taxes are payable annually or in three installments, at the taxpayers' option, normally due the last day of February, April 30, and July 31. A 2% discount is allowed on either the first installment or the full year tax payment, normally if paid by February 10. If no payment is received by the last day of February, the installment payment privilege is forfeited, and the entire tax for the year is considered delinquent. Penalty and interest is imposed on delinquent payments. Delinquent taxes are liened every three years after the levy date. The City provides programs of tax abatement for new construction and rehabilitation of residential and commercial/industrial properties pursuant to Commonwealth legislative authority. The residential abatement program provides for the abatement of taxes for a period of three years on the increased assessment attributable to new construction or rehabilitation up to an annually indexed average housing construction cost ceiling. The City makes tax abatements available for commercial/industrial properties for the assessment increase attributable to new construction. The City shares the real estate tax base with the County of Allegheny and the School District of Pittsburgh, separate taxing bodies. Information regarding real estate, tax rates and major taxpayers is provided in the following tables. CITY OF PITTSBURGH REAL ESTATE TAX RATES CITY OF PITTSBURGH DIRECT AND OVERLAPPING JURISDICTIONS (mills) Year Land Building Total City (1) School District County (2) Total (1) Determined by multiplying the respective assessed valuation by the millage rate and dividing by the total assessed valuation. (2) Includes levy by Allegheny County Institution District (the Institution District ). (3) Four changes took place in 2001 that affected real estate tax rates: (i) the County conducted a property revaluation program that resulted in an approximate 57% increase in taxable property values for the City; (ii) the County changed the ratio of assessed value to market value from 25% to 100%; (iii) the City changed from a bifurcated (land and building) tax rate to a single, unified tax rate for both land and buildings; and (iv) the School District raised its effective millage rate by approximately 27%. Source: City of Pittsburgh D-5

220 CITY OF PITTSBURGH ASSESSED VALUATION AND ESTIMATED ACTUAL VALUES OF TAXABLE PROPERTY ($ s in Thousands) Less: Total Taxable Estimated Fiscal Year Total Assessed Value Tax-Exempt Property Taxable Assessed Value Rate (mills) Taxable Value 2008 $21,032,626 $7,777,749 $129, $143, ,299,162 7,950, , , ,549,437 8,180, , , ,980,818 8,494, , , ,380,149 8,737, , ,335 Source: City of Pittsburgh CITY OF PITTSBURGH REAL ESTATE ASSESSED VALUE, TAX RATE, LEVY AND COLLECTIONS ($ s in Thousands) Year of Original Levy Taxable Percent Percent Delinquent Taxes Assessed of of Percent Percent Valuation Original Adjusted of of Fiscal Of Land & Land Building Original Adjusted (2) Net levy Net levy Budget Collections Budget Year Buildings Millage Millage Net levy Net levy (1) Budget Receipts Collected Collected Collected Budget Receipts Collected ,254, , , , , ,245 3, ,348, , , , , ,201 4, ,441, , , , , ,454 3, ,486, , , , , ,830 3, ,642, , , , , ,525 5, (1) Represents net levy as of December 31 of the tax year (i.e., net of exonerations, discounts, and additions granted in that year) (2) Receipts are net of funds. Source: City of Pittsburgh CITY OF PITTSBURGH TEN LARGEST REAL ESTATE TAXPAYERS DECEMBER 31, 2012 PERCENTAGE TAXABLE OF TOTAL TAX LEVEID TAXPAYER ASSESSED VALUE TAXPAYER 500 Grant Street Associates/Mellon Bank... $ 349,940, % PNC ,789, Holdings Acquisition Co. LP ,091, Buncher Company ,247, Market Associates Limited ,000, GS Prop. LP ,000, Oxford Development ,000, Grant Liberty Development Group ,000, North Shore Developers... 64,297, Liberty Avenue Holdings... 62,100, Total... $1,729,466, % Source: City of Pittsburgh D-6

221 Real Estate Assessments The City has the power to levy and collect ad valorem taxes on all taxable real estate within its boundaries without limitation as to rate or amount. The City does not have a statutory limit on real estate taxes, except for certain limits imposed in a year of reassessment. In recent years, changes have occurred to the system by which real estate taxes are assessed by the County. These changes have affected revenues from taxable real property in the City. The City, as part of Allegheny County, had all property reassessed for the year Assessments are now based on 100% of market value. Due to the magnitude of the changes from the previous assessments, particularly in the ratio of land to building values, the City was forced to abandon its two-tiered or bifurcated tax, which had been in existence since The City now taxes land and building at the same unified rate and plans to maintain a unified rate unless land values are reassessed in the future. A courtordered reassessment for Allegheny County, including the City of Pittsburgh, occurred during Currently, these reassessed values are to be used for the 2013 tax levy. City and School Real Estate Taxes (property taxes) are based on the assessed value of the property as determined by the Allegheny County Board of Assessors. The assessed value of a property is broken down by land value and building value. For 2012, the City s tax rate was 10.8 mills on the assessed value of the property. The School District of Pittsburgh's tax rate was mills on the assessed value. A mill is 1/10 of a cent. For example, on a property assessed at $1,000, the City Real Estate tax would be $ The School District of Pittsburgh Real Estate Tax would be $ The 2013 City real estate tax rate is 7.56 mills. Taxes are billed on a calendar year. There are two tax relief programs in the City, the Homestead and Senior Tax Relief. The City's Urban Redevelopment Authority has been active in promoting tax increment financings to finance certain types of development within the City. The Tax Increment Financing Act of the Commonwealth precludes a municipality from allowing the aggregate value of taxable property of all tax increment financing districts to exceed ten percent of the total value of "equalized taxable property within the municipality." Typically the tax increment financings undertaken by the URA only provide for 60 to 75% of the tax increment attributable to such projects (representing the increase in real estate taxes above the base year when the tax increment financing district was established) to be diverted to the projects or related infrastructure. On January 1, 2010, the City entered into an agreement with Jordan Tax Service to outsource properties with delinquent taxes of one year or more for aggressive collection services. Non-Real Estate Taxes In addition to ad valorem taxes on real estate, the City is empowered by the Local Tax Enabling Act and the Home Rule Charter and Optional Plans Law to levy taxes for general revenue purposes, on persons, transactions, occupations, privileges, and upon the transfer of real property or interest therein. All non-real estate taxes, except the Deed Transfer Tax, which is payable at the time of transfer, are payable annually, by April 15, quarterly or monthly depending on the tax. In 2004, in connection with the Recovery Plan (defined in Act 47/ICA herein), legislation was passed which eliminated the occupational privilege tax payable by residents and nonresident employees at $10 per year and replaced it with the Emergency and Municipal Services Tax, now named the Local Services Tax, payable by residents and nonresident employees at $1 per week, and for those earning less than $12,000 per year no tax is imposed. The legislation authorized the City to levy a gross payroll tax at the rate of 0.55% on all non-charitable businesses. The legislation also required the City to eliminate the 2 mill mercantile tax in 2005, and eliminated the City s business privilege tax. D-7

222 The City currently levies the following non-real estate taxes: Earned Income Tax Parking Tax Amusement Tax Deed Transfer Tax The Earned Income Tax or Wage-Tax is levied at the rate of 1.00% on the wages or net profits earned by residents of the City. The majority of the tax payments are deducted from payrolls and remitted by employers to the City. As an Act 187 mandated subsidy, the School District of Pittsburgh remits an additional 0.25% on the wages or net profits earned by residents of the City. A tax equal to 37.5% of the consideration paid for each parking transaction is levied on the patrons of non-residential parking places in the City. This tax is levied at the rate of 5% on the admission price paid by patrons of all manner and forms of for profit amusement within the City. Non-profits are exempt from the amusement tax. A tax of 2% of the consideration paid for real property transfers is levied upon the transfer of an interest in real property situated in the City. Institution Service Privilege Local Services Tax Payroll Preparation Tax Facility Usage Fee This 6 mill tax is levied on certain receipts of non-profit, non-charitable organizations conducting or operating a service or service institution in the City. A $52 tax is levied upon each individual whose principal place of employment is located in the City, regardless of residence. Legislative action requires collection at $1 per week, remitted according to a calendar quarter, with an exemption for persons on active military duty and employees who are honorably discharged veterans with 100% service-connected disabilities. This tax is imposed on all for-profit companies in an amount equal to.55% of the total wages of all employees who perform work in the City. A fee of 3% tax on wages earned by non-resident athletes and performers that work at certain facilities that have been subsidized with public money. RAD Tax Revenues The Allegheny Regional Asset District (the RAD ), a special purpose area wide unit of local government created in 1993 to provide supplemental sources of revenue for local governments in the southwestern region of Pennsylvania, imposes a 1% regional sales tax (the RAD Tax ) on sales of products and services in Allegheny County that are subject to the Pennsylvania State Sales Tax. The proceeds of the RAD Tax are distributed as follows: one-half to the RAD, one-fourth to the County and one-fourth to all other eligible municipalities, including the City. Other Contingencies: ALCOSAN As described in note 17 to 2012 CAFR, (see Appendix B) in addition to potential contingencies from lawsuits, real estate tax appeals and possible disallowance of federal and state program costs, the Pittsburgh Water and Sewer Authority (the Authority ) and the City entered into a Consent Order and Agreement (the Order ) regarding wet weather sewer overflows in the City with the United States Environmental Protection Agency, the Pennsylvania Department of Environmental Protection (the DEP ) and the Allegheny County Health Department. In compliance with the Order the Authority submitted a West Weather Feasibility Study to the DEP on July 31, 2013 to address the overflows. Work is ongoing with respect to the Order and, as described in note 17, "Given the scope of the Order, the size of the City's sewer system, and the various conditions and/or deficiencies that may be discovered by the assessment, it is difficult to predict the total cost of compliance with the Order D-8

223 CITY OF PITTSBURGH DEMOGRAPHIC INFORMATION (2) (2) (2) (3) (4) Fiscal (1) Per Personal Median School Unemployment Year Population Capita Income Income Age Enrollment Rate % ,563 32,381 76, , % ,563 33,015 77, , % ,563 34,897 79, , % ,563 36,680 83, , % ,563 36,894 85, , % ,563 38,550 91, , % ,563 42, , , % ,704 44, , , % ,704 43, , , % ,704 50, , , % (1) Census Borough (2) U.S. Department of Commerce, 12-month lag (3) School District of Pittsburg (4) U.S. Department of Labor, Bureau of Labor Statistics Source: City of Pittsburgh Pittsburgh s Economy The City continues to build and strengthen its economy not only by expanding existing businesses, but also by working to attract new businesses and industries to the region. The primary goal is to assist businesses both small and large in developing and enhancing working relationships among economic development practitioners throughout the state. By supporting the growth of the existing business core and marketing its competitive advantages to attract new businesses, the City has modernized its economy. Nationally the number of jobs has been increasing and Pittsburgh has followed the national trend by increasing its number of jobs from 2011 to 2012 by 2.0%. As of December 31, 2012, Pittsburgh's unemployment rate was 7.2% compared to 7.9% for the state and 8.1% nationally. Initiatives such as "one-stop service providers" allow firms doing business in the City to be assigned a project coordinator who will serve as a single point of contact throughout the development process. Tax credits granted by both the federal government and the Commonwealth provide financial incentives for companies to hire new employees. The City also contains three State Enterprise Zones which enable businesses located within those designated areas to enjoy more favorable interest rates and tax incentives. The City has several sites included among the Commonwealth's Keystone Opportunity Zones, which exempt a majority of state and local taxes for a number of years. Over the past couple of years the City has focused on the revitalization of its downtown core, making aesthetic improvements to reestablish it as a regional destination point. With the formation of a Business Improvement District in 1996, the Pittsburgh Downtown Partnership spearheaded improvements in maintenance, safety, and marketing. A combination of factors including residential tax incentives and growing enrollment in post-secondary educational institutions has stimulated residential growth and development in the central business district. The City is also working to make downtown the region's chief entertainment destination. In 2012, The City unveiled a redesigned Market Square, Downtown Pittsburgh s central meeting place making it more pedestrian friendly. Many new restaurants opened in Market Square and throughout Downtown Pittsburgh and ground was broken on the Tower at PNC Plaza, a 32-story skyscraper that will be the new world headquarters of the PNC Financial Services Group. The City is also strengthening and revitalizing its neighborhoods, encouraging new housing and mixed-use development throughout the City, providing both new and existing residents a higher quality of life. Major development sites offer great opportunities for growth in the lower Hill District, the Strip and in Hazelwood. Community plans are furthering development initiatives in Larimer. Lawrenceville and the Hill, and throughout our neighborhoods, the City has partnered with developers to attract new stores and restaurants. D-9

224 In 2011, at the old Nabisco site and newly developed Bakery Square complex in the Larimer neighborhood of the City, Google opened a 40,000 sq. ft. office space with 150 employees. Google is planning further expansion in Also in 2011, in the Bakery Square development, a 110-room Marriott Springhill Suites opened, and Target opened a 145,000-square-foot store in East Liberty. Spurred by this success, more than $90 million in private investments is now underway or due to begin construction in the coming year in this corridor, including a full-service, 140-room Holiday Inn, 84 market rate condominiums, square feet of commercial space, and 640 parking spaces. The most dramatic development in the City, however, may be its rebirth as a hub for the technology industry. The University of Pittsburgh and Carnegie Mellon University lead the way in research of biotechnology, bioengineering, robotics, and information technology. Increases in university research and development spending are a significant sign that the City's universities are working to commercialize technology development. This R & D spending will spin off new companies, new jobs and new wealth. During the past 15 years, Pittsburgh has more than doubled its number of technology driven firms, creating over 1,200 new enterprises. Today, nearly 2,400 high technology firms employ over 90,000 individuals, accounting for roughly nine percent of the total workforce in Pittsburgh metropolitan area. In fact, the Pittsburgh region now ranks in the top ten in the nation in total employment of computer software professionals. Pittsburgh is also the third largest environmental technology hub in the country. In aggregate, technology companies have produced over 30,000 new jobs since 1980, sharply offsetting job losses from other industries in the region. Pittsburgh sits at the center of a growing industry in the energy sector. The advances in natural gas extraction have enabled access to previously unattainable resources through the process of hydraulic fracturing of shale. The greater Pittsburgh region is located above both the Marcellus and Utica shale formations and, while this kind of drilling activity has been banned in the City of Pittsburgh, the effects of the growth of this industry in the region are impacting the City and its residents. According to the Pittsburgh Regional Alliance, the Pittsburgh region was among the nation s top performers for business investment in 2010, despite the worst global economic conditions since the Great Depression. According to this data, regional capital investments from 197 economic development deals totaled $3 billion in These are expected to create, over time, 7,238 new jobs and retain 8,683 - for a total employment impact of nearly 16,000 jobs. According to "Foreign Direct Investment" magazine, the Pittsburgh region is now recognized as a top destination for global business investment. Pittsburgh ranked first overall in the country in the large cities category. In cooperation with the Pittsburgh School District, the City has created the Pittsburgh Promise Program which is funded by private contributions from foundations, corporations, and individuals. This program provides scholarships of up to $10,000 per year for qualified students to any accredited post-secondary institution within Pennsylvania. As of the end of 2012, more than 3,800 graduates of the Pittsburgh Public Schools have taken advantage of the Pittsburgh Promise scholarship. This should help to grow the City's population and make it attractive for families to stay or move into the City. The overall outlook for Pittsburgh in the 21 st century and beyond is promising. The City s investments and initiatives of the past several years are leading to more business development and increased residential construction. Green Industry in Pittsburgh Mayor Ravenstahl has led the City with the creation of the City s Office of Sustainability and Energy Efficiency, which seeks to integrate climate protection, recycling, green development and renewable energy strategies into the City s operations and economy. Pittsburgh is one of only 25 U.S. cities to be named a Solar America City. Pittsburgh is a leader in green development, with more than 30 LEED certified green buildings. The David L. Lawrence Convention Center, home to the 2009 G-20 Summit is the world s first and largest green engineered convention center. Pittsburgh G-20 Summit (2009) Pittsburgh hosted the September 2009 G-20 summit, allowing the City to showcase itself to world leaders. Pittsburgh s economic diversity, recovery from the loss of steel and its technologically based industry were all illustrated to a global audience. Public safety and security costs of over $12 million were incurred under budget, and with reimbursements to the City which resulted in all of these costs being covered by various state and federal agencies. D-10

225 CITY OF PITTSBURGH 2012 LARGEST EMPLOYERS % of Total Municipal Employer Employees Rank Employment University of Pittsburg Medical Center 42, % U.S. Government 19, Commonwealth of PA 13, University of Pittsburgh 12, Giant Eagle 11, West Penn Allegheny Health System 10, BNY Mellon 7, Allegheny County 6, Westinghouse Electric 5, Highmark, Inc. 5, Total 134, Source: Pittsburgh Business Times. D-11

226 Act 47/ICA In November 2003, the City sought municipal self-help as a financially distressed municipality under the Municipalities Financial Recovery Act ( Act 47 ). The Pennsylvania Department of Community and Economic Development ( DCED ), after review of the City s application and advice of its legal and financial experts, agreed. The Act 47 coordinators issued their Recovery Plan on June 11, 2004, which was adopted by Pittsburgh City Council on June 29, 2004 (the Recovery Plan ). Subsequent to the City s designation as financially distressed under Act 47, the Commonwealth of Pennsylvania legislature under Act 11 established an Intergovernmental Cooperation Authority ( ICA ) to provide fiscal oversight for the City for an initial period of seven years. Act 11 stipulated that the ICA is to operate concurrently and equally with the Act 47 coordinators. In accordance with specific requirements under Act 11 and with the support and approval of both the Act 47 coordinators and ICA oversight committee, the City submitted on November 5, 2004 its 2005 Operating and Capital Budgets and Five-Year Financial Forecast and Performance Plan. The plan called for both expenditure cut backs and proposed a new tax levy structure. Expenditure reductions and controls included: salary freezes City-wide for at least two years, public safety cost reduction achieved primarily through the renegotiation of the firefighter contract, reductions to all elected officials budgets and regular reporting requirements verifying adherence to the Recovery Plan s budget. On November 21, 2004, the State legislature approved legislation providing the City with new taxing authority that was intended to balance its 2005 and subsequent operating budget allowing for a surplus each year to build a fund balance of $21.9 million by As of December 31, 2012, the City had exceeded these expectations by having a fund balance of $92.1 million. Taxes included: a 0.55% tax on the gross payroll of all for-profit businesses, $52 on individuals working in the City, 3.0% tax on wages earned by nonresident sports players and performers using the stadium and arena, a shift in earned income away from the school district and to the City beginning in 2007, elimination of the $4.0 million payment of regional asset district sales tax to the school district, and a gradual reduction in the City s parking tax beginning on The tax package provided for the gradual reduction of the business privilege tax and total elimination of the mercantile tax. In November 2012, the Act 47 Coordinator for the City recommended that the Secretary of DCED rescind the City s status as a financially distressed municipality. The Secretary has forwarded the recommendation to the Governor. On December 31, 2012, the 2013 Operating and Capital budgets and Five-Year Financial Forecast and Performance plan was submitted to and subsequently approved by the Act 47 coordinators and ICA oversight committee. There were no significant changes from the initial five-year plan. Pension Funding Commonwealth of Pennsylvania Act 47 of 2009 required the City s aggregate pension funding level to be at least 50 percent by December 31, 2010 to avoid having the City s pension funds seized and administered by the Pennsylvania Municipal Retirement System. The City met this requirement by transferring $45 million to the Comprehensive Trust Fund in 2010 and agreeing to dedicate a portion of parking tax revenues for the next 31 years. The City contributed $13.4 million of the parking tax revenue to the Fund in 2011 and 2012, and intends to contribute the same amount each year through 2017 and $26.8 million per year from 2018 through The Mayor-Elect William Peduto proposed changes to the City s pension eligibility rules for those City employees who have not yet reached sixty (60) or attained twenty (20) years of service. Those City employees whose combined age and years of service exceeds seventy (70) and elect to retire before January 31, 2014 would be able to retire without a reduction in benefits. To be eligible the employee must be a minimum of fifty (50) years of age. The City estimates this change could affect 132 employees. The ordinance approving this proposed amendment has been introduced to City Council. There is no way to predict at this time if the proposal will be passed by City Council or if passed how many eligible employees will avail themselves of this benefit. D-12

227 APPENDIX E CONSULTING ENGINEER S REPORT IN SUPPORT OF THE 2013 CAPITAL IMPROVEMENTS BOND ISSUE DATED NOVEMBER 26, 2013

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229 Pittsburgh Water and Sewer Authority Allegheny County, Pennsylvania Engineer's Report in Support of the 2013 Capital Improvements Bond Issue November 26, 2013 Prepared by: David W. Troianos, P.E. Approved by: John Balewski, P.E. Project No.: CE-02 - Penn Avenue Plaza I 1250 Penn Avenue, Pittsburgh PA FAX

230 CONSULTING ENGINEER'S ANNUAL REPORT AND BUDGET TABLE OF CONTENTS Executive Summary...v Purpose...1 Proposed Bond Issue...1 Water and Sewer Revenue Bonds Series 2013 (the 2013 Bonds)...1 Total Debt Service Requirements...2 Debt Service Coverage Factor...4 Method Method Rate Covenant Calculations...5 Revenue and Expense Projections...6 Project Cost Summary...11 Project Schedule...11 Outstanding Litigation...11 Proposed Capital Improvements for 2013 Bond...11 History of the Authority...17 Initial Authority Operation...17 General Description of the Authority System...18 The Water System...18 The Sewer System...18 Bond Issue History...22 First Bond Issue Bond Issue and Refinancing Bond Issue Bond Issue and Refinancing Bond Issue Bond Refinancing Bond Issue Bond Advance Refunding Bond Advance Refunding...24 The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -ii-

231 CONSULTING ENGINEER'S ANNUAL REPORT AND BUDGET TABLE OF CONTENTS (CONT.) PENNVEST Funding...25 Summary of Funding Sources...25 Appendix A Project Priorities and Estimated Costs Appendix B Anticipated Bond Drawdown Schedule Appendix C 2013 Rate Study for Years Sycamore Advisors, LLC Appendix D PWSA Resolution 102 of 2013, Adopting and Establishing Rates Appendix E Debt Service Analysis Public Financial Management, Inc. Appendix F PWSA 2013 Debt Service The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -iii-

232 LIST OF TABLES Page No. Table 1 Forecasted Debt Service Payments...2 Table 2 Existing Bonded Debt Service Payments...3 Table 3 Debt Service Coverage Factor...5 Table Actual, 2013 Budgeted, and Projected Revenues and Expenses...9 Table 5 Sources of Capital Improvement Funds...26 The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -iv-

233 ENGINEER'S REPORT IN SUPPORT OF THE 2013 CAPITAL IMPROVEMENTS BOND ISSUE EXECUTIVE SUMMARY The purpose of this report is to certify the ability of the Pittsburgh Water and Sewer Authority (Authority) to meet debt service coverage requirements as required under the Authority s Trust Indenture defined herein. This report provides an overview of the financial condition of the Authority including revenue and expense projections to establish the Authority s ability to provide debt service coverage on its outstanding bonds and long term indebtedness, including the 2013 B Bonds (2013 B Bonds) anticipated to be approximately $83,000,000. The report will also include a brief description of the history of the Authority, a general description of the Authority s facilities and a listing of the anticipated projects to be financed through the proceeds of the proposed 2013 B Bonds. The Authority has routinely adopted user fees and rate increases for the water and sewer systems based on a review of previous years revenues, expenses, and cash balance. The Authority contracted with Sycamore Advisors, LLC, for the preparation of a rate study report to evaluate the need for possible user rate adjustments. The report was titled Pittsburgh Water and Sewer Authority Rate Study (Sycamore Report). Chester Engineers performed an evaluation of the Sycamore Report. Based on the evaluation, the assumptions and determinations of the Sycamore Report are reasonable and consistent with standard rate studies performed for the Authority. The information obtained for the Sycamore Report is consistent with information gathered for this engineer s report. The evaluation of customer population levels and regional water consumption is also consistent with our independent evaluations. The Sycamore Report recommended that the Authority adjust rates in order to meet financial obligations and provide full funding of the proposed Capital Improvement Program, estimated at $150,000,000. On October 11, 2013, the Authority Board approved the rate increase recommended in the Sycamore Report through Resolution 102 of 2013, Adopting and Establishing Rates. New user rates were approved for years 2014 through The projected revenues from the approved rate increase under Resolution 102 of 2013 are adequate to provide sufficient operating revenues to fund operating costs, debt service costs and debt service reserve requirements of all the Authority s outstanding bonds and long term indebtedness, including the 2013 B Bonds through The capital improvements that will be funded under the 2013 B Bonds are divided into the following major categories: The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -v-

234 A. Water System Improvements. 1. Water Treatment Plant Improvements. 2. Pumping and Storage System Improvements. 3. Water Distribution System Improvements. B. Sewer System Improvements. 1. Waste/Storm Water Systems. C. City Capital Projects. D. Pennsylvania Department of Transportation (PENNDOT). E. Miscellaneous Projects. F. Engineering. G. Contingency. The proposed amount of the 2013 B Bonds in Chester Engineers evaluation of capital projects and debt service is $83,000,000. The proposed capital improvements to be completed under the 2013 B Bonds are estimated at $75,000,000. Approximately $8,000,000 of the 2013 B Bond funds will be utilized to reimburse the Authority s Operations Fund which was utilized to construct Capital Improvements in It is anticipated that the 2013 B Bonds projects will be completed within 30 months from the implementation of this capital program. Our opinion of the estimated 2013 B Bonds project costs and the anticipated schedule for the proposed capital improvements are shown in Appendix A. The proposed 2013 Capital Improvements Program (CIP) projects include: Water Treatment Plant Filter Rehabilitation. Emergency Plan for Water Treatment Plant Clearwell. Bruecken Pump Station Valve Vault and Controls Upgrade. SCADA System Upgrades/Extensions. Security Camera System Extensions. Water Treatment Plant Access Tunnel Evaluation and Rehabilitation. Two PAX Water Technologies Systems for THM (Trihalomethane) Removal - Allentown Tank Number 1 & Squirrel Hill Tank. Allentown Tank Number 1 Painting. Allentown Tank Number 2 Painting. Emergency Power Interconnects for Pump Stations (includes transformers) at the Saline, Herron Hill, and Ross Pump Stations. The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -vi-

235 Highland Pump Station Replace Motor Control Center (MCC). Pumping Storage Flow Meters. Electrical Upgrades Phase 1, Herron Hill & Bruecken Pump Stations. Water Valve and Hydrant Contract. Water Line Replacement and/or Relay Contract - Various Locations. Ellsworth Avenue Waterline Contract. River Avenue Waterline Relay, Phase 2. Joint Municipal Projects Cost Share Water. Fair Oaks Sanitary Sewer Line Replacement. Sewer Improvement on Holden and Summerlea Street (Phase II). Sewer Improvements Construction/Reconstruction Annual Contract. Catch Basin Replacement Contract. Sewer Rehabilitation - Gunite Repair of Lines Greater Than 42-inches. Sewer Rehabilitation Lining. Joint Municipal Projects - Cost Share Sewer. Brookline Boulevard Water and Sewer Starkamp Street to Pioneer Avenue. City of Pittsburgh Paving Program Cost Share Reconstruction. City of Pittsburgh Paving Program Cost Share Resurfacing. South Highland Avenue Bridge 8-inch Waterline Replacement and Catch Basin Installation. PennDOT Cost Share - Reconstruction Project. Route 19 A-27 West End Circle Waterline Relocation. Waterline Relay, Route 28 to Bay Valley Foods. PennDOT Cost Share Resurfacing. Saw Mill Run Green Infrastructure Projects. Computerized Maintenance Management Software System (CMMC). Engineering and Construction Management Services. There are three (3) projects not identified in the proposed CIP project list that are funded in the amount of $9,801,942 by the Pennsylvania Infrastructure Investment Authority (PENNVEST) that will be constructed during 2013 and Two of the projects are The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -vii-

236 currently under construction. The third project is expected to begin in early These PENNVEST projects are: Sewer Phase IV $3,275, (Closed loan on October 17, 2013 Construction started scheduled to be completed October 2014) Water Phase VII $2,713, (Closed on August 21, 2013 Construction started scheduled to be completed December 2014) Water Phase VIII $3,813, (Loan to be closed November 6, 2013 Construction has not started - scheduled to be completed November 2014) Additional PENNVEST applications, totaling $5,020,000, were approved by the Authority at the October 23, 2013 Board Meeting. These PENNVEST projects are: Consent Order Agreement Storm Sewer Separation Project 2013 $2,720,000 Lower Hill Sanitary Sewer Infrastructure Project Phase 1A $2,300,000 Loan closing and construction for these two projects are expected to occur during The five PENNVEST projects are not included in the 2013 Bond project list. The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -viii-

237 ENGINEER'S REPORT IN SUPPORT OF THE 2013 CAPITAL IMPROVEMENTS BOND ISSUE PURPOSE The purpose of this report is to certify the ability of the Pittsburgh Water and Sewer Authority (Authority) to meet debt service coverage requirements as required by the Authority s Trust Indenture defined herein. This report provides an overview of the financial condition of the Authority including revenue and expense projections to establish the Authority s ability to provide debt service coverage on its outstanding bonds and long term indebtedness, including the 2013 B Bonds (2013 B Bonds) anticipated to be approximately $83,000,000. The report also includes a brief description of the history of the Authority, a general description of the Authority s facilities and a listing of the anticipated projects to be financed through the proceeds of the proposed 2013 B Bonds. PROPOSED BOND ISSUE Water and Sewer Revenue Bonds Series 2013 (the 2013 Bonds) The Authority proposes to issue (Fixed Rate) Water and Sewer Revenue Bonds, Series B of 2013 (2013 B Bonds) on or about December 11, 2013, the proceeds of which will provide approximately $83,000,000 for the Capital Improvement Program described herein. These bonds are expected to carry interest at approximately 5.16% maturing in 30 years (2043). The (Fixed Rate) Water and Sewer Revenue Refunding Bonds, Series A of 2013(2013A Bonds) are being issued to currently refund the 2003 Bonds and the 2007 B Bonds. The 2013 A Bonds and together with the 2013 B Bonds represent the 2013 Bonds. The 2013 Bonds will be issued under a Trust Indenture dated as of October 15, 1993, as amended and supplemented by a First Supplemental Indenture dated as of July 15, 1995, a Second Supplemental Indenture dated as of March 1, 1998, a Third Supplemental Indenture dated as of March 1, 2002, a Fourth Supplemental Indenture dated as of September 15, 2003, a Fifth Supplemental Indenture dated as of June 1, 2005, a Sixth Supplemental Indenture dated as of March 1, 2007, and the Seventh Supplemental Indenture dated as of June 1, 2008, as amended by an Amendment to the Initial First Lien Indenture and the Seventh Supplemental Indenture dated as of October 15, 2009, as further amended by a Second Amendment to the Seventh Supplemental Indenture dated as of August 1, 2010, as further amended by a Second Amending Supplement to the Initial First Lien Indenture and Third Amending Supplement to the Seventh Supplemental Indenture dated as of October 22, 2013 and an Eighth Supplemental First Lien Indenture dated as of December 1, 2013 (collectively, the Indenture or First Lien Indenture ) between the Authority and The Bank of New York Mellon Trust Company, The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -1-

238 N.A., as Trustee. The anticipated sources and uses of funds for the 2013 Bonds are outlined in the Official Statement. The uses of funds are also defined in this report. TOTAL DEBT SERVICE REQUIREMENTS In addition to the 2013 Bonds, the Authority will have outstanding under the Indenture the 2008 A, B, C, and D bonds, 2007 A bonds, and the 1998 Series B Capital Appreciation Bonds. The Authority also has outstanding loans from the PENNVEST. Table 1 presents a forecast of future annual debt service payments, including existing outstanding bonds, existing PENNVEST debt (including the three new PENNVEST loans totaling $9,801,942 that will be constructed during 2013 and 2014), and estimated debt service for the 2013 Bonds. Table 1 Forecasted Debt Service Payments Year Debt Service Existing Bond Issues Estimated Debt Service 2013 Bond Issue Total Bond Debt Service Debt Service PENNVEST Loans Total Debt Service ,536,479-44,536,479 3,135,616 47,672, ,692,001 3,231,600 49,923,601 3,135,616 53,059, ,756,651 6,058,800 52,815,451 3,553,004 56,368, ,802,676 6,058,800 52,861,476 3,818,981 56,680, ,485,276 6,060,250 52,545,526 3,875,620 56,421,146 Table 2 outlines the existing debt service payments of the Authority s outstanding first lien and subordinate bond issues (excluding PENNVEST obligations). The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -2-

239 Table 2 Existing Bonded Debt Service Payments BOND ISSUE Year First Lien Revenue Bond Subordinate Revenue Bond Total 1993A 1998B A 2007B 2008A 2008B 20008D 2008C ,792,675 2,258,919 5,758,425 4,287,898 4,531,492 7,548,766 4,916,965 5,441,339 44,536, ,372,794 5,754,925 4,677,707 4,531,492 8,235,017 5,252,910 5,867,156 46,692, ,440,394 5,751,975 4,677,707 4,531,492 8,235,017 5,252,910 5,867,156 46,756, ,483,394 5,755,000 4,677,707 4,531,492 8,235,017 5,252,910 5,867,156 46,802, ,300,000 1,861,994 5,754,000 4,677,707 12,536,492 8,235,017 5,252,910 5,867,156 46,485,276 The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -3-

240 DEBT SERVICE COVERAGE FACTOR The Authority s Trust Indenture provides for the fixing and charging by the Authority of rates, rents and charges for water and sewer service in accordance with the following Rate Covenant. Under the Indenture, the Authority has covenanted with the owners of all the bonds to adopt rates complying with either of the following in each Fiscal Year: Method 1 The Authority will maintain, charge and collect, so long as any of the Bonds shall remain outstanding, reasonable rates, rentals and other charges for the use of the facilities of the Water and Sewer System which (after making due and reasonable allowances for contingencies and a margin of error in the estimates), together with other receipts and revenues, including any unrestricted cash and investments accumulated in the Revenue Fund at the beginning of each Fiscal Year, shall be at all times at least sufficient to provide annually; or a. Funds to pay all of the current expenses of the Authority; and b. An amount equal to 120 percent of the Debt Service Requirements with respect to the bonds authenticated and delivered under the Indenture or other Long term Indebtedness of the Authority during the then current Fiscal Year of the Authority. Method 2 The Authority will maintain, charge and collect, so long as any of the Bonds shall remain outstanding, reasonable rates, rentals and other charges for the use of the facilities of the Water and Sewer System which (after making due and reasonable allowances for contingencies and a margin of error in the estimates), together with other receipts and revenues, for the then current Fiscal Year (exclusive of interest income earned by the Authority on funds other than the Debt Service Reserve Fund; provided, however, that earnings on the Construction Fund may also be included during any construction period, but only to the extent such earnings are expressly required to be either retained in the Construction Fund and may be used to pay debt service on the Bonds or applied directly to payment of debt service of Bonds) shall be at all times at least sufficient to provide annually: The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -4-

241 a. Funds to pay all of the Current Expenses of the Authority; and b. An amount equal to 100 percent of the Debt Service Requirements with respect to the bonds authenticated and delivered under the Indenture or other Long term Indebtedness of the Authority during the then current Fiscal year of the Authority. The rate covenant calculations included herein are based upon both Method 1 and Method 2 as described above. Rate Covenant Calculations Based on the forecasts of 1) Water Sales, 2) Interest Earnings, 3) Operating Expenses, and 4) Debt Service Requirements presented in the proceeding sections of this report, the Coverage Factors for the years 2012 through 2017 are calculated as shown in Table 3. Table 3 Debt Service Coverage Factor Unrestricted Cash at 41,676,000 38,895,016 42,966,336 51,420,619 51,781,691 52,706,496 Beginning of Year Total Operating 147,495, ,285, ,436, ,069, ,212, ,944,796 Revenues Total Funds Available 189,171, ,180, ,402, ,490, ,993, ,651,291 Operating Expenses 101,658, ,960, ,923, ,340, ,607, ,673,828 Total Operating 101,658, ,960, ,923, ,340, ,607, ,673,828 Expenses Debt Service Cover Factor - Method 1 Funds Available for 87,512,128 89,220, ,479, ,150, ,386, ,977,463 Debt Service First Lien Bond Debt 45,073,766 39,095,140 44,056,445 46,948,295 46,994,320 46,678,370 Service Subordinate Bond Debt 5,441,339 5,867,156 5,867,156 5,867,156 5,867,156 Service PENNVEST Loan 3,077,362 3,085,616 3,135,616 3,553,004 3,818,981 3,875,620 Payments Total Debt Service 48,151,128 47,622,095 53,059,217 56,368,455 56,680,457 56,421,146 Requirements Debt Service Coverage Factor Required Coverage Debt Service Cover Factor - Method 2 Total Operating Revenues 147,495, ,285, ,436, ,069, ,212, ,944,796 The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -5-

242 Total Operating 101,658, ,960, ,923, ,340, ,607, ,673,828 Expenses Amount Remaining For 45,836,128 50,325,842 61,513,500 56,729,527 57,605,261 57,270,967 Debt Service First Lien Bond Debt 45,073,766 39,095,140 44,056,445 46,948,295 46,994,320 46,678,370 Service 5,441,339 5,867,156 5,867,156 5,867,156 5,867,156 Subordinate Bond Debt Service PENNVEST Loan 3,077,362 3,085,616 3,135,616 3,553,004 3,818,981 3,875,620 Payments Total Debt Service 48,151,128 47,622,095 53,059,217 56,368,455 56,680,457 56,421,146 Requirements Debt Service Coverage 95% 106% 116% 101% 102% 102% Factor Required Coverage 100% 100% 100% 100% 100% 100% Cash at End of Year 39,361,000 41,598,763 51,420,619 51,781,691 52,706,496 53,556,317 The Debt Service Coverage Factor of 120% (minimum) required by Method 1 or 100% (minimum) required for Method 2 of the Authority Rate Covenant is satisfied in each year of the Report period (2012 through 2017) does not pass for Method 2 but does pass for Method 1. REVENUE AND EXPENSE PROJECTIONS Table 4 shows actual revenues and expenses for 2011 and 2012, budgeted revenues and expenses for 2013, and projected revenues and expenses for 2014, 2015, 2016, and The projection of total operating revenue for 2014 to 2017 is based on the following: Projected water collections and sewer collections are based on the rates established by Resolution 102 of 2013 adopted by the Authority Board at the October 11, 2013 Regular Meeting, a slight increase in population, and decreased water usage. A copy of Resolution 102 of 2013 is included in Appendix D. The current population of the City shows a slight increase of 507 persons from the 2010 census. We expect the population, and the Authority s customer base, to increase slightly by 0.1 percent for the foreseeable future. The increase in residential population numbers are utilized in calculations relative to the 3/4-inch and 5/8-inch meter size water usage. The projected revenue from fixed water collections and fixed sewer collections is based on this slight change in the customer base. According to the Authority s 2012 Rate Brochure, water usage from residential customers decreased by 24 percent from 2003 to A decrease in consumption from residential, commercial and health and education customers is an industrywide trend. The use of low flow plumbing fixtures and the results of rate increases in sewer billings also contribute to water conservation efforts in The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -6-

243 residential, commercial and health and education customers. To reflect this trend, projected revenues for residential, commercial and health and education retail customers are based on an annual decrease in usage of 0.5 percent in years 2014 and 2015, and 0.25 percent in years 2016 and The decrease in consumption is adjusted over the years to depict a leveling of cost efficiencies realized during the past decade. The decreased consumption estimates are utilized for variable collections calculations during the projected period. Sewage revenue for the Allegheny County Sanitary Authority (ALCOSAN) charges are based on the 2013 budgeted amount and projected ALCOSAN increases for 2014 through The net effect of ALCOSAN sewage revenue on the rate covenant tests is zero since ALCOSAN sewage expenses are equal to ALCOSAN sewage revenue. The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -7-

244 Table Actual, 2013 Budgeted, and Projected Revenues and Expenses Actual Budgeted Projected Projected Projected Projected Operating Revenues Collections Water Collections $87,788,026 $ 91,310,000 $100,250,383 $105,439,168 $107,315,560 $108,157,087 Sewage Collections 47,270,475 47,651,000 55,751,670 61,884,354 68,691,633 76,247,712 Return of Major Customer 299, , , ,000 1,104,000 DISC 6,072,473 6,160,000 7,017,527 7,380,742 7,512,089 7,570,996 Capital Reimbursement for Engineering 1,500, Tap Fee Collections 1,084,265 1,253,000 1,253,000 1,253,000 1,253,000 1,253,000 Other Collections 1,620,703 1,642,000 1,642,000 1,642,000 1,642,000 1,642,000 Subtotal $145,335,942 $ 148,315, ,466, ,151, ,242, ,974,796 Less Customer Refunds (253,054) (400,000) (400,000) (400,000) (400,000) (400,000) Net Collections 145,082, ,915, ,066, ,751, ,842, ,574,796 Interest Earnings 496, , , , , ,000 Reimbursement for Capital Projects - 8,000,000 Pennvest Loan Proceeds 1,915,715 3,000,000 10,000, ,381 Total Operating Revenues $147,495,083 $ 151,285,947 $ 184,436,580 $ 179,069,644 $ 187,212,282 $ 195,944,796 Operating Expenses Direct Operating 36,865,721 40,396,618 42,442,573 44,257,091 46,166,499 48,176,456 OpEx Savings (385,513) (1,586,690) (1,428,450) (2,061,200) (2,619,336) Sewage 46,036,404 47,151,000 55,751,670 61,884,354 68,691,633 76,247,712 DISC 6,800,892 1,500,000 7,017,527 7,380,742 7,512,089 7,570,996 Cooperation Agreement 7,150,000 7,150,000 7,150,000 7,150,000 7,150,000 7,150,000 Non-City Water Subsidy 1,971,281 2,148,000 2,148,000 2,148,000 2,148,000 2,148,000 PENNVEST Projects 2,834,657 3,000,000 10,000, ,381 Subtotal 101,658, ,960, ,923, ,340, ,607, ,673,828 The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -8-

245 Table Actual, 2013 Budgeted, and Projected Revenues and Expenses (continued) Actual Budgeted Projected Projected Projected Projected Debt Service Bond Related Debt Service 45,073,766 42,483,446 49,923,601 52,815,451 52,861,476 52,545,526 PENNVEST Loan Payments 3,077,362 3,085,616 3,135,616 3,553,004 3,818,981 3,875,620 Subtotal Debt Service $48,151,128 $ 45,569,062 53,059,217 56,368,455 56,680,457 56,421,146 Total Operating Expenses $149,810,083 $ 146,529,167 $ 175,982,297 $ 178,708,572 $ 186,287,478 $ 195,094,974 Unrestricted Operating Cash (Beginning) $ 41,676,000 $ 38,895,016 $ 42,966,336 $ 51,420,619 $ 51,781,691 $ 52,706,496 Unrestricted Operating Cash (Ending) $ 39,361,000 $ 42,966,336 $ 51,420,619 $ 51,781,691 $ 52,706,496 $ 53,556,317 The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -9-

246 Distribution Infrastructure Service Charge (DISC) revenue is based on 7 percent of the revenue projected from water collections and sewer collections. The net effect of DISC revenue on the rate covenant tests is zero since DISC expenses are equal to DISC revenue. The projections for tap fee collections are the same as the 2013 budgeted amount of $1,253,000. The projections for other collections are the same as the 2013 budgeted amount of $1,642,000. Other collections include, but are not limited to, meter sales, dye testing fees, refunds, permit fees, map fees, fire hydrant use fees, and miscellaneous revenue. Interest earnings are projected based on the 2013 Budgeted amount. Expected proceeds from the PENNVEST loans are anticipated to be $10,000,000 in 2014 and $940,000 in The net effect of PENNVEST proceeds on the rate covenant test is zero since the projected expenses for the PENNVEST projects equal the expected loan proceeds. The projection of operating expenses for 2014 to 2017 is based on the following: For the estimation of direct operating expenses, the figures presented in the Sycamore Report were utilized. The Sycamore Report is included in Appendix C. ALCOSAN s sewage expenses are assumed to equal the ALCOSAN sewage revenue. DISC expenses are equal to DISC revenue. Cooperation Agreement expenses are set by agreement between the Authority and the City of Pittsburgh (City) and are assumed to remain at their current level. According to the Sycamore Report, the Non-City water subsidy is assumed to be the same as the 2013 budget amount of $2,148,000. Payments for PENNVEST projects are assumed to equal the PENNVEST proceeds. For purposes related to calculating the rate covenant, interest on existing variable rate bond is calculated by using the published Bond Buyer 25 Bond revenues Index plus fifty basis points, per the requirement of the indenture. Debt service projections are based on data provided by Public Financial Management Inc., the Authority s financial advisor. The current debt profile and 2013 Debt Service Projection tables are shown in Appendix E and Appendix F. The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -10-

247 PROJECT COST SUMMARY The estimated project costs for the proposed capital improvements under the 2013 B Bonds are summarized within Appendix A. The anticipated drawdown schedule for the proceeds of the 2013 B Bonds is included in Appendix B. The project costs within Appendix A include design engineering, construction, construction management, general project services, survey, right-of-way acquisition, legal and administrative costs, as well as contingency. The proposed projects are in various stages of design with select projects ready for procurement at the beginning of Appendix A provides projected project costs for each major task area. Each major task has been broken into sub-tasks for further clarification. The amount of funding for each task and sub-task has been delineated. PROJECT SCHEDULE It is anticipated that the capital improvements projects funded within the 2013 Bond will be complete within thirty (30) months from implementation. OUTSTANDING LITIGATION To the best of our knowledge, there is no outstanding litigation at this time involving the Authority which would have a material adverse effect on the Authority s ability to pay debt service. PROPOSED CAPITAL IMPROVEMENTS FOR 2013 BOND The primary objectives of the CIP are to ensure uninterrupted service to the Authority s customers and to enhance system capabilities. The Program was designed to maintain a satisfactory level of service to the water and sewer systems users, to improve operating efficiencies, and to address future requirements. The current program was initiated in 1984 and has resulted in major improvements, additions and rehabilitation to many components of the water and sewer systems. In order to ensure that a continued supply of safe drinking water and adequate sewer service are provided to the Authority s current and future users, and also to address future demands on both the water and sewer systems, it has been determined that additional funding is required. In determining the future funding requirements, the following factors and conditions were considered: 1. Perform necessary improvements/upgrades to existing facilities. A sample of the projects under this category include: a. Bruecken Pump Station Valve Vault Upgrade The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -11-

248 The project involves upgrades to the Bruecken Pump Station, which handles approximately 52 million gallons per day or 75% of the water produced by the PWSA s rapid sand filtration water treatment plant. This project proposes several upgrades and repairs including: The overall project proposes to replace fourteen (14) of the valves (5 30-inch, 6 36-inch and 3 48-inch sizes) in kind (double disc gate valves) and provide each valve with a new Limitorque motor actuator. The proposed structural repairs to the valve vault include replacement of the removable precast concrete valve vault covers and their steel support beams. The tops of the concrete curb walls framing the vault covers need to be repaired and will be raised to improve exterior surface drainage conditions and to provide additional headroom for equipment. The concrete roof panels and steel support beams are to be replaced. The project will include aluminum access hatchways above each 30-inch pump valve. A new automated Programable Logic Control (PLC) system and touchscreen will be provided as the primary method of control for the gate valve actuators. The existing electrical wiring and controls associated with the gate valves will also be replaced. This hard wired system shall serve as a back-up control system in the event of PLC or Supervisory Control and Data Acquisition (SCADA) system failures. Replacement of the existing 80 kilowatt, natural gas fired standby generator that enables operation of the gate valves during a power failure. The project will also replace the station s nonfunctional, battery powered emergency lighting system. Emergency Power Interconnects for Pump Stations (includes transformers) at the Saline, Herron Hill and Ross Pump Stations. Engineering and installation of Emergency Power Interconnect Points (Docking Stations) for Saline, Herron Hill, and Ross Pump Stations. 2. Rehabilitation and/or replacement of existing facilities that have exceeded their useful lives. A significant portion of the Authority's facilities, including the water system pump stations, water storage facilities, and the bulk of the The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -12-

249 water distribution system is over 70 years old. The majority of the sewer system is at least as old, and in some areas was constructed nearly 150 years ago. Due to the age of these systems, an annual program to rehabilitate and/or replace a portion of such facilities has been established and must be maintained. In addition, changing development conditions within various service areas are increasing water demands and causing increased sewage flows that stress distribution and collection systems capacities. a. Water Line Replacement and/or Relay Contract Various Locations Repair of water main(s) breaks, leaks and all other general waterline work at various locations within the Authority s system. b. Storage Paint Allentown Tank Number 1 and Number 2 Replace the interior and exterior coatings of the tank. Caulk the foundation at the interface between foundation and tank. Remove Ventilation screens around the tank and replace with a new shield system and add screen to overflow pipe. Replace shell ladder and roof man-way to comply with Occupational Safety and Health Administration (OSHA) standards, and add a safety climb ladder. Grade and re-slope site area to direct runoff away from the tank foundations to minimize the potential for future foundation problems. c. Pumping Electrical Upgrades Phase I, Herron Hill and Bruecken Pump Stations The electrical equipment in five of the Authority s critically ranked pump stations was found to be obsolete. The electrical systems contain operational systems that are outdated and require needed maintenance or replacement. Work includes replacement of the undersized and obsolete electrical equipment at Aspinwall, New Highland, Herron Hill, Bruecken and Mission Pump Stations. Phase 1 will focus on the Herron Hill and Bruecken Pump Station upgrades. The Phase II Electrical Upgrades Project is preliminarily scheduled for 2017 and will include work at the Aspinwall, New Highland, and Mission Pump Stations. The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -13-

250 d. Ellsworth Avenue Waterline Contract Replace approximately 2,500 linear feet of existing 6-inch waterline with a new 12-inch waterline. This project is directly related to water demand improvements to accommodate residential needs. e. River Avenue Waterline Relay Upgrade approximately 4,000 linear feet of existing 8-inch waterline with 12-inch or 16-inch waterline depending upon the expected water demand. f. Sewer Line Improvements on Holden and Summerlea Street Phase II Provide improvements to the sewer system in both streets. The project includes construction of approximately 1,000 linear feet of 36-inch sewer to help alleviate flooding and backup issues experienced in the residential area. Phase I was completed in g. Fair Oaks Sanitary Sewer Line Replacement Four homes on Fair Oaks experience frequent sewer backups. To remedy the situation, a dedicated sanitary sewer will be constructed in Fair Oaks Street that will connect into the existing combination sewer at the intersection of Wilkins Avenue and Beeler Streeet. 3. Water and sewer system improvements required to serve planned City CIP Projects and Pennsylvania Department of Transportation (PENNDOT). Projects. Under the City s CIP, water and sewer facilities within street rightsof-way must be replaced when major street reconstruction is undertaken. Improvements to the Authority s water and sewer systems are typically required to serve these redevelopment projects. The Authority works jointly with PennDOT in upgrading and replacing Authority facilties affected by PennDOT projects. Projects involving PennDOT are usually performed on a cost share basis. a. Brookline Boulevard Water and Sewer Lines Starkamp Street to Pioneer Avenue The City is reconstructing Brookline Boulevard; improvements include new traffic signals, sidewalks with trees and furnishings, and street lighting, as well as improvements to the storm water and sewer lines. PennDOT will fund 80% of the work on the storm lines, the Authority will reimburse the City 20% of the storm water improvements and 100% of the sewer improvements costs. The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -14-

251 b. PennDOT Cost Share Reconstruction Projects Route 51/Route 88 Sewers, Section A1. Project work includes relocation and reconstruction of sections of Authority sanitary and storm sewers impacted by construction of bridges and/or culverts. West Carson Viaduct Replacement, Route 51, Section A63. Project work includes replacement and rehabilitation of water and sewer facilities. Route 28 to Bay Valley Foods Waterline Relay. Project work includes waterline reconstruction due to the relocation and upsizing of the 10-inch waterline to a 16-inch. 4. Improvements required under current and anticipated requirements of the Safe Drinking Water Act. Current and anticipated future drinking water standards, promulgated through regulations under the Pennsylvania Safe Drinking Water Act (35 P.S ), require that the following process modifications and improvements be made at the Authority s water treatment plant. a. Water Treatment Plant (WTP) Filter Rehabilitation Rehabilitate the 18 rapid sand filters at the WTP. Preliminary design recommendations have been made to replace the existing under drains and gravel media support system with a new Integral Media Support Cap system, replace the filter gullet air scour header, replace the media and backwash troughs, repair or replace all process valves and hydraulic cylinder actuators, replace existing filter console panels with Programmable Logic Controllers and replace the existing backwash pump. b. Emergency Plan for WTP Clearwell Replacement of the starters and synchronous motors for the four Aspinwall Pump Station booster pumps with variable frequency drives and new motors; replacement of the across-the-line starters and synchronous motor for the Number 2 Pump at Bruecken Pump Station with a variable frequency drive and new motor; construction of an addition to the Inlet Gate House including an emergency overflow to the river; construction of an addition to the Outlet Gate House and construction of a 48-inch diameter transfer pipeline between the Inlet and Outlet Gate Houses. 5. Implementation of Combined Sewer Overflow (CSO) Controls as contained in the Authority s Wet Weather Feasibility Study (Feasibility Study) when approved by the Pennsylvania Department of Environmental Protection The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -15-

252 (PADEP) expected in Capital improvements are expected to be completed for both the sewage collection and sewage conveyance systems. In addition to routine investigations of the sewer collection and conveyance system, the City and the Authority have entered into a Consent Order and Agreement (the Order) with PADEP and Allegheny County Health Department (ACHD). The Order requires the systematic investigation, mapping, and repair of the sewer collection system. a. The Authority s Integrated Watershed Management (IWM) approach is based on the principles and elements espoused in the U.S. Environmental Protection Agency s (USEPA) Integrated Planning Framework. The IWM approach recognizes that combined sewer overflows are just one source of pollution affecting waterways, and that compliance with the Order may not achieve attainment of broader water quality standards mandated under the Clean Water Act unless other pollution sources are also controlled. The USEPA s integrated planning framework promotes the ability to manage compliance efforts across the spectrum of pollutant sources and water quality related permits and programs. The Authority proposes assessing the potential for IWM through a demonstration program in the Saw Mill Run sewershed. This process will assess a wide variety of improvements, aimed not only at controlling combined sewer overflows, but at meeting broader water quality standards through a combination of pollution control strategies. Saw Mill Run is an optimal sewershed in which to target this assessment of integrated watershed planning on a demonstration scale. The initial project efforts will be to assess the role and potential of IWM in the Saw Mill Run sewershed and will include watershed and source characterization, assessment of pollutant source context, identification of demonstration projects, and assessment and development of an integrated controls program. The analysis will also include a comparison between traditional control plans and IWM control plans, both in terms of effectiveness in improving water quality and in affordability. Based upon these noted factors and conditions and evaluations of the existing Water and Sewer Systems, a proposed Capital Expenditure Plan was developed that addresses the identified and anticipated capital improvement needs of the Authority for the next thirty months (from 2014 through mid-2016). The 2013 B Bonds are anticipated to be in the amount of $83,000,000. This report addresses the proposed capital improvements scheduled to be implemented during the The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -16-

253 period from 2014 through mid-2016 totaling $75,000,000. Additional funding for other capital improvements during the 2014 to 2016 period includes $14,821,942 derived from PENNVEST funding. Two of the PENNVEST projects have begun. The five PENNVEST projects are not listed in the proposed CIP Projects presented in Appendix A. Approximately $8,000,000 of the 2013 B Bonds will be utilized to reimburse the Authority s Operations Fund for funds that were used by the Authority to construct CIP projects in HISTORY OF THE AUTHORITY In February 1984, the City established the Authority under provisions of applicable law in the Commonwealth of Pennsylvania. The City charged the Authority with the responsibility of carrying out a major CIP that was recommended in a comprehensive report titled "Evaluation of the Water and Sewer Systems of the City of Pittsburgh," and dated December 9, Operations of the Authority prior to December 31, 1994 were carried out in accordance with the Lease and Management Agreement between the Authority and the City of Pittsburgh, dated March 29, Pursuant to this agreement, the City provided services necessary to operate the water and sewer systems to the Authority with the Authority reimbursing the City for all expenses actually incurred and expended by the City. The Capital Lease Agreement and Cooperation Agreement, each between the Authority and City as authorized in Resolution No. 47 of 1995, terminated the Lease and Management Agreement between the City and the Authority. The Cooperation Agreement provided for the City to render certain services to the Authority as set forth in the agreement. The Cooperation Agreement also provided for the basis of payment for such services to be rendered by the City. As of January 1, 1995 all positions in the City Water Department and certain positions in the Water and Sewer Division of the Department of Engineering and Construction were eliminated from the City s budget and similar positions were created and filled by the Authority. Initial Authority Operation The Authority took over operations of the Water and Sewer Systems on May 1, 1984 pursuant to the terms of a Lease and Management Agreement between the City and the Authority. The Authority was authorized to operate and maintain the Water and Sewer Systems, construct all necessary improvements, establish and collect rates and charges for its service, and finance its operations and improvements through revenue collections and sale of bonds and notes payable solely from the Authority's revenues. The Authority appointed and designated the City as the Authority's agent to manage, operate, and maintain the Water and Sewer Systems for the term of the lease, subject to the general supervision, direction, and control of the Authority. The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -17-

254 In 1995, the Authority and the City terminated the Lease and Management Agreement and established a Capital Lease Agreement and a Cooperation Agreement. Under the terms of the Capital Lease Agreement, the Authority will own the Water and Sewer System on September 1, 2025 upon payment of $1.00. GENERAL DESCRIPTION OF THE AUTHORITY SYSTEM The Water System The water supply and distribution system consists of a 117 million gallons per day (MGD) rapid sand type treatment plant, one 26 MGD (currently optimized to run at approximately 9 MGD). microfiltration plant, approximately 1,000 miles of mains, 25,330 valves, 7,441 fire hydrants, 12 pumping stations, four reservoirs, and twelve storage tanks. The total storage capacity of the reservoirs and tanks is approximately 455 million gallons. Based on the average usage over the past several years, this capacity is sufficient to provide storage equivalent to approximately two to three days of normal water usage. The average daily filtered water processed in 2012 was 56.6 mgd, with a peak day of 74.8 mgd. The sole source of water for the Water System is the Allegheny River. The Pennsylvania Department of Environmental Resources, now the PADEP, issued a Water Allocation Permit to the Authority in March This permit allows for water withdrawal of up to 100 mgd from the river. The PADEP has advised that the permitted allocation would be reevaluated in the future should the Authority's demand increase as a result of growth within the City or through the sale of water to surrounding municipalities. The Authority s water system currently has approximately 83,578 active service line connections for residential, commercial, industrial, and public customers with potable water and water for fire protection within the geographic boundaries of the City. Approximately 11,000 of the connections are fire hydrants and private fire line accounts. There is an average of 66,403 monthly billed accounts. The Pennsylvania-American Water Company (PAWC) provides service to approximately 24,600 customers in the southern and western sections of the City while two small areas, one in the eastern part and the other in the western end of the City, are served by the Wilkinsburg-Penn Joint Water Authority and the West View Water Authority, respectively. In each of these areas, the distribution system elements (waterlines, valves, hydrants, etc.) are owned and maintained by the respective independent water purveyor. In addition, the Authority, through interconnections with other systems, provides water for supply and/or emergency use to several adjacent municipalities. The Sewer System The Authority sends wastewater collected within its boundaries to ALCOSAN, a regional wastewater treatment facility that provides service to about 880,000 people in Allegheny The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -18-

255 County, nearly 311,000 of whom live within the City. The total drainage area served by the regional system is approximately 300 square miles. The City comprises about 55 square miles, or nearly 18 percent of the total drainage area. The Authority sewer system is comprised of an extensive network of approximately 1,200 miles of sanitary, storm, and combined sewers, manholes, inlets, catch basins, diversion structures, flow dividers, outfalls, four wastewater pump stations, and ancillary facilities. A limited quantity of dedicated sanitary and storm sewer systems exist throughout the Authority service area. Approximately 77 percent of the sewers within the Authority collection system are combined sewers. However, the percentage of separate sanitary and storm sewers is gradually increasing. The average age of the sewer lines is between 60 and 70 years old, with some portions reaching nearly 150 years in age. The sewer system conveys wastewater generated within the City boundaries to the ALCOSAN interceptors located along the rivers and major tributaries for conveyance to ALCOSAN's wastewater treatment facility for treatment prior to discharge into the Ohio River. The ALCOSAN treatment facility is operating in compliance with the National Pollutant Discharge Elimination System (NPDES) under Permit No ALCOSAN also manages enforcement of industrial pretreatment in the Authority s service area. The sewer system collects wastewater throughout the City, and also serves twenty-four (24) neighboring communities by conveying flows from these communities through the Authority system and into the ALCOSAN wastewater system. The twenty-four suburban municipalities sewer system connections were established pursuant to agreements with the City to convey their wastewater to the ALCOSAN treatment facility. Many of the agreements with the suburban municipalities do not provide for sharing Sewer System maintenance and reconstruction costs. The sewer system is designed so that during wet weather, a portion of the collected stormwater and diluted wastewater is discharged to natural watercourses by diversion chambers located throughout the sewer system and at connections to the ALCOSAN interceptors. The sewer system is in satisfactory operating condition and has adequate capacity for the dry weather wastewater flows. However, during wet weather events, the sewer system has often been taxed beyond its capacity and has resulted in overflows, bypassing, and flooding. The USEPA has adopted regulations regarding overflows from combined sewers during events that result in the discharge of untreated sanitary sewage to receiving waters. These CSOs contain pollutants that are present in domestic and industrial wastewater, as well as those in the urban stormwater runoff that enter the combined Sewer System. The USEPA regulations require owners of any sewer system having CSOs to acquire NPDES discharge permits for each overflow site. The owners of these systems implemented the USEPA s Nine Minimum Control Measures (NMC s) in January of The NMC s The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -19-

256 define the basic steps for maintaining the sewer systems in proper operational order and identifying potential areas of needed updates and repairs. During dry weather conditions, the ALCOSAN interceptor system is designed to intercept wastewater flows from the City and surrounding municipalities and convey the flows to the ALCOSAN treatment plant. The interceptor system includes shallow-cut pipes, deep tunnels, and diversion structures. During wet weather conditions, the flow diversion structures, maintained by ALCOSAN, the Authority, and other municipal entities, limit or regulate the amount of combined sewage that enters the ALCOSAN interceptor system so as to not exceed interceptor and treatment capacity at the ALCOSAN regional treatment plant. According to the ALCOSAN NPDES discharge permit, the dry weather capacity of the ALCOSAN plant is 190 mgd (million gallons per day), while the wet weather capacity of the plant is listed as 220 mgd. Currently, the ALCOSAN plant is being operated at capacity. The flow regulation at the plant limits peak wet weather flow to the permitted capacity. The combined sewage in excess of the interceptor and treatment capacity is discharged as CSOs to the receiving waters of the state. ALCOSAN maintains 53 diversion structures. An additional 153 diversion structures are maintained by other agencies. During the approximately 75 wet weather events that occur in the region over a typical year, the discharge structures allow an estimated 16 billion gallons of untreated sewage and stormwater to flow into the region's rivers. As early as 1997, the USEPA and the PADEP began negotiations with ALCOSAN and its tributary communities to mitigate these discharges. The process culminated with a Federal Consent Decree (CD) issued to ALCOSAN by the USEPA that required preparation of a Wet Weather Plan (WWP) by 2012 and implementation of controls to minimize the frequency and duration of CSOs NMC until planned improvements to eliminate CSOs can be implemented. On January 23, 2008, a binding CD was approved in federal court in which ALCOSAN, under the mandate of the USEPA, PADEP, and the ACHD, agreed to a comprehensive plan to greatly reduce the annual discharge of untreated sewage into area waterways by The CD requires ALCOSAN to handle all flows that their customer municipalities, one of which is the Authority, can deliver to their connection points. Flows delivered to these connection points would then be handled by ALCOSAN per their Regional Wet Weather Control Plan. ALCOSAN s CD requires ALCOSAN to complete its WWP in coordination with the Authority and other member agencies. In accordance to the CD, ALCOSAN released a draft WWP on July 31, 2012 for public review and comment. It provides a blueprint on how the region will address federal regulations for sewer overflows and represents what will be the largest capital infrastructure project in the region's history. The public comment period ran from July 31 to October 19, 2012, and the final version of the WWP was submitted to regulators by January 30, The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -20-

257 In January 2004, ALCOSAN service area communities signed municipal consent orders related to the assessment and long-term planning of our region s sewage infrastructure. Under the municipal consent orders, the USEPA assigned enforcement responsibility to PADEP and the ACHD. Municipalities operating combined sewer systems (carrying wastewater and stormwater in the same pipes) received a Consent Order and Agreement, which is enforced by the PADEP. Communities with separate sanitary sewer systems (wastewater and stormwater are transported in two separate systems) received an Administrative Consent Order, which is enforced by the ACHD. The orders end in 2015 and require communities to complete the following activities: Assess and map the sewer collection system Clean and televise the system Make critical repairs Conduct flow monitoring Develop a long-term wet weather control plan in conjunction with ALCOSAN Since 2004, the Authority has been working to complete the consent orders compliance requirements. The Long-Term Wet Weather Control Plan that municipalities and ALCOSAN are required to jointly create must address the sustainable operation and maintenance of the region s sewage infrastructure through The Authority is currently authorized by the PADEP to discharge combined sewage during wet weather events from over 100 CSO structures throughout the City. The current NPDES permit that authorizes the Authority to discharge combined sewage, requires the Authority to maintain all of its facilities in accordance with the NMCs in order to minimize the frequency and duration of CSO discharges. The Authority entered into an Administrative Consent Order and Agreement (COA) in 2004 in order to address the USEPA regulations governing CSOs and extend deadlines for compliance with them. Evaluation of the most efficient and cost-effective method of eliminating or controlling CSOs is contained in the Feasibility Study. ALCOSAN s CD was finalized during the preparation of the Authority Feasibility Study Report. The Authority undertook the task of inventorying and monitoring CSOs and the sewer collection and conveyance system in an effort to evaluate the impact of the CSO discharges on receiving streams. The Authority commissioned detailed studies from two engineering consultants to develop the Feasibility Study for addressing all CSO related issues which was submitted to the PADEP and the ACHD on July 31, 2013 as required under the COA. Many of the sewer system rehabilitation projects and capital expenditures defined in this report are a direct result of the Authority s COA investigations and evaluations of the existing system. The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -21-

258 BOND ISSUE HISTORY First Bond Issue On April 19, 1984 the Authority Board adopted a major CIP by Resolution No. 19 of The Program was designed to maintain a satisfactory level of service to the Water and Sewer Systems' current users, to improve operating efficiency of the Water and Sewer Systems, and to address future user requirements. In July 1984, the Authority issued $93,600,000 Daily Adjustable Demand Water and Sewer System Revenue Bonds, Series of 1984, in order to implement the initial phase of this program. From proceeds of this bond issue, $78,777,000 was deposited into the Construction Fund for the initial phase of the CIP. In June 1986, the Authority issued an additional $134,700,000 Revenue Bonds, Series of From the 1986 Bond Issue, $115,000,000 was available to continue the program. An additional $7,000,000 was made available for capital improvements by Resolution No. 72 of 1993, adopted on August 18, These additional funds were provided through a transfer from the Debt Service Reserve Fund in accordance with Section 6.04 of the Trust Indenture, which provided for the required funds for Debt Service Reserve Fund to be in the form of cash, a letter of credit or other credit instrument, a surety bond or a combination thereof. The Authority Board elected to replace the monies in the fund with a surety bond. As a result, $7,000,000 was transferred to the Construction Fund for capital improvements, and the balance of monies were transferred to the Debt Service Fund Bond Issue and Refinancing In 1993, the Authority issued two series of Water and Sewer System Revenue Bonds to: (i) advance refund of all of the outstanding previously issued bonds, (ii) provide additional funds for capital improvements to the Authority's Water and Sewer Systems, and (iii) pay all fees and expenses incurred in connection with issuance of the 1993 Bonds. Series A of the 1993 Bonds, in the aggregate principal amount of $278,970,000, was for the advanced refunding of outstanding bonds and Series B of 1993 Bonds, in the aggregate principal amount of $10,785,000, was for additional capital improvements. The new Trust Indenture, dated October 15, 1993 and applicable to the Series A and B of 1993 Bond Issues eliminated the requirements for a fund balance to be maintained in the Renewal and Replacement Fund unless determined necessary, annually, by the Consulting Engineer. Therefore, the $2,009,523, which was being maintained in the Fund under the previous Trust Indenture, was transferred to the Prior Bonds Construction Fund for use for capital improvements. From the Series B of the 1993 Bond Issue, $9,990,477 was deposited into the 1993 Bond Construction Fund for additional capital improvements. The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -22-

259 1995 Bond Issue In 1995, the Authority recognized that the funding for the CIP implemented in 1984 was almost depleted. In order to ensure a continued supply of safe drinking water and proper sewer service to the Authority's current and future users and to address future demands on the Water and Sewer Systems, a new CIP was developed and adopted. The Authority also negotiated a Capital Lease Agreement with the City, which terminated the Lease and Management Agreement and provided for the Authority to acquire the Water and Sewer Systems from the City. The Authority issued additional bonds in 1995 to fund the 1995 CIP and to pay certain obligations of the Authority to the City under the Capital Lease Agreement. Water and Sewer System First Lien Revenue Bonds, Series A of 1995, in the aggregate principal amount of $89,850,000, were issued on July 15, 1995 to pay for capital improvements as identified in a new CIP. On July 15, 1995, the Authority issued Water and Sewer System Subordinate Revenue Bonds, Series B of 1995, in the aggregate principal amount of $103,020,000, in order to pay the obligation of the Authority to the City under the Capital Lease Agreement. From the 1995 Series A Bonds, $80,000,000 was deposited into the Series A 1995 Capital Project Fund to fund the new CIP of the Authority Bond Issue and Refinancing Early in 1998, additions to the CIP were proposed that addressed future needs of the Authority. These centered on covering Highland Reservoir Number 1, City and Urban Redevelopment Authority projects, and improvements to the water distribution and sewerage systems. The Authority issued 1998 Series A, B, and C Water and Sewer Revenue Bonds on March 2, The 1998 Series A Bonds were used to provide for the refunding of the Authority s outstanding 1995 Series A Bonds. The 1998 Series B Bonds were used to fund additions to the CIP, and the 1998 Series C Bonds were used to refund the Authority s outstanding 1995 Series B Bonds. The Series B Bonds enabled $36,001,908 to be deposited in the 1998 Capital Projects Fund, funding the CIP into the year Bond Issue At the end of 2000, the capital project funds of the Authority were largely spent with only about $345,000 in reserve for the construction of capital projects. The Authority had anticipated this drawdown of funds and had begun work to issue additional bonds in early The Capital Projects Fund, through this issue, provided $90,494,400 for the construction of capital projects and to meet the needs of emergencies that may require the use of capital funds. The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -23-

260 2003 Bond Refinancing During the fourth quarter of 2003, the Authority issued revenue refunding bonds in the amount of $167,400,000 for the purpose of partially refunding the 1993 Bond Issue. The 2003 Refunding Bonds, with an average yield of 3.8 percent, generated a reduction in annual debt service payment of approximately $4,000,000 for The 2003 Bonds are being refunded by a portion of the 2013 A Bonds Bond Issue In June of 2005, the Authority issued first lien revenue bonds in the amount of $50,385,000 to provide for continuation of the CIP and to meet the needs of emergencies that may require the use of capital funds. The 2005 Revenue Bonds, with an average yield of 4.23 percent, created an increase in annual debt service payments of approximately $3.2 million for the first 12 years. The Capital Projects Fund, through this issue, provided $49,799,037 for capital projects Bond Advance Refunding Pursuant to Resolution No. 23 of 2007, adopted on February 9, 2007, the Authority issued Water and Sewer System First Lien Revenue Refunding Bonds Series A of 2007 $43,720,000 (Fixed Rate), (Variable Rate Demand) Water and Sewer System First Lien Revenue Refunding Bonds Series B-1 of 2007 $57,585,000, and (Variable Rate Demand) Water and Sewer System First Lien Revenue Refunding Bonds Series B-2 of 2007 $57,590,000 (Variable Rate Demand). The 2007 Bond Issue refunded the 2002 Bonds and the 2005 Bonds. The 2007 Bond Advance Refunding also resulted in a deposit of $6,319,014 into the 2007 Depository Agreement Fund. These funds were available for capital projects and were exhausted in December The final amount deposited was $7,503,881. The 2007 B Bonds are being refunded by the 2013 A Bonds Bond Advance Refunding In June of 2008 and pursuant to Resolution No. 54 of 2008, adopted on April 11, 2008, the Authority issued (Variable Rate Demand) Water and Sewer System First Lien Revenue Bonds, Series of 2008 consisting of: $145,495,000 (Variable Rate Demand) Water and Sewer First Lien Revenue Refunding Bonds, Series B of $71,225,000 (Variable Rate Demand) Water and Sewer System First Lien Revenue Bonds, Series D-2 of On the same date and pursuant to the same resolution, the Authority issued (Variable Rate Demand) Water and Sewer System Subordinate Revenue Refunding Bonds, Series of 2008 consisting of: The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -24-

261 $51,910,000 (Variable Rate Demand) Water and Sewer System Subordinate Revenue Refunding Bonds, Series C-1 of 2008 $51,885,000 (Variable Rate Demand) Water and Sewer System Subordinate Revenue Refunding Bonds, Series C-2 of 2008 On the same date and pursuant to the same resolution, the Authority issued (Fixed Rate) Water and Sewer System First Lien Revenue Refunding Bonds consisting of: $68,970,000 (Fixed Rate) Water and Sewer System First Lien Revenue Refunding Bonds, Series A of 2008 Taxable. $24,665,000 (Fixed Rate) Water and Sewer System First Lien Revenue Refunding Bonds, Series D-1 of Proceeds of the 2008 Bonds refunded the Authority s 1998A Bonds, 1998C Bonds, certain maturities of the 2007 B-1 and 2007 B-2 Bonds, advance refunded certain maturities of the 1998B Bonds, and provided $98,062,184 for the continuation of the capital improvements program and to meet the needs of emergencies that may require the use of capital funds. The issuance of the 2008 Bonds resulted in no rate increase and initially leveled the Authority s debt service requirements at approximately $42,000,000 until Due to the crisis that hit the financial sector in the last quarter of 2008, the debt service for 2009 increased to $51,716,888, the debt service for 2010 was $49,803,245, and the debt service for 2011 was $46,507,900. The 2012 debt service was $45,073,766. The 2013 debt service budget is $45,569,062. PENNVEST Funding Act 16 of 1988 established PENNVEST to assist local governments in financing sewer and water projects. The PENNVEST program provides loans and grants for acquisition, construction, improvement, expansion, extension, repair, and/or rehabilitation of all or part of any water or sewage system. Funding under the PENNVEST program is primarily in the form of low-interest, twenty-year loans. To date, the Authority has secured sixteen (16) PENNVEST loans totaling $69,969,579. Seven water projects, seven sewage projects and two storm sewer projects have been funded through this program. A total of $55,147,367 in project costs have been expended in the PENNVEST loan budgets. Summary of Funding Sources Under the various bond issues and PENNVEST loans, a total of $644,607,989 has been made available for capital improvements since the establishment of the Authority in Table 5 summarizes the sources of these funds: The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -25-

262 Table 5 Sources of Capital Improvement Funds Source Amount 1984 Bond Issue $ 78,777, Bond Issue 115,000,000 Transfer from Debt Service Reserve Fund 7,000,000 Transfer from Renewal and Replacement Fund 2,009, Series B Bond Issue 9,990, Series A Bond Issue 80,000, Series B Bond Issue 36,001, Bond Issue 90,494, Bond Issue 49,799, Depository Agreement Fund 7,503, Construction Fund 98,062,184 Sub-Total (Bond Funds) $574, PENNVEST Funds 69,969,579 TOTAL (Total Funds) $644,607,989 The Pittsburgh Water and Sewer Authority /11-13/PWSA Bond Issue Report - Draft/lb -26-

263 APPENDIX A PROJECT PRIORITIES AND ESTIMATED COSTS

264 THE PITTSBURGH WATER AND SEWER AUTHORITY CAPITAL IMPROVEMENT PROGRAM - LIST OF PROJECTS WATER AND SEWER REVENUE BONDS, SERIES OF 2013 WATER - TREATMENT PLANT Description Program Bond Comments Water Treatment Plant Filter Rehabilitation Design 554, ,600 89, ,400 CM/Const. 2,710,000 10,840,000 4,920,000 18,470,000 Emergency Plan for Water Treatment Plant Clearwell Breucken Pump Station Valve Vault and Controls Upgrade Pre-design 50, ,000 CM/Const. 2,430,000 2,970,000-5,400,000 SCADA System Upgrades / extensions Design 71,379 95,172 47, ,138 CM/Const. 1,453,793 1,754, ,241 4,085,517 Security Camera System Extensions CM/Const. 137, ,000 82, ,200 Water Treatment Plant - Access Tunnel Evaluation and Rehabilitation Design 30, ,000 CM/Const. 64, , ,880 Total 7,501,552 16,359,155 6,016,428 29,877,135

265 THE PITTSBURGH WATER AND SEWER AUTHORITY CAPITAL IMPROVEMENT PROGRAM - LIST OF PROJECTS WATER AND SEWER REVENUE BONDS, SERIES OF 2013 WATER - PUMPING AND STORAGE Description Program PAX Systems for THM Removal Allentown Tank No. 1 & Squire Hill Tank Bond Comments CM/Const. 794, ,875 Allentown Tank #1 Paint CM/Const. 600, ,000 Allentown Tank #2 Paint CM/Const. 171, , ,000 Emergency Power Interconnects for Pump Stations (includes transformers) at the Saline PS, Herron Hill PS & Ross PS CM/Const. 1,275, ,275,000 Highland Pump Station Replace MCC Design 12, ,300 CM/Const , ,700 Pumping Storage Flow Meters CM/Const. 187, , ,000 Electrical Upgrades Phase 1, Herron Hill & Bruecken Pump Stations. Design 55, ,000 CM/Const , ,000 Total 3,096,104 1,245,771-4,341,875

266 THE PITTSBURGH WATER AND SEWER AUTHORITY CAPITAL IMPROVEMENT PROGRAM - LIST OF PROJECTS WATER AND SEWER REVENUE BONDS, SERIES OF 2013 WATER - WATER DISTRIBUTION Description Program Bond Comments Water Valve and Hydrant Contract CM/Const. 825,000 1,100, ,000 2,475,000 Water Line Replacement &/or Relay Contract - Various Locations Water Meter Replacement Program for Unaccountable Water Service CM/Const. 825,000 1,100, ,000 2,475,000 Constr. 200, , , ,000 Ellsworth Avenue Waterline Contract CM/Const. 1,210, ,250-1,361,250 River Avenue Waterline Relay, Phase 2 - CM/Const. 293, , ,000 Joint Municipal Projects - Cost Share - Water 153, , , ,000 Total 3,507,179 3,368,686 1,315,385 8,191,250

267 THE PITTSBURGH WATER AND SEWER AUTHORITY CAPITAL IMPROVEMENT PROGRAM - LIST OF PROJECTS WATER AND SEWER REVENUE BONDS, SERIES OF 2013 Sewer - WASTE / STORM WATER SYSTEMS Description Program Bond Comments Fair Oaks Sanitary Sewer Line Replacement CM/Const. 432, , ,000 Sewerline Improvement on Holden and Summerlea Street (Phase II) Sewer Improvements Construction/Reconstruction Annual Contract CM/Const , , ,000 CM/Const. 1,100,000 1,100, ,000 2,750,000 Catch Basin Replacement Contract CM/Const. 825,000 1,100, ,000 2,475,000 Sewer Rehabilitation - Gunite Repair of Lines Greater Than 42" CM/Const. 916,667 1,100, ,000 2,566,667 Sewer Rehabilitation - Lining CM/Const. 733,333 1,100, ,000 2,383,333 Joint Municipal Projects - Cost Share - Sewer 230, , , ,000 Total 4,238,436 5,631,654 2,506,910 12,377,000

268 THE PITTSBURGH WATER AND SEWER AUTHORITY CAPITAL IMPROVEMENT PROGRAM - LIST OF PROJECTS WATER AND SEWER REVENUE BONDS, SERIES OF 2013 CITY PROJECTS Description Program Bond Comments Brookline Boulevard Water and Sewer - Starkamp Street to Pioneer Avenue City of Pittsburgh Paving Program Cost Share - Reconstruction City of Pittsburgh Paving Program Cost Share - Resurfacing South Highland Avenue Bridge - 8-inch Waterline Replacement and Catch Basin Installation 200, , ,500, , ,000 1,875, , , ,000 1,000, , , Total 2,123, , ,000 3,098,500

269 THE PITTSBURGH WATER AND SEWER AUTHORITY CAPITAL IMPROVEMENT PROGRAM - LIST OF PROJECTS WATER AND SEWER REVENUE BONDS, SERIES OF 2013 PENNDOT PROJECTS Description Program Bond Comments PennDOT Cost Share - Reconstruction Project 2,000,000 4,000,000 1,500,000 7,500,000 Route 19 A-27 West End Circle Waterline Relocation 1,000, ,000,000 Route 28 to Bay Valley Foods - Waterline Relay 200, ,000 PennDOT Cost Share - Resurfacing 500, , ,000 1,250,000 Total 3,700,000 4,500,000 1,750,000 9,950,000

270 THE PITTSBURGH WATER AND SEWER AUTHORITY CAPITAL IMPROVEMENT PROGRAM - LIST OF PROJECTS WATER AND SEWER REVENUE BONDS, SERIES OF 2013 MISCELLANEOUS OTHER PROJECTS Description Program Bond Comments Saw Mill Run Green Infrastructure Project 1,500,000 1,500,000 1,500,000 4,500,000 CMMC 200, ,000 50, ,000 Operations Fund Reimbursement 8,000, ,000,000 Total 9,700,000 1,600,000 1,550,000 12,850,000

271 THE PITTSBURGH WATER AND SEWER AUTHORITY CAPITAL IMPROVEMENT PROGRAM - LIST OF PROJECTS WATER AND SEWER REVENUE BONDS, SERIES OF 2013 ENGINEERING Description Program Bond Comments Construction Management for Private Development 50,000 50,000 25, ,000 Miscellaneous Engineering / CM Services 100, ,000 50, ,000 Temporary Engineering Staffing 400, , ,000 1,000,000 Construction Management for City Projects 150, ,000 75, ,000 Total 700, , ,000 1,750,000

272 THE PITTSBURGH WATER AND SEWER AUTHORITY CAPITAL IMPROVEMENT PROGRAM - LIST OF PROJECTS WATER AND SEWER REVENUE BONDS, SERIES OF 2013 CONTINGENCY Description Program Bond Comments CONTINGENCY 200, , , ,240 Total 200, , , ,240 YEARLY TOTALS Description Program Bond Comments YEARLY TOTALS 34,766,771 34,255,266 13,977,962 83,000,000 Total 34,766,771 34,255,266 13,977,962 83,000,000

273 APPENDIX B ANTICIPATED BOND DRAWDOWN SCHEDULE

274 90,000,000 THEPITTSBURGHWATERANDSEWERAUTHORITY WATERANDSEWERREVENUEBONDS,SERIESOF2013 ESTIMATEDDRAWDOWN 80,000,000 70,000,000 60,000,000 AMOUNT 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 MONTH

275 The Pittsburgh Water and Sewer Authority Water and Sewer Revenue Bonds, Series of 2013 Estimated Drawdown Period Month Incremental Cumulative 1 Jan-14 8,892,792 8,892,792 2 Feb-14 1,061,858 9,954,650 3 Mar-14 1,286,004 11,240,654 4 Apr-14 2,231,273 13,471,927 5 May-14 2,342,170 15,814,098 6 Jun-14 2,355,245 18,169,343 7 Jul-14 2,327,457 20,496,800 8 Aug-14 2,369,957 22,866,756 9 Sep-14 2,300,811 25,167, Oct-14 3,206,702 28,374, Nov-14 3,192,967 31,567, Dec-14 2,968,766 34,536, Jan-15 3,032,291 37,568, Feb-15 3,082,991 40,651, Mar-15 3,064,691 43,715, Apr-15 3,106,330 46,822, May-15 2,955,080 49,777, Jun-15 2,749,985 52,527, Jul-15 2,802,719 55,330, Aug-15 2,775,319 58,105, Sep-15 2,701,985 60,807, Oct-15 2,701,985 63,509, Nov-15 2,635,069 66,144, Dec-15 2,300,669 68,445, Jan-16 2,269,709 70,714, Feb-16 2,269,709 72,984, Mar-16 2,269,709 75,254, Apr-16 2,354,225 77,608, May-16 2,354,225 79,962, Jun-16 2,287,309 82,250,000

276 APPENDIX C 2013 RATE STUDY FOR YEARS Sycamore Advisors, LLC

277 Pittsburgh Water and Sewer Authority Rate Study October 23, 2013

278 TABLE OF CONTENTS Page I. Executive Summary & Recommendations 3-7 II. Introduction & Background of PWSA 8-9 III. Rate Study Objectives, Process & Peer Review Objectives Process & Review 11 IV. Revenue Requirement Analysis Direct O&M Indirect O&M Operational and Debt Service Savings Existing Debt Service New Debt Service for capital V. Allocation Analysis Direct O&M Indirect O&M Operational and Debt Service Savings Existing Debt Service New Debt Service for capital VI. Non-Rate Revenues VII. Billing Determinants VIII. Rate Design Scenarios Scenario A. Revenue Requirement 29 B. Rate Schedule 30 C. Sample Residential Bill Scenario A. Revenue Requirement 32 B. Rate Schedule 33 C. Sample Residential Bill Scenario A. Revenue Requirement 35 B. Rate Schedule 36 C. Sample Residential Bill Scenario A. Revenue Requirement 38 B. Rate Schedule 39 C. Sample Residential Bill Additional Rate Design Considerations A. PAWC Subsidy 41 B. Wholesale Customers IX. Conclusion and Recommendations 43 X. Epilogue XI. APPENDICES Page 2

279 I. EXECUTIVE SUMMARY & RECOMMENDATIONS The overall objective in a rate study is to determine the revenue required from user rates such that they are sufficient to cover the essential costs of providing utility service, including, but not limited to, operation and maintenance expenses, existing debt service, repair and renovation of existing plant and the cost of new capital. Certain reserve funds, savings and other non-rate revenue should not be considered when developing the rate model, and ideally each utility should generate sufficient revenue to operate as a stand-alone entity, i.e. water revenues cover water expenses, while sewer revenues fund sewer expenses. Another consideration is one of long-term sustainability. A utility s rate structure should be designed such that the utility has made conservative assumptions about costs, growth and other assumptions so that it can be reasonably confident that it will realize the appropriate mix of fixed and volumetric revenue, as well as the total level of overall revenue, needed to support its operations. In May 2013, Veolia asked Sycamore Advisors to conduct a rate study of PWSA s water and sewer conveyance charges. Based upon preliminary results of the revenue requirement and cost allocation analyses, PWSA requested the study focus on developing a rate structure for a four year period ( ) that would achieve the following key objectives: 1. Fully fund the three year Capital Improvement Program (CIP) developed by PWSA; 2. Address inequities in the revenue recovery by each utility s service (also an issue in the study); 3. Utilize industry standard (AWWA) meter equivalency factors for establishing minimum charges; 4. Achieve a rate increase that the Board determines is reasonable and covers the utility s operational expenses, existing debt service costs, and provides funds for new capital while minimizing, to the extent practicable, the impact on customers; 5. To the extent possible, maintain the Penn American Water Company (PAWC) subsidy at or below current levels; and 6. Move toward more stable revenue recovery by increasing fixed revenue relative to volumetric revenue. PWSA s last rate study was a full cost of service study conducted in The study highlighted the cross subsidization of the sewer utility by the water utility and the lack of consistency in the amount of flow allowed under base rate charges, issues that still exist today. Revenue Requirements Key Assumptions The revenue requirement is the amount of revenue needed to pay operations and maintenance costs, existing debt service and the cost of new capital for a particular utility service (i.e. water or sewer). The revenue requirement shortfall is the amount that the utility is underfunded in a given year based on rate revenue alone. In this study, assumptions were made to adjust the revenue requirements to reflect the following: Includes annual fee savings on new credit facilities projected from the 2013 restructuring; Includes Veolia s operational savings projections, reflecting the probability of being achieved; Includes meeting debt service coverage at 1.0 times (without the use of DISC revenues or reserve funds); Funding of PWSA s new CIP using bond financing, assuming either the full program amount of $169.6 million or a reduced $150 million; Page 3

280 Does not provide for additional capital expenditures in 2017; and Does not include Distribution Infrastructure System Charge ( DISC ) or ALCOSAN revenues or expenses. It is important to note that PWSA s revenue requirement shortfall for 2014 does not mean that the utility does not meet budget for that year. The revenue requirement is the amount of rate revenue needed to cover all costs of operation for the utility, including existing debt service. The revenue shortfall in each year reflects the shortfall in rate revenues only to cover operations and maintenance and debt service. Under the base case revenue requirement, even without funding any new capital projects, PWSA would require an average annual increase in the revenue requirement of 1.2% annually for the period. Cost Allocation PWSA does not currently separately account for its rate revenues between its water and sewer operations. The purpose of a cost allocation analysis is to help the utility understand and assess where its true costs lie and allocate those expenses based on current data. These cost allocations in turn drive the development of the revenue requirement for each utility. In this rate study, Sycamore evaluated direct operations and maintenance expenses from for the Administration, Operations, and Engineering/Construction divisions, with Benefits separately aggregated. PWSA s costs have been allocated between water and sewer based upon data and input from PWSA, highlighted by the following major components of the cost allocation analysis: Per PWSA and Sycamore agreement based on records from PWSA, the study assumes all administrative costs are allocated 50% to water and 50% to sewer; For existing debt service expenses (including the cost of swaps, credit facilities, remarketing etc.), costs are allocated by utility based on the description and allocation of the expenditures by utility from the 2008 construction fund; PennVest debt service is allocated based on project expenditures by type; and Proposed capital spending allocated according to PWSA s fully loaded CIP. Billing Determinants During the revenue requirement phase of the analysis, it became clear to PWSA, Veolia and Sycamore Advisors that the data available to PWSA staff and others was at times internally inconsistent, incomplete or inaccurate. The parties brought in nationally recognized rate experts J. Stowe & Co., a division of NewGen Strategies and Solutions, LLC, to work directly with the PWSA utility billing system provider, SAP, to develop data queries of the PWSA billing system in an effort to develop a reliable report regarding the number of connections by meter size and by utility service (i.e. water or sewer) and the level of billed water consumption and billed sewer flow. The goal of this process was to produce a reliable report of billing determinants that could be used by Sycamore to project rates for PWSA. J. Stowe & Co. analyzed the raw data and applied the rates in effect at the time, comparing the calculated revenue stream with the actual revenue stream produced over the same time period (2012), both from within the SAP system itself as well as within the 2012 audited numbers of PWSA. Within the 2012 audit, revenues of $94,272,000 were reported. This number includes the revenues associated with the 7% DISC charge. Given that the DISC revenues were not included within the J. Stowe & Co. calculation, the $94,272,000 was adjusted to remove the 7% surcharge, resulting in audited revenues of $88,104,673. When compared with the total revenues calculated by J. Stowe & Co. of $87,652,180, the resulting variance is $452,493 or a differential of 0.51%. Within the industry, a variance of 1% or less between calculated utility revenues and audited utility revenues indicates that the billing Page 4

281 determinant data that has been provided can be sufficiently relied on within a rate analysis. Based upon the close tie to the audited financial results, Stowe opined that the billing data provided in their report appeared representative of the actual utility performance in Fiscal Year 2012 and could be relied upon as the basis for establishing 2012 as the Test Year. PWSA staff subsequently reviewed and certified the billing determinants results. Rate Scenarios The rate scenarios discussed in the study are based on certain assumptions and/or underlying goals to help achieve the Board s broader goals of sustainability and equity. These assumptions include: Phasing in AWWA meter equivalency standard for fixed rates, which fully captures the actual cost of consumption allowed under the fixed rates. This was also recommended in the rate study. Adjusting the fixed charge to capture the cost of consumption allowed under fixed rates and increasing revenue stability. Bringing revenues from each utility into alignment with allocated costs of the utility. The rate scenarios all held water volumetric rates constant through Including annual residential declines in consumption based on an historic average annual decline of 3.92% from (per PWSA 2012 rate brochure). Providing 1.0 times debt service coverage from operating revenues alone. Fully funding a debt service reserve fund from bond proceeds at maximum annual debt service for each bond issue. Issuing fixed rate, 30 year, tax-exempt debt at current PWSA market pricing levels assuming no change to the current ratings by the credit rating agencies and/or market pricing adjustments. None of the funding scenarios included capitalized interest at PWSA s request. Structuring debt on a fully-amortizing basis with level debt service payments. Sycamore and J. Stowe & Co. analyzed four rate scenarios based on four capital financing options: Page 5 SCENARIO 1: Fully funded CIP ($169.6 million) in one bond issue SCENARIO 2: Partially funded CIP ($150 million) in one bond issue SCENARIO 3: Partially funded CIP ($150 million) over three years SCENARIO 4: Fully funded CIP ($169.6 million) over three years In evaluating the four capital funding scenarios, Sycamore considered various tradeoffs between issuing all debt in one year vs. in three separate bond issues. Where the CIP is funded with a single bond issue in Year 1, PWSA would need to front load the increase in rates to achieve sufficient revenue to cover projected new debt service expenses, but overall debt service expenses would be lower. Conversely, where bonds are issued over a three year construction period, PWSA would be better able to fund its entire CIP with a more level series of annual rate increases, but total debt service expense would be higher over the life of the bonds. PWSA would also be at risk of interest rates rising significantly over the three year period, increasing debt service expenses beyond the projected interest rate increases of 0.50% for Year 2 and 1.00% for Year 3. It is also possible that legal, rating and other costs related to issuance would increase for a series of transactions versus one bond issue. A final consideration in sizing the bond issue is PWSA s historic rate of spending down bond proceeds. Based upon internal estimates provided by PWSA, they estimate the ability to spend proceeds based on existing capacity at $3.5 to $4.0 million per month, so the $150 million bond issuance more closely approximates the projected spend rate of proceeds.

282 PAWC Subsidy and Wholesale Contracts Under a 1973 agreement, PWSA s predecessor entity agreed to provide a subsidy to private water customers in Pittsburgh to ensure that rates paid by private water utility customers never exceeded those paid by PWSA customers. The 2012 PAWC customer subsidy was $1.8 million of the $2.2 million Non- City Water Subsidy, or 3.8% of PWSA s overall operating expenses for PAWC customers are provided sewer services but not charged by PWSA because that would have the effect of increasing PWSA s subsidy payments to PAWC. The higher PWSA s rate increase, the larger the decline in the PAWC subsidy. Under the rate scenarios presented in this study, the PAWC subsidy should be equal to or less than the 2012 subsidy amount subject to PAWC not imposing a DISC charge, which was reduced to 0%, per their final rate tariff, effective January 1, revenue from PWSA s wholesale water customers totaled $2.3 million, or 2.5% of overall revenue, and 10.8% of PWSA s total volume. Wholesale rate increase calculations were included as part of this study where data on contracts in place was sufficient to support an assumption that water rate increases could be passed through. All wholesale contracts remain subject to review by PWSA s legal counsel. Other Key Assumptions in Rate Study The rate study includes $8.75 million (allocated over with no spending in 2017) in new capital for green infrastructure to begin addressing PWSA s obligations under the AECOM Wet Weather feasibility study and proposed Long Term Control Plan (the LTCP ). The AECOM study commissioned by PWSA identifies approximately $170 million in required expenditures by PWSA through This plan has not yet been approved by the Pennsylvania Department of Environmental Protection (PaDEP) or the Allegheny County Health Department (ACHD) - PWSA expects a response on or before June 30, Beyond the $8.75 million referenced above, Sycamore has not included additional expenditures from the feasibility study in its analysis. At the request of PWSA, the rate study does not include any capital expenditures for The study assumes that DISC revenues will continue to be used only for DISC projects, outside of the O&M budget. The study does not assume any additional debt service coverage over 1.0 times annual debt service. Future statements related to the PAWC subsidy are based on the use of available data from PAWC and were made subject to PAWC s ability to change its DISC charges every three months. Statements and estimates of wholesale customer rate increases are provided subject to legal review of the wholesale contracts by PWSA s attorneys. The study does not provide for growth in PWSA s customer base but does include annual declines in consumption for residential customers based on the 2012 PWSA rate brochure. Sycamore and J. Stowe & Co. have relied exclusively upon data provided by PWSA, its staff or by one of its direct service providers (including SAP, Veolia, Chester Engineers and PFM). Page 6

283 Recommendations Sycamore is making the following recommendations as part of this rate study: Fully fund the proposed PWSA Capital Improvement Plan (CIP), consistent with Chester Engineers assessment that the water and sewer systems are in adequate operating condition and have adequate capacity to meet demands in the foreseeable future, provided PWSA continues the rehabilitation and replacement program provided for in its ongoing CIP. Move toward reducing the subsidization of the sewer utility by the water utility, such that operating revenue from the sewer utility is ultimately sufficient to support sewer-related debt service and operating expenses. Improve the stability of the revenue stream by increasing the relative percentage of fixed revenues versus volumetric revenues. Utilize industry standard (AWWA) meter equivalency factors in establishing minimum water and sewer charges. Conduct an audit of the PAWC subsidy calculations and verify them for a defined period. Implement improved data collection and management to better link consumption data and billed revenue and reporting capabilities. Standardize wholesale contracts where possible and reduce term to 20 years or less, adding reopener and inflator provisions. Closely monitor PWSA s obligations under the Wet Weather feasibility study and proposed LTCP after approval by the PaDEP and ACHD (the schedule assumes the period for review of the PWSA Plan ends July 2014, one year after submission of the FS to the regulatory agencies), especially with regard to the fiscal impact on low-income households as a percentage of median household income. In the conduct of this analysis, Sycamore has sought to be conservative in its use of estimates and projections. The study reflects data available at a point in time. However, because PWSA operates in a changing and dynamic environment and is contemplating various new debt financings including possible restructuring of existing debt issues which could have a material impact on PWSA s cost structure, we recommend that an annual update and review of the revenue requirement and debt capacity analysis be conducted to ensure that revenues and savings are meeting targets projected in the rate study. Page 7

284 II. INTRODUCTION & BACKGROUND ON PWSA The Pittsburgh Water and Sewer Authority ( PWSA ) is a body corporate and politic, organized and existing under the Pennsylvania Municipal Authorities Act pursuant to Resolution No. 36 of the Council of the City of Pittsburgh (the City ), effective Feb. 16, The Secretary of the Commonwealth of Pennsylvania approved PWSA s Articles of Incorporation and issued a Certificate of Incorporation Feb. 17, Articles of Amendment were approved and a Certificate of Amendment was issued by the Pennsylvania Department of State on May 9, 2008 to extend the terms of existence of PWSA to May 31, PWSA was established for the purpose of assuming responsibility for the operation of the City s water supply and distribution and wastewater collection systems (the Water and Sewer Systems). Originally the City and PWSA operated under a Lease and Management Agreement, but that was terminated in 1995 and PWSA was granted an option to acquire the portion of the Water and Sewer System owned by the City pursuant to a Capital Lease and Management Agreement dated as of July 15, 1995 between the City and PWSA. The Agreement provides for a series of payments from PWSA to the City, and PWSA will acquire title to the Water and Sewer System in 2025 upon the payment of one dollar. The Water and Sewer System provides water treatment, transmission and distribution, as well as wastewater collection and transmission service to customers in the Pittsburgh City limits. Based on U.S. Census (American Community Survey) estimates, Pittsburgh has seen increasing levels of Median Household Income since 2000 and total population trending upwards to approximately 308,000 in 2011 from a level of 290,900 in Per GIS data, PWSA has 83,578 active service connections. Of these service connections, 66,413 were billed units, with additional connections for 7,600 fire hydrants, 3,400 private fire line accounts, 408 unbilled City accounts and 6,599 currently disconnected accounts. Another 23,000 customers receive water and sewer service from Pennsylvania American Water Company ( PAWC ). In addition to PAWC, the water system also has long-term wholesale contracts to provide water to 6 neighboring communities, the largest of which is Fox Chapel followed by Reserve Township. Page 8

285 The Water and Sewer System does not include wastewater treatment facilities such facilities are the responsibility of the Allegheny County Sanitary Authority ( ALCOSAN ), a separate and distinct legal entity. Pursuant to the Pennsylvania Municipal Authorities Act, rates and charges established by PWSA are not subject to the approval of any department, board or agency of the Commonwealth of Pennsylvania or the City, but rates must be reasonable and uniform under the Municipal Authorities Act, 53 Pa.Cons.Stat. 5607(d)(9), The Board consists of seven members who serve staggered five year terms, with no fewer than six members appointed by the Mayor of the City of Pittsburgh and all approved by the City Council. The Authority has two operating divisions: Administration and Operations. The water supply and distribution system consists of a 117 million gallon per day rapid sand type treatment plant which was placed in service in 1969, 1000 miles of mains, more than 25,330 valves, more than 7,441 fire hydrants, twelve pumping stations, four reservoirs and twelve storage tanks. The total storage capacity of the reservoirs and tanks is approximately 455 million gallons. The sole source of water for the Water System is the Allegheny River, for which PWSA and its predecessors have held withdrawal permits since According to information in Appendix A of PWSA s 2012 Reoffering Circular, PWSA stores enough finished water to provide a two to three day uninterrupted supply to all customers should it temporarily be unable to treat additional water from the Allegheny River. In 2012, the water plant treated and distributed over billion gallons of water. The wastewater collection and transmission systems consist of approximately 1,200 miles of sewer lines and four wastewater pumping stations. Seventy seven percent (77%) of the sewer system is a combined sewer system designed to carry both storm and sanitary flows. The average age of the sewer lines is between 60 and 70 years old, with some portions dating back 150 years. The sewer system conveys wastewater to ALCOSAN interceptors for conveyance to the ALCOSAN plant for treatment. ALCOSAN operates under its own NPDES permit and also serves 24 suburban municipalities. In July 2012, PWSA s Board approved an Agreement for interim executive management services with Veolia Water North America Northeast, LLC ( Veolia ). The Agreement provides for two types of services: a full-time, on-site interim Executive Director and consulting services led by a full-time, on-site Study Manager. The initial one year term of the Agreement has been extended an additional year and a half, through December Sycamore Advisors, LLC ( Sycamore ) was retained by Veolia in May 2013 to conduct a combined water and sewer rate study on behalf of PWSA. Veolia specified that this would be a rate study and would not include a full cost of service study. With the knowledge that sewage treatment rates for PWSA s customers are set by ALCOSAN and simply pass-through PWSA, this study focuses on Water and Sewer Conveyance rates directly set by PWSA. The overall goal of this study is to determine the adequacy of the existing water and sewer rates and provide the basis for adjustments to maintain rates sufficient to fund each utility s respective cost of service. This report describes the methodology, findings, and conclusions of the water and sewer rate study process. Page 9

286 III. RATE STUDY OBJECTIVES, PROCESS & PEER REVIEW 1. Rate Study Objectives The overall objective in any rate study is to determine the revenue required from user rates such that they are sufficient to cover the essential costs of providing utility service, including, but not limited to, operation and maintenance expenses, existing debt service, repair and renovation of existing plant and the cost of new capital. Certain reserve funds, savings and other non-rate revenue should not be considered when developing the rate model, and ideally each utility should generate sufficient revenue to operate as a stand-alone entity (i.e. water revenues cover water expenses, while sewer revenues fund sewer expenses). Another important consideration is one of long-term sustainability. A utility s rate structure should be designed such that the utility has made conservative assumptions about costs, growth and other assumptions so that it can be reasonably confident that it will realize the appropriate mix of fixed and volumetric revenue, as well as the total level of overall revenue, needed to support its operations. PWSA requested the study focus on developing a rate structure for a four year period ( ) that would achieve the following key objectives: 1. Fully fund the three year Capital Improvement Program (CIP) developed by PWSA; 2. Address inequities in the revenue recovery by each utility s service (also an issue in the study); 3. Utilize industry standard (AWWA) meter equivalency factors for establishing minimum charges; 4. Achieve a rate increase that the Board determines is reasonable and covers the utility s operational expenses, existing debt service costs, and provide funds for new capital while minimizing, to the extent practicable, the impact on customers. 5. To the extent possible, maintains the Penn American Water Company (PAWC) subsidy at or below current levels. 6. Move toward more stable revenue recovery by increasing fixed revenue relative to volumetric revenue. While minimal in the larger context, there are conflicts inherent between achieving some of these objectives. For example, moving to an AWWA standard for establishing meter equivalencies in setting the minimum meter charge hampers efforts to maintain or reduce the current PAWC subsidy which is focused on residential customers, as resulting fixed charge increases have a greater dollar impact on larger meter customers. However, leaving the current minimum monthly charges in place perpetuates the existing cross-subsidization between meter sizes. Keeping increases at or below 9% reduces PWSA s ability to fully fund the CIP ($170 million), regardless of the timing of the financing structure (1 versus 3 bond issues). Smaller rate increases for PWSA customers may result in increased PAWC subsidies. PWSA s last rate study was a full cost of service study conducted in The study highlighted the cross subsidization of the sewer utility by the water utility and the lack of consistency in the amount of flow allowed under base rate charges, issues that still exist today. Page 10

287 The three main components of this rate study are: 2. Process & Review 1. REVENUE REQUIREMENT ANALYSIS 2. ALLOCATION ANALYSIS 3. RATE DESIGN Sycamore first presented the revenue requirements to PWSA, and then used those figures, as well as the allocation analysis and the billing determinants (see below) to help determine the rate design under various financing scenarios. Sycamore used industry and statutory standards for rate analysis and design when possible. The Municipal Authorities Act, 53 Pa.Cons.Stat. 5607(d)(9), provides that an Authority has the right to fix, alter, charge and collect rates and other charges in the area served by its facilities at reasonable and uniform rates While the final determination of reasonable rates will be one for PWSA s attorneys following adoption of any actual rate increase(s), this study was developed with this statutory standard in mind. Rates must be reasonable and cover, at minimum, (1) operations and maintenance; (2) existing debt service; and (3) the cost of any new capital. Industry standards also provided guidance in developing this study. Pursuant to the AWWA Manual 1, Chapter 34, Legal Considerations, rates must be just and reasonable. Additionally, during the revenue requirement and rate design phases of the study, any changes based upon adjusting the Test Year were for known and measurable changes. Finally, the results and rate recommendations must be publicly defensible and rely upon appropriate assumptions and valid data. The methodology utilized in this rate study was subject to a peer review process by J. Stowe & Co., and certain data sets were certified by PWSA after consultation with staff to ensure that the data utilized in this study was the most reliably available data which could be produced by PWSA and its data systems. The revenue requirement was calculated for PWSA, and allocated to the different utilities based on input from PWSA and Veolia. Data was gathered for years 2007 to 2013, and projected for 2014, 2015, 2016 and 2017, relying on historic trends or PWSA inputs as the basis for pro forma projections. Page 11

288 IV. REVENUE REQUIREMENT ANALYSIS Utilizing a cash basis approach and setting a rate timeframe from 2014 to 2017, Sycamore worked with PWSA and Veolia staff to gather historic data (2007 through the 2013 budget) for the five main components of the revenue requirement, and compiled them as follows: 1. Direct O&M a. Administration b. Operations c. Engineering & Construction d. Employee Benefits 2. Indirect O&M a. Cooperation Agreements b. Non-City Water Subsidy 3. Savings a. Fee savings from new credit facility agreements b. Operational savings 4. Existing Debt Service a. Existing debt service b. Existing fees 5. New Debt Service Together, these costs represent PWSA s rate-funded revenue requirements. After determining the revenue requirement, miscellaneous and non-user fee revenues are subtracted to arrive at the total revenue required from rates. In addition to these rate-funded costs, PWSA has historically paid for capital through three major mechanisms: 1. PennVest low-interest loans that reimburse PWSA for approved capital projects. 2. DISC the Distribution Infrastructure System Charge ( DISC ) was established in 2010, first as a 5% surcharge to both the water and sewer charges, and raised to 7% in The idea was to create a pool of money set aside for potentially disastrous infrastructure failures which could be accessed more quickly than bond funds, and wouldn t deplete the O&M budget. Neither the revenues nor expenses associated with the DISC charge were included as part of the revenue requirement or the rate design. If DISC revenues were utilized for other purposes, Sycamore believes an adjustment to the rate model would be warranted. 3. Bond Proceeds since 2007, the vast majority of PWSA s capital program has been paid for out of various bond construction funds, including the 2002, 2005, 2007 and 2008 bond funds. While Sycamore analyzed PennVest and DISC as a part of this rate study, those capital expenses were not included as part of the rate-funded revenue requirement. The DISC fund currently exists effectively as a reserve fund for future major fixes large and unexpected main breaks, etc. that cannot be continuously funded or well-planned-for through the operations and maintenance budget, or that cannot wait for the standard bidding time required for the use of bond proceeds. Since revenues generated in one year may Page 12

289 not be spent until later years, both the revenues and associated expenses have been removed from the ratefunded revenue requirement. In addition, PennVest and other bond proceeds are not treated as sources of revenue in the rate model, only the debt service costs that must be recovered by the revenue requirement. ALCOSAN Similarly, while PWSA bills its customers for wastewater treatment provided by ALCOSAN, PWSA has no control over ALCOSAN rates or expenses, which are designed to be a pass-through or wash through the system. As a result, ALCOSAN revenues and expenses have been removed from the revenue requirement analysis and rate design. DEBT SERVICE COVERAGE The debt service coverage requirement under the existing indenture is an either/or test which allows PWSA to meet the covenant one of two ways: Method 1: The Authority will maintain, charge and collect, so long as any of the bonds shall remain outstanding, reasonable rates, rentals and other charges for the use of the facilities of the Water and Sewer System which (after making due and reasonable allowances for contingencies and a margin of error in the estimates), together with other Receipts and Revenues, including any unrestricted cash and investments accumulated in the Revenue Fund at the beginning of each Fiscal Year, shall be at all times at least sufficient to provide annually; Or, a. Funds to pay all of the Current Expenses of the Authority; and b. An amount equal to 120 percent of the Debt Service Requirements with respect to the bonds authenticated and delivered under the Indenture during the then current Fiscal Year of the Authority. Method 2: The Authority will maintain, charge and collect, so long as any of the Bonds shall remain outstanding, reasonable rates, rentals and other charges for the use of the facilities of the Water and Sewer System which (after making due and reasonable allowances for contingencies and a margin of error in the estimates), together with other Receipts and Revenues, for the then current Fiscal Year (exclusive of interest income earned by the Authority on funds other than the Debt Service Reserve Fund; provided, however, that earnings on the Construction Fund may also be included during any construction period, but only to the extent such earnings are expressly required to be either retained in the Construction Fund and may be used to pay debt service on the Bonds or applied directly to payment of debt service of Bonds) shall be at all times at least sufficient to provide annually: a. Funds to pay all of the Current Expenses of the Authority; and b. An amount equal to 100 percent of the Debt Service Requirements with respect to the bonds authenticated and delivered under the Indenture during the then current Fiscal year of the Authority. In setting the revenue requirement and designing rates such that rate revenues will be sufficient to cover all of the existing and new debt service, this rate study implicitly assumes 100% debt service coverage from rates, without the use of DISC revenues or unrestricted cash. Page 13

290 1. Direct O&M For the purposes of this study, Sycamore adopted the cost structure PWSA uses for budgeting purposes, with the following accounts falling under the three main Direct O&M Divisions. Employee benefits are embedded within each account, but were aggregated separately as the fourth Direct O&M category, which is also consistent with PWSA budgeting practices. a) Administration Division Operations Executive/Admin Office of the Executive Director Customer Service Management Information Systems Finance Procurement Human Resources Legal b) Operations Division Safety & Security General Office Facilities Support Plant - Operations & Maintenance Water Quality Water Operations/Distribution Sewer & Service Operations c) Engineering/Construction Division d) Employee Benefits Based on data received from PWSA, the following represents historic Direct O&M costs, summarized by major Division: DIRECT O&M: (budget) Administration Division $8,486,330 $9,467,880 $ 8,779,229 $10,131,981 $11,088,476 Operations Division 27,878,978 24,850,442 21,949,315 22,379,251 23,262,992 Engineering/Construction Division 1,148,594 1,289,243 2,788,771 2,558,421 2,834,062 Employee Benefits (All Divisions) 2,851,048 3,108,978 3,104,463 3,193,648 3,532,099 TOTAL: $40,364,949 $38,716,542 $36,621,778 $38,263,302 $40,717,630 As a result of the implementation of the DISC charge in 2010, many of the Operations Division expenses were shifted to the DISC budget, including many of the annual emergency repair contracts, which resulted in a reduction of overall Operations expenses from 2009 to Because of this, Sycamore has projected expenses for each through 2017 based on different historic time periods: Page 14

291 Page 15 DIRECT O&M: Average Annual Growth Time Period Administration Division 7.00% Operations Division 3.00% Engineering/Construction Division 1.00% Employee Benefits (All Divisions) 6.30% See Appendix A for detail regarding Direct O&M expenditures. 2. Indirect O&M In 1995, PWSA entered into an agreement with the City of Pittsburgh which terminated the agency relationship established in 1984 between the City and PWSA. The agreement effectively transferred several employment positions in the Water Department and certain positions in the Water and Sewer Division within the Engineering and Construction from the City s budget to PWSA s budget. In exchange for the City continuing to provide various services to PWSA, PWSA agreed to the following: 1. Payment of the Subsidy payment to Pennsylvania American Water Company (see below.) 2. Payment to the City for any direct expenses, public works salaries and wages and overhead expenses continued to be provided by the City. 3. Allowance of up to 600 million gallons of water each year to be used by the City and its agencies. 4. Reimbursement to the City for all workers compensation benefits paid by the City on behalf of those employees whose positions were transferred over to PWSA from the City. A. Cooperation Payments PWSA continues to make three separate payments pursuant to the Cooperation Agreement: Indirect Water, Direct Sewer and Indirect Sewer. While the sum of these payments has been as high as $9.65 million in 2007, the 2013 budget and projections through 2017 are for $7.15 million per year combined. B. Water Subsidy Payment Under a 1973 agreement, PWSA s predecessor entity agreed to provide a subsidy to private water customers in Pittsburgh to ensure that rates paid by private water utility customers never exceeded those paid by PWSA customers. PWSA continues to pay a subsidy to Pennsylvania America to compensate for Pennsylvania America s higher water rates. The amount of the Non-city water subsidy has ranged from $680k in 2007 to over $2.3 million in The 2012 PAWC customer subsidy was $1.8 million of the $2.148 million total subsidy payment, or 3.8% of PWSA s overall operating expenses for Effective January 1, 2014, PAWC customers with 5/8 meters will see a 9.1% increase in their fixed rate and a 12% increase in the volumetric rate. Absent any rate increase for PWSA customers, the subsidy payment to PAWC can be expected to increase. For purposes of the revenue requirement for years , however, this payment is assumed to be constant at $2.148 million. A. Fee Savings 3. Operational and Debt Service Savings In 2013, PWSA undertook a request for proposals for renewal of liquidity facilities, facilitated by their financial advisor, Public Financial Management Group ( PFM ). Based on numbers provided to us by

292 PFM, these savings on debt service fees total $2.3 million per year, and have been included as offsets to the rate-funded revenue requirement. B. Veolia Operational Savings and Business Cases Veolia has also presented to PWSA s Board a series of business cases and opportunities to achieve operational savings. Up through June 2016, PWSA receives 50% or 60% of the net savings, but after June 2016, PWSA will receive all of those savings. Below is a table which details estimated operational savings by initiative, adjusted for the probability of achievement: Initiative Probability Adjustment (represents adjusted amount, in $000s) 1 Fire line service charge 100% $ 175 $ 175 $ 175 $ 263 $ Win back large customer 100% ,104 3 Filter backwash reduction 90% Increase filter run time 0% Membrane plant optimization 90% Make vs. Buy analysis - CCTV 90% Sourcing of chemicals 75% Laboratory efficiency 50% Large meter replacement program 75% ,125 1, THM control optimization 0% Make vs. Buy analysis - PA One Call 25% Warehousing 25% AMR rebid ( E) 25% Project and contract management ( E) 25% Automate CSO monitoring 0% Engineering services contract review 0% TOTAL $ 685 $ 2,139 $ 1,980 $ 2,889 $ 3,723 TOTAL, LESS #2 $ 386 $ 1,587 $ 1,428 $ 2,061 $ 2,619 As stated later in this report, Initiative #2 represents one of the utility s largest clients, which left the system in In 2013, the client returned to PWSA under the terms of a ten year Take Or Pay contract with adjustment formulas and minimum volumes per month. Their return to PWSA adds back a significant piece of PWSA s revenue stream, and has been included as existing non-rate revenue through Therefore, operational savings have been calculated net of Initiative #2, which shows up under existing non-rate revenue. 4. Existing Debt Service As of October 15, 2013, PWSA had $489.8 million in outstanding First Lien debt, and $103.7 million in outstanding Subordinate Lien debt. In addition, there is approximately $32.8 million in outstanding PennVest debt outstanding as of the date of this report. Of the $593.5 million total First Lien and Subordinate debt, $403 million, or 67.9% is variable rate with corresponding interest rate swaps. PWSA pays approximately $43.6 million per year in annual debt service, plus $5.0 million in debt related fees. See Appendix B for the combined debt service schedule, including total debt service on the PennVest loans. Page 16

293 TOTAL REVENUE REQUIREMENT Below is a summary of the combined water and sewer revenue requirements of the utility, prior to any new capital, inclusive of both Veolia s operational savings and the credit facilities savings. Even before the addition of new capital costs, and after substantial savings adjustments, PWSA faces increasing costs of over 1% per year through Revenue Requirement Direct O&M 38,263,302 40,717,630 42,442,573 44,257,091 46,166,499 48,176,456 Indirect O&M 9,347,244 9,298,000 9,298,000 9,298,000 9,298,000 9,298,000 Debt Service 42,824,921 43,378,660 43,633,538 43,698,191 43,833,749 43,572,979 Debt Service Fees 4,757,089 5,037,638 5,040,007 5,040,007 5,052,716 4,668,364 Total Revenue Requirement 95,192,555 98,431, ,414, ,293, ,350, ,715,799 Savings Adjustments Less: Fee Savings (2,288,845) (2,288,845) (2,288,845) (2,288,845) Less: OpEx Savings (385,513) (1,586,690) (1,428,450) (2,061,200) (2,619,336) Total Savings Adjustments - (385,513) (3,875,535) (3,717,295) (4,350,045) (4,908,181) Total Adjusted Revenue Requirement, Prior to New Capital 95,192,555 98,046,414 96,538,583 98,575, ,000, ,807,618 Page 17

294 5. New Debt Service for Capital Pursuant to Appendix A in PWSA s most recent Official Statement (2012), PWSA s consulting engineers, Chester Engineers, opined that the Water System is in adequate operating condition and has adequate capacity to meet the demands in the foreseeable future, provided PWSA continues the rehabilitation and replacement program provided for in its ongoing Capital Improvement Program (emphasis added). The proposed investment in infrastructure is being driven by PWSA s Capital Improvement Plan. The CIP envisions approximately $170 million in new capital expenditures over three years, including $8.75 million in green infrastructure under the Wet Weather Feasibility Study and Proposed LTCP. Total 3-Year CIP + Wet Weather Task 1 Capital Needs, by Utility (in millions) Total Water $ $ $ $ Sewer Wet Weather Task Total CIP: $ $ $ $ While the current CIP does not include any new capital for 2017, PWSA s spend down rate and capacity to manage and execute projects (per conversations with PWSA and Veolia staff) is currently approximately $ million per month. If this spend down rate continues in , a substantial portion of the current CIP would be spent in See Appendix C for PWSA s current CIP in full, as well as the allocation of the CIP by each utility. As noted above, for the purposes of this rate study, Sycamore was asked to include $8.75 million from the AECOM Feasibility Study and Proposed LTCP. On December 14, 2012, PWSA commissioned AECOM to complete a Wet Weather Feasibility Study for submittal to the Pennsylvania Department of Environmental Protection ( PaDEP ) and the Allegheny County Health Department ( ACHD ). On July 31, 2013, PWSA submitted the final study, which identified nearly $170 million in LTCP costs (capital expenditures) from 2014 to 2026 for which PWSA will be directly responsible. Final approval of this plan may not occur until July 2014, but the study and proposed plan suggest that the communities subject to the Plan will likely be responsible for costs up to the projected amounts. The Implementation Schedule attached as Appendix D illustrates the anticipated timing and amounts (by phases) of expected capital expenditures by PWSA under the Proposed LTCP. This rate study modeled 4 financing options for this CIP: 1. Fully funded CIP ($169.9 million) in one bond issue; 2. Partially funded CIP ($150 million) in one bond issue; 3. Partially funded CIP ($150 million) over 3 years; and 4. Fully funded CIP ($169.9 million) over 3 years All financing scenarios assume: year final maturity; 2. Fully funded debt service reserve fund at maximum annual debt service as required by PWSA s indenture; 3. Traditional fixed rate structure level debt service, current market pricing and increasing interest rates for 3 bond issue scenarios; and 4. No capitalized interest, per request by PWSA Page 18

295 The following table shows the projected new debt service, by scenario, for : ESTIMATED NEW DEBT SERVICE SCENARIO 1 Issue $169.9 million in projects in year 1 9,013,750 12,019,500 12,018,500 12,020,250 SCENARIO 2 Issue $150 million in projects in year 1 7,977,625 10,635,000 10,635,750 10,635,000 SCENARIO 3 Issue $150 million in projects over 3 years 2,671,750 6,406,803 10,355,394 11,353,438 SCENARIO 4 Issue $169.9 million in projects over 3 years 2,983,188 6,821,542 10,172,932 12,866,088 Among the rate scenarios, tradeoffs considered were the need to front load the increase in rates in order to achieve sufficient revenue to cover projected new debt service expenses where the capital program is funded with a single bond issuance in Year 1. Conversely, where bonds are issued over the three year construction period, PWSA is able to fund its entire CIP with a more level series of annual rate increases but total debt service expense is higher over the life of the bonds and PWSA is at risk of interest rates rising significantly over the period, pushing up debt service expenses beyond the 0.50% interest rate increase projected for Year 2 and the 1.00% interest rate increase projected for Year 3 of issuance. It is also possible that legal, rating and other costs related to issuance would increase for a series of transactions versus one bond issue. A final consideration in sizing the bond issue is PWSA s historic rate of spending down bond proceeds. Based upon internal estimates provided by PWSA, they estimate the ability to spend proceeds based on existing capacity at $3.5 to $4.0 million per month, so the $150 million bond issuance more closely approximates the projected spend rate of proceeds. Page 19

296 V. ALLOCATION ANALYSIS PWSA does not currently separately account for its rate revenues or expenditures between its water and sewer operations. The purpose of a cost allocation analysis is to help the utility understand and assess where its true costs lie and allocate those expenses based on real or historic data. These cost allocations in turn drive the development of the revenue requirement for each utility. In this rate study, Sycamore evaluated direct operations and maintenance expenses from for Administration, Operations, and Engineering/Construction divisions, with the ultimate goal of bringing revenues from each utility into alignment with allocated costs of each utility. PWSA s costs have been allocated between water and sewer based upon data and input from PWSA as follows: Per PWSA and Sycamore agreement based on records from PWSA, the study assumes all administrative costs are allocated 50% to water and 50% to sewer; For existing debt service expenses (including the cost of swaps, credit facilities, remarketing etc.), costs are allocated by utility based on the description and allocation of the expenditures by utility from the 2008 construction fund; PennVest debt service was allocated based on project expenditures by type; and Proposed capital spending allocated according to PWSA s fully loaded CIP. 1. Direct O&M Sycamore used the results of the revenue requirement analysis, and inputs from management and staff to compare an estimated allocation of expenses between water and sewer to the current allocation of the rate. The following table shows the assumptions used to allocate Direct O&M and Indirect O&M, based on the various accounts/functions within each Division: % WATER % SEWER Administration Division Operations Executive/Admin 50% 50% Office of the Executive Director 50% 50% Customer Service 50% 50% Management Information Systems 50% 50% Finance 50% 50% Procurement 50% 50% Human Resources 50% 50% Legal 50% 50% Operations Division Safety & Security 50% 50% General Office 50% 50% Facilities Support 50% 50% Plant - Operations & Maintenance 100% 0% Water Quality 100% 0% Water Operations/Distribution 100% 0% Sewer & Service Operations 0% 100% Engineering/Construction Division 64% 36% Page 20

297 Based on input from Veolia and PWSA, all administrative functions were split 50%-50% between water and sewer, the Plant and Water Quality and Water Operations accounts were allocated 100% to water, and the Sewer Service account was allocated 100% to sewer. Based on the budgeted allocation of the 2008 construction fund (see below) the Engineering & Construction account was split 64% Water - 36% Sewer. Benefits appear in each account within each Division, and were allocated in the same manner as the account in which they appear. 2. Indirect O&M The three different Cooperation Agreement payments are explicitly tied to either water or sewer and were allocated accordingly. The Non-City Water Subsidy was allocated 74% Water 26% Sewer, reflecting the split in the average bill for a residential PAWC customer using 4,100 gallons/month under current rates for PWSA. 3. Operational and Debt Service Savings Veolia s operational savings have been split between the two utilities, and the credit facility fee savings have been split the same way as existing debt service (see below.) 4. Existing Debt Service In order to allocate existing debt service and fees between the utilities, Sycamore gathered data from Chester Engineers regarding the use of the 2008 Construction proceeds. Below is a table which shows the 2008 Construction Fund budget allocated between the two utilities. Page 21 AMOUNT BUDGETED % WATER % SEWER WATER SYSTEM Water - Distribution System 23,694,609 Water - Pumping & Storage 14,976,568 Water - Treatment Plant 9,443,846 TOTAL WATER SYSTEM $ 48,115, % 0% SEWER SYSTEM Sewer - Sanitary Sewer - Sewer - Combined Sewer 20,594,250 Sewer - Pump Station 250,000 Sewer - CSO - TOTAL SEWER SYSTEM $ 20,844,250 0% 100% CITY/URA/SEA/PORT AUTHORITY 8,806,435 50% 50% ENGINEERING 12,310,049 50% 50% TOOLS AND EQUIPMENT 4,295,139 50% 50% IT/GIS 3,984,670 50% 50% CONTINGENCY 86,627 50% 50% TOTAL 2008 CONSTRUCTION FUND $ 98,442,194 $62,856,484 $35,585,710 OVERALL % OF TOTAL BUDGET 64% 36% Of the $55 million in PennVest loans completed since 2002, approximately 56% of the proceeds have been spent on water-related projects, so the PennVest debt service has been allocated according to historic patterns of project expenditures:

298 Project Name Utility PennVest Loan Amount Railside Street Sanitary S 158,399 Ollie St. & Overbrook Blvd. Storm Sewer S 800,963 Water System Improvements No.1 W 3,940,114 Streets Run Interceptor S 3,505,100 Water System Improvements No. 2 W 5,112,264 Water System Improvements No. 3 W 4,821,500 Sewer System Improvements - Phase I S 4,672,410 Sewer System Improvements - Phase II S 10,264,250 Sewer System Improvements - Phase III S 4,865,613 Water System Improvements - Phase 5 W 8,613,546 Water System Improvements - Phase 6 W 8,393,478 Total 55,147,637 % Water overall 56.0% % Sewer overall 44.0% Below is a summary of the revenue requirement allocated by utility, prior to any new capital, but adjusted for both operational and debt service fee savings: Water 60,933,659 62,550,790 61,773,887 63,068,759 64,071,071 64,666,442 Sewer 34,258,896 35,495,624 34,764,696 35,507,235 35,929,848 36,141,175 Combined 95,192,555 98,046,414 96,538,583 98,575, ,000, ,807, New Debt Service for capital Sycamore used the $169.6 million capital improvement plan for the purposes of allocating future debt service. Debt service on the new capital was allocated by year according to the table following table: Total 3-Year CIP + Wet Weather Task 1 Capital Needs, by Utility (in millions) Total Water $ $ $ $ Sewer Wet Weather Task Total CIP: $ $ $ $ % Water 64.4% 69.7% 66.9% 67.0% % Sewer 35.6% 30.3% 33.1% 33.0% Any bonds issued in 2014 were allocated according to the 2014 project allocations through Any debt service resulting from financing scenarios involving a single bond issue in 2014 are allocated by the overall split between water and sewer. Although multiple combinations of sizing, timing of issuance, and Page 22

299 structure for the bond financings are possible, Appendix E has the debt service sizing for a single $150 million bond issue with a fully funded debt service reserve fund. Page 23

300 VI. NON-RATE REVENUES PWSA collects a variety of fees and miscellaneous revenues and interest earnings. Based on information from PWSA, the following table includes these revenues. It does not include either ALCOSAN, bond or PennVest proceeds or DISC collections. To conservatively estimate and project existing non-rate revenue, we have either flat-lined non-rate revenues to the 2013 numbers, or used the average. In our estimates of non-rate revenues we have included the return of one of the utility s largest clients in 2013 under the terms of a Take or Pay Contract. Their return adds back a significant piece of PWSA s revenue stream, and has been included in existing non-rate revenue through These non-rate revenues have been allocated between the two utilities based on individual characteristics. See Appendix F for this detail. The table below shows non-rate revenues in 2012, budget 2013, and projected through 2017: Page 24

301 Non-Rate Revenues Actual BUDGET PRO-FORMA - Baseline, NO RATE INCREASE Assumptions Fee Revenues Return of Major Customer 299, , , ,000 1,104,000 per Veolia estimates Water Penalty & Interest 534, , , , , , ,000 flatline to 2013 budget Dye Testing 127, , , , , , , average Hydrant Line Use 12,410 12,308 13,840 12,853 12,853 12,853 12, average Hydrant Sales 5,740 25,260 25,339 18,779 18,779 18,779 18, average Lab Test Fees average Map Fees average Meter Sales 111, , , , , , , average Meter Test Fees average New Connection Fees (7,157) (6,973) 6,385 (2,582) (2,582) (2,582) (2,582) average NSF Fees 14,341-20,440 11,594 11,594 11,594 11, average Repair Fees average Shut Fees 446, , , , , , , average Tap Fees 465,755 1,084,265 1,253, , , , , average TOTAL 1,712,421 2,245,760 2,750,102 2,671,374 2,671,374 2,947,374 3,223,374 Miscellaneous Revenue Bid Fees 2, ,200 1,508 1,508 1,508 1, average Lien Satisfaction Fees average Miscellaneous Fees 2,298,560 2,014, , , , , ,237 flatline to 2013 budget Sewage Fiche Collections average CARC.MBIA 07 Buyback 15,609 43,197 flatline to 2013 budget Collection Agency Clearing 10,644 3,060 flatline to 2013 budget TOTAL 2,327,752 2,062, , , , , ,027 Interest Earnings Capital Project Funds 5, ,000 30,000 30,000 30,000 30,000 30,000 flatline to 2013 budget Debt Service Funds 405, , , , , , ,000 flatline to 2013 budget Debt Service Reserve Funds flatline to 2013 budget Revenue Fund 12,720 9,480 10,000 10,000 10,000 10,000 10,000 flatline to 2013 budget Other Funds 26, flatline to 2013 budget Total Interest Earnings 450, , , , , , ,000 TOTAL NON-RATE REVENUE: 4,491,010 4,804,268 4,081,717 4,003,401 4,003,401 4,279,401 4,555,401 Page 25

302 VII. BILLING DETERMINANTS During the revenue requirement phase of the analysis, it became clear to PWSA, Veolia and Sycamore that the billing data available to PWSA staff and others was at times internally inconsistent, incomplete or inaccurate. The parties brought in rate experts J. Stowe & Co., a division of NewGen Strategies and Solutions, LLC, to work directly with the PWSA utility billing system provider, SAP, to develop data queries of the PWSA billing system to evaluate 2012 data provided by PWSA regarding the number of connections, by meter size and by utility service and the level of billed water consumption and billed sewer flow. The goal of this process was to produce a reliable report of billing determinants that could be used by Sycamore to project rates for PWSA. J. Stowe & Co. analyzed the raw data and applied the rates in effect at the time, comparing the calculated revenue stream with the actual revenue stream produced over the same time period (2012), both from within the SAP system itself as well as within the 2012 audited numbers of PWSA. The 2012 audit reported revenues of $94,272,000. This number includes the revenues associated with the 7% DISC surcharge. Given that the DISC revenues were not included within the J. Stowe & Co. calculation, the $94,272,000 was adjusted to remove the 7% surcharge, resulting in audited revenues of $88,104,673. When compared with the total revenues calculated by J. Stowe & Co. of $87,652,180, the resulting variance is $452,493 or a differential of 0.51%. Within the industry, a variance of 1% or less between calculated utility revenues and audited utility revenues indicates that the billing determinant data that has been provided can be sufficiently relied on within a rate analysis. See Appendix G for J. Stowe & Co. memorandum discussing the process for establishing Billing Determinants for the Test Year The data was reviewed and certified by PWSA as representative of actual operations during Fiscal Year Below is a summary of the results of the data inquiry regarding the billing accounts, consumption and revenue for the 2012 test year by meter size and customer class: BILLING ACCOUNTS Water Sewer Average Average Annual Annual Monthly Monthly Accounts Accounts Accounts Accounts Meter Size: 5/8" 690,975 57, ,508 57,626 3/4" 36,023 3,002 36,065 3,005 1" 36,020 3,002 36,039 3, /2" 10, , " 10, , " 6, , " 4, , " 2, , " " or greater Total: 796,959 66, ,062 66,505 Page 26

303 2012 WATER CONSUMPTION Minimum Bill Volumes Volumes Above Minimum Total Retail Customers: Residential 858,374,000 2,489,560,000 3,347,934,000 Commercial 808,411,000 2,625,715,000 3,434,126,000 Industrial 35,871, ,230, ,101,000 Health & Educational Facilities 287,833,000 1,182,752,000 1,470,585,000 Fire 638,000 5,931,000 6,569,000 Total Retail: 1,991,127,000 6,612,188,000 8,603,315,000 Total Wholesale: 1,048,351,000 Retail + Wholesale: 9,651,666,000 FIXED REVENUE 2012 BILLED REVENUE Meter Size: Water Sewer TOTAL 5/8" $ 9,708,199 $ 1,756,430 $ 11,464,629 3/4" 859, ,571 1,042,719 1" 1,574, ,416 2,033, /2" 863, ,529 1,121,271 2" 1,343, ,380 1,793,422 3" 1,659, ,219 2,306,861 4" 2,382, ,923 3,294,257 6" 2,395, ,104 3,350,299 8" 485, , ,077 10" or greater 113,283 48, ,085 Total: $ 21,384,936 $ 5,881,896 $ 27,266,832 VOLUMETRIC REVENUE Retail: Water Sewer TOTAL Residential $ 14,090,910 $ 7,021,222 $ 21,112,132 Commercial 14,493,947 6,851,976 21,345,922 Industrial 1,556, ,244 2,348,805 Health & Education 9,674,911 3,477,408 13,152,320 Fire 31,256 14,778 46,034 Total Retail Revenue: $ 39,847,586 $ 18,157,628 $ 58,005,213 Total Wholesale Revenue: $ 2,380,135 $ - $ 2,380,135 Total Retail & WHOLESALE: $ 63,612,657 $ 24,039,523 $ 87,652,180 Page 27

304 VIII. RATE DESIGN SCENARIOS The rate scenarios discussed in the accompanying presentation are based on certain assumptions and/or underlying goals to help achieve the Board s broader goals. These assumptions include: Phasing in AWWA meter equivalency standard for fixed rates, which fully captures the actual cost of consumption allowed under the fixed rates. This was also recommended in the rate study. Adjusting the fixed charge to capture the cost of consumption allowed under fixed rates and increasing revenue stability. Bringing revenues from each utility into alignment with allocated costs of the utility. The rate scenarios all held water volumetric rates constant through Including annual residential declines in consumption based on an historic average annual decline of 3.92% from (per PWSA 2012 rate brochure). Providing 1.0x times debt service coverage from operating revenues. Fully funding a debt service reserve fund from bond proceeds at maximum annual debt service for each bond issue. Issuing of fixed rate, tax-exempt debt at current PWSA market pricing levels with no change to the current ratings by the credit rating agencies and/or market pricing adjustments. Structure debt on a fully-amortizing basis with level debt service payments. As stated, Sycamore and J. Stowe & Co. analyzed four rate scenarios based on four capital financing options: SCENARIO 1: Fully funded CIP ($169.6 million) with one bond issue, in Year 1 SCENARIO 2: Partially funded CIP ($150 million) with one bond issue, in Year 1 SCENARIO 3: Partially funded CIP ($150 million) with three bond issues, one each year SCENARIO 4: Fully funded CIP ($169.6 million) with three bond issues, one each year For each scenario, we have calculated the overall rate revenue shortfall on a combined basis as well as by utility, based on the revenue requirement and allocation analyses. The revenue shortfall percentages below do not equate to the rate increase. A revenue increase reflects the adjustment to the utility s overall revenue stream. However, the application of this revenue increase can vary by customer due to the adjustments made to the differing components of the rate structure. For example, the rate designs discussed herein increase fixed charges for larger meters at a greater percentage than fixed charges for smaller meters. This results in the percentage increase in the monthly bill for a larger meter being greater than the revenue shortfall percentage. Overall, the utility must recover its needed revenue, but how it collects that revenue on a per customer basis can vary greatly due to the selected rate design. Rate increase recommendations are based on the respective revenue requirements. Page 28

305 A.) REVENUE REQUIREMENT, SCENARIO 1: Fully Fund $169.9 million in projects through one bond issue Revenue Requirement - Combined 95,192,555 98,046, ,552, ,595, ,019, ,827,868 Less: Non-Rate Revenues (4,804,268) (4,081,717) (4,003,401) (4,003,401) (4,279,401) (4,555,401) Less: Existing Wholesale Revenues (2,380,135) (2,380,134) (2,380,133) (2,445,176) (2,576,937) (2,625,249) Less: Existing Retail Rate Revenues (85,272,045) (85,272,045) (85,272,045) (98,176,897) (103,135,923) (102,974,944) Rate SHORTFALL - Combined 2,736,107 6,312,519 13,896,754 5,970,021 2,027,159 2,672,274 Shortfall - % of Existing Retail Rate Revenues 3.2% 7.4% 16.3% 6.1% 2.0% 2.6% Revenue Requirement - Water 60,933,659 62,550,790 67,813,236 71,122,006 72,123,648 72,720,192 Less: Non-Rate Revenues (2,869,973) (2,395,820) (2,410,191) (2,410,191) (2,612,155) (2,814,119) Less: Existing Wholesale Revenues (2,380,135) (2,380,135) (2,380,135) (2,445,176) (2,576,937) (2,625,249) Less: Existing Retail Rate Revenues (61,232,522) (61,232,522) (61,232,522) (62,405,073) (65,619,963) (65,110,056) Rate SHORTFALL - Water (5,548,971) (3,457,687) 1,790,388 3,861,566 1,314,593 2,170,769 Shortfall - % of Existing Retail Rate Revenues -9.1% -5.6% 2.9% 6.2% 2.0% 3.3% Revenue Requirement - Sewer 34,258,896 35,495,624 37,739,097 39,473,488 39,895,771 40,107,676 Less: Non-Rate Revenues (1,934,295) (1,685,896) (1,593,210) (1,593,210) (1,667,246) (1,741,282) Less: Existing Retail Rate Revenues (24,039,523) (24,039,523) (24,039,523) (35,771,824) (37,515,960) (37,864,888) SHORTFALL - Sewer 8,285,079 9,770,205 12,106,364 2,108, , ,506 Shortfall - % of Existing Retail Rate Revenues 34.5% 40.6% 50.4% 5.9% 1.9% 1.3% Page 29

306 B.) RATE SCHEDULE, SCENARIO 1: Fully Fund $169.9 million in projects through one bond issue WATER - FIXED CHARGES CURRENT Meter Size: 5/8" /4" " /2" " " " " 1, , , , , " 1, , , , , " or greater 3, , , , , WATER - VARIABLE Residential Commerical Industrial Health & Educational Facilities Fire SEWER - FIXED CHARGES CURRENT Meter Size: 5/8" /4" " /2" " " " " " , , , , " or greater 1, , , , , SEWER - VARIABLE Residential Commerical Industrial Health & Educational Facilities Fire TOTAL - WATER + SEWER CURRENT FIXED 5/8" /4" " /2" " " " , , " 1, , , , , " 2, , , , , " or greater 4, , , , , Page 30

307 C.) SAMPLE RESIDENTIAL BILL, SCENARIO 1: Fully Fund $169.9 million in projects through one bond issue 2014 Residential 4,000 gallons Variance Current Recommended $ % Water Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Sewer Minimum Bill (5/8") $ 2.54 $ 4.20 $ % Volumetric Bill % Total $ $ $ % Total Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % 2015 Residential 4,000 gallons Variance Current Recommended $ % Water Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Sewer Minimum Bill (5/8") $ 4.20 $ 4.47 $ % Volumetric Bill % Total $ $ $ % Total Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % 2016 Residential 4,000 gallons Variance Current Recommended $ % Water Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Sewer Minimum Bill (5/8") $ 4.47 $ 4.58 $ % Volumetric Bill % Total $ $ $ % Total Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % 2017 Residential 4,000 gallons Variance Current Recommended $ % Water Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Sewer Minimum Bill (5/8") $ 4.58 $ 4.66 $ % Volumetric Bill % Total $ $ $ % Total Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Page 31

308 A.) REVENUE REQUIREMENT, SCENARIO 2: Fund $150.0 million in projects through one bond issue Revenue Requirement - Combined 95,192,555 98,046, ,516, ,210, ,636, ,442,618 Less: Non-Rate Revenues (4,804,268) (4,081,717) (4,003,401) (4,003,401) (4,279,401) (4,555,401) Less: Existing Wholesale Revenues (2,380,135) (2,380,134) (2,380,133) (2,420,036) (2,544,940) (2,592,881) Less: Existing Retail Rate Revenues (85,272,045) (85,272,045) (85,272,045) (97,201,899) (101,787,044) (101,651,587) Rate SHORTFALL - Combined 2,736,107 6,312,519 12,860,629 5,585,658 2,025,285 2,642,749 Shortfall - % of Existing Retail Rate Revenues: 3.2% 7.4% 15.1% 5.7% 2.0% 2.6% Revenue Requirement - Water 60,933,659 62,550,790 67,119,017 70,194,370 71,197,185 71,792,054 Less: Non-Rate Revenues (2,869,973) (2,395,820) (2,410,191) (2,410,191) (2,612,155) (2,814,119) Less: Existing Wholesale Revenues (2,380,135) (2,380,135) (2,380,135) (2,420,036) (2,544,940) (2,592,881) Less: Existing Retail Rate Revenues (61,232,522) (61,232,522) (61,232,522) (61,753,084) (64,734,830) (64,224,923) Rate SHORTFALL - Water (5,548,971) (3,457,687) 1,096,168 3,611,058 1,305,260 2,160,131 Shortfall - % of Existing Retail Rate Revenues: -9.1% -5.6% 1.8% 5.8% 2.0% 3.4% Revenue Requirement - Sewer 34,258,896 35,495,624 37,397,191 39,016,624 39,439,485 39,650,564 Less: Non-Rate Revenues (1,934,295) (1,685,896) (1,593,210) (1,593,210) (1,667,246) (1,741,282) Less: Existing Retail Rate Revenues (24,039,523) (24,039,523) (24,039,523) (35,448,815) (37,052,214) (37,426,664) SHORTFALL - Sewer 8,285,079 9,770,205 11,764,459 1,974, , ,618 Shortfall - % of Existing Retail Rate Revenues: 34.5% 40.6% 48.9% 5.6% 1.9% 1.3% Page 32

309 B.) RATE SCHEDULE, SCENARIO 2: Fund $150.0 million in projects through one bond issue WATER - FIXED CHARGES CURRENT Meter Size: 5/8" /4" " /2" " " " " 1, , , , , " 1, , , , , " or greater 3, , , , , WATER - VARIABLE Residential Commerical Industrial Health & Educational Facilities Fire SEWER - FIXED CHARGES CURRENT Meter Size: 5/8" /4" " /2" " " " " " , , , , " or greater 1, , , , , SEWER - VARIABLE Residential Commerical Industrial Health & Educational Facilities Fire TOTAL - WATER + SEWER CURRENT FIXED 5/8" /4" " /2" " " " , , " 1, , , , , " 2, , , , , " or greater 4, , , , , VARIABLE Residential Commerical Industrial Health & Educational Facilities Fire Page 33

310 C.) SAMPLE RESIDENTIAL BILL, SCENARIO 2: Fund $150.0 million in projects through one bond issue 2014 Residential 4,000 gallons Variance Current Recommended $ % Water Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Sewer Minimum Bill (5/8") $ 2.54 $ 4.16 $ % Volumetric Bill % Total $ $ $ % Total Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % 2015 Residential 4,000 gallons Variance Current Recommended $ % Water Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Sewer Minimum Bill (5/8") $ 4.16 $ 4.42 $ % Volumetric Bill % Total $ $ $ % Total Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % 2016 Residential 4,000 gallons Variance Current Recommended $ % Water Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Sewer Minimum Bill (5/8") $ 4.42 $ 4.53 $ % Volumetric Bill % Total $ $ $ % Total Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % 2017 Residential 4,000 gallons Variance Current Recommended $ % Water Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Sewer Minimum Bill (5/8") $ 4.53 $ 4.61 $ % Volumetric Bill % Total $ $ $ % Total Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Page 34

311 A.) REVENUE REQUIREMENT, SCENARIO 3: Fund $150.0 million in projects over three years Revenue Requirement - Combined 95,192,555 98,046,414 99,210, ,982, ,356, ,161,055 Less: Non-Rate Revenues (4,804,268) (4,081,717) (4,003,401) (4,003,401) (4,279,401) (4,555,401) Less: Existing Wholesale Revenues (2,380,135) (2,380,134) (2,380,133) (2,380,135) (2,448,635) (2,583,939) Less: Existing Retail Rate Revenues (85,272,045) (85,272,045) (85,272,045) (94,457,918) (97,671,016) (98,803,349) Rate SHORTFALL - Combined 2,736,107 6,312,519 7,554,754 4,141,343 5,957,260 6,218,366 Shortfall - % of Existing Retail Rate Revenues: 3.2% 7.4% 8.9% 4.4% 6.1% 6.3% Revenue Requirement - Water 60,933,659 62,550,790 63,494,741 67,345,075 71,015,466 72,278,581 Less: Non-Rate Revenues (2,869,973) (2,395,820) (2,410,191) (2,410,191) (2,612,155) (2,814,119) Less: Existing Wholesale Revenues (2,380,135) (2,380,135) (2,380,135) (2,380,135) (2,448,635) (2,583,939) Less: Existing Retail Rate Revenues (61,232,522) (61,232,522) (61,232,522) (60,680,158) (61,981,993) (61,472,086) Rate SHORTFALL - Water (5,548,971) (3,457,687) (2,528,107) 1,874,590 3,972,683 5,408,437 Shortfall - % of Existing Retail Rate Revenues: -9.1% -5.6% -4.1% 3.1% 6.4% 8.8% Revenue Requirement - Sewer 34,258,896 35,495,624 35,715,592 37,637,722 39,340,847 39,882,474 Less: Non-Rate Revenues (1,934,295) (1,685,896) (1,593,210) (1,593,210) (1,667,246) (1,741,282) Less: Existing Retail Rate Revenues (24,039,523) (24,039,523) (24,039,523) (33,777,760) (35,689,024) (37,331,263) SHORTFALL - Sewer 8,285,079 9,770,205 10,082,859 2,266,753 1,984, ,929 Shortfall - % of Existing Retail Rate Revenues: 34.5% 40.6% 41.9% 6.7% 5.6% 2.2% Note: In instances of revenue over-recovery, rates are held constant, not reduced Page 35

312 B.) RATE SCHEDULE, SCENARIO 3: Fund $150.0 million in projects over three years WATER - FIXED CHARGES CURRENT Meter Size: 5/8" /4" " /2" " " " " 1, , , , , " 1, , , , , " or greater 3, , , , , WATER - VARIABLE Residential Commerical Industrial Health & Educational Facilities Fire SEWER - FIXED CHARGES CURRENT Meter Size: 5/8" /4" " /2" " " " " " , , , , " or greater 1, , , , , SEWER - VARIABLE Residential Commerical Industrial Health & Educational Facilities Fire TOTAL - WATER + SEWER CURRENT FIXED RATES: 5/8" /4" " /2" " " " , , " 1, , , , , " 2, , , , , " or greater 4, , , , , VARIABLE RATES: Residential Commerical Industrial Health & Educational Facilities Fire Page 36

313 C.) SAMPLE RESIDENTIAL BILL, SCENARIO 3: Fund $150.0 million in projects over three years 2014 Residential 4,000 gallons Variance Current Recommended $ % Water Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Sewer Minimum Bill (5/8") $ 2.54 $ 3.97 $ % Volumetric Bill % Total $ $ $ % Total Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % 2015 Residential 4,000 gallons Variance Current Recommended $ % Water Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Sewer Minimum Bill (5/8") $ 3.97 $ 4.26 $ % Volumetric Bill % Total $ $ $ % Total Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % 2016 Residential 4,000 gallons Variance Current Recommended $ % Water Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Sewer Minimum Bill (5/8") $ 4.26 $ 4.51 $ % Volumetric Bill % Total $ $ $ % Total Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % 2017 Residential 4,000 gallons Variance Current Recommended $ % Water Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Sewer Minimum Bill (5/8") $ 4.51 $ 4.64 $ % Volumetric Bill % Total $ $ $ % Total Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Page 37

314 A.) REVENUE REQUIREMENT, SCENARIO 4: Fund $169.9 million in projects over three years Revenue Requirement - Combined 95,192,555 98,046,414 99,521, ,397, ,173, ,673,705 Less: Non-Rate Revenues (4,804,268) (4,081,717) (4,003,401) (4,003,401) (4,279,401) (4,555,401) Less: Existing Wholesale Revenues (2,380,135) (2,380,134) (2,380,133) (2,380,135) (2,458,553) (2,585,002) Less: Existing Retail Rate Revenues (85,272,045) (85,272,045) (85,272,045) (94,586,641) (98,051,654) (98,948,025) Rate SHORTFALL - Combined 2,736,107 6,312,519 7,866,192 4,427,358 5,384,244 7,585,277 Shortfall - % of Existing Retail Rate Revenues: 3.2% 7.4% 9.2% 4.7% 5.5% 7.7% Revenue Requirement - Water 60,933,659 62,550,790 63,695,336 67,612,376 70,896,263 73,293,492 Less: Non-Rate Revenues (2,869,973) (2,395,820) (2,410,191) (2,410,191) (2,612,155) (2,814,119) Less: Existing Wholesale Revenues (2,380,135) (2,380,135) (2,380,135) (2,380,135) (2,458,553) (2,585,002) Less: Existing Retail Rate Revenues (61,232,522) (61,232,522) (61,232,522) (60,680,158) (62,203,281) (61,693,374) Rate SHORTFALL - Water (5,548,971) (3,457,687) (2,327,512) 2,141,891 3,622,274 6,200,998 Shortfall - % of Existing Retail Rate Revenues: -9.1% -5.6% -3.8% 3.5% 5.8% 10.1% Revenue Requirement - Sewer 34,258,896 35,495,624 35,826,435 37,785,160 39,277,589 40,380,213 Less: Non-Rate Revenues (1,934,295) (1,685,896) (1,593,210) (1,593,210) (1,667,246) (1,741,282) Less: Existing Retail Rate Revenues (24,039,523) (24,039,523) (24,039,523) (33,906,483) (35,848,373) (37,254,651) SHORTFALL - Sewer 8,285,079 9,770,205 10,193,702 2,285,468 1,761,970 1,384,279 Shortfall - % of Existing Retail Rate Revenues: 34.5% 40.6% 42.4% 6.7% 4.9% 3.7% Note: In instances of revenue over-recovery, rates are held constant, not reduced Page 38

315 B.) RATE SCHEDULE, SCENARIO 4: Fund $169.9 million in projects over three years WATER - FIXED CHARGES CURRENT Meter Size: 5/8" /4" " /2" " " " " 1, , , , , " 1, , , , , " or greater 3, , , , , WATER - VARIABLE Residential Commerical Industrial Health & Educational Facilities Fire SEWER - FIXED CHARGES CURRENT Meter Size: 5/8" /4" " /2" " " " " " , , , , " or greater 1, , , , , SEWER - VARIABLE Residential Commerical Industrial Health & Educational Facilities Fire TOTAL - WATER + SEWER CURRENT FIXED 5/8" /4" " /2" " " " , " 1, , , , , " 2, , , , , " or greater 4, , , , , VARIABLE Residential Commerical Industrial Health & Educational Facilities Fire Page 39

316 C.) SAMPLE RESIDENTIAL BILL, SCENARIO 4: Fund $169.9 million in projects over three years 2014 Residential 4,000 gallons Variance Current Recommended $ % Water Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Sewer Minimum Bill (5/8") $ 2.54 $ 3.98 $ % Volumetric Bill % Total $ $ $ % Total Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % 2015 Residential 4,000 gallons Variance Current Recommended $ % Water Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Sewer Minimum Bill (5/8") $ 3.98 $ 4.27 $ % Volumetric Bill % Total $ $ $ % Total Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % 2016 Residential 4,000 gallons Variance Current Recommended $ % Water Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Sewer Minimum Bill (5/8") $ 4.27 $ 4.51 $ % Volumetric Bill % Total $ $ $ % Total Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % 2017 Residential 4,000 gallons Variance Current Recommended $ % Water Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Sewer Minimum Bill (5/8") $ 4.51 $ 4.70 $ % Volumetric Bill % Total $ $ $ % Total Minimum Bill (5/8") $ $ $ % Volumetric Bill % Total $ $ $ % Page 40

317 ADDITIONAL RATE DESIGN CONSIDERATIONS A. PAWC SUBSIDY As stated previously, PAWC received approval for rate increases effective January, 2014 of 9.1% of their base charge for 5/8 residential meters to $15.00 (which charges for the first gallon of usage) and another 12.0% increase in their volumetric rate to $ per hundred gallons. Under the rate scenarios presented in this study, the PAWC subsidy should be equal to or be less than the 2012 subsidy amount, provided PAWC does not increase its DISC charge, which was reduced to 0%, per the final rate tariff. B. WHOLESALE CUSTOMERS Sycamore & J. Stowe & Co. have developed the rate structures to take into account PWSA s wholesale customers, which generate 10.8% of PWSA s volume and 2.5% of overall revenue. The contractual terms below are based on a reading of the water rate increase provisions and are subject to legal review, but overall the rate study assumes that the allowable rate increase is equal to the average percentage water rate increase approved by the Board for other customers, which under Scenario 2 is 1.8% for water customers Billing Determinants % of Wholesale RATE INCREASE PROVISIONS Volumes Revenues Volumes Revenues Sharpsburg 27,600, , % 5.40% Rates as adopted by Resolution and in accordance with the terms and conditions of the 1929 agreement between the parties. Hampton Shaler Water Authority 7,600,000 30, % 1.30% Annual rate increase allowed but may not exceed the average percentage increase approved by the Board of Directors for PWSA s similar municipal/municipal authority customers AND may not exceed the percentage increase in the CPI for the Pittsburgh area for the prior year (3.5% per 2012 BLS data). Reserve Township (1012) 116,594, , % 16.40% Reserve Township (1009) 21,512,000 81, % 3.40% West View Water Authority 14,630,000 73, % 3.10% Fox Chapel 783,066,000 1,399, % 58.80% Rates as adopted by Resolution but shall not exceed 5% per year unless the CPI (consumer price index) exceeds 10% Rates as adopted by Resolution but shall not exceed 5% per year unless the CPI (consumer price index) exceeds 10% Charged monthly minimum charge for all connections; volumetric charge per usage; no increase calculated Rate increases for the years 2010 through 2025 shall be equal to the average percentage increase approved by the Board of Directors of the Authority for other customers. Annual percentage increase to Fox Chapel cannot exceed the average percentage increase to all customers. Average percentage increase is the change in total amount of revenue resulting from all changes to all rates for all water sales divided by the total amount of revenue resulting from all charges to all water sales prior to the change in rates for an equivalent amount of water over the same length of time. PAWC 10,760,000 68, % 2.90% Wholesale contract terminated in Aspinwall 66,589, , % 8.70% TOTAL: 1,048,351,000 2,380, % 100% Annual rate increase allowed but may not exceed the average percentage increase approved by the Board of Directors for PWSA s similar municipal/municipal authority customers AND may not exceed the percentage increase in the CPI for the Pittsburgh area for the prior year (3.5% per 2012 BLS data). Page 41

318 Given the varying contractual terms, rate increase definitions, termination and renewal provisions of each of these Wholesale contracts, Sycamore is recommending that PWSA move to implement a standard wholesale contract with shorter overall terms (20 years maximum), regular cost inflators and reopener terms to reflect its underlying cost structure. A complete cost of service analysis might determine the relative value of these customers. Page 42

319 IX. CONCLUSION AND RECOMMENDATIONS Sycamore is making the following recommendations as part of this rate study: Fully fund the proposed PWSA Capital Improvement Plan (CIP), consistent with Chester Engineers assessment that the water and sewer systems are in adequate operating condition and have adequate capacity to meet demands in the foreseeable future, provided PWSA continues the rehabilitation and replacement program provided for in its ongoing CIP. Move toward reducing the subsidization of the sewer utility by the water utility, such that operating revenue from the sewer utility is ultimately sufficient to support sewer-related debt service and operating expenses. Improve the stability of the revenue stream by increasing the relative percentage of fixed revenues versus volumetric revenues. Utilize industry standard (AWWA) meter equivalency factors in establishing minimum water and sewer charges. Conduct an audit of the PAWC subsidy calculations and verify them for a defined period. Implement improved data collection and management to better link consumption data and billed revenue and reporting capabilities. Standardize wholesale contracts where possible and reduce term to 20 years or less, adding reopener and inflator provisions. Closely monitor PWSA s obligations identified by the Wet Weather feasibility study and proposed Municipal Flow Management Compliance Plan after approval by the PaDEP and ACHD (the schedule assumes the period for review of the PWSA Plan ends July 2014, one year after submission of the FS to the regulatory agencies), especially the fiscal impact on low income households in the service territory. In the conduct of this analysis, Sycamore has sought to be conservative in its use of estimates and projections. The study reflects data available at a point in time. However, because PWSA operates in a changing and dynamic environment and is contemplating various new debt financings including possible restructuring of existing debt issues which could have a material impact on PWSA s cost structure, we recommend that an annual update and review of the revenue requirement and debt capacity analysis be conducted to ensure that revenues and savings are meeting targets projected in the rate study. Page 43

320 X. EPILOGUE On October 11, 2013 the PWSA Board approved the rate schedule per Scenario 2 which will transition PWSA s fixed rates into alignment with AWWA equivalency standards by The rate resolution also included a provision for adjustments to future rates beginning in April 2018, based upon changes in the annual Consumer Price Index (CPI-U) for the Pittsburgh area. Sycamore s study did not include analysis of CPI adjustments or rate projections beyond See Appendix H for the full rate resolution, as amended. Either just prior to or subsequent to the Board adoption of the rates resolution, several pieces of information came to our attention, most of which we believe will not have a material impact on rates, but should be disclosed nonetheless: 1. Fee Savings. Sycamore utilized estimates of debt service fee savings as provided by PFM on July 29, The $25 million 2008C1A, B and C Bonds were privately placed with Bank of America on September 3, 2013 with savings of $225,000 per year for each of 3 years, which is slightly lower than earlier estimates. On October 22, 2013, PWSA intends to extend its liquidity provisions on the $72.75 million Series 2008B-1 bonds with its current provider, Bank of America, for a five year term with savings of $495,000 per year, slightly lower than previously estimated. Also on October 22, 2013, PWSA is expected to close on a new LOC credit facility for the $ million 2008B-2 Bonds with RBC, for savings of $582,000 per year, which is slightly higher than previously estimated. Altogether, these changes would increase the revenue requirement just $6,500 per year versus the estimates used in the rate model. However, these new facilities will achieve PWSA s objectives of staggering the maturity of its credit facilities and diversifying counterparty risk. 2. Wholesale Contracts. The Westview wholesale contract was provided to Sycamore just prior to the Board presentation and so adequate time for review for the purposes of the rate model calculations was not possible. Therefore, the rate model did not assume that rate increases could be passed through to Westview, although subsequent review by counsel and staff suggests that the 1.8% increase in rates may be possible. 3. Billing Connections Reconciliation. For the purposes of this study, the billing determinants analysis completed by J. Stowe & Co. relied on identifying the number of billing units on the system by meter size and customer classification based on the meter rate paid, regardless of the number of service connections. For example, an apartment complex with 10 units may have a single billing account with PWSA. In addition, an abandoned housing unit may still have a service connection but not be a current billing customer. Stowe s analysis reported 66,413 average monthly retail billing accounts for the water utility, which is less than the 83,000 water customers typically reported by the utility. As a follow-up reconciliation of connections to billing units, J. Stowe & Co. worked with PWSA and their GIS system. After adding in unbilled system connections including 7,619 fire hydrants, 3,385 private fire accounts, 408 unbilled City accounts and 6,599 currently disconnected accounts, the total billed and non-billed accounts add to 84,424, which represents a variance of 1% to the GIS report of 83,578 active service lines. Page 44 In 2013 so subsequent to the 2012 Test Year for the Rate Study PWSA instituted monthly fees for 1,043 private fire lines, revenue that is not included in Sycamore s analysis. 4. New PennVest Debt. Pursuant to the debt obligation agreements between PWSA and PennVest, PWSA does not typically begin paying debt service on PennVest loans until the approved project completion, at which point PennVest funds are distributed to PWSA for reimbursement, and

321 PWSA begins paying debt service on that reimbursement. In this study s calculation of existing PennVest debt service, Sycamore included in its calculations debt service on the eleven PennVest loans on which debt service is currently being paid. There are three additional Penn Vest loans which were approved by the PWSA Board in 2013 but for which PWSA is not yet paying debt service. Debt service for these loans is not yet included in the current debt service schedules provided by PWSA and therefore was not included in the revenue requirement, but PWSA will ultimately be responsible for debt service for these loans if and when all three close. Loan # * Project Sewer Improvement Project Phase IV Water Improvement Project Phase 7 Water Improvement Project Phase 8 Loan Amount Interest Rate Approx. Annual Debt Service $3,275, % $180,744 $2,713, % $149,724 $ 3,850, % * *At its October 11, 2013 Board meeting, PWSA approved an Inducement Resolution for the new loan with PennVest for 20 year debt with an estimated interest rate of 1%. Final terms of the loan will not be known until the loan is closed on November 6, This Final Report includes minor, clerical changes, as well as the addition of the Epilogue dated as of October 23, Page 45

322 XI. APPENDICES PAGE APPENDIX A Direct O & M Expenses and Allocation APPENDIX B Combined Debt Service Schedule for Existing Senior, Subordinate and PennVest Debt APPENDIX C PWSA s Current ( ) CIP APPENDIX D AECOM Wet Weather Feasibility Study Implementation Schedule 55 APPENDIX E Proposed Debt Service Sizing for $150 Million Bond Issued in APPENDIX F Allocation of Non-Rate Revenue APPENDIX G J. Stowe & Co. Memorandum Re: Billing Determinants and Attachments APPENDIX H Final Rate Resolution Page 46

323 APPENDIX A SALARY&WAGES(doesnotincludebenefits) AccountNumber %WATER DIRECTOPERATIONS&MAINTENANCEEXPENSES WATERONLY ACTUAL Budget AdministrationDivision TotalAdministrationDivision 1,158,349 1,230,953 1,336,334 1,407,950 1,338,579 1,333,636 1,580,292 1,690,911 1,809,275 1,935,924 2,071,439 OperationsDivision TotalOperationsDivision 6,307,692 6,820,399 7,152,499 7,204,123 7,412,243 7,705,045 7,922,713 8,160,394 8,405,206 8,657,362 8,917,083 Engineering/ConstructionDivision 452, , , , , , , , , , ,160 TotalSALARY&WAGES: 7,918,171 8,509,626 8,956,652 9,272,954 9,437,914 9,775,391 10,290,201 10,646,373 11,017,500 11,404,335 11,807,681 NONSALARYEXPENSES(doesnotincludedepreciation) AccountNumber AdministrationDivision Budget TotalAdministrationDivision 3,754,644 2,745,774 2,906,831 3,325,990 3,051,036 3,732,355 3,963,947 4,241,423 4,538,322 4,856,005 5,195,925 OperationsDivision TotalOperationsDivision 13,517,814 14,500,504 14,690,103 12,765,459 10,859,973 10,866,341 11,054,734 11,386,376 11,727,967 12,079,806 12,442,200 Engineering/ConstructionDivision 283, , , ,315 1,093, ,871 1,022,385 1,032,609 1,042,935 1,053,364 1,063,898 TotalNONSALARYExpenses 17,556,116 17,533,389 17,862,505 16,253,764 15,004,579 15,495,567 16,041,065 16,660,407 17,309,224 17,989,175 18,702,023 BENEFITS %WATER %WATER DIRECTOPERATIONS AccountNumber ACTUAL Budget AdministrationDivision TotalAdministrationDivision 1,148,787 1,321,291 1,438,704 1,563,801 1,584, , , , , , ,712 OperationsDivision TotalOperationsDivision (296) (20,407) (14,394) (5,940) (38,690) 1,603,064 1,672,243 1,777,594 1,889,583 2,008,626 2,135,170 Engineering/ConstructionDivision 1930 (7,492) (8,791) (6,274) (7,323) (7,462) 121, , , , , ,335 TotalBENEFITS: 1,140,999 1,292,093 1,418,035 1,550,538 1,538,643 2,057,530 2,307,447 2,452,816 2,607,344 2,771,606 2,946,218 TOTALDIRECTO&MEXPENSES(Salary&Wages+NonSalaryExpenses+Benefits) %WATER DIRECTOPERATIONS AccountNumber ACTUAL Budget AdministrationDivision TotalAdministrationDivision 6,061,781 5,298,019 5,681,869 6,297,741 5,974,409 5,398,860 6,008,446 6,425,785 6,872,136 7,349,513 7,860,076 OperationsDivision ACTUAL TotalOperationsDivision 19,825,210 21,300,496 21,828,208 19,963,642 18,233,526 20,174,450 20,649,690 21,324,364 22,022,755 22,745,794 23,494,453 Engineering/ConstructionDivision 728, , , ,873 1,773,201 1,755,178 1,980,580 2,009,448 2,039,177 2,069,809 2,101,393 TOTALDIRECTO&MEXPENSES 26,615,286 27,335,109 28,237,193 27,077,256 25,981,136 27,328,487 28,638,713 29,759,597 30,934,068 32,165,117 33,455,922 47

324 SALARY&WAGES(doesnotincludebenefits) AccountNumber %SEWER DIRECTOPERATIONS&MAINTENANCEEXPENSES SEWERONLY ACTUAL Budget AdministrationDivision TotalAdministrationDivision 1,158,349 1,230,953 1,336,334 1,407,950 1,338,579 1,333,636 1,580,292 1,690,911 1,809,275 1,935,924 2,071,439 OperationsDivision TotalOperationsDivision 1,966,086 2,121,498 2,228,568 2,341,689 2,603,290 2,582,665 2,977,933 3,067,270 3,159,288 3,254,067 3,351,689 Engineering/ConstructionDivision 255, , , , , , ,665 TotalSALARY&WAGES: 3,380,405 3,611,900 3,829,754 4,123,792 4,330,861 4,333,383 5,003,889 5,208,303 5,423,186 5,649,160 5,886,888 NONSALARYEXPENSES(doesnotincludedepreciation) AccountNumber AdministrationDivision Budget TotalAdministrationDivision 3,754,644 2,745,774 2,906,831 3,325,990 3,051,036 3,732,355 3,963,947 4,241,423 4,538,322 4,856,005 5,195,925 OperationsDivision TotalOperationsDivision 3,525,762 3,667,414 3,807,808 2,539,171 1,073,809 1,225,201 1,307,613 1,346,841 1,387,246 1,428,864 1,471,730 Engineering/ConstructionDivision 160, , ,351 91, , , , , , , ,317 TotalNONSALARYExpenses 7,440,997 6,575,734 6,864,990 5,957,054 4,743,961 5,465,313 5,850,375 6,172,867 6,516,018 6,881,223 7,269,973 BENEFITS %SEWER %SEWER DIRECTOPERATIONS AccountNumber ACTUAL Budget AdministrationDivision TotalAdministrationDivision 1,148,787 1,321,291 1,438,704 1,563,801 1,584, , , , , , ,712 OperationsDivision TotalOperationsDivision 10,859 (7,544) (2,139) (1,215) (14,750) 734, , , , , ,352 Engineering/ConstructionDivision 1930 (4,241) (4,977) (3,552) (4,146) (4,225) 68,841 96, , , , ,609 TotalBENEFITS: 1,155,405 1,308,771 1,433,012 1,558,440 1,565,820 1,136,118 1,224,652 1,301,805 1,383,819 1,471,000 1,563,673 TOTALDIRECTO&MEXPENSES(Salary&Wages+NonSalaryExpenses+Benefits) %SEWER DIRECTOPERATIONS AccountNumber ACTUAL Budget AdministrationDivision TotalAdministrationDivision 6,061,781 5,298,019 5,681,869 6,297,741 5,974,409 5,398,860 6,008,446 5,938,590 6,350,837 6,791,724 7,263,242 OperationsDivision ACTUAL TotalOperationsDivision 5,502,708 5,781,368 6,034,236 4,879,644 3,662,349 4,542,274 4,949,182 5,119,557 5,296,424 5,480,063 5,670,770 Engineering/ConstructionDivision 412, , , ,900 1,003, ,680 1,121,290 1,137,634 1,154,464 1,171,806 1,189,687 TOTALDIRECTO&MEXPENSES 11,976,807 11,496,404 12,127,756 11,639,286 10,640,642 10,934,814 12,078,916 12,682,976 13,323,023 14,001,383 14,720,534 48

325 PITTSBURGH WATER & SEWER AUTHORITY SUMMARY OF OUTSTANDING INDEBTEDNESS APPENDIX B A B A B-1 B-2 A B-1 B-2 D-1 D-2 C1-A C1-B C1-C C1-D C2 Debt Service Requirements FIRST LIEN REVENUE BONDS SUBORDINATE REVENUE BONDS TOTAL Fiscal Rev Bonds Rev Bonds Rev Bonds Rev Bonds Rev Bonds Rev Bonds Rev Bonds Rev Bonds Rev Bonds Rev Bonds Rev Bonds First Lien Sub Rev Bonds Sub Rev Bonds Sub Rev Bonds Sub Rev Bonds Sub Rev Bonds Sub Lien Total Year Series A of Series B of Series of Series A of Series B-1 of Series B-2 of Series A of Series B-1 of Series B-2 of Series D-1 of Series D-2 of Debt Series C1-A of Series C1-B of Series C1-C of Series C1-D of Series C2 of Debt Debt Ended (CABs) [1] 2007 [1] 2008 (Taxable) 2008 [2] 2008 [2] [3] Service 2008 [4] 2008 [4] 2008 [5] 2008 [6] 2008 [7] Service Service 12/31/2013 9,792,675 2,258,919 5,758,425 2,142,009 2,142,264 4,531,492 3,962,623 3,962,351 1,221,575 3,806,823 39,579, , , ,051 1,481,693 2,795,959 5,751,526 45,330,683 12/31/ ,372,794 5,754,925 2,142,009 2,142,264 4,531,492 3,962,623 3,962,351 1,221,575 3,806,823 39,896, , , ,226 1,450,073 2,766,108 5,691,074 45,587,931 12/31/ ,440,394 5,751,975 2,142,009 2,142,264 4,531,492 3,962,623 3,962,351 1,221,575 3,806,823 39,961, , , ,226 1,450,073 2,766,108 5,691,074 45,652,581 12/31/ ,483,394 5,755,000 2,143,286 2,143,541 4,531,492 3,965,219 3,964,946 1,221,575 3,809,023 40,017, , , ,402 1,450,073 2,767,854 5,693,839 45,711,315 12/31/2017 2,300,000 1,861,994 5,754,000 2,142,009 2,142,264 12,536,492 3,962,623 3,962,351 1,221,575 3,806,823 39,690, , , ,226 1,450,073 2,766,108 5,691,074 45,381,206 12/31/2018 2,300,000 1,860,275 5,232,009 5,237,264 12,092,374 3,962,623 3,962,351 1,221,575 3,806,823 39,675, , , ,226 1,450,073 2,766,108 5,691,074 45,366,369 12/31/2019 2,300,000 1,859,500 6,532,573 6,542,570 9,426,360 3,962,623 3,962,351 1,221,575 3,806,823 39,614, , , ,226 1,450,073 2,766,108 5,691,074 45,305,449 12/31/2020 2,300,000 1,864,313 4,853,845 4,858,326 12,699,387 3,965,219 3,964,946 1,221,575 3,809,023 39,536, , , ,402 1,450,073 2,767,854 5,693,839 45,230,473 12/31/2021 2,300,000 1,861,063 4,822,594 4,821,818 12,705,157 3,962,623 3,962,351 1,221,575 3,806,823 39,464, , , ,226 1,450,073 2,766,108 5,691,074 45,155,078 12/31/2022 2,305,000 1,862,938 4,795,677 4,779,900 12,723,624 3,962,623 3,962,351 1,221,575 3,806,823 39,420, , , ,226 1,450,073 2,766,108 5,691,074 45,111,585 12/31/2023 2,300,000 1,859,313 4,766,535 4,746,533 12,876,151 3,962,623 3,962,351 1,221,575 3,806,823 39,501, , , ,226 1,450,073 2,766,108 5,691,074 45,192,978 12/31/2024 4,160,000 4,715,544 4,721,574 4,690,840 3,965,219 3,964,946 9,601,575 3,809,023 39,628, , , ,402 1,450,073 2,767,854 5,693,839 45,322,560 12/31/2025 4,160,000 4,681,582 4,687,353 3,962,623 3,962,351 14,752,575 3,806,823 40,013, , , ,226 1,450,073 2,766,108 5,691,074 45,704,381 12/31/ ,930, , ,767 3,962,623 3,962, ,075 3,806,823 40,407, , , ,226 1,450,073 2,766,108 5,691,074 46,098,967 12/31/ ,930, , ,285 3,962,623 3,962, ,075 3,806,823 40,423, , , ,226 1,450,073 2,766,108 5,691,074 46,114,519 12/31/ ,930, , ,422 3,965,219 3,964, ,075 3,809,023 40,400, , , ,402 1,450,073 2,767,854 5,693,839 46,094,465 12/31/ ,930, , ,290 3,962,623 3,962, ,075 3,806,823 40,402, , , ,226 1,450,073 2,766,108 5,691,074 46,093,303 12/31/ ,660,000 5,309,811 5,309,034 3,962,623 3,962, ,075 3,806,823 37,115, , , ,226 2,205,073 4,236,108 8,631,074 45,746,792 12/31/2031 5,264,367 5,263,590 3,962,623 3,962,351 2,440,075 3,806,823 24,699,830 2,057,916 2,057,916 1,016,991 5,384,318 10,357,782 20,874,924 45,574,754 12/31/2032 1,573,950 1,563,173 3,965,219 3,964,946 4,049,023 15,116,312 2,950,413 2,950,413 1,465,107 7,799,748 15,030,543 30,196,223 45,312,535 12/31/2033 1,555,851 1,550,590 3,962,623 3,962,351 4,189,029 15,220,445 2,899,044 2,899,044 1,440,104 7,693,210 14,834,750 29,766,153 44,986,598 12/31/2034 3,962,623 3,962,351 7,247,973 15,172,947 2,857,384 2,857,384 1,427,690 7,628,177 14,714,554 29,485,189 44,658,137 12/31/ ,397,623 17,397,351 3,587,729 38,382, , , ,869 1,571,680 3,033,188 6,075,124 44,457,828 12/31/ ,243,871 20,243,599 3,589,803 44,077,273 44,077,273 12/31/ ,066,406 20,066,134 3,587,729 43,720,268 43,720,268 12/31/ ,885,256 19,879,984 3,587,729 43,352,969 43,352,969 12/31/2039 6,331,402 6,331,402 30,262,729 42,925,533 42,925,533 12/31/ ,607,003 42,607,003 42,607,003 TOTAL 9,792, ,805,000 52,584,894 28,774,325 68,083,207 68,086, ,876, ,115, ,103,176 40,756, ,047,181 1,040,025,073 22,347,215 22,347,215 10,921,363 56,965, ,267, ,848,458 1,261,873,531 Principal [8] : 0 32,400,242 44,100,000 20,335,000 41,320,000 41,325,000 68,970,000 72,750,000 72,745,000 24,665,000 71,225, ,835,242 10,000,000 10,000,000 5,000,000 26,840,000 51,820, ,660, ,495,242 Type Fixed Rate Fixed Rate Fixed Rate Fixed Rate Variable Rate Variable Rate Fixed Rate Variable Rate Variable Rate Fixed Rate Variable Rate Call Date: Non-callable Non-callable 9/1/2013 Non-callable Anytime Anytime Make-Whole Anytime Anytime 9/1/2018 Anytime Variable Rate (Term Mode) Variable Rate (Term Mode) Variable Rate (Term Mode) Variable Rate (Term Mode) Variable Rate Purpose: Adv Ref 1991A New Money Cur Ref 1993A Adv Ref 2002 Liquidity Type Adv Ref 2002 & 2005 Adv Ref 2002 & 2005 Provider: JP Morgan JP Morgan Adv Ref 1993A & 2003 New Money SBPA SBPA LOC LOC SBPA LOC LOC LOC SBPA Bank of America PNC Bank PNC Bank Northwest Savings Bank ESB Bank Washington Financial Bank Expiration: 8/10/2014 8/10/ /22/ /22/2013 8/4/ /9/ /9/ /9/2013 9/1/2015 8/9/2014 Term Mode ends 9/1/2013 Notes [1] Assumes all-in rate of 5.132%, consisting of a fixed swap rate of 3.932%, liquidity fee of 1.100% and remarketing fee of 0.100%, as well as annual rating fee of $10,000 [2] Assumes all-in rate of 5.408%, consisting of a fixed swap rate of 4.038%, liquidity fee of 1.270% and remarketing fee of 0.100%, as well as annual rating fee of $5,000 [3] Assumes all-in rate of 5.303%, consisting of a fixed swap rate of 4.103%, liquidity fee of 1.100% and remarketing fee of 0.100%, as well as annual rating fee of $10,000 [4] Assumes all-in rate of 5.898%, consisting of a fixed swap rate of 3.998%, liquidity fee of 1.500% and term mode rate of 0.400%, as well as annual rating fee of $1,250 [5] Assumes all-in rate of 5.648%, consisting of a fixed swap rate of 3.998%, liquidity fee of 1.250% and term mode rate of 0.400%, as well as annual rating fee of $1,250 [6] Assumes all-in rate of 5.398%, consisting of a fixed swap rate of 3.998%, liquidity fee of 0.000% and term mode rate of 1.400%, as well as annual rating fee of $1,250 [7] Assumes all-in rate of 5.298%, consisting of a fixed swap rate of 3.998%, liquidity fee of 1.200% and remarketing fee of 0.100%, as well as annual rating fee of $5,000 [8] Principal outstanding as of October 14, 2013 JP Morgan Note: Does not include existing PENNVEST debt Public Financial Management, Inc. 7/16/

326 Fiscal Period PWSA Outstanding PennVest Loans Maturity Year Exisitng PennVest Amount 9/1/ ,135, /1/ ,135, /1/ ,135, /1/ ,135, /1/ ,225, /1/ ,281, /1/ ,281, /1/ ,281, /1/ ,281, /1/ ,281, /1/ ,163, /1/ ,920, /1/ ,792, /1/ ,370, /1/ ,304, /1/ ,304, /1/ ,304, /1/ ,304, /1/ ,304, /1/ , Total 55,914,

327 APPENDIX C 51

328 52

329 53

330 54

331 APPENDIX D 55

332 Sep 24, :35 pm Prepared by Public Financial Management TABLE OF CONTENTS Pittsburgh Water and Sewer Authority Series 2013NM ALL Scenario 1 - $150,000,000 Project Fund New Money - All FY2014-FY2016 Capital Improvement Plan ***Preliminary*** Report Page Sources and Uses of Funds Bond Summary Statistics Bond Pricing Bond Debt Service Reserve Fund Project Fund APPENDIX E

333 SOURCES AND USES OF FUNDS Pittsburgh Water and Sewer Authority Series 2013NM ALL Scenario 1 - $150,000,000 Project Fund New Money - All FY2014-FY2016 Capital Improvement Plan ***Preliminary*** Sources: Bond Proceeds: Par Amount 162,870, Net Premium 4,632, ,502, Uses: Project Fund Deposits: Project Fund 150,000, Other Fund Deposits: Debt Service Reserve Fund 16,287, Delivery Date Expenses: Cost of Issuance 400, Underwriter's Discount 814, ,214, Other Uses of Funds: Additional Proceeds 1, ,502, Sep 24, :35 pm Prepared by Public Financial Management Page 1 57

334 BOND SUMMARY STATISTICS Pittsburgh Water and Sewer Authority Series 2013NM ALL Scenario 1 - $150,000,000 Project Fund New Money - All FY2014-FY2016 Capital Improvement Plan ***Preliminary*** Dated Date 12/01/2013 Delivery Date 12/01/2013 Last Maturity 09/01/2043 Arbitrage Yield % True Interest Cost (TIC) % Net Interest Cost (NIC) % All-In TIC % Average Coupon % Average Life (years) Duration of Issue (years) Par Amount 162,870, Bond Proceeds 167,502, Total Interest 153,469, Net Interest 149,650, Total Debt Service 316,339, Maximum Annual Debt Service 10,635, Average Annual Debt Service 10,633, Underwriter's Fees (per $1000) Average Takedown Other Fee Total Underwriter's Discount Bid Price Par Average Average PV of 1 bp Bond Component Value Price Coupon Life change Bond Component 162,870, % , ,870, , All-In Arbitrage TIC TIC Yield Par Value 162,870, ,870, ,870, Accrued Interest + Premium (Discount) 4,632, ,632, ,632, Underwriter's Discount -814, , Cost of Issuance Expense -400, Other Amounts Target Value 166,688, ,288, ,502, Target Date 12/01/ /01/ /01/2013 Yield % % % Sep 24, :35 pm Prepared by Public Financial Management Page 2 58

335 BOND PRICING Pittsburgh Water and Sewer Authority Series 2013NM ALL Scenario 1 - $150,000,000 Project Fund New Money - All FY2014-FY2016 Capital Improvement Plan ***Preliminary*** Maturity Yield to Call Call Bond Component Date Amount Rate Yield Price Maturity Date Price Bond Component: 09/01/2014 1,870, % 0.430% /01/2015 2,585, % 0.910% /01/2016 2,715, % 1.350% /01/2017 2,850, % 1.700% /01/2018 2,990, % 2.150% /01/2019 3,140, % 2.510% /01/2020 3,295, % 2.810% /01/2021 3,460, % 3.160% /01/2022 3,635, % 3.420% /01/2023 3,815, % 3.590% /01/2024 4,010, % 3.760% C 3.850% 09/01/ /01/2025 4,210, % 3.940% C 4.081% 09/01/ /01/2026 4,420, % 4.110% C 4.273% 09/01/ /01/2027 4,640, % 4.240% C 4.412% 09/01/ /01/2028 4,870, % 4.370% C 4.535% 09/01/ /01/2029 5,115, % 4.490% C 4.640% 09/01/ /01/2030 5,370, % 4.600% C 4.729% 09/01/ /01/2031 5,640, % 4.680% C 4.791% 09/01/ /01/2032 5,920, % 4.760% C 4.848% 09/01/ /01/2033 6,215, % 4.820% C 4.890% 09/01/ /01/2034 6,530, % 4.890% C 4.935% 09/01/ /01/2035 6,855, % 4.950% C 4.971% 09/01/ /01/2036 7,195, % 5.000% /01/2037 7,555, % 5.050% /01/2038 7,935, % 5.090% /01/2039 8,330, % 5.110% /01/2040 8,750, % 5.130% /01/2041 9,185, % 5.150% /01/2042 9,645, % 5.160% /01/ ,125, % 5.170% ,870,000 Dated Date 12/01/2013 Delivery Date 12/01/2013 First Coupon 03/01/2014 Par Amount 162,870, Premium 4,632, Production 167,502, % Underwriter's Discount -814, % Purchase Price 166,688, % Accrued Interest Net Proceeds 166,688, Sep 24, :35 pm Prepared by Public Financial Management Page 3 59

336 BOND DEBT SERVICE Pittsburgh Water and Sewer Authority Series 2013NM ALL Scenario 1 - $150,000,000 Project Fund New Money - All FY2014-FY2016 Capital Improvement Plan ***Preliminary*** Period Debt Ending Principal Coupon Interest Service 09/01/2014 1,870, % 6,107,625 7,977,625 09/01/2015 2,585, % 8,050,000 10,635,000 09/01/2016 2,715, % 7,920,750 10,635,750 09/01/2017 2,850, % 7,785,000 10,635,000 09/01/2018 2,990, % 7,642,500 10,632,500 09/01/2019 3,140, % 7,493,000 10,633,000 09/01/2020 3,295, % 7,336,000 10,631,000 09/01/2021 3,460, % 7,171,250 10,631,250 09/01/2022 3,635, % 6,998,250 10,633,250 09/01/2023 3,815, % 6,816,500 10,631,500 09/01/2024 4,010, % 6,625,750 10,635,750 09/01/2025 4,210, % 6,425,250 10,635,250 09/01/2026 4,420, % 6,214,750 10,634,750 09/01/2027 4,640, % 5,993,750 10,633,750 09/01/2028 4,870, % 5,761,750 10,631,750 09/01/2029 5,115, % 5,518,250 10,633,250 09/01/2030 5,370, % 5,262,500 10,632,500 09/01/2031 5,640, % 4,994,000 10,634,000 09/01/2032 5,920, % 4,712,000 10,632,000 09/01/2033 6,215, % 4,416,000 10,631,000 09/01/2034 6,530, % 4,105,250 10,635,250 09/01/2035 6,855, % 3,778,750 10,633,750 09/01/2036 7,195, % 3,436,000 10,631,000 09/01/2037 7,555, % 3,076,250 10,631,250 09/01/2038 7,935, % 2,698,500 10,633,500 09/01/2039 8,330, % 2,301,750 10,631,750 09/01/2040 8,750, % 1,885,250 10,635,250 09/01/2041 9,185, % 1,447,750 10,632,750 09/01/2042 9,645, % 988,500 10,633,500 09/01/ ,125, % 506,250 10,631, ,870, ,469, ,339,125 Sep 24, :35 pm Prepared by Public Financial Management Page 4 60

337 BOND DEBT SERVICE Pittsburgh Water and Sewer Authority Series 2013NM ALL Scenario 1 - $150,000,000 Project Fund New Money - All FY2014-FY2016 Capital Improvement Plan ***Preliminary*** Annual Period Debt Debt Ending Principal Coupon Interest Service Service 03/01/2014 2,035,875 2,035,875 09/01/2014 1,870, % 4,071,750 5,941,750 7,977,625 03/01/2015 4,025,000 4,025,000 09/01/2015 2,585, % 4,025,000 6,610,000 10,635,000 03/01/2016 3,960,375 3,960,375 09/01/2016 2,715, % 3,960,375 6,675,375 10,635,750 03/01/2017 3,892,500 3,892,500 09/01/2017 2,850, % 3,892,500 6,742,500 10,635,000 03/01/2018 3,821,250 3,821,250 09/01/2018 2,990, % 3,821,250 6,811,250 10,632,500 03/01/2019 3,746,500 3,746,500 09/01/2019 3,140, % 3,746,500 6,886,500 10,633,000 03/01/2020 3,668,000 3,668,000 09/01/2020 3,295, % 3,668,000 6,963,000 10,631,000 03/01/2021 3,585,625 3,585,625 09/01/2021 3,460, % 3,585,625 7,045,625 10,631,250 03/01/2022 3,499,125 3,499,125 09/01/2022 3,635, % 3,499,125 7,134,125 10,633,250 03/01/2023 3,408,250 3,408,250 09/01/2023 3,815, % 3,408,250 7,223,250 10,631,500 03/01/2024 3,312,875 3,312,875 09/01/2024 4,010, % 3,312,875 7,322,875 10,635,750 03/01/2025 3,212,625 3,212,625 09/01/2025 4,210, % 3,212,625 7,422,625 10,635,250 03/01/2026 3,107,375 3,107,375 09/01/2026 4,420, % 3,107,375 7,527,375 10,634,750 03/01/2027 2,996,875 2,996,875 09/01/2027 4,640, % 2,996,875 7,636,875 10,633,750 03/01/2028 2,880,875 2,880,875 09/01/2028 4,870, % 2,880,875 7,750,875 10,631,750 03/01/2029 2,759,125 2,759,125 09/01/2029 5,115, % 2,759,125 7,874,125 10,633,250 03/01/2030 2,631,250 2,631,250 09/01/2030 5,370, % 2,631,250 8,001,250 10,632,500 03/01/2031 2,497,000 2,497,000 09/01/2031 5,640, % 2,497,000 8,137,000 10,634,000 03/01/2032 2,356,000 2,356,000 09/01/2032 5,920, % 2,356,000 8,276,000 10,632,000 03/01/2033 2,208,000 2,208,000 09/01/2033 6,215, % 2,208,000 8,423,000 10,631,000 03/01/2034 2,052,625 2,052,625 09/01/2034 6,530, % 2,052,625 8,582,625 10,635,250 03/01/2035 1,889,375 1,889,375 09/01/2035 6,855, % 1,889,375 8,744,375 10,633,750 03/01/2036 1,718,000 1,718,000 09/01/2036 7,195, % 1,718,000 8,913,000 10,631,000 03/01/2037 1,538,125 1,538,125 09/01/2037 7,555, % 1,538,125 9,093,125 10,631,250 03/01/2038 1,349,250 1,349,250 09/01/2038 7,935, % 1,349,250 9,284,250 10,633,500 Sep 24, :35 pm Prepared by Public Financial Management Page 5 61

338 BOND DEBT SERVICE Pittsburgh Water and Sewer Authority Series 2013NM ALL Scenario 1 - $150,000,000 Project Fund New Money - All FY2014-FY2016 Capital Improvement Plan ***Preliminary*** Annual Period Debt Debt Ending Principal Coupon Interest Service Service 03/01/2039 1,150,875 1,150,875 09/01/2039 8,330, % 1,150,875 9,480,875 10,631,750 03/01/ , ,625 09/01/2040 8,750, % 942,625 9,692,625 10,635,250 03/01/ , ,875 09/01/2041 9,185, % 723,875 9,908,875 10,632,750 03/01/ , ,250 09/01/2042 9,645, % 494,250 10,139,250 10,633,500 03/01/ , ,125 09/01/ ,125, % 253,125 10,378,125 10,631, ,870, ,469, ,339, ,339,125 Sep 24, :35 pm Prepared by Public Financial Management Page 6 62

339 RESERVE FUND Pittsburgh Water and Sewer Authority Series 2013NM ALL Scenario 1 - $150,000,000 Project Fund New Money - All FY2014-FY2016 Capital Improvement Plan ***Preliminary*** Debt Service Reserve Fund (DSRF) Interest Date 0.3% Principal Debt Service Balance 03/01/ ,287,000 12, , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 Sep 24, :35 pm Prepared by Public Financial Management Page 7 63

340 RESERVE FUND Pittsburgh Water and Sewer Authority Series 2013NM ALL Scenario 1 - $150,000,000 Project Fund New Money - All FY2014-FY2016 Capital Improvement Plan ***Preliminary*** Debt Service Reserve Fund (DSRF) Interest Date 0.3% Principal Debt Service Balance 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , , ,287,000 03/01/ , , ,287,000 09/01/ , ,287,000-16,311, ,287,000 1,453, ,287,000-17,740, Yield To Receipt Date: % Arbitrage Yield: % Value of Negative Arbitrage: 11,474, Sep 24, :35 pm Prepared by Public Financial Management Page 8 64

341 PROJECT FUND Pittsburgh Water and Sewer Authority Series 2013NM ALL Scenario 1 - $150,000,000 Project Fund New Money - All FY2014-FY2016 Capital Improvement Plan ***Preliminary*** Project Fund (PROJ) Interest Scheduled Date 0.3% Principal Draws Balance 12/01/ ,000, ,000, /01/ , ,962, ,000, ,037, /01/2014 4,000, ,000, ,037, /01/2014 4,000, ,000, ,037, /01/2014 4,000, ,000, ,037, /01/2014 4,000, ,000, ,037, /01/2014 4,000, ,000, ,037, /01/ , ,795, ,000, ,241, /01/2014 4,000, ,000, ,241, /01/2014 4,000, ,000, ,241, /01/2014 4,000, ,000, ,241, /01/2014 4,000, ,000, ,241, /01/2014 4,000, ,000, ,241, /01/ , ,831, ,000,000 98,409, /01/2015 4,000, ,000,000 94,409, /01/2015 4,000, ,000,000 90,409, /01/2015 4,000, ,000,000 86,409, /01/2015 4,000, ,000,000 82,409, /01/2015 4,000, ,000,000 78,409, /01/ , ,867, ,000,000 74,542, /01/2015 4,000, ,000,000 70,542, /01/2015 4,000, ,000,000 66,542, /01/2015 4,000, ,000,000 62,542, /01/2015 4,000, ,000,000 58,542, /01/2015 4,000, ,000,000 54,542, /01/ , ,903, ,000,000 50,639, /01/2016 4,000, ,000,000 46,639, /01/2016 4,000, ,000,000 42,639, /01/2016 4,000, ,000,000 38,639, /01/2016 4,000, ,000,000 34,639, /01/2016 4,000, ,000,000 30,639, /01/ , ,939, ,000,000 26,700, /01/2016 4,000, ,000,000 22,700, /01/2016 4,000, ,000,000 18,700, /01/2016 4,000, ,000,000 14,700, /01/2016 4,000, ,000,000 10,700, /01/2016 4,000, ,000,000 6,700, /01/ , ,974, ,000,000 2,725, ,000, , ,274, ,000,000 Yield To Receipt Date: % Arbitrage Yield: % Value of Negative Arbitrage: 12,468, Sep 24, :35 pm Prepared by Public Financial Management Page 9 65

342 APPENDIX F %WATER REVENUESWATER ACTUAL BUDGET PROFORMABaseline,NORATEINCREASE FeeRevenues TOTAL 2,166,658 2,771,569 1,408, , ,841 1,216,574 1,543,191 1,557,289 1,557,289 1,759,252 1,961,216 MiscellaneousRevenue TOTAL 1,517,555 1,377,437 1,172,944 1,513,262 1,496,318 1,335, , , , , ,721 InterestEarnings TotalInterestEarnings 2,697, ,066 1,300, , , , , , , , ,182 TOTALNONRATEWATERREVENUE 6,381,995 4,619,072 3,881,932 2,626,527 2,737,400 2,869,973 2,395,820 2,410,191 2,410,191 2,612,155 2,814,119 [1]BASEDONBILLEDREVENUE: TOTAL: 93,076,648 88,135,280 85,953,971 85,496,324 88,425,509 89,659,677 89,820,000 89,820,000 89,820,000 89,820,000 89,820,000 [2]BASEDONOVERALLREVENUEREQUIREMENT [3]Split5050basedon2012revenuedetaildata("2012MONTHLYPERMITCOUNTERREPORT") 66

343 %SEWER REVENUESSEWER ACTUAL BUDGET PROFORMABaseline,NORATEINCREASE FeeRevenues TOTAL 1,372,054 1,934,457 1,084, , ,580 1,029,186 1,206,911 1,114,085 1,114,085 1,188,121 1,262,158 MiscellaneousRevenue TOTAL 758, , , , , , , , , , ,306 InterestEarnings TotalInterestEarnings 1,308, , , , , , , , , , ,818 TOTALSEWERREVENUE 3,438,979 2,865,186 2,431,705 1,694,732 1,753,609 1,934,295 1,685,896 1,593,210 1,593,210 1,667,246 1,741,282 [1]BASEDONBILLEDREVENUE: TOTAL: 93,076,648 88,135,280 85,953,971 85,496,324 88,425,509 89,659,677 89,820,000 89,820,000 89,820,000 89,820,000 89,820,000 [2]BASEDONOVERALLREVENUEREQUIREMENT [3]Split5050basedon2012revenuedetaildata("2012MONTHLYPERMITCOUNTERREPORT") 67

344 APPENDIX G 68

345 69

346 70

347 Attachment 1 Pittsburgh Water and Sewer Authority Billing Determinants Analysis Rate Codes by Customer Class Water Rate Codes Residential Commercial Industrial Health and Education Fire Wholesale W_RES_1 W_COM_1 W_IND_1 W_H&E_1 W_FIRE_C01 W_WHS_1001 W_RES_10 W_COM_10 W_IND_10 W_H&E_10 W_FIRE_I01 W_WHS_1008 W_RES_11/2 W_COM_11/2 W_IND_11/2 W_H&E_11/2 W_FIRE_R01 W_WHS_1009 W_RES_11/4 W_COM_11/4 W_IND_11/4 W_H&E_11/4 W_FIRE_W01 W_WHS_1010 W_RES_2 W_COM_2 W_IND_2 W_H&E_2 W_WHS_1011 W_RES_3 W_COM_3 W_IND_3 W_H&E_3 W_WHS_1012 W_RES_3/4 W_COM_3/4 W_IND_3/4 W_H&E_3/4 W_WHS_1013 W_RES_4 W_COM_4 W_IND_4 W_H&E_4 W_WHS_1014 W_RES_5/8 W_COM_5/8 W_IND_5/8 W_H&E_5/8 W_RES_6 W_COM_6 W_IND_6 W_H&E_6 W_RES_8 W_COM_8 W_IND_8 W_H&E_8 Sewer Rate Codes Residential Commercial Industrial Health and Education Fire S_RES_1 S_COM_1 S_IND_1 S_H&E_1 S_FIRE_C01 S_RES_10 S_COM_10 S_IND_10 S_H&E_10 S_FIRE_I01 S_RES_11/2 S_COM_11/2 S_IND_11/2 S_H&E_11/2 S_FIRE_R01 S_RES_11/4 S_COM_11/4 S_IND_11/4 S_H&E_11/4 S_RES_2 S_COM_2 S_IND_2 S_H&E_2 S_RES_3 S_COM_3 S_IND_3 S_H&E_3 S_RES_3/4 S_COM_3/4 S_IND_3/4 S_H&E_3/4 S_RES_4 S_COM_4 S_IND_4 S_H&E_4 S_RES_5/8 S_COM_5/8 S_IND_5/8 S_H&E_5/8 S_RES_6 S_COM_6 S_IND_6 S_H&E_6 S_RES_8 S_COM_8 S_IND_8 S_H&E_8 71

348 Attachment 2 Page 1 of 2 Pittsburgh Water and Sewer Authority Billing Determinants Analysis Summary of Retail Water and Sewer Billing Determinants and Calculated Revenues Water Sewer Annual Accounts Average Monthly Revenues Annual Accounts Average Monthly Revenues Total Revenues Meter Size: Accounts Accounts 5/8" 690,975 57,581 $ 9,708, ,508 57,626 $ 1,756,430 $ 11,464,629 3/4" 36,023 3, ,149 36,065 3, ,571 1,042,719 1" 36,020 3,002 1,574,794 36,039 3, ,416 2,033, /2" 10, ,742 10, ,529 1,121,271 2" 10, ,343,043 10, ,380 1,793,422 3" 6, ,659,642 6, ,219 2,306,861 4" 4, ,382,334 5, ,923 3,294,257 6" 2, ,395,195 2, ,104 3,350,299 8" , , ,077 10" or greater , , ,085 Total 796,959 66,413 $ 21,384, ,062 66,505 $ 5,881,896 $ 27,266,832 Volumetric Charge: Volumes (Gallons) Revenues Volumes (Gallons) Revenues Revenues Residential Minimum Bill Volumes 858,374,000 $ - 858,328,000 $ - $ - Volumes Above Minimum 2,489,560,000 14,090,910 2,489,795,000 7,021,222 21,112,132 Subtotal 3,347,934,000 $ 14,090,910 3,348,123,000 $ 7,021,222 $ 21,112,132 Commercial Minimum Bill Volumes 808,411,000 $ - 808,423,000 $ - $ - Volumes Above Minimum 2,625,715,000 14,493,947 2,625,278,000 6,851,976 21,345,922 Subtotal 3,434,126,000 $ 14,493,947 3,433,701,000 $ 6,851,976 $ 21,345,922 Industrial Minimum Bill Volumes 35,871,000 $ - 35,883,000 $ - $ - Volumes Above Minimum 308,230,000 1,556, ,266, ,244 2,348,805 Subtotal 344,101,000 $ 1,556, ,149,000 $ 792,244 $ 2,348,805 Health & Educational Facilities Minimum Bill Volumes 287,833,000 $ - 287,845,000 $ - $ - Volumes Above Minimum 1,182,752,000 9,674,911 1,182,792,000 3,477,408 13,152,320 Subtotal 1,470,585,000 $ 9,674,911 1,470,637,000 $ 3,477,408 $ 13,152,320 Fire Minimum Bill Volumes 638,000 $ - 652,000 $ - $ - Volumes Above Minimum 5,931,000 31,256 5,983,000 14,778 46,034 Subtotal 6,569,000 $ 31,256 6,635,000 $ 14,778 $ 46,034 Total 8,603,315,000 $ 39,847,586 8,603,245,000 $ 18,157,628 $ 58,005,213 Total Revenues: Minimum Charge $ 21,384,936 $ 5,881,896 $ 27,266,832 Volumetric Charge 39,847,586 18,157,628 58,005,213 Total $ 61,232,522 $ 24,039,523 $ 85,272,045 72

349 Attachment 2 Page 2 of 2 Pittsburgh Water and Sewer Authority Billing Determinants Analysis Summary of Wholesale Waterr Billing Determinants and Calculated Revenues Volumes Revenues Rate Code 1001 Minimum Charges - $ - Volumetric Charges 27,600, ,340 Subtotal 27,600,000 $ 128,340 Rate Code 1008 Minimum Charges 1,960,000 $ 18,394 Volumetric Charges 5,640,000 12,099 Subtotal 7,600,000 $ 30,493 Rate Code 1009 Minimum Charges 4,900,000 $ 27,797 Volumetric Charges 16,612,000 53,717 Subtotal 21,512,000 $ 81,514 Rate Code 1010 Minimum Charges 700,000 $ 5,757 Volumetric Charges 13,930,000 67,978 Subtotal 14,630,000 $ 73,736 Rate Code 1011 Minimum Charges 8,218,000 $ 44,304 Volumetric Charges 774,848,000 1,355,072 Subtotal 783,066,000 $ 1,399,376 Rate Code 1012 Minimum Charges 8,220,000 $ 41,475 Volumetric Charges 108,374, ,130 Subtotal 116,594,000 $ 390,605 Rate Code 1013 Minimum Charges 4,384,000 $ 37,359 Volumetric Charges 6,376,000 31,115 Subtotal 10,760,000 $ 68,474 Rate Code 1014 Minimum Charges - $ - Volumetric Charges 66,589, ,598 Subtotal 66,589,000 $ 207,598 Total Minimum Charges 28,382,000 $ 175,087 Volumetric Charges 1,019,969,000 2,205,049 Subtotal 1,048,351,000 $ 2,380,135 73

350 Attachment 3 Pittsburgh Water and Sewer Authority Billing Determinants Analysis Reconcilation of JSC Calculated Revenues to Audit Audit Reconciliation: Audit Numbers Residential, Commercial, and Industrial Water Sales $ 94,272,000 Less: DISC Revenues (@ 7%) (6,167,327) Water and Sewer Rate Revenue $ 88,104,673 J. Stowe & Co. Calculations: Water Revenues Fixed Charge $ 21,384,936 Volumetric Charge 39,847,586 Total Water Revenues $ 61,232,522 Sewer Revenues Fixed Charge $ 5,881,896 Volumetric Charge 18,157,628 Total Sewer Revenues $ 24,039,523 Wholesale Water Revenues Fixed Charge $ 175,087 Volumetric Charge 2,205,049 Total Wholesale Water Revenues $ 2,380,135 Total JSC Revenues $ 87,652,180 Variance from Audit Number ($) $ (452,493) Variance from Audit Number (%) 0.51% 74

351 APPENDIX H Resolution No. 102 of 2013 Adopting and Establishing Rates As Amended WHEREAS, The Pittsburgh Water and Sewer Authority (the Authority ) has the statutory power under the Municipality Authorities Act to fix, alter, charge and collect rates in the area served by its facilities at reasonable and uniform rates to be determined exclusively by it for the purpose of providing for the payment of the expenses of the authority, for the construction, improvement, repair, maintenance and operation of its facilities and properties, and for the fulfillment of its contractual obligations; WHEREAS, the Members of the Authority s Board of Directors have reviewed and carefully considered all available information relating to the establishment of such rates, including but not limited to the 2013 Rate Study (for the years ) prepared by Sycamore Advisors, LLC with input by J. Stowe & Co., a division of NewGen Strategies & Solutions, LLC; and WHEREAS, the Members of the Board of Directors have determined that the proposed rates are reasonable and uniform and that the proposed rates for wholesale customers are reasonable and consistent with the requirements of existing water sales agreements with those customers. NOW, THEREFORE, BE IT RESOLVED that the rates set forth on the Schedule attached hereto and incorporated herein are hereby established effective January 1, 2014, and through calendar year 2014 and, unless changed by further resolution of the Authority s Board of Directors, for the years 2015, 2016, 2017, 2018 and thereafter. These rates shall be applied in accordance with the Authority s Rules and Regulations effective October 1, The invoices of those customers whose billing cycles include two different rate structures will be prorated between the two periods. The Authority s other charges, set forth in its Rules and Regulations, are not affected by this Resolution and may be changed by further resolution of the Board of Directors at any time. DULY ADOPTED AT A REGULAR MEETING OF THE PITTSBURGH WATER AND SEWER AUTHORITY HELD ON OCTOBER 11, Secretary { } 75

352 January 1, 2014, through December 31, 2014: SCHEDULE OF WATER AND SEWER RATES THE PITTSBURGH WATER AND SEWER AUTHORITY Effective January 1, 2014, and through December 31, 2014, charges for the supply of metered water and the conveyance of sewage shall be determined and billed monthly, as follows: Meter Size Minimum Gallons Minimum Charge-- Water Minimum Charge--Sewer Total Minimum Charge 5/ $ $ 4.16 $ / /2" 0 10, , , , ,000 1, , ,000 2, , , or larger 0 548,000 3, , , For every 1,000 gallons over the minimum, the rate will be the following: Account Classification Water Allocation Sewer Allocation Total Combined Rate Residential Property $ 5.66 $ 3.72 $ 9.38 Commercial Property Industrial Property Health or Education Property Fire systems (use other than reported fire Rule 304.9) Water Customers (including sewer conveyance) whose use is not metered shall be billed monthly at the following rates: Single family Residential Customers $57.83 Multi-unit Residential Customers, a multiple of the single unit rate based on the number of units Commercial, Industrial, and Health and Education Customers $ The Distribution Infrastructure System Charge (DISC) added to all customers bills shall be 7 percent of the total water use and sewer conveyance charge. { } 76

353 SCHEDULE OF WATER AND SEWER RATES 2014, continued Wholesale Water Customers Rates for wholesale water customers for the year 2014 will increase by 1.8%, in compliance with applicable agreements. Rates for 2015 and thereafter will be adopted annually by the Board of Directors of The Pittsburgh Water and Sewer Authority. { }

354 SCHEDULE OF WATER AND SEWER RATES Effective January 1, 2015, and through December 31, 2015, charges for the supply of metered water and the conveyance of sewage shall be determined and billed monthly, as follows: Meter Size Minimum Gallons Minimum Charge--Water Minimum Charge--Sewer Total Minimum Charge 5/ $ $ 4.42 $ / /2" 0 10, , , , ,000 1, , ,000 2, , , or larger 0 548,000 4, , , For every 1,000 gallons over the minimum, the rate will be the following: Account Classification Water Allocation Sewer Allocation Total Combined Rate Residential Property $ 5.66 $ 3.92 $ 9.58 Commercial Property Industrial Property Health or Education Property Fire systems (use other than reported fire Rule 304.9) Water Customers (including sewer conveyance) whose use is not metered shall be billed monthly at the following rates: Single family Residential Customers $60.25 Multi-unit Residential Customers, a multiple of the single unit rate based on the number of units Commercial, Industrial, and Health and Education Customers $ The Distribution Infrastructure System Charge (DISC) added to all customers bills shall be 7 percent of the total water use and sewer conveyance charge. { }

355 SCHEDULE OF WATER AND SEWER RATES Effective January 1, 2016, and through December 31, 2016, charges for the supply of metered water and the conveyance of sewage shall be determined and billed monthly, as follows: Meter Size Minimum Gallons Minimum Charge--Water Minimum Charge Sewer Total Minimum Charge 5/ $ $ 4.53 $ / /2" 0 10, , , , , ,000 1, , ,000 2, , , or larger 0 548,000 4, , , For every 1,000 gallons over the minimum, the rate will be the following: Account Classification Water Allocation Sewer Allocation Total Combined Rate Residential Property $ 5.66 $ 3.99 $ 9.65 Commercial Property Industrial Property Health or Education Property Fire systems (use other than reported fire Rule 304.9) Water Customers (including sewer conveyance) whose use is not metered shall be billed monthly at the following rates: Single family Residential Customers $61.82 Multi-unit Residential Customers, a multiple of the single unit rate based on the number of units Commercial, Industrial, and Health and Education Customers $ The Distribution Infrastructure System Charge (DISC) added to all customers bills shall be 7 percent of the total water use and sewer conveyance charge. { }

356 SCHEDULE OF WATER AND SEWER RATES Effective January 1, 2017, and through March 31, 2018, charges for the supply of metered water and the conveyance of sewage shall be determined and billed monthly, as follows: Meter Size Minimum Gallons Minimum Charge--Water Minimum Charge--Sewer Total Minimum Charge 5/ $ $ 4.61 $ / /2" 0 10, , , , , ,000 1, , ,000 2, , , or larger 0 548,000 4, , , For every 1,000 gallons over the minimum, the rate will be the following: Account Classification Water Allocation Sewer Allocation Total Combined Rate Residential Property $ 5.66 $ 4.03 $ 9.69 Commercial Property Industrial Property Health or Education Property Fire systems (use other than reported fire Rule 304.9) Water Customers (including sewer conveyance) whose use is not metered shall be billed monthly at the following rates: Single family Residential Customers $62.78 Multi-unit Residential Customers, a multiple of the single unit rate based on the number of units Commercial, Industrial, and Health and Education Customers $ The Distribution Infrastructure System Charge (DISC) added to all customers bills shall be 7 percent of the total water use and sewer conveyance charge. { }

357 SCHEDULE OF WATER AND SEWER RATES 2018 AND THEREAFTER Beginning on April 1, 2018, and annually thereafter, if approved by the Board of Directors, the rates for metered and unmetered water and the conveyance of sewage shall be adjusted for the change in annual Consumer Price Index for the Pittsburgh area most recently published by the Bureau of Labor Statistics or any successor organization prior to such anniversary. If the change in annual CPI Index is 0% or is a decrease, the Base Water Rate and the Sewer Rate will remain unchanged from the Rates then in effect. { }

358 APPENDIX D PWSA RESOLUTION 102 OF 2013, ADOPTING AND ESTABLISHING RATES

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