Valuation of Providence Water Supply Board Water Assets Report Date: August 8, 2017 Valuation Date: March 31, 2017 Honorable Jorge O. Elorza Mayor City of Providence Providence City Hall 25 Dorrance Street Providence, Rhode Island 02903 5 Professional Circle, Suite 208  Colts Neck NJ 07722  Tel: 732.780.6000  Fax: 732.780.6001  www.MRValuation.com August 8, 2017 Honorable Jorge O. Elorza Mayor City of Providence Providence City Hall 25 Dorrance Street Providence, Rhode Island 02903 RE: Valuation of the Providence Water Supply Board Water Assets Dear Mayor Elorza: Pursuant to your request, MR Valuation Consulting, LLC (“MRV Consulting”) has performed a valuation of the Providence Water Supply Board Water Assets, as of March 31, 2017. Due to Rhode Island regulation, the Providence Water Supply Board is subject to rate suppression and a “pay as you go” infrastructure program. They are not allowed to earn a rate of return on its rate base. Any monies approved by the Public Utilities Commission must be paid back with principal and interest and zero profit is allowed. The purpose of this analysis is to provide the City of Providence (the “City”) with a hypothetical valuation of the water assets owned and operated by the Providence Water Supply Board, as of March 31, 2017. The hypothetical condition is that the Providence Water Supply Board is to be considered a “special purpose” property and the analysis should only consider the cost approach to value, specifically “reproduction cost new, less physical depreciation, less functional obsolescence.” According to the Uniform Standards of Appraisal Practice (“USPAP”), a hypothetical condition is defined as “a condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis.” The premise of value is “reproduction cost new, less physical depreciation, less functional obsolescence,” which is the cost of reproducing a new replica of a property or asset on the basis of current prices with the same or closely similar materials, as of a specific date. The premise of value should include physical depreciation, which is “a form of depreciation where the loss in value or usefulness of a property is due to the using up or expiration of its useful life caused by wear and tear, deterioration, exposure to various elements, physical stresses, and similar factors.” In addition, the premise of value should include functional obsolescence, which is “a form of depreciation in which the loss in value or usefulness of a property is caused by inefficiencies or inadequacies inherent in the property itself, when compared to a more efficient or less costly replacement property that new technology and changes in design, materials, or process that result in inadequacy, overcapacity, excess construction, lack of functional utility, excess operating costs, etc. has developed.” 5 Professional Circle, Suite 208  Colts Neck NJ 07722  Tel: 732.780.6000  Fax: 732.780.6001  www.MRValuation.com City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Page ii As indicated above, the attached report is a valuation analysis, not a real estate appraisal. This valuation analysis has been conducted consistent with the USPAP and the local Rhode Island regulation. The local Rhode Island regulation does not account for certain intangible value associated with unique characteristics of the water assets owned and operated by the Providence Water Supply Board. MRV Consulting considered the value of these intangible assets, however, due to the local regulations a value was not assigned to these assets. Most significantly, these approaches considered but did not assign value to certain intangible value associated with the public interest in the assets, particularly considering the scarcity of comparable resources. There is inherent, additional intangible value in the water system to the City of Providence that provides a majority of the state’s water supply while ensuring high standards of water quality. These approaches considered but did not assign value to water quality standards, the state’s reliance on this resource, or the intangible value associated with the need to preserve and maintain this essential resource into the future. Conclusion Subject to the assumptions and limiting conditions stated throughout the accompanying report and based on our research and analyses, we estimated the “reproduction cost new, less physical depreciation, less functional obsolescence” of the assets owned and operated by the Providence Water Supply Board to be $404,200,000, as of March 31, 2017. The conclusions expressed herein are explained throughout the attached valuation report and are subject to the above hypothetical condition, the statement of assumptions and limiting conditions and certification. These conclusions should not be used for any purpose other than the purpose specified above. Before the conclusions presented in this letter are relied upon, the attached report should be read and analyzed in its entirety. Should you have any questions with regards to the matters discussed herein, or if we can be of any further assistance to you, please contact Mark Rodriguez at (732) 780-6010 or by email at MRodriguez@MRValuation.com. Respectfully submitted, MR Valuation Consulting, LLC City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 A: TABLE OF CONTENTS DESCRIPTION PAGE A: TABLE OF CONTENTS ........................................................................................................... 1 B: DEFINITIONS AND ABBREVIATIONS ................................................................................ 2 C: STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS ................................... 3 D: CERTIFICATION ..................................................................................................................... 8 E: PURPOSE AND SCOPE ........................................................................................................... 9 F: ECONOMIC AND INDUSTRY CONSIDERATIONS .......................................................... 10 G: LOCATION MAPS ................................................................................................................ 18 H: DESCRIPTION OF THE ASSETS ........................................................................................ 20 I: VALUATION METHODOLOGY ........................................................................................... 27 J: HIGHEST AND BEST USE ..................................................................................................... 29 K: ASSET VALUATION (COST) APPROACH......................................................................... 30 L: INCOME VALUATION (INCOME) APPROACH ................................................................ 42 M: COMPARABLE SALES (MARKET) APPROACH ............................................................. 43 N: RATE BASE APPROACH ..................................................................................................... 48 O: RECONCILIATION ................................................................................................................ 50 P: POTENTIAL CONCESSION LEASE AGREEMENT ........................................................... 53 APPENDIX 1 PROFESSIONAL QUALIFICATIONS .............................................................. 54 APPENDIX 2 EXECUTIVE SUMMARY.................................................................................. 56 APPENDIX 3 FIXED ASSET REGISTER................................................................................. 58 APPENDIX 4 COMPARABLE SALES DATA ......................................................................... 64 APPENDIX 5 SITE PHOTOGRAPHS ....................................................................................... 69 MR Valuation Consulting, LLC Page 1 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 B: DEFINITIONS AND ABBREVIATIONS ADA Americans with Disabilities Act ASA Accredited Senior Appraiser Assets The water assets owned and operated by the Providence Water Supply Board Client City of Providence Company Providence Water Supply Board (PWSB) GOU Government Owned Utility HCLD Historical Cost Less Depreciation HW Handy-Whitman Index IOU Investor Owned Utilities MRICS Member of the Royal Institution of Chartered Surveyors MRV Consulting MR Valuation Consulting, LLC MVS Marshall Valuation Service RCN Reproduction Cost New RCNLD Reproduction Cost New Less Depreciation Report Date August 8, 2017 SF Square Feet USPAP Uniform Standards of Professional Appraisal Practice Valuation Date March 31, 2017 WACC Weighted Average Cost of Capital MR Valuation Consulting, LLC Page 2 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 C: STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS This valuation is subject to the following Assumptions and Limiting Conditions. Other assumptions and limiting condition may be included in this report at other locations in the report. In this section, the term report can mean study, valuation, research or analysis and any report or work product or deliverable about the study, valuation, research, or analysis. Further, the term MRV Consulting stands for MR Valuation Consulting, LLC and its employees, consultants, appraisers, staff members, and service providers. Information and Data Sources 1. Information on the financial, legal, and physical condition of the subject property or assets, provided by the Client, or its representatives, directly to us or to the public through various public disclosure methods is assumed to be reliable. Other materials and information obtained from various professionally appropriate public and private sources are assumed to be reliable. 2. The information contained within this report was obtained from sources deemed to be reliable. Reasonable efforts, given the intended use, purpose, and scope of the valuation, have been made to verify such information; however, no warranty and responsibility is given as to its accuracy. Property Specific Assumptions and Limiting Conditions 3. This report analyzes the fee simple interest of the subject property or assets, free and clear of any or all liens or encumbrances. This valuation is subject to the restrictions imposed by this agreement. 4. MRV Consulting does not provide legal, accounting, audit, engineering, architectural, or environmental sciences services. MRV Consulting assumes no responsibility for matters of a legal nature, matters of title, matters of audit, matters of engineering, matters of environmental science, or matters of architecture. It is assumed that any legal, engineering, architectural, environment, accounting and financial information as provided by Client, representatives, and management or obtained from public records are correct and assumed to be reliable. 5. MRV Consulting assumes that there are no hidden or unapparent conditions at the subject land and/or improvements, which would render the subject property or assets more or less valuable, except as noted herein. MRV Consulting assumes no responsibility for such conditions, or for engineering, environmental, legal, or architectural counseling which might be required to discover such conditions. It is assumed that the subject property or assets are not adversely affected by contaminates or health risks and that no contamination or health risks exist on or near the Property. MRV Consulting assumed that there were no ADA issues sufficient to significantly render the subject property or assets more or less valuable. MR Valuation Consulting, LLC Page 3 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 6. It is assumed that there are no zoning or building code issues, or other federal, state, or local regulation compliance issues concerning the subject property or assets that would significantly increase or decrease the value of the subject property or assets being appraised. 7. Competent and responsible management and ownership are assumed. 8. Since MRV Consulting is not an engineering or architectural firm, it makes no representation as to quality, functionality, condition, limitations and size of the subject property or assets, except that 1) MRV Consulting has relied upon what has been reported to MRV Consulting as the best available data, where said data was provided by others to MRV Consulting who MRV Consulting assumes to be an appropriate source of said data given the specific purpose, intended use and scope of work of this study, and 2) if a visual inspection was conducted by MRV Consulting then MRV Consulting has relied upon the visual inspection. Given the inherent limitations of MRV Consulting’s visual inspection, if conducted, important issues at the Property may not be uncovered. MRV Consulting’s visual inspection of the Property is not an engineering, architectural, or environmental inspection, and does not test building operations and does not cover 100 percent of the building(s), machinery and equipment, or the site. 9. This study assumes that, unless specifically noted elsewhere in the report, the subject property or assets suffers no environmental or hazard issues, and that there are no contamination or health risks existing at or near the Property. 10. If substantive issues are later discovered in data relied upon, then the reported opinions in this study may need to be revised accordingly. Study Analysis and Format Assumptions 11. This report has been prepared in accordance with the requirements of USPAP of the Appraisal Foundation, and the American Society of Appraisers. When necessary for compliance with local law and assessment procedures, we may employ the jurisdictional exception rule of the USPAP. Extraordinary assumptions or hypothetical conditions, as defined by USPAP, will be disclosed at various points in this report. The use of extraordinary assumptions or hypothetical conditions may affect the assignment results. 12. MRV Consulting has determined the scope of work, based on its discussions with the Client, and their reported needs, their reported purposes and intended use of the valuation. The valuation scope is limited to the work necessary to provide for the Client’s purpose and use of the report, and as such this report is not recommended for any other use. The scope of this valuation is not so confined as to result in misleading or unsupported opinions of value. Publication, Distribution, Use of Report 13. The opinions proffered in this report are as of a specific date, for a specific use and purpose, and made under specific assumptions and limiting conditions. Possession of this report, or a MR Valuation Consulting, LLC Page 4 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 copy thereof, does not give the holder the right of publication, nor may the report or any part thereof be used by anyone other than the Client and intended users for the intended use. Using the opinions proffered herein for any other use or purpose is inappropriate and unwise, and is prohibited, unless authorized in written by MRV Consulting. The Client agrees that: a) Any advice or recommendations, written or oral, provided by MRV Consulting in connection with this engagement is exclusively for the Client and any other intended user specifically identified by MRV Consulting. b) This report is intended to be utilized as a whole, and may not be used in parts. 14. Any party receiving a copy of this report in order to satisfy disclosure requirements, does not become an intended user of the valuation unless MRV Consulting identifies such party as an intended user. Possession of this report, or a copy thereof, does not give the holder the right of publication, nor may the report or any part thereof be used by anyone other than the Client and intended users for the intended use. 15. Disclosure of the contents of this report is governed by the by-laws and regulations of the USPAP of the Appraisal Foundation, the American Society of Appraisers and the Royal Institution of Chartered Surveyors. MRV Consulting is authorized by the Client to disclose all or any portion of this report, and the work files to appropriate representatives of the Appraisal Foundation, the American Society of Appraisers and the Royal Institution of Chartered Surveyors, if such disclosure is required to enable the MRV Consulting to comply with their respective by-laws and regulations now or hereafter in effect , or as may otherwise be required to be disclosed by Court Order or governing laws, rules and/or regulations. Limit of Liability 16. MRV Consulting warrants that it has performed the services hereunder in good faith and in a professional manner. MRV Consulting disclaims all other warranties, either express or implied, including, without limitation, warranties of merchantability and fitness for a particular purpose. 17. Any valuation or forecasts models of income and expenses in this report are not predictions of the future and are created for the specific use and purpose of the valuation. No warranty or representation is made that the model will coincide with actual future events. Furthermore, there will usually be differences between the modeled results and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. 18. It is understood and agreed that Client and MRV Consulting are independent of the other and that neither is, nor shall be considered to be, an agent, distributor, or representative of the other. Neither party shall act or represent itself, directly or by implication, as an agent of the other or in any manner assume or create any obligation on behalf of, or in the name of, the other. Client acknowledges that the full independence and authority of MRV Consulting will be maintained throughout this engagement and that no assurances or guarantees of a value estimate or consulting recommendation have been made or are a condition of this engagement. MR Valuation Consulting, LLC Page 5 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 19. In providing this service, MRV Consulting establish and the Client understands and agrees that (a) no relationship other than one of a service provider is created between MRV and its staff members and the Client; and (b) MRV Consulting assumes no responsibility for or ownership of the risks and rewards of the client business decisions based on, or business results that are consequential to the use of this report. 20. The liability of MRV Consulting is limited to the Client only and shall not exceed in the aggregate the amounts actually received by MRV Consulting for its services. 21. MRV Consulting is not required to give testimony about this report, or to provide other services to the Client concerning the subject property or assets, without a written agreement between the Client and MRV Consulting for compensation to MRV Consulting. Ownership of MRV Consulting Properties 22. MRV Consulting Technology and Copyrights. MRV Consulting has created, acquired, or otherwise has rights in, and may, in connection with the performance of services hereunder, employ, provide, modify, create, acquire or otherwise obtain rights in, various concepts, ideas, methods, methodologies, procedures, processes, know-how, and techniques; (including, without limitation, models; templates; the generalized features of the structure, sequence and organization of software; user interfaces and screen designs; general purpose consulting and software tools, utilities and routines; and logic, coherence and methods of operation of systems) (collectively, referred to as “MRV Consulting Technology and Copyrights”). 23. Ownership and Use of Deliverables. Except as provided in Paragraph 24 below, upon full and final payment to MRV Consulting for its services hereunder, the tangible items specified as deliverables or work product in the proposal, engagement letter, or contract to which these terms are attached (the “Deliverables”) will become the property of the Client. To the extent that any MRV Consulting Technology and Copyrights are contained in any of the Deliverables, MRV Consulting hereby grants the Client, upon full and final payment to MRV Consulting hereunder, a royalty free, fully paid up, worldwide, non-exclusive license to use such MRV Consulting Technology and Copyrights in connection with the Deliverables, and only for the Deliverables, and only for the Client’s intended purpose and use as enumerated in the attached proposal, engagement letter, or contract. 24. Ownership of MRV Consulting Properties. To the extent that MRV Consulting utilizes any of its property (including, without limitation, the MRV Consulting Technology and Copyrights, or any hardware or software of MRV Consulting in connection with the performance of services hereunder, such property shall remain the property of MRV Consulting and, except for the license expressly granted in Paragraph 23 above, Client shall acquire no right or interest in such property. Notwithstanding anything herein to the contrary, the parties acknowledge and agree that (a) MRV Consulting will own all rights, title, and interest, including, without limitation, all rights under all copyright, patent and other intellectual property laws, in and to the MRV Consulting Technology and Copyrights and (b) MRV Consulting may employ, modify, disclose, and otherwise exploit the MRV Consulting Technology and Copyrights MR Valuation Consulting, LLC Page 6 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 (including, without limitation, providing services or creating programming or materials for other clients). MRV Consulting does not agree to any terms that may be construed as precluding or limiting in any way its right to (a) provide consulting or other services of any kind or nature whatsoever to any person or entity as MRV Consulting in its sole discretion deems appropriate or (b) develop for itself, or for others, materials that are competitive with those produced as a result of the services provided hereunder, irrespective of their similarity to the Deliverables. Statements of Qualifications and Personal Histories 25. Any statements of qualifications, resumes, and personal and/or company histories are presented in summary for marketing purposes and to assist the intender(s) of the report with understanding the professional competency and experience of MRV Consulting. These statements of qualifications, resumes, and personal and/or company histories are (1) not a complete listing of our professional experiences and qualifications and (2) not a full disclosure of our professional, corporate, and personal interactions and relationships. MR Valuation Consulting, LLC Page 7 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 D: CERTIFICATION We certify that, to the best of my knowledge and belief: 1. The statements of fact in this report are true and correct. Certain efforts, as described herein, given the use, purpose, and scope of the valuation, have been made to verify such statements of facts. 2. The reported analysis, opinions, and conclusions contained herein are limited only by the reported assumptions and limiting conditions, and our personal, impartial, and unbiased professional analyses, opinions, and conclusions. This report is a valuation analysis, not a real estate appraisal. 3. The undersigned has no present or prospective future interest in the real estate or assets that are the subject of this report, and no personal interest with respect to the parties involved. 4. The undersigned has no bias with respect to the real estate or assets that are the subject of this report, or to the parties involved. 5. The undersigned has not performed any valuation services regarding the real estate or assets that are the subject of this report within the three-year period immediately preceding acceptance of this assignment, as an appraiser or in any other capacity. 6. Our engagement in this valuation assignment was not contingent upon developing or reporting predetermined results. 7. Our compensation for this valuation is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the Client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this valuation. 8. This valuation has been developed and reported in conformity with, and is subject to, the requirements of the Code of Professional Ethics and Standards of Professional Practice of the USPAP of the Appraisal Foundation and the American Society of Appraisers. This valuation is based upon a hypothetical condition. 9. Mark Rodriguez, Scott McMahon, Avi Garg, and Julian Jaramillo performed site tours of the various Providence Water Supply Board water assets on April 12 through April 13, 2017. 10. As of the date of this report, Mark Rodriguez and Scott McMahon have completed the requirements of the continuing education program established by the American Society of Appraisers (see Appendix 1 for Professional Qualifications). Mark Rodriguez, ASA MRICS MR Valuation Consulting, LLC Scott McMahon, ASA MRICS Page 8 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 E: PURPOSE AND SCOPE MRV Consulting has performed a valuation of the water assets owned and operated by the Providence Water Supply Board. The valuation of the Providence Water Supply Board Water Assets is based upon a hypothetical condition. Our valuation report is presented in accordance with the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation and the American Society of Appraisers. We did not exclude any of the appropriate valuation approaches from consideration. The purpose of this analysis is to provide the City of Providence with a hypothetical valuation of the water assets owned and operated by the Providence Water Supply Board, as of March 31, 2017. The hypothetical condition is that the Providence Water Supply Board is to be considered a “special purpose” property and the analysis should only consider the cost approach to value, specifically “reproduction cost new, less physical depreciation, less functional obsolescence.” According to the Uniform Standards of Appraisal Practice, a hypothetical condition is defined as “a condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis.” The premise of value is “reproduction cost new, less physical depreciation, less functional obsolescence,” which is the cost of reproducing a new replica of a property or asset on the basis of current prices with the same or closely similar materials, as of a specific date. The premise of value should include physical depreciation, which is “a form of depreciation where the loss in value or usefulness of a property is due to the using up or expiration of its useful life caused by wear and tear, deterioration, exposure to various elements, physical stresses, and similar factors.” In addition, the premise of value should include functional obsolescence, which is “a form of depreciation in which the loss in value or usefulness of a property is caused by inefficiencies or inadequacies inherent in the property itself, when compared to a more efficient or less costly replacement property that new technology and changes in design, materials, or process that result in inadequacy, overcapacity, excess construction, lack of functional utility, excess operating costs, etc. has developed.” As indicated, this report is a valuation analysis, not a real estate appraisal. This valuation analysis has been conducted consistent with the USPAP and the local Rhode Island regulation. The local Rhode Island regulation does not account for certain intangible value associated with unique characteristics of the water assets owned and operated by the Providence Water Supply Board. MRV Consulting considered the value of these intangible assets, however, due to the local regulations a value was not assigned to these assets. Most significantly, these approaches considered but did not assign value to certain intangible value associated with the public interest in the assets, particularly considering the scarcity of comparable resources. There is inherent, additional intangible value in the water system to the City of Providence that provides a majority of the state’s water supply while ensuring high standards of water quality. These approaches considered but did not assign value to water quality standards, the state’s reliance on this resource, or the intangible value associated with the need to preserve and maintain this essential resource into the future. MR Valuation Consulting, LLC Page 9 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 F: ECONOMIC AND INDUSTRY CONSIDERATIONS Economic Outlook Summary The general economic climate is an important consideration in the valuation of any business interest. This is because the national and regional economic outlook influences how investors perceive alternative investment opportunities at any given time. Overall Economic Activity1 Reports from the 12 Federal Reserve Districts indicated the economy expanded at a modest to moderate pace from early January through mid-February of 2017. Consumer spending has expanded modestly and retail sales increased at a subdued pace across most of the nation, with a few districts noting an ongoing shift from in-store to internet purchasing. Auto sales varied widely, but were said to be up in most districts. Tourism activity was mixed but mostly stronger. Manufacturing activity accelerated somewhat, with most districts characterizing the pace of growth as moderate. The energy sector showed modest growth in early 2017, and transportation activity was steady to somewhat higher across the nation. Home construction and sales continued to expand modestly in most districts, while residential rental markets were mixed. Home prices were steady to up modestly in most districts, and a few districts noted low inventories of existing homes. Commercial real estate construction grew modestly, and sales and leasing activity grew moderately. Lending activity was steady to somewhat higher. Businesses were generally optimistic about the near-term outlook but to a somewhat lesser degree than reported in January 2017. Labor markets remained tight in early 2017, with some districts noting widening labor shortages. Employment grew moderately in most of the nation, though three districts characterized growth as modest and two reported that it was little changed. A few districts noted that staffing firms were seeing brisk business for this time of year, and one noted more conversions from temporary to permanent workers. In general, wages in most districts rose modestly or moderately, with a few reporting some pickup in the pace of wage growth. A few districts noted that shortages of skilled workers, particularly engineers and IT workers, were driving up their wages, and there were also some reports of labor shortages in the leisure and hospitality, construction and manufacturing industries. Pricing pressures were little changed from the prior report. Most Districts reported that selling prices were up modestly or moderately, though four indicated that prices had largely leveled off. Input prices were up modestly, on balance. Energy prices and farm prices were mixed but mostly steady, on balance, while prices for construction materials climbed in a few Districts. Overall, businesses said they expected both input prices and selling prices to increase modestly in the months ahead. 1 Board of Governors of the Federal Reserve System. Accessed on March 27, 2017. MR Valuation Consulting, LLC Page 10 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Boston Federal Reserve Economic Activity2 Businesses within the district, that includes Providence, Rhode Island, reported modest to moderate increases in activity from a year earlier. Retailers cited flat or single digit increases in sales, while two-thirds of responding manufacturers saw revenue gains. Staffing firms mostly saw slight year over year declines in revenues, attributable in part to tight labor supply. Commercial real estate markets in the region were steady, with “good but not great” office leasing activity in Boston, Portland, and Providence. Residential real estate markets across the region saw increased median sales prices and mixed sales results, partially attributable to ongoing inventory shortages. Across most sectors, input and selling prices were stable, although staffing firms have raised bill and pay rates. While some responding firms expressed concern about increased uncertainty, most continued to say they were upbeat about 2017. Water & Sewer Utilities Industry Summary Overview3 Companies in this industry operate water treatment and water supply systems; sewer systems and sewage treatment facilities; and steam and air conditioning supply systems. Major companies include American Water Works, Aqua America, and California Water Service, along with Francebased global giants SUEZ Environment and Veolia Environment, Brazil’s SABESP, and the UK’s Severn Trent. These private owner and operators are known as Investor Owned Utilities. The size of the global water utility market is estimated to be $185 billion. Investor Owned Utilities comprise approximately 20 percent of that market. Though public utilities dominate, competition among private water management companies takes place in major markets in Europe, Asia, Australia, and North America. Figure F-1 illustrates the percentages of Investor Owned Water Utilities by service population in the US as of 2014 from the US Environmental Protection Agency. 2 Board of Governors of the Federal Reserve System. Accessed on March 27, 2017. 3 Water & Sewer Utilities - Quarterly Update 3/6/2017. (First Research Industry Profiles). Mergent, Fort Mill, South Carolina, 2017. MR Valuation Consulting, LLC Page 11 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Figure F-1 Investor Owned Water Utilities Ownership by Service Population (2014) The US commercial water and sewer utilities industry has a combined annual revenue of approximately $14 billion. The commercial industry is small compared to the water and sewer services operated by many regional and local governments in the US. GOU’s have annual revenue of approximately $110 billion. Customers are individuals, businesses, and municipalities. Large commercial customers pay lower rates than residential customers, but residential customers provide stable and predictable income. Residential customers comprise most customers for commercial utilities. Rates are set by state public utility commissions. The rate setting mechanism of most public utility commissions is complicated and slow, sometimes stretching out for years. Consequently, the managers of utilities are constantly involved in rate setting procedures. Competitive Landscape Demand depends on commercial and residential water needs, which are related to population growth and to the level of economic activity. The profitability of individual companies depends on efficiency of operations, because prices are fixed by public utility commissions. Large companies have economies of scale in operations and the ability to raise capital for infrastructure improvements. Small companies can compete successfully through superior engineering or by serving desirable local markets. The US industry is concentrated: the 50 largest companies account for approximately 75 percent of industry revenue. High barriers to entry, such as capital investments, make the industry somewhat resistant to competition; many companies operate as de facto monopolies. MR Valuation Consulting, LLC Page 12 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Products, Operations & Technology Per the US Census Bureau, water services account for approximately 70 percent of industry revenue, while sewer services account for about 15 percent. Steam supply, irrigation, and other water services account for the remaining 15 percent. Figure F-2 illustrates the breakdown of industry revenue by service, as of March 2017. Figure F-2 US Water & Sewer Utilities Industry Revenue by Service Irrigation 2% Steam/AC 8% Other 6% Water Services 71% Sewer Services 13% The operations of small or large water and sewer systems and commercial or municipal utilities are similar. Water and sewer operations are local monopolies, mainly because of the large infrastructure of reservoirs, pipes, and treatment facilities needed. Competition exists only in determining who operates a system. Commercial companies may own a local system, or operate a system on behalf of a local government, or may own parts of a system, such as water wells or a reservoir. A water system consists of a water source, a system of storage reservoirs and pumping stations, a water treatment facility, and pipe transmissions and distribution systems. The water source may be surface (lakes or rivers) or ground water (springs and wells). While water from lakes or rivers is sometimes free, companies must often pay wholesale fees for water owned by private owners or local or regional public water authorities. To ensure that water is available during periods of peak use (which often coincide with periods of low accumulation, like the summer months), utilities may operate various types of reservoirs, including tanks, artificial lakes, and covered ground reservoirs. Water treatment consists of various steps to remove contaminants. Treated water runs through meters before flowing through distribution pipes to final customers. Water is periodically tested for quality at various stages in the system. MR Valuation Consulting, LLC Page 13 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 The operation of both water and sewer systems is highly automated and requires mainly monitoring. The average local water or sewer utility has fewer than a dozen employees. Maintenance and capital costs are often higher than operating costs, because of the large network of pipes, valves, pumps, reservoirs, and treatment facilities that that comprise the system. Pipe maintenance and/or replacement is especially expensive, as pipes are usually located under asphalt paved roads. Regulation Water and sewer utilities are regulated by federal, state, and local authorities. Rates charged by water and sewer companies typically are set by state public utility commissions. Rates are generally set to allow a utility to earn a reasonable return on investment. State public utility commissions also set conditions and standards for services and often must approve long term financing programs, capital expenditures, and reorganizations. The EPA monitors state compliance with the Safe Drinking Water Act, which sets regulations concerning contaminants in drinking water. Water system operators are required to post “consumer confidence reports” about the contaminants in their water. Under the Clean Water Act, the EPA also regulates the types of contaminants that may be discharged into public waters from sewage systems. Utilities are also subject to regulations regarding storage and disposal of hazardous substances, such as water treatment chemicals, and occupational safety laws. Financial Profile In general, the revenues of water utility systems are typically derived from (1) user charges, (2) connection fees, and (3) the provision of services to other utilities. Typical expense categories for water utility systems include (1) operation and maintenance, (2) debt service, (3) depreciation, and (4) income tax (in the case of Investor Owned Utilities). The cash flow of water or sewer companies can be highly seasonal, as water demand may be higher in the summer but water availability lower. Many companies make large annual capital investments to maintain or expand their systems. Transmission and distribution infrastructure accounts for most capital expenditures, other investments include treatment, storage, and water source rights. Regional Highlights In the US, availability of water resources varies by region. Areas such as the West and the Southwest are marked by water scarcity and frequent droughts. Water is more plentiful and available in the northern and eastern parts of the US. Pricing for water is influenced not only by availability, but also by demand, infrastructure, regional planning, state and local government subsidies, and other factors. Water is cheapest in the Great Lakes region of the United States, but that is not true for other water rich areas, according to the Pacific Institute’s research organization Circle of Blue. In a recent MR Valuation Consulting, LLC Page 14 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 year, a family in Providence paid on average $36 per month. In Boston and Phoenix, a family of four paid on average $78 vs. $39 per month, respectively. Similarly, Las Vegas residents paid on average $42 per month; Atlanta residents $92 monthly. Atlanta has about 10 times the annual rainfall of Las Vegas. Comparative annual water bills for regulated water utilities in Rhode Island are illustrated in Figure F-3 below. Figure F-3 Comparative Rhode Island Annual Water Bills Regulated Water Utilities (based on 100 hundred cubic feet) Water may come from rivers, aquifers, reservoirs, or natural lakes, depending upon the region. Companies are restricted by legislation on how they can access, treat, and deliver water to their customers. Local weather conditions, such as floods, hurricanes, or tornadoes, can impact water availability or cause contamination. Industry Indicators & Forecast The value of US nonresidential construction spending, a demand indicator for water and sewer utilities services, rose 2.4 percent year to date in January 2017 compared to the same period in 2016. The value of US residential construction spending, which impacts demand for water and sewer utilities services, rose 5 percent year to date in January 2017 compared to the same period in 2016. Revenue (in current dollars) for US water, sewage, and other systems is forecast to grow at an annual compounded rate of 4 percent between 2017 and 2021, as illustrated in Figure F-4. MR Valuation Consulting, LLC Page 15 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Figure F-4 US Water & Sewer Utilities Industry Revenue Forecast 2017 through 2021 Hypothetical Willing Buyers or Lessors Estimating the value of the assets of the Providence Supply Water Board requires the consideration of the most likely population of hypothetical willing buyers or lessors. Based on the characteristics of Providence Supply Water Board and the population of market participants who are likely to invest in a water utility system, the most likely pool of hypothetical willing buyers or lessors of the assets of the Providence Supply Water Board includes governmental or quasi-state agencies as well as investor owned utilities within the State of Rhode Island. The investor owned utilities would only be interested in investing in this system if they could earn a profit or rate or return on the rate base. We have identified four likely parties that may be considered as hypothetical buyers or lessors of the Providence Water Supply Board. These may include: 1. State of Rhode Island – Potentially set up quasi-state agency to run water company 2. Narragansett Bay Commission – A quasi-state agency in Rhode Island that provides wastewater collection and treatment services throughout the metropolitan Providence and Blackstone areas 3. SUEZ Rhode Island – An investor owned utility located in Washington County, Rhode Island that operates a public water supply and distribution system in a non-exclusive territory. SUEZ serves portions of the Towns of South Kingstown, Narragansett, and the Village of Point Judith. Its parent company provides drinking water to 92 million people across 70 countries and 5 continents. 4. Surrounding Water Supply Boards and Water Districts – Potentially the Pawtucket Water Supply Board, East Providence Water District, and Bristol County Water Authority could merge and acquire the Providence Water Supply Board MR Valuation Consulting, LLC Page 16 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 These considerations suggest that the likely population of hypothetical willing buyers or lessors of Providence Water includes both governmental and investor owned utilities with the capital and infrastructure to purchase and maintain a water system of comparable size. In the acquisition or lease of a going concern business, the population of buyers or lessors with the greatest expected synergies will set market. The expected synergies of a population of willing buyers or lessors can be strategic, operational, and/or financial. By considering synergies, the City of Providence can identify the most likely population of buyers or lessors for the Providence Water Supply Board. In the potential sale or lease of the water assets of the Providence Water Supply Board, many types of buyers or lessors may bid for the water company. However, the category of investors with the greatest expected synergies will set the price range that all serious potential bidders must match. In the case of the Providence Water Supply Board, a not-for-profit public entity, i.e. a GOU (1) will not have to pay income taxes, (2) will have access to low cost municipal financing, and (3) will not be subject to the same regulatory environment as an IOU buyer. Therefore, public entities will set the range of market prices in which all potential buyers (both GOU and IOU) will have to bid. MR Valuation Consulting, LLC Page 17 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 G: LOCATION MAPS Figure G-1 Providence Water Supply Board Service Area Map MR Valuation Consulting, LLC Page 18 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Figure G-2 Surrounding Major Public Water Supply Districts MR Valuation Consulting, LLC Page 19 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 H: DESCRIPTION OF THE ASSETS Water Supply Sources The Scituate Reservoir Complex is the sole source of water supply for the Providence Water Supply Board. The Scituate Reservoir Complex consists of six reservoirs: the Scituate Reservoir (main) and five smaller reservoirs, which are tributary to the main reservoir. Scituate Reservoir The total storage capacity of the Scituate Reservoir is ±37 billion gallons. The dead storage is 400 million gallons, resulting in a net storage volume of ±36.6 billion gallons. The reservoir has a water surface area of 5.3 square miles and a watershed area of 92.8 square miles. Water in the Scituate Reservoir is impounded behind the Gainer Dam, a large zoned earth structure built in 1927 at the southeast end of the Scituate Reservoir, which is traversed along its 3,200-foot length by Rhode Island Route 12. The flow discharges through a natural rock channel to the Pawtuxet River below the dam. Raw water needed for water supply flows from the reservoir ±4,300 feet to the Philip J. Holton Water Treatment Plant. Regulating Reservoir Regulating Reservoir has a storage capacity of 428 million gallons, of which 7 million gallons is dead storage. The drainage area of this reservoir is ±22.3 square miles, while the water surface area is 0.4 square miles. The dam impounding the waters in the Regulating Reservoir includes a 600-linear foot earth embankment structure. The dam was built in 1919 and includes a 260-foot long concrete horseshoe overfall spillway. Barden Reservoir The storage in Barden Reservoir is 853 million gallons. Due to the arrangement of the outlets there is no dead storage. The water surface area is 0.4 square miles and the watershed area is ±33 square miles. Built in 1883, the Barden Reservoir Dam is an earth embankment structure with a concrete corewall. The length of the dam, including the spillway is approximately 612 feet. Moswansicut Reservoir The Moswansicut Reservoir covers a surface area of about 0.4 square miles. It has a total storage capacity of 1.8 billion gallons and dead storage of 1.1 billion gallons, for a net storage of 715 million gallons. The drainage area of this reservoir is ±3.9 square miles. The dam forming Moswansicut Reservoir is a 450-foot long earth embankment structure, which was constructed in 1919. The dam includes two spillways, an overflow spillway and an emergency spillway. MR Valuation Consulting, LLC Page 20 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Ponaganset Reservoir The Ponaganset Reservoir has a watershed area of 2.1 square miles and a water surface area of 0.4 square miles. This reservoir has a storage capacity of 742 million gallons, of which 49 million gallons are dead storage. The net storage capacity is 693 million gallons. The dam impounding the Ponaganset Reservoir is a 635-foot long earth embankment structure that was built in 1885. Westconnaug Reservoir Westconnaug Reservoir has a total storage capacity of 453 million gallons with no dead storage. Its surface area covers approximately 0.3 square miles with a drainage area of four square miles. The dam at the Westconnaug Reservoir was built in 1924. It is an earth embankment structure with a steel sheeting and concrete corewall. The length of the dam is 320 feet with a spillway. Both the spillway and the outlet conduit discharge into Westconnaug Brook. Water Treatment Facility The Providence Water Supply Board operates one conventional water treatment plant to purify source water. The treatment plant is known as the Philip J. Holton Water Purification Works plant. The raw water flows from the Scituate Reservoir via twin 60 inch pipelines for the first 1,600 feet and then converge into a common 90-inch pipe for the remaining 2,700 feet as it travels into to the water treatment plant. The raw water characteristics from the Scituate Reservoir are typical of well protected surface water supplies in the New England region. The water treatment plant utilizes a conventional treatment process. The hydraulics of the plant allow it to be normally operated under gravity flow conditions. The Raw Water Booster Pump Station is available for pumping water to the plant under extremely low reservoir conditions. The treatment process consists of aeration, coagulation-flocculation, lime addition for corrosion control and pH adjustment, sedimentation, disinfection, filtration, and fluoridation. Storage Facilities – Distribution Reservoirs The Providence Water Supply Board operates five water storage facilities throughout the distribution system. Water is also collected in a 260,000-gallon clear well at the water treatment plant before being delivered to the distribution system. These facilities are used to meet peak demand flows and to provide storage for emergency and firefighting purposes. MR Valuation Consulting, LLC Page 21 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Aqueduct Reservoir The Aqueduct Reservoir is located at 430 Scituate Avenue in Cranston and has a storage capacity of 43.4 million gallons. Its characteristics include a 390 x 590-foot enclosed underground concrete structure with a water depth of ±25 feet and an overflow elevation of 231 feet mean high water. The Aqueduct Reservoir is gravity fed and provides operational storage for the Low Service area of the distribution system. Water is supplied to the reservoir through aqueducts and transmission mains from the water treatment plant. Neutaconkanut Reservoir The Neutaconkanut Reservoir is located at 60 Ashby Street in Johnston. Water continues to flow through the Neutaconkanut Conduit to the further downstream Neutaconkanut Reservoir. The Neutaconkanut Reservoir has a storage capacity of 42.1 million gallons and is a 397 x 597-foot enclosed underground concrete structure with an average water depth of approximately 25 feet and an overflow elevation of 227 feet mean high water. The facility provides operational storage for the gravity fed Low Service area and a portion of the pumped supply to the High Service area of the distribution system. Longview Reservoir The Longview Reservoir is located at 1830 Mineral Spring Avenue, North Providence. It has a storage capacity of 24.8 million gallons and has an overflow elevation of 306 feet mean high water. The original reservoir was built in 1928. A 200 x 323-foot deep cast in place concrete underground addition was constructed immediately adjacent to the existing reservoir in 1990. This addition doubled the size of the reservoir to its current capacity. The facility provides operational, emergency, and fire storage to the High Service area of the distribution system. Ridge Road Reservoir The Ridge Road Reservoir is located across from 264 Ridge Road in Smithfield. It has a capacity of 3.5 million gallons and provides operational, emergency, and fire storage for the Extra-High Service area of the distribution system. Water is pumped to the reservoir by the Fruit Hill Pump Station. The above ground structure is a pre-stressed concrete tank with a water depth of 40 feet and an overflow elevation of 398 feet mean high water. Lawton Hill Reservoir The Lawton Hill Reservoir is located at 2814 Plainfield Pike in Johnston. It has a storage capacity of 5.0 million gallons and is a 187 x 187-foot enclosed underground concrete structure with a water depth of 20 feet and an overflow elevation of 485 feet mean high water. The Lawton Hill Reservoir provides operational storage for the Western Cranston area of the distribution system. Water is pumped to this reservoir via the Aqueduct Pump Station adjacent to the Aqueduct Reservoir. MR Valuation Consulting, LLC Page 22 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Pump Stations In order to maintain the supply of potable water at a sufficient pressure, the Providence Water Supply Board owns and operates multiple water pump stations in its distribution system, one emergency pump station in the transmission system, and one raw water pump station. Structure “D” Pump Station The Structure “D” Pump Station is located at 68 Hoover Street in West Warwick. In its normal capacity is an isolation transmission structure for the 78-inch Aqueduct. The Structure “D” Pump Station contains two 2,800 gallons per minute pumps that can provide a wholesale emergency pump station connection. Raw Water Pumping Station The Raw Water Booster Pumping Station is located at 8 Gainer Dam Access Road in Scituate. It contains four pumps, two with a pumping capacity of 50 million gallons per day and two with a pumping capacity of 30 million gallons per day. The station is used to supplement the head to provide adequate delivery capacity the water treatment plant under low reservoir water level conditions. The Raw Water Booster Pumping Station is equipped with emergency power supplied by a 2000 kilowatt diesel generator. Dean Estates Pump Station The Dean Estates Pump Station is located at 5 Melody Lane in Cranston. It contains one 200 gallons per minute pump, two 475 gallons per minute pumps and two 1,200 gallons per minute pumps. Emergency power is supplied by a 150-kilowatt natural gas generator. The Dean Estates Pump Station serves the higher elevations in the Dean Estates and the Garden Hills subdivisions. Greenville Avenue Pump Station The Greenville Avenue Pump Station is located at 387 Greenville Avenue in Johnston. It contains one 50 gallons per minute jockey pump, three 320 gallons per minute pumps, and one 750 gallons per minute fire pump. Emergency power is supplied by a 125-kilowatt diesel generator. Fruit Hill Pump Station The Fruit Hill Pump Station is located at 1578 Smith Street in North Providence. It contains two 1,500 gallons per minute pumps and provides water to the Extra High Service area. Emergency power is provided by a 150-kilowatt natural gas generator. Bath Street Pump Station The Bath Street Pump Station is located at 134 Bath Street in Providence. It contains three pumps with a pumping capacity of 6,700 gallons per minute each. A 1000-kilowatt diesel generator MR Valuation Consulting, LLC Page 23 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 supplies emergency power for the pump station. This station pumps water to Longview Reservoir and supplies water to the High Service area as well as the high-pressure fire zone in downtown Providence. Neutaconkanut Pump Station The Neutaconkanut Pump Station is located at 40 Ashby Street in Johnston. It contains four pumps with a pumping capacity of 6,700 gallons per minute each. A 1000-kilowatt diesel generator supplies emergency power for Neutaconkanut Pump Station and the adjacent Ashby Street Pump Station. Neutaconkanut Pump Station transfers water from the Neutaconkanut Reservoir and supplies water to Longview Reservoir and the High Service area. Ashby Street Pump Station The Ashby Street Pump Station is located adjacent to the Neutaconkanut Pump Station. It contains one 50 gallons per minute jockey pump, two 100 gallons per minute domestic pumps, and one 750 gallons per minute fire pump. Electrical power and emergency power is supplied to the station from the adjacent Neutaconkanut Pump Station. The Ashby Street Pump Station provides water to ±100 residential services in the Neutaconkanut Hill area of Johnston. Aqueduct Pump Station The Aqueduct Pump Station is located at 430 Scituate Avenue in Cranston. It contains four vertical turbine pumps with a pumping capacity of ±2,000 gallons per minute each. A 600-kilowatt diesel generator supplies emergency power for the pump station. The Aqueduct Pump Station pumps water to Lawton Hill Reservoir and the Western Cranston Service area. Alpine Estates Pump Station The Alpine Estates Pump Station is located at 2 Basil Crossing in Cranston. This pump station is similar to the Ashby Street Pump Station and has an 80-kilowatt diesel generator, which supplies emergency power for the station. This Alpine Estates Pump Station is currently out of service and serves as a back-up to the Cranston Commons Pump Station to provide water to the Alpine Estates subdivision in Western Cranston. Cranston Commons Pump Station The Cranston Commons Pump Station is located at 36 Starline Way in Cranston. This pump station is similar to the Ashby Street Pump Station. Emergency power is supplied by a diesel generator, which is owned and maintained by a privately managed water/sewer utility company who also uses the generator as an emergency power supply for a booster pump station for the sewer system in the City of Cranston. The station provides water to Cranston Commons and Alpine Estates subdivision in Western Cranston. Atwood Avenue Pump Station MR Valuation Consulting, LLC Page 24 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 The Atwood Avenue Pump Station is located at 1651 Atwood Avenue in Johnston. This pump station was taken over by the Providence Water Supply Board from the Town of Johnston in 2010. This pump station is similar to the Ashby Street Pump Station. Emergency power is supplied by a 200-kilowatt natural gas generator. North Elmore Pump Station The North Elmore Pump Station is located at Pole #10 North Elmore Street in Smithfield. It contains three pumps with a pumping capacity of 250 gallons per minute each. This pump station will be taken out-of-service in late 2017. Transmission and Distribution Piping System Raw water needed for water supply travels ±4,300 feet from the dam at Scituate Reservoir through large bore pipe conduits by gravity to the Philip J. Holton Water Treatment Plant. Finished water is transmitted from the clear well at the water treatment plant to the distribution system through two major transmission conduits, the 90-inch diameter Scituate Tunnel and Aqueduct and the 78-inch and 102-inch diameter Supplemental Tunnel and Aqueduct. The Providence Water Supply Board is comprised of the following transmission and distribution assets:     4 miles of concrete lined tunnels 10 miles of concrete aqueducts 131 miles of various sizes (16 inch through 66 inch) of transmission piping 874 miles of various sizes (6 inch through 12 inch) of distribution piping Service Area The Providence Water Supply Board supplies approximately 600,000 people in the State of Rhode Island with potable water through both its retail and wholesale customers. Service area mains range in size from 6 inches to 66 inches in diameter and are constructed of a variety of materials including cast iron, ductile iron, concrete, steel, and asbestos cement. Service connections are customized to customer demands and they range in size from 5/8 inch to 12 inches. The retail service area consists essentially of all of Providence, Cranston, North Providence, and a significant portion of Johnston. The 74,864 retail service connections include residential, industrial, commercial, and fire service supplies. The retail service area is divided into four major separate pressure zones: Low Service, High Service, Extra High Service, and the Western Cranston water district. The Providence Water Supply Board wholesales water to nine water utilities in the Providence area. These include the Bristol County Water Authority (one interconnection); East Providence Water Division (one interconnection); Greenville Water District (one interconnection); Kent MR Valuation Consulting, LLC Page 25 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 County Water Authority (three interconnections); Lincoln Water Commission (two interconnections); Smithfield Water Department (one interconnection); Warwick Water Department (three interconnections); Johnston Sewer and Water Department (six interconnections); and the East Smithfield Water District (three interconnections). Metering The Providence Water Supply Board measures water produced at the water treatment plant and meters 100 percent of its service connections. Raw water flowing into the water treatment plant is measured by two 72 inch x 36-inch diameter venturi meters. These meters measure the flow of raw water from the influent control chamber into the sedimentation basins. The flow of effluent discharged from the water treatment plant to the distribution system is measured by 36 master effluent meters. These meters are 16 inch venturi tube meters located on the effluent lines from the filtration system. The effluent flows can also be measured by two 72 inch x 42 inch finished water effluent venturi meters. All services are metered and the connections are generally constructed of lead, copper, cast iron, or ductile iron. The service area metering includes meters at interconnections to wholesale customers as well as normal metering of the retail service connections. The retail service area contains a variety of water consumers ranging from large industrial and manufacturing accounts, to commercial accounts, and residential users. Appendix 5 of this report includes aerial pictures and photographs of certain assets owned and operated by the Providence Water Supply Board. Due to security concerns, MRV was allowed access to the assets but not able to photograph certain assets. MR Valuation Consulting, LLC Page 26 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 I: VALUATION METHODOLOGY The valuation process is applied to develop a well-supported opinion of a defined value based on an analysis of pertinent general and specific data. An opinion of value can be developed with specific procedures that reflect three distinct methods of data analysis. The utility and applicability of each approach is dependent upon the characteristics of the subject property or assets, market conditions, and the purpose of the valuation analysis. The following section provides a brief overview of the theoretical basis of the three traditional approaches to value. Additionally, we included an overview of the rate base approach to value. (1) Asset Valuation (Cost) Approach The cost approach is based on the principle of substitution. This principle affirms that a prudent buyer would pay no more for an asset than the cost to acquire a similar asset of equivalent desirability and utility without undue delay. The cost approach is based on the understanding that market participants relate value to cost. In this approach, the value of the assets is derived by subtracting the amount of depreciation of the reproduction or replacement of the assets. The cost of an asset as of a certain date may be developed as the estimated reproduction cost or replacement cost of the asset. The theoretical base (and classic starting point) for the cost approach is reproduction cost, but replacement cost is commonly utilized because it may be easier to obtain and can reduce the complexity of the depreciation analysis. (2) Income Valuation (Income) Approach The income approach is based on the premise that the value of a security or asset is the present value of the future earning capacity that is available for distribution to the subject investors in the security or asset. The underlying principle in this approach is that buyers invest in assets comparable to the subject with the expectation of receiving the anticipated future income. (3) Comparable Sales (Market) Approach The market approach to value is a procedure by which value can be estimated from prices paid in actual market transactions as well as asking prices for similar assets which are available for sale. In essence, the procedure is a comparison and correlation between the asset being appraised and other similar assets. Certain factors such as location, date of sale, physical characteristics, and technical and economic conditions relating to the transaction are analyzed for their comparable uniqueness. These transactions, with appropriate adjustments will assist in determining the market value of the assets being appraised. (4) Rate Base Approach The rate base approach takes into account the principal of the Historical Cost Less Depreciation value indicator derivation, which includes the historical or original acquisition cost of the assets less certain items. In many situations, this results in the taxable historical cost. The taxable MR Valuation Consulting, LLC Page 27 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 historical cost is then reduced for regulatory accounting depreciation of the assets. HCLD is one of the primary indicators of value for closely regulated public utilities. The general practice of the regulatory agencies is to use historical or original cost less depreciation (with various adjustments) as the rate base. The regulatory agencies establish a rate base and a rate of return; utilities are permitted to earn at this established rate on the rate base. Hence, it is logical that prospective buyers and sellers may see the rate base as a factor in formulating investment decisions. HCLD is much less important for valuing public utility properties that are not closely rate base regulated. MR Valuation Consulting, LLC Page 28 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 J: HIGHEST AND BEST USE When performing a valuation of the Providence Water Supply Board, one must identify its highest and best use, and must assume such highest and best use as the premise of value. Other types of value may assume other uses. The American Society of Appraisers, within the book “Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery and Technical Assets,” 3rd edition defines Highest and Best Use as “the most probable and legal use of a property (including machinery and equipment), which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria that highest and best use must meet are legally permissible, physically possible, financially feasible, and maximally profitable.” There are four basic criteria that are considered and analyzed in determining the highest and best use of a property (including machinery and equipment):  Physically possible: One must identify and consider which or what uses are physically possible given the constraints of the size and physical characteristics of the assets.  Legally permissible: One must identify and consider which or what uses are permitted by zoning or other restrictions on the property or assets (including machinery and equipment).  Financially feasible: Of the physically possible and legally permitted uses, one must identify and consider which uses are financially feasible that will produce a net return to the owner.  Maximally productive: Of the financially feasible uses, one must identify and consider which use will produce the highest net return, or result in the highest present value to the owner. Conclusions The highest and best use of the assets (including machinery and equipment) of the Providence Water Supply Board as currently improved, is for its continued use as a public water utility company. As per Rhode Island regulation, the Providence Water Supply Board is subject to rate suppression and a “pay as you go” infrastructure program. They are not allowed to earn a rate of return on its rate base. Any monies approved by the Public Utilities Commission must be paid back with principal and interest and zero profit is allowed. MR Valuation Consulting, LLC Page 29 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 K: ASSET VALUATION (COST) APPROACH Introduction The basis of the cost approach, as applied for these purposes, is reproduction. How much would it cost to build an asset or group of assets? The cost to develop/build or redevelop/rebuild a property is estimated and reconciled to value. The cost approach is based on the “principle of substitution.” This principle supports the position that a prudent seller would not sell for less, nor would a prudent buyer pay more for a specific property than the cost of building an asset offering the same utility. The same utility means the same potential capacity, condition, life, and operational usefulness as the subject property over a similar remaining useful life. The basic concern surrounding the cost approach is that cost may not equal value. When applicable, the cost approach reflects market thinking by recognizing that market participants sometimes relate value to cost. Buyers tend to judge the value of an improved property by considering the cost to create the improvements. Moreover, buyers adjust their contemplated acquisition prices by estimating the costs to bring an existing structure up to the physical condition and functional utility they desire. Generally, when making such an analysis, frequently referred to as a feasibility analysis, the property owner or buyer compares such cost to the revenue that will be produced with an expected rate of return included on such an investment. There is more than one method to estimate the cost to develop public utility assets; however, these methods tend to fall into either the general category of the reproduction cost approach or the replacement cost approach. Using the reproduction cost, the appraiser is concerned with issues surrounding an exact duplicate of the subject property, whereas, using the replacement cost, the appraiser is concerned with issues surrounding the replacement of functionality or utility. When assets are new, the market value of those assets is usually closely related to the cost expended to develop and construct those assets or groupings of assets. Buyers of older properties will often measure the price they are willing to pay for the subject assets against the cost of developing new assets (less adjustments for depreciation and/or the cost to bring the existing asset up to standard). Therefore, the cost approach is applicable in situations where sellers and buyers view “market value” to be closely related to “actual cost.” Reproduction cost has been and is widely used in many industries including the public utility industries. Reproduction cost is an accepted cost methodology within the public utility industries as historical cost and operating information concerning most assets is readily available. The cost approach is also often considered useful for complex appraisal situations such as when an asset has a large quantity of tangible assets associated with it, when a distinction needs to be made between real and personal property, when a grouping of assets is not frequently traded in the market, and when an asset is considered unique, such as a “special purpose” or “specialty” asset. MR Valuation Consulting, LLC Page 30 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Cost Approach Procedure “After gathering relevant information and analyzing data for the market area, site, and improvements, an appraiser follows a series of steps to derive a value indication by the cost approach. 1. Estimate the value of the site as though vacant and available to be developed to its highest and best use. 2. Determine which cost basis is most applicable to the assignment: reproduction cost or replacement cost. 3. Estimate the amount of direct (hard) and indirect (soft) costs of the improvements as of the effective appraisal date. 4. Estimate an appropriate entrepreneurial incentive or profit from the analysis of the market. 5. Add the direct costs, indirect costs, and entrepreneurial incentive or profit to arrive at the total cost of improvements. 6. Estimate the amount of depreciation from the total cost of improvements and, if necessary, allocate it among the three major categories:    Physical deterioration Functional obsolescence Economic obsolescence 7. Deduct estimated depreciation from the total cost of the improvements to derive an estimate of their depreciated cost. 8. Estimate the contributory value of any site improvements that have not already been considered. (Site improvements are often appraised at their contributory value - i.e., directly on a depreciated cost basis but may be included in the overall cost calculated in Step 3 and depreciated if necessary.) 9. Add land value to the total depreciated cost of all the improvements to develop the market value of the property. 10. Adjust the value conclusion of the property if any personal property (e.g., furniture, fixtures, and equipment) or any intangible assets are included in the appraisal. 11. Adjust the value conclusion, which reflects the value of the fee simple estate, for the property interest being appraised to arrive at the indicated value of the specified interest in the property.” MR Valuation Consulting, LLC Page 31 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Reproduction Cost The American Society of Appraisers, within the book “Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery and Technical Assets,” 3rd edition defines Reproduction Cost as “the cost of reproducing a new replica of a property (of assets) on the basis of current prices with the same or closely similar materials, as of a specific date.” Replacement Cost The American Society of Appraisers, within the book “Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery and Technical Assets,” 3rd edition defines Replacement Cost as “The current cost of a similar new property (or assets) having the nearest equivalent utility as the property being appraised, as of a specific date.” The following Table K-1 identifies the cost approach to value method that was utilized to value the various asset types. Table K-1 Cost Approach Method Utilized Trended Original Cost Method For public utility assets, reproduction cost is routinely based on trending original cost dollars to restate dollar cost levels as of the effective date of the valuation. This methodology is well recognized by appraisers as an acceptable means to value public utility property. The usefulness of the trended original cost method of the reproduction cost is contingent on the accuracy and completeness of historical pricing information and the trending method utilized. To use trending, the costs by date of expenditure (generally by year) must be reliable and available for each class of asset. The trended original cost method was utilized in our analysis to determine the reproduction cost new for the Gainer Dam; the Horseshoe Structure at the Regulating Dam; and certain Pump Station equipment. MR Valuation Consulting, LLC Page 32 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 The first step was to trend the historical costs for each asset to estimate the reproduction cost new. We utilized the Handy-Whitman trend indices to determine the reproduction cost new of certain assets. Indices provide the basis for a trend that can be used to adjust a cost from one year to another. The trending is based on weighted ratios (quotients) of indices. The following Table K2 demonstrates an example of trending an original cost of $50,000 from 1967 to estimate the 2017 reproduction cost new of the asset. Table K-2 Trended Original Cost Example Handy-Whitman Trend Indices The most commonly accepted and widely acknowledged trend index within the water utility industry for this purpose is HW published by Whitman, Requardt, and Associates, LLP. Whitman, Requardt, and Associates, LLP biannually publishes the HW Index from Public Utility Construction Costs. The HW Index gives index numbers for various construction, material, and labor costs of building, water utility, and gas utility construction for six different regions in the US from 1912 to present. The Assets are located in the North Atlantic Region of the US, as defined by HW. Therefore, this is the region (section W-1 of HW) we utilized to obtain the appropriate indices. The HW Index has been nationally recognized and accepted in the appraisal industry as an appropriate means to trend utility property to calculate reproduction cost new. The HW Index lists indices by year and by asset classification. In HW Bulletin No. 184, the years prior to 2001, have a single index per classification. Beginning in 2001, HW provides two indices per year per classification: one index for January 1 and the second for July 1 of the year. Periodically, HW determines an annual average index per year per classification. This essentially combines the January 1 and July 1 indices into one index per year per classification. HW performs this combination because most users of the index do not need the higher level of accuracy. For the purposes of our analysis, we extrapolated the 2017 trend index using the July 1, 2016 data since HW has not published Bulletin No. 185, as of the writing of this report. Bulletin No. 184 is the most recent HW index available, as of Valuation Date. Each HW index is weighted by the components included in the overall account classification. The more significant components have a greater impact on the index value. Appraisers prefer to use weighted indices because they are more accurate than unweighted indices. The use of these weighted HW indices is appropriate for our analyses. MR Valuation Consulting, LLC Page 33 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Based on the vintage year and account code of each asset, we determined the historical index and current trend index, as of the Valuation Date, to calculate the trend factor for each asset. From the trend factor, we trended the original cost for each asset to obtain their respective reproduction cost new. See trending example in Table K-2 above. Reproduction Cost New Our reproduction cost new values for the various asset types of the Providence Water Supply Board are summarized in the following Table K-3 and included within Appendix 3. Table K-3 Reproduction Cost New Methodology Dams We utilized a trended original cost method to value the Gainer Dam and the Horseshow structure at the Regulating Dam because historical cost data was readily available. The Providence Water Supply Board provided the volumetric dimensions of the dams. For the Moswansicut Dam we utilized RS Means to estimate the replacement costs of the dams. Then we extrapolated the volumetric unit costs from the Moswansicut Dam to arrive at a replacement cost of the Regulating, Barden, Ponaganset, and Westconnaug Dams using their respective volumes. Raw Water Transmission Piping We utilized RS Means to estimate the replacement costs of the raw water transmission lines from the lower gatehouse of the Gainer Dam to the water treatment facility. To determine the length of the raw water transmission pipes, we utilized the ruler option within the satellite image program MR Valuation Consulting, LLC Page 34 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 called “Google Earth Pro.” This process allowed us to accurately measure the pipe lengths using satellite imagery. Water Treatment Facility To estimate the replacement cost of the P.J. Holton Purification Plant, we utilized unit cost data from Marshall Valuation Service. Additionally, we received input from the Providence Water Supply Board engineering department along with a telephone interview with a local engineering firm that is familiar with the P.J. Holton Purification Plant. Storage Facilities We utilized Marshall Valuation Service to determine the replacement costs of the four underground concrete storage tanks as well as the one above ground concrete storage tank. Pump Stations To estimate the reproduction costs of the major pumps and motors at the pump stations, we conducted interviews with the Providence Supply Water Board engineering department. We were provided with certain historical construction costs which allowed us to utilize a trended original cost method. For the emergency generators at the pump stations, we utilized unit cost replacement data from Marshall Valuation Service. Buildings To estimate the replacement costs of the buildings, structures, and pump houses we utilized Marshall Valuation Service. For each building, we determined the dimensions by employing the ruler option within the satellite image program called “Google Earth Pro.” This process allowed us to accurately measure the building dimensions using satellite imagery. Transmission and Distribution Piping We utilized RS Means to estimate the replacement cost of the transmission and distribution piping systems. The Providence Water Supply Board provided an Excel spreadsheet, which included a matrix that identified pipe diameters and their respective lengths, along with installation date ranges. The Providence Water Supply Board could not provide specific installation years for the piping system. However, they could provide the installation data during half decade installation intervals. For example, the Excel spreadsheet identified that 8.93 miles of 6-inch pipe was installed during the half decade period of 1970 through 1974. Additionally, we were provided a quantity of fire hydrants and customer meters with diameters. We estimated the length of the customer laterals by assuming an average 14-foot length of pipe MR Valuation Consulting, LLC Page 35 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 from the center of the road to the customer property line. Regarding the valves for the transmission and distribution piping system, the Providence Water Supply Board provided a quantity, type, and diameter of the valves. The system contained both gate valves and butterfly valves. For fire hydrants; gate values ranging from 6 to 36 inches; and butterfly valves ranging from 12 to 24 inches, we utilized RS Means for replacement costs. For the butterfly valves, which are greater than 36 inches, we utilized historical construction cost data provided by the Providence Water Supply Board. Land We utilized the property tax assessed values for the underlying land to estimate a unit value per acre on a town by town basis. For Foster, we utilized the unit cost per acre from the current tax treaty between the Providence Water Supply Board and the Town of Foster. For Scituate, we utilized a unit cost per acre, which is 4.1 percent higher than the current unit cost per acre in the current tax treaty that expires at the end of 2017. Rights-Of-Way The rights-of-way are included for the 48, 60, 78, and 102-inch transmission pipelines. The Providence Supply Water Board provided the total area of land used and occupied by the transmission rights-of-way. Using a blended unit cost per acre from above, we made an adjustment considering land value reduction for a utility corridor to estimate the market value of the transmission line rights-of-way for the Providence Water Supply Board. Miscellaneous Assets This category of assets includes post 9/11 security systems; telephone systems; GIS Mapping System; and the Supervisory Control and Data Acquisition system. These assets were valued using the trended original cost method and in certain situations we received current vendor costs to confirm our replacement costs. Reproduction Cost New Less Depreciation Reproduction Cost New Less Depreciation is the Reproduction Cost New as developed within Table K-3, less physical depreciation, less functional obsolescence. Depreciation The American Society of Appraisers, within the book “Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery and Technical Assets,” 3rd edition defines depreciation as “the actual loss in value or worth of a property (or assets) from all causes including those resulting from physical deterioration, functional obsolescence, and economic obsolescence.” MR Valuation Consulting, LLC Page 36 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 This is essentially the same definition as that used by the American Standards Board in its publication of Uniform Standards of Professional Appraisal Practice. The above definition implies that the difference or loss in value includes all forms of depreciation. For an appraiser, the question becomes how to categorize and measure the various motivations in the market in a way that explains and classifies this difference. Several mathematical processes have been developed to accomplish and explain depreciation; however, it is well to remember that because market value is ultimately based on the judgment of both the buyer and the seller, depreciation is also ultimately based on the judgment of both the buyer and the seller or in the case of an appraisal, depreciation is ultimately based on the judgment of the appraiser. For this reason, in determining depreciation, one factor to consider is the physical inspection of the assets, which aids the knowledgeable appraiser to bring the various depreciation processes into perspective. For the appraiser, the quantification and classification of depreciation is needed for directly developing a value indicator under the various cost approaches. Of course, the income and sales approaches indirectly consider depreciation in terms of revenue, expenses, or market sales. Typical depreciation techniques can be as simple as the estimate of a single age over life ratio or as complicated as the breakdown of the subject assets depreciation into its various components for individual consideration. The selection of the appropriate depreciation model(s) by the appraiser will be based on the type and amount of data available. While depreciation models are plentiful, the model(s) selected must be commensurate with the types of depreciation occurring in the assets. Models based on the economic age-life method are probably the best known and easiest understood of depreciation techniques. These models provide an estimate of the total depreciation for either single or groups of assets. In simplest form, the economic age-life method arrives at an estimate of accrued depreciation by using the ratio of the effective age over the effective age plus the remaining service life. Often the effective age plus the remaining useful life is equivalent to the service life. The effective age is the measure of the condition of the asset with respect to the expected life, which may or may not be the actual or chronological (historical) age. It should also be recognized the expected remaining service life of an asset might change during the life cycle of the asset. We used an age-life depreciation procedure to calculate depreciation for the Reproduction Cost analysis. Age Historical age is the valuation year less the placed in-service year of the assets. Improvements over time can contribute to an asset being effectively younger than its historical age. Conversely, abnormal wear can contribute to an asset effectively being older than its historical age. For the purposes of this analysis, we considered the effective ages of the assets because historical ages were not available for most assets. MR Valuation Consulting, LLC Page 37 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Life Expectancy (Average Service Life) Typically, experience gives an indication of the conditions that can be anticipated in the future, and, thus, can be useful as a major element in estimating the average service life of an asset. Factors other than age that contribute to the average service life include the effect of wear and tear on the asset, preventative maintenance procedures, operating and capital expenditure policy, thermal cycling, changing technology, changing regulatory and environmental requirements, and obsolescence. The average service lives we incorporated in our analysis are not accounting lives, but are lives based upon industry experience. An asset may survive longer or shorter than its average service life. An average service life is the estimated number of years that an asset is expected to remain in service, based upon experience and anticipated future expectations. Physical life may be longer than the average service life, but it may not accurately represent the usefulness of the service of an asset. The average service life does represent the anticipated usefulness and years of service of an asset. Table K-4 summarizes the life expectancy (average service life) for the various asset types. Table K-4 Life Expectancy (Average Service Life) Physical Deterioration Physical deterioration is the physical wear and tear due to age that diminishes the value of an asset. Physical deterioration can be estimated by the straight-line method, by the age-life method, using mortality dispersion techniques, and by property inspection. The straight-line depreciation technique is commonly accepted and used in the valuation of public utility assets. The technique is used in our analyses not simply because it is common accounting tool, but rather because it is the most accurate technique in the cost approach valuation of public MR Valuation Consulting, LLC Page 38 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 utility assets, as a valuation tool and as an economic reality. The following equation defines straight-line depreciation: Depreciation (percent) = Age (years) / Service Life (years) x 100 percent However, we utilized the following alternative straight-line depreciation equation (where Age and Remaining Life are both expressed in years): Depreciation (percent) = Age / (Remaining Life + Age) x 100 percent Correspondingly, the percent good of an asset can be defined as the complement of depreciation: Percent Good (percent) = 1 - Depreciation (percent) That above percentage was based on the age and life expectancy (average service life) of the assets. Using this methodology, there are some Assets that were historically older then the assumed average service life of that asset category. As such Assets remained in use, and recognizing that service lives include assets that live both longer and shorter than the determined service, we determined a minimum condition (percent good) that an asset could remain in service regardless of age. That minimum condition factor was a percent good factor of 20 percent (or a maximum depreciation of 80 percent) was used for most assets. Regarding piping, the minimum condition factor was a percent good factor of 10 percent (or a maximum depreciation of 90 percent) because of the age of the system along with consideration given to the method that the Providence Water Supply Board presented its historical data by decades. Therefore, we multiplied our reproduction cost new of the assets by its estimated percent good factor to arrive at reproduction cost new less physical depreciation. Functional Obsolescence Functional obsolescence is the loss of value due to functional deficiencies, overcapacity, excess capital costs, lack of functional utility, excess operating costs, or inadequacies within the property itself. An improvement is functionally obsolete, when the improvement requires an operation, use, or activity to be completed in a way that current replacement improvements would not. Some types of functional obsolescence are curable if the costs to repair, modify, or add are offset by the increased value of the asset. Typical examples of functional obsolescence issues involve the current costs to construct new replacement assets, efficiencies, and the cost to maintain the assets or improve operations based on changes in available technology. Functional obsolescence can be characterized by:   Deficiencies requiring an addition – Not currently included in the estimate of cost new and is currently desired or required in the market. Deficiencies requiring a modification – Included in the estimate of cost new but is not adequate or outmoded. MR Valuation Consulting, LLC Page 39 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017   Super-adequacies – Included in the reproduction cost (likely not in replacement cost) and are cost components that surpass current market standards. Deficiencies requiring additional operating cost. In most water distribution systems, a large percentage of water is lost in transit from the treatment plants to its consumers. Leakage can occur in different components of the distribution system such as distribution pipes, service connection pipes, joints, valves, and fire hydrants. Some of the factors that contribute to this can include old or poorly constructed pipelines, inadequate corrosion protection, poorly maintained valves, and/or mechanical damage. Ultimately, these leaks lead to an economic loss due to the cost of raw water, its treatment, and its transportation. The Providence Water Supply Board provided a leak detection survey report by Distribution System Maintenance Solutions, Inc. dated January 2011. The total leakage potential is estimated to be 2,136,960 gallons. Based upon interviews with the PWSB engineering department, this leakage of water pumped into the distribution system ending up as non-revenue water has an annualized net cost of $1M. Our functional obsolescence calculation is summarized below in Table K-5. Table K-5 Functional Obsolescence The functional obsolescence penalty was applied only to the fire hydrants and the 6-inch distribution piping system. Economic Obsolescence Economic obsolescence is the loss of earnings and value stemming from negative changes in the market, or due to other factors external to the property. Changes in market demand, federal or state law, the economy, and/or any operational constraints external to the asset that are detrimental MR Valuation Consulting, LLC Page 40 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 to the asset’s earnings can be measured by capitalizing the expected losses in the earnings over the period that the condition is expected to exist. Due to Rhode Island regulation, the Providence Water Supply Board is subject to rate suppression and a “pay as you go” infrastructure program. The Company is not allowed to earn a rate of return on its rate base. Any monies approved by the Public Utilities Commission must be paid back with principal and interest and zero profit is allowed. The Providence Water Supply Board is not allowed to operate under conventional rate making scenarios, whereby invested capital would earn a return and depreciation would be expensed and considered within the rate structure. This valuation considers the hypothetical condition whereby the water assets of the Providence Water Supply Board are not limited in this capacity. Therefore, we did not apply an economic obsolescence penalty because of rate suppression. Conclusion – Asset Valuation (Cost Approach) The following Table K-6 provides a summary of the Asset Valuation (Cost Approach) to value analysis. The complete fixed asset register for the cost approach analysis is included with Appendix 3. Table K-6 Cost Approach Summary MR Valuation Consulting, LLC Page 41 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 L: INCOME VALUATION (INCOME) APPROACH The income approach is based on the premise that the value of the water utility is the present value of the future earning capacity that is available for distribution to investors within the company. The underlying principle in this approach is that buyers invest in utilities comparable to the subject with the expectation of receiving the anticipated future income. Discounted Cash Flow Analysis Performing a discounted cash flow analysis requires the preparation and analysis of a reliable forecast of the expected future financial performance of the subject entity. Forecasting cash flows requires the projection of revenues, operating expenses, taxes (if applicable), depreciation, working capital requirements, and capital expenditures for a future period, usually at least three years or more referred to as the discrete period. Projected cash flows must then be discounted to a present value using a discount rate that properly accounts for the market cost of capital, as well as the risk and nature of the subject cash flows. Finally, an assumption must be made regarding the sustainable long-term rate of growth at the end of the projection period, and a terminal value must be estimated and discounted to a present value. The sum of the present values of the projected cash flows and the terminal value equals the value of the business. Forecasted Revenue and Expenses The Providence Water Supply Board provided historical revenues and operating expenses from 2013 through 2016, as well as projected revenues and expenses for 2017. The Company generates revenue from general customer sales, sales to other local water suppliers, fire protection services, other maintenance charges, and miscellaneous items. Major operating expenses consist of administrative and general expenses, source of supply, water treatment, property taxes, transmission and distribution, etc. Income Approach Conclusion Due to Rhode Island regulation, the Providence Water Supply Board is subject to rate suppression and a “pay as you go” infrastructure program. They are not allowed to earn a rate of return on its rate base. Any monies approved by the Public Utilities Commission must be paid back with principal and interest and zero profit is allowed. In theory, the revenue and expenses are projected to equal each other for the projected period and an income approach to value is not an appropriate method to value the Providence Water Supply Board. If revenue is ever in excess of the operating expenses, this positive net income must be kept in a restricted fund to be used for future capital expenditures (i.e. infrastructure replacement plan). We have considered the income approach to value and have deemed it to be not applicable. MR Valuation Consulting, LLC Page 42 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 M: COMPARABLE SALES (MARKET) APPROACH Introduction The sales comparison approach is a traditional valuation technique that is most useful when a number of similar companies have been sold in the market, and when details on those companies and sale transactions are publicly available for analysis. This approach arrives at an estimate of value for a subject company by comparing the sale price of similar (comparable) companies. This is a classic example of the principle of substitution. When a purchaser has the opportunity to acquire a number of competing companies with similar utility and desirability, the purchaser will not choose to pay more to acquire the subject than the reasonable market value of a substitute company. Likewise, the seller of a company will understandably not accept an offer below the sale price obtained for similar companies. Ideally, research for comparable companies that have sold will yield transactions for companies identical to the subject company in all major value-impacting categories. As a practical matter, searches for comparables rarely result in perfect comparables. When dealing with these particular sales which are not ideally similar, standard valuation practice requires reconciliation of the differences between the major value-impacting characteristics of the subject company and those of the comparables. This is known as the adjustment process. Transaction Universe Our analysis focused on comparable sales of water utility systems that were announced and closed within three years of the Valuation Date. We identified four transactions as appropriate for our sales comparison analysis. Comparable Sales An important qualification of each comparable sale was the level of supporting data that is publicly available. Confidentiality provisions, non-full disclosure of necessary supporting data and sale terms preclude an appraiser from properly adjusting comparable sales to make adequate comparisons. Although difficult to make adjustments for factors unique to each transaction, a discussion of the various types of adjustments considered for comparable sales analyses is included in our report. Sales Comparison Adjustments A comparable sale must be a recent bona fide sale, and be similar to the subject in terms of legal, economic, and physical characteristics. Physical characteristics include system design, unit size, expected distribution levels, system condition and age, super adequacy, functional utility, pollution control equipment requirements, and remaining license life. Legal and economic characteristics include income and expense rates and market specific water utility prices. Adjustments fall into the following general categories: MR Valuation Consulting, LLC Page 43 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017     Property Rights Financing terms Conditions of sale Market conditions     Physical characteristics Location Economic characteristics Use Financing Terms The adjustment for financing terms, more commonly known as the cash equivalency adjustment, is a procedure whereby sale prices for comparable companies with atypical financing terms are adjusted to reflect cash settlements with more common, market-typical, financing terms. If the sales were in cash to the seller, then no adjustment for cash equivalency would be required. If adjustments were necessary, they would probably be negative, since special financing usually adds to the value of the comparable. Special financing positively affects value when buyers receive financing rates that are favorable when compared to current market rates. Buyers will not accept unfavorable terms relative to the market, because they can always receive more favorable terms from competing market lenders. Financing of comparable sales was not publicly available and as such, we were unable to incorporate any financing adjustments to the comparable sales. Conditions of Sale The conditions of sale adjustment usually reflect the motivation of a buyer and seller, and is required when a sale is considered to be non-arm’s length. As with financing terms, any divergence in the conditions of a sale are most likely to be considered in investment and business value analyses. Given the lack of public information, we assumed each comparable sale to be an arm’s length transaction, as neither the buyer nor the seller appeared to be under undue duress. Additionally, each system was considered to be available on the open market for an adequate period of time prior to sale. Based on the competitive bidding process that typically takes place for water utility distribution systems (which are not publicly reported), the willing buyer factor is expected. Furthermore, we have no evidence that any of the comparables were initiated by bankruptcies or liquidation proceedings. Comparable Sale #2 is a future condemnation by the City of Missoula and Mountain Water is not a willing seller. Market Conditions (Date of Sale or Time Adjustment) Market condition adjustments reflect changes in value over time due to fluctuations in the balance of supply, demand, and inflation. We were unable to identify the specific impact of these market forces on transactions included in our analysis. It is evident that the comparable sales have a wide range of unit costs, independent of the sale or offering date. MR Valuation Consulting, LLC Page 44 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Physical Characteristics Adjustments for system condition, super adequacy, and functional utility are subject to depreciation. Because many physical characteristics of the water systems included in comparable sales are not released as public information, reasonable adjustments based on many of these factors were not considered. System Age/Condition Water utility systems have substantially more discrete life spans than general real estate. We were unable to make adjustments for the age and condition of the comparables because the information was not readily available. Location Location based revenue differences should be analyzed, as water prices are usually dependent on the region each system is located. Another location difference may include the proximity to a water source. Environmental conditions, land size, and whether the location is a brown or green field can have a significant impact on the location value for distribution. In addition, local support for having water utility facilities in the community can be an important consideration. Adjustments are necessary when the location characteristics of a comparable system differ from those of the subject. Our analyses contain comparables that are located throughout the US. Specific characteristics for comparable water utility systems were not available. Economic Characteristics Economic characteristics are factors that affect income. It may be necessary to adjust for specific revenue differences between the subject and comparable water utility systems. Regarding cost related adjustments, differences may be made for expense rate differences, labor, and operating costs. Additionally, adjustments related to tax differences might be necessary, as each is an important factor in the market value of each water system. As specific economic characteristics regarding comparable systems were not available, we were unable to make reasonable adjustments for these characteristics. Use Use adjustments reflect the difference between current use and highest and best use. The highest and best use of the subject system and the comparables are concluded to be as currently improved and used as water utility systems. This conclusion is based primarily on the observation that no adaptive uses appear legal, physically probable, or financially feasible, given the highly unique improvement types that would be necessary to make such improvements. MR Valuation Consulting, LLC Page 45 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Sales Comparison Approach Conclusions The following Table M-1 includes a summary of our Comparable Sales Grid for the Sales Comparison analysis. Table M-1 Comparable Sales Grid Historically, the sales comparison approach has not been employed to appraise water utility systems, primarily due to the lack of sales data. Publicly available sales information often excludes the details necessary to perform a thorough analysis. Nevertheless, market participants are attempting to track and incorporate sales information into their acquisition and disposition due diligence. Appendix 4 includes copies of the press releases related to the four comparable sales listed within Table M-1. Confidentiality provisions and non-full disclosure of sale terms preclude an appraiser from adjusting comparable sales to make adequate comparisons. In the sales comparison approach, we MR Valuation Consulting, LLC Page 46 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 analyzed transactions involving water utility systems in the marketplace. The number of transactions indicates the existence of a competitive, open market for water utility systems. However, the data regarding the sales also suggests that these sales involve considerations beyond the physical assets. As previously stated, transactions involving the sale of utility assets are extremely confidential and the most important details are simply not made available to the public. Based on uncertainty and the lack of specificity of information available, as well as the resulting inability to make reasonable adjustments in the absence of this information, the sales comparison approach cannot be relied upon to determine the value of the water assets of the Providence Water Supply Board. Our sales comparison approach analyzed four transactions (two closed, two pending) in the marketplace over a three-year period prior to the Valuation Date. We derived two primary conclusions from our sales comparison approach. First, an active market exists for the transfer of water utility assets. Second, a comparison analysis to precisely derive a market value estimate could not be meaningfully completed because certain necessary adjustments could not be made to the comparable sales. Thus, our value conclusion considering the sales comparison approach is $327,000,000, as of the March 31, 2017. MR Valuation Consulting, LLC Page 47 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 N: RATE BASE APPROACH When determining rate base the objective is to identify the amount of capital the company uses and needs to use to provide regulated services. This capital includes the invested plant or facilities in service that the regulator determines to be prudent, plus working capital. The basic decisions include determining how to value the plant that is in service, for what period the rate base is measured, and what plant investment is included. The most common method of rate base for valuing utility plant investment is the original cost approach or historical approach. In this approach, assets are valued at what the company originally paid to place them in service. The original cost approach has the advantages of being objective because the values are tied to the financial records of the company and provide a continual matching between the money the shareholders provide for investment and the cash flow that is provided back to the investors. The following rate base values were provided by Providence Water Supply Board. These adjusted net book values are consistent with Docket No. 4618, the rate case settlement agreement with the Rhode Island Public Utilities Commission from February 2017. MR Valuation Consulting, LLC Page 48 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 The required methodology of the rate base approach, as depicted by the City of Providence is defined as “an estimate of the value of the Water Assets using the original cost of the asset, less accumulated depreciation and other reserves, less contributions in aid of construction, less advances for construction, plus a working capital allowance.” The total plant investment above included Construction Work in Progress of $46,684,658, however, the 2015 audited financial statements by BlumShapiro included Construction Work in Progress at $55,087,340. We made an adjustment of $8,402,675 for the difference in Construction Work in Progress to the total plant investment. Next, we subtracted the total accumulated depreciation of $206,818,020 from the 2015 audited financial statements from the total plant investment to arrive at the rate base value. $524,079,633 $206,818,020 $317,261,613 This resulted in a Rate Base value of the Providence Water Supply Board of $317,261,613, as of March 31, 2017. This value is consistent with the total capital assets, net identified within the 2015 audited financial statements. MR Valuation Consulting, LLC Page 49 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 O: RECONCILIATION The purpose of this analysis is to provide the City of Providence with a valuation of the water assets owned and operated by the Providence Water Supply Board, as of March 31, 2017. The valuation of the Providence Water Supply Board Water Assets is based upon a hypothetical condition. The hypothetical condition is that the Providence Water Supply Board is to be considered a “special purpose” property and the analysis should only consider the cost approach to value, specifically “reproduction cost new, less physical depreciation, less functional obsolescence.” There are two considerations one must weigh when applying various approaches to value. First, appraisers should use those approaches commonly utilized by market participants. Second, the supply of data within a submarket, or within a particular time frame, may necessitate the exclusion of approaches commonly employed in the larger market or at different points in time. The following provides a summary of the valuation analysis and a reconciliation of the various approaches to value. Asset Valuation (Cost) Approach The cost approach is based on the principle of substitution. This principle affirms that a prudent buyer would pay no more for an asset than the cost to acquire a similar asset of equivalent desirability and utility without undue delay. The cost approach is based on the understanding that market participants relate value to cost. In this approach, the value of assets is derived by subtracting the amount of depreciation of the reproduction or replacement of the assets. The cost of an asset as of a certain date may be developed as the estimated reproduction cost or replacement cost of the asset. The theoretical base (and classic starting point) for the cost approach is reproduction cost, but replacement cost is commonly used because it may be easier to obtain and can reduce the complexity of depreciation analysis. Due to Rhode Island regulation, the Providence Water Supply Board is subject to rate suppression and a “pay as you go” infrastructure program. The Company is not allowed to earn a rate of return on its rate base. Any monies approved by the Public Utilities Commission must be paid back with principal and interest and zero profit is allowed. The Providence Water Supply Board is not allowed to operate under conventional rate making scenarios, whereby invested capital would earn a return and depreciation would be expensed and considered within the rate structure. The cost approach considers a hypothetical condition whereby the water assets of the Providence Water Supply Board are not limited in this capacity. Therefore, we did not apply an economic obsolescence penalty because of rate suppression. Our value conclusion considering the cost approach is $404,200,000, as of the March 31, 2017. The cost approach was considered for this valuation and was given weight in our overall conclusion of the value of the water assets of the Providence Water Supply Board. MR Valuation Consulting, LLC Page 50 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Income Valuation (Income) Approach The income approach is based on the premise that the value of the water utility is the present value of the future earning capacity that is available for distribution to investors within the company. The underlying principle in this approach is that buyers invest in utilities comparable to the subject with the expectation of receiving the anticipated future income. Due to Rhode Island regulation, the Providence Water Supply Board is subject to rate suppression and a “pay as you go” infrastructure program. They are not allowed to earn a rate of return on its rate base. Any monies approved by the Public Utilities Commission must be paid back with principal and interest and zero profit is allowed. Therefore, the revenue and expenses are projected to equal each other for the projected period and an income approach to value is not an appropriate method to value the Providence Water Supply Board. We have considered the income approach to value and have deemed it to be not applicable. We did not assign any weight to the income approach to value. Comparable Sales (Market) Approach The market approach to value is a procedure by which value can be estimated from prices paid in actual market transactions and from asking prices for similar assets, which are available for sale. Our sales comparison approach analyzed four transactions (two closed, two pending) in the marketplace over a three-year period prior to the Valuation Date. We derived two primary conclusions from our sales comparison approach. First, an active market exists for the transfer of water utility assets. Second, a comparison analysis to precisely derive a value estimate could not be meaningfully completed because certain necessary adjustments could not be made to the comparable sales. Our value conclusion considering the sales comparison approach of $327,000,000, as of the March 31, 2017. Due to the hypothetical condition, we did not assign any weight to the sales comparison approach to value. Rate Base Approach The rate base approach takes into account the principal of the Historical Cost Less Depreciation value indicator derivation, which includes the historical or original acquisition cost of the assets less certain items. The historical cost is then reduced for regulatory accounting depreciation of the Assets. HCLD is one of the primary indicators of value for closely regulated public utilities. The general practice of the regulatory agencies is to use historical or original cost less depreciation (with various adjustments) as the rate base. In February 2017, the Providence Water Supply Board and the Rhode Island Public Utilities Commission settled the latest rate case, which is known as Docket No. 4618. The rate base value of the Providence Water Supply Board is $317,261,613, as of March 31, 2017. Due to the hypothetical condition, we did not assign any weight to the rate base method to value. MR Valuation Consulting, LLC Page 51 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Conclusion In our valuation synthesis and conclusion, we assigned 100 percent of the weight to the Asset Valuation (cost approach) to value. This conclusion is directly related to the hypothetical condition that the Providence Water Supply Board is to be considered a “special purpose” property and the analysis should only consider the cost approach to value, specifically “reproduction cost new, less physical depreciation, less functional obsolescence.” Subject to the assumptions and limiting conditions stated throughout this report and based on our research and analyses, we estimated the “reproduction cost new, less physical depreciation, less functional obsolescence” of the assets owned and operated by the Providence Water Supply Board to be $404,200,000, as of March 31, 2017. As indicated, this report is a valuation analysis, not a real estate appraisal. This valuation analysis has been conducted consistent with the USPAP and the local Rhode Island regulation. The local Rhode Island regulation does not account for certain intangible value associated with unique characteristics of the water assets owned and operated by the Providence Water Supply Board. MRV Consulting considered the value of these intangible assets, however, due to the local regulations a value was not assigned to these assets. Most significantly, these approaches considered but did not assign value to certain intangible value associated with the public interest in the assets, particularly considering the scarcity of comparable resources. There is inherent, additional intangible value in the water system to the City of Providence that provides a majority of the state’s water supply while ensuring high standards of water quality. These approaches considered but did not assign value to water quality standards, the state’s reliance on this resource, or the intangible value associated with the need to preserve and maintain this essential resource into the future. MR Valuation Consulting, LLC Page 52 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 P: POTENTIAL CONCESSION LEASE AGREEMENT The City of Providence may want to enter a potential long-term concession lease agreement of the water assets owned and operated by the Providence Water Supply Board. This type of lease agreement would require a competitive procurement process whereby the City would receive an up-front lump sum payment along with an annual lease payment. Since the City is not interested in privatizing the water system, the lease agreement would only be open to other local government owned utilities and quasi-state agencies. The purpose of the lease agreement would be to generate a significant up-front payment to provide a foundation and path for fiscal stability. Proceeds from the lease agreement of water assets owned and operated by the Providence Water Supply Board may be used to reduce its long-term legacy costs, particularly its unfunded pension liability and to offset current support of their general fund. The success of the long-term concession lease agreement would depend on underlying provisions of the agreement to ensure a long-term relationship with a qualified partner. Key provisions in the lease agreement may include: a rate setting regime comparable to historical rate increases throughout Rhode Island; operating standards to ensure high quality of performance; the City maintaining ownership of the water assets; ensuring the system is well maintained and returned to the City in good operating condition at the end of the agreement; fair treatment of the Providence Water Supply Board employees; required capital improvements; the City maintains approval rights over certain events, and ongoing reporting requirements. MR Valuation Consulting, LLC Page 53 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 APPENDIX 1 PROFESSIONAL QUALIFICATIONS MR Valuation Consulting, LLC Page 54 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Mark Rodriguez, ASA MRICS is the managing partner of MRV Consulting. He is a mechanical engineer with a master’s degree in management, an Accredited Senior Appraiser with the American Society of Appraisers, and a Member of the Royal Institution of Chartered Surveyors. He is a former President of the Northern New Jersey Chapter #73 of the American Society of Appraisers from 2004 to 2005. Mr. Rodriguez has over 25 years of experience as an international valuation specialist, including five years as a senior manager in the valuation group of Deloitte & Touche located in New York City, plus five years as a construction project manager with an “ENR top 50” construction management company constructing several gas-fired cogeneration and wasteto-energy facilities. Mr. Rodriguez has supervised and performed a diversity of valuation and consulting engagements, including the valuation of intangible assets such as IPR&D, trademarks, trade names, developed software, engineering drawings, customer relationships, and goodwill, and tangible assets such as telecommunication equipment and facilities, electric generating/transmission/distribution facilities (including renewables and nuclear) and systems, water systems and facilities, healthcare facilities and operations, commercial buildings, real estate and complex manufacturing, process and industrial facilities His experience includes both domestic and international transactions. Many of these transactions included the valuation of tangible assets, intangible assets, and goodwill for purchase price allocations for tax and financial reporting including compliance with FASB Accounting Standards Codification and International Financial Reporting Standards. Mr. Rodriguez was responsible for the asset valuation approach, comparable sales approach, and rate base approach. In addition, he also participated in the preparation and writing of the report. Scott McMahon, ASA MRICS is a partner who oversees and manages the business valuation practice at MRV Consulting. Mr. McMahon specializes in business valuations and appraisals, mergers and acquisition support, litigation consulting and economic analysis. He has over 15 years of valuation experience in both domestic and international business valuation matters. Mr. McMahon is an Accredited Senior Appraiser with the American Society of Appraisers designated in the discipline of Business Valuation and is a Member of the Royal Institution of Chartered Surveyors. He holds a MBA with a concentration in finance and a Bachelor’s degree in economics. Scott has testified numerous times as an expert witness in valuation matters throughout the United States. Mr. McMahon specializes in the valuation and appraisal of business entities, business interests, tangible and intangible assets of all sizes, from small proprietorships to large multinational corporations. Scott has extensive experience performing these valuations for large manufacturing businesses including pipeline companies, telecom, oil and gas, power plants, casinos, water and electric utilities. He has been involved in various litigation support projects, bankruptcy valuations, shareholder disputes, and estate tax valuation projects. Mr. Mahon prepared the income approach and lease analysis, he also participated in the preparation and writing of the report. Mr. McMahon did not appraise any of the real property associated with Providence Water. MR Valuation Consulting, LLC Page 55 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 APPENDIX 2 EXECUTIVE SUMMARY MR Valuation Consulting, LLC Page 56 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Executive Summary Providence Water Supply Board (As of March 31, 2017) Approach to Value Cost Approach Value Value $ Income Approach Value Weighting 404,200,000 Inconclusive Weighted Value 100% $ 404,200,000 0% $ - Market Approach Value $ 327,000,000 0% $ - Rate Base Value $ 317,261,613 0% $ - Value of Providence Water Supply Board * $ 404,200,000 * Based upon a hypothetical condition MR Valuation Consulting, LLC Page 57 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 APPENDIX 3 FIXED ASSET REGISTER MR Valuation Consulting, LLC Page 58 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 MRV No. Asset Type Description / Location Fixed Asset Register Placed In Service Year Acquisition Cost Life Expectancy Depreciation To Date Reproduction Cost New Less Physical Depreciation Reproduction Cost (New) Cost Approach Value Functional Obsolescence 50000 Dams Gainer Dam 1927 $ 3,430,846 100 N/A $ 108,374,370 $ 37,931,030 $ - $ 50001 Dams Regulating Dam - Horseshoe Structure 1918 $ 50,591 100 N/A $ 1,811,160 $ 362,232 $ - $ 362,232 50002 Dams Regulating Dam 1918 100 N/A $ 7,063,326 $ 1,412,665 $ - $ 1,412,665 1,779,958 N/A 37,931,030 50003 Dams Barden Dam / Spillway 1883 N/A 100 N/A $ 8,899,790 $ 1,779,958 $ - $ 50004 Dams Moswansicut Dam 1919 N/A 100 N/A $ 2,629,271 $ 525,854 $ - $ 525,854 50005 Dams Ponaganset Dam 1885 N/A 100 N/A $ 12,862,004 $ 2,572,401 $ - $ 2,572,401 50006 Dams Westconnaug Reservoir and Dam 1924 N/A 100 N/A 50007 Raw Water Transmission Pipe Pipe: 60 inch and 90 inch N/A N/A 60 N/A $ 2,260,264 $ 3,313,726 452,053 $ - $ $ 331,373 $ - $ 452,053 $ 331,373 80,133,391 50008 Water Treatment P.J.Holton Purification Plant 1962 N/A 80 N/A $ 160,266,781 $ 80,133,391 $ - $ 50009 Storage Facilities Distribution Reservoirs - Aqueduct Reservoir 1962 N/A 55 N/A $ 47,549,370 $ 9,509,874 $ - $ 9,509,874 50010 Storage Facilities Distribution Reservoirs - Neutaconkanut Reservoir 1928 N/A 55 N/A $ 46,114,124 $ 9,222,825 $ - $ 9,222,825 50011 Storage Facilities Distribution Reservoirs - Longview Reservoir 50012 Storage Facilities Distribution Reservoirs - Ridge Road Reservoir 1928 / 1990 N/A 55 N/A $ 27,171,068 $ 5,434,214 $ - $ 5,434,214 1989 N/A 55 N/A $ 24,190,783 $ 11,875,475 $ - $ 11,875,475 50013 Storage Facilities Distribution Reservoirs - Lawton Hill Reservoir 1972 55 50014 Structure D / Tunnel Access / Building Two Pumps @ 2,800 GPM 1970 $ 475,694 40 N/A $ 5,478,038 $ 1,095,608 $ - $ 1,095,608 N/A $ 781,657 $ 586,243 $ - $ 50015 Raw Water - Booster Pump Station 2 Pumps @50 MGD / 2 Pumps @ 30 MGD 1966 $ 1,211,417 40 586,243 N/A $ 16,307,537 $ 3,261,507 $ - $ 3,261,507 50016 Raw Water - Booster Pump Station Emergency Generator - 2,000 kW Diesel 1966 50017 Dean Estates Pump Station 1Pump@200GPM/2Pumps@475GPM/2 Pumps @ 1,200GPM 1982 40 N/A $ 842,420 $ 716,057 $ - $ 716,057 40 N/A $ 1,941,131 $ 1,698,489 $ - $ 1,698,489 N/A N/A $ 1,458,621 50018 Dean Estates Pump Station Emergency Generator - 150 kW Natural Gas 1982 N/A 40 N/A $ 90,012 $ 78,761 $ - $ 78,761 50019 Greenville Pump Station 1Pump@50GPM/3Pumps@320GPM/1Pump@750 GPM 1990 N/A 40 N/A $ 81,862 $ 26,605 $ - $ 26,605 50020 Greenville Pump Station Emergency Generator - 125 kW Natural Gas 1990 50021 Fruit Hill Pump Station Two Pumps @ 1,500 GPM 1989 50022 Fruit Hill Pump Station Emergency Generator - 150 kW Natural Gas 1989 50023 Bath Street Pump Station 3 Pumps @ 6,700 GPM 1928 N/A 40 N/A $ 81,862 $ 26,605 $ - $ 26,605 587,965 40 N/A $ 1,870,798 $ 561,239 $ - $ 561,239 40 N/A $ 90,012 $ 27,004 $ - $ 27,004 2,472,410 40 N/A $ 5,140,654 $ 2,827,360 $ - $ 2,827,360 $ N/A $ 50024 Newtaconkanut Pump Station 4 Pumps @ 6,700 GPM 1959 N/A 40 N/A $ 6,292,592 $ 3,146,296 $ - $ 3,146,296 50025 Newtaconkanut Pump Station Emergency Generator - 1,000 kW Diesel 1959 N/A 40 N/A $ 421,210 $ 168,484 $ - $ 168,484 50026 Ashby Street Pump Station 1Pump@50GPM/2Pumps@100GPM/1Pump@750GPM 1999 $ 202,135 40 N/A $ 420,281 $ 231,154 $ - $ 231,154 50027 Aqueduct P.S 4 Pumps @ 2,000 GPM Vertical Turbine Pumps 2007 $ 2,353,475 40 N/A $ 3,934,950 $ 2,951,213 $ - $ 2,951,213 50028 Aqueduct Office Diesel Generator Emergency Generator - 600 kW Diesel Diesel Lenerator 1998 N/A 40 N/A $ 252,726 $ 176,908 $ - $ 176,908 50029 Alpine Estates Pump Station 1Pump@50GPM/2Pumps@100GPM/1Pump@750GPM 1960 N/A 40 N/A $ 420,281 $ 115,577 $ - $ 115,577 50030 Alpine Estates Pump Station Emergency Generator - 80 kW Diesel 1960 N/A 40 N/A $ 74,318 $ 20,437 $ - $ 20,437 50031 Atwood Pump Station 1Pump@50GPM/2Pumps@100GPM/1Pump@750GPM 1959 N/A 40 N/A $ 420,281 $ 231,154 $ - $ 231,154 50032 Atwood Pump Station Emergency Generator - 200 kW Natural Gas 1959 N/A 40 N/A $ 120,016 $ 66,009 $ - $ 66,009 Page 59 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 MRV No. Asset Type Description / Location Fixed Asset Register Placed In Service Year Acquisition Cost $ 1,000,000 Life Expectancy Depreciation To Date Reproduction Cost New Less Physical Depreciation Reproduction Cost (New) Cost Approach Value Functional Obsolescence 50033 Waltham Street Pump Station 2 Pumps @ 115GPM / 2 Pumps @810GPM 2015 40 N/A $ 1,127,820 $ 1,071,429 $ - $ 50034 Waltham Street Pump Station Emergency Generator - 150 kW 2015 N/A 40 N/A $ 90,012 $ 85,511 $ - $ 85,511 50035 Cranston Commons Pump Station 1Pump@50GPM/2Pumps@100GPM/1Pump@750GPM 1960 N/A 40 N/A $ 420,281 $ 199,633 $ - $ 199,633 - 1,071,429 50036 North Elmore Pump Station 3 Pumps @ 250 GPM 1928 N/A 40 N/A N/A $ $ - $ 50037 Buildings Administration - New Headquarters Building 1972 N/A 60 N/A $ 15,405,823 $ 6,419,093 $ - $ 6,419,093 - 50038 Buildings Treatment - Forestry/Garage Service 1960 N/A 60 N/A $ 820,595 $ 164,119 $ - $ 164,119 50039 Buildings Treatment - Storage Shed (former generator bldg) 1960 N/A 60 N/A $ 43,426 $ 8,685 $ - $ 8,685 50040 Buildings Treatment - Granular Storage Facility - Silos (Two) 1995 N/A 40 N/A $ 76,579 $ 34,461 $ - $ 34,461 320,435 50041 Buildings Maintenance / Storage - Watershed Storage Facility 2011 N/A 40 N/A $ 376,983 $ 320,435 $ - $ 50042 Buildings Pump Station - Structure D / Tunnel Access / Building 1970 N/A 60 N/A $ 133,387 $ 28,901 $ - $ 28,901 50043 Buildings Pump Station - Raw Water - Booster Pump Station 1966 N/A 60 N/A $ 1,621,318 $ 324,264 $ - $ 324,264 50044 Buildings Pump Station - Dean Estates Pump Station 1982 N/A 60 N/A $ 113,379 $ 47,241 $ - $ 47,241 50045 Buildings Pump Station - Greenville Pump Station 1990 N/A 60 N/A $ 40,016 $ 22,009 $ - $ 22,009 50046 Buildings Pump Station - Fruit Hill Pump Station 1989 N/A 60 N/A $ 117,914 $ 62,887 $ - $ 62,887 50047 Buildings Pump Station - Bath Street Pump Station 1928 N/A 60 N/A $ 280,113 $ 56,023 $ - $ 56,023 37,348 50048 Buildings Pump Station - Newtaconkanut Pump Station 1959 N/A 60 N/A $ 186,742 $ 37,348 $ - $ 50049 Buildings Pump Station - Newtaconkanut Pump Station 1928 N/A 60 N/A $ 21,342 $ 4,268 $ - $ 4,268 50050 Buildings Pump Station - Aqueduct Office 1998 N/A 60 N/A $ 1,165,846 $ 796,661 $ - $ 796,661 50051 Buildings Pump Station - Aqueduct Resv. Pump Station (2 Bldgs) 1962 N/A 60 N/A $ 314,260 $ 62,852 $ - $ 62,852 50052 Buildings Pump Station - Alpine Estates Pump Station 1960 N/A 60 N/A $ 18,007 $ 3,601 $ - $ 3,601 17,687 50053 Buildings Pump Station - Garden Hills Pump Station 1959 N/A 60 N/A $ 88,436 $ 17,687 $ - $ 50054 Buildings Pump Station - Atwood Pump Station 1959 N/A 60 N/A $ 38,415 $ 7,683 $ - $ 7,683 50055 Buildings Pump Station - Water Tank Reservoir - Pump House 1989 N/A 60 N/A $ 20,008 $ 10,671 $ - $ 10,671 50056 Buildings Pump Station - Waltham Street Pump Station 2015 N/A 60 N/A $ 60,024 $ 58,023 $ - $ 58,023 50057 Buildings Pump Station - Lawton Hills Pump Station 1960 N/A 60 N/A $ 44,818 $ 8,964 $ - $ 8,964 50058 Buildings Pump Station - Cranston Commons Pump Station 1960 N/A 60 N/A $ 26,677 $ 5,335 $ - $ 5,335 50059 Buildings Pump Station - Pump Station 1928 N/A 60 N/A $ 266,774 $ 53,355 $ - $ 53,355 50060 Buildings Tunnel Access Structure - East Portal / Tunnel Access / Building 2005 N/A 60 N/A $ 80,032 $ 64,026 $ - $ 64,026 50061 Buildings Tunnel Access Structure - Structure E / Tunnel Access / Building 1970 N/A 60 N/A $ 80,032 $ 17,340 $ - $ 17,340 50062 Buildings Farm / Storage - Care Takers House 1980 N/A 50 N/A $ 429,722 $ 214,861 $ - $ 214,861 50063 Buildings Farm / Storage - Riding Stable 1980 N/A 50 N/A $ 287,525 $ 143,763 $ - $ 143,763 50064 Buildings Office / Storage - House (Office) 1981 N/A 50 N/A $ 415,177 $ 149,464 $ - $ 149,464 50065 Buildings Office / Storage - Storage Garage 1981 N/A 50 N/A $ 104,484 $ 37,614 $ - $ 37,614 Page 60 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 MRV No. Asset Type Description / Location Fixed Asset Register Placed In Service Year Acquisition Cost Life Expectancy Depreciation To Date Reproduction Cost New Less Physical Depreciation Reproduction Cost (New) Cost Approach Value Functional Obsolescence 50066 Buildings Structure (Not in Use) - Pole 82 3 Farnum Pike 1970 N/A 50 N/A $ 15,079 $ 3,016 $ - $ 3,016 50067 Piping System Piping - <=2" N/A N/A 60 N/A $ 104,917 $ 27,678 $ - $ 24,799 50068 Piping System Piping - 6" N/A N/A 60 N/A $ 224,959,071 $ 29,155,425 $ 50069 Piping System Piping - 8" N/A N/A 60 N/A $ 199,682,291 $ 47,421,517 $ (12,856,309) $ - $ 26,122,979 42,489,222 50070 Piping System Piping - 10" N/A N/A 60 N/A $ 2,093,399 $ 248,394 $ - $ 222,559 50071 Piping System Piping - 12" N/A N/A 60 N/A $ 84,053,592 $ 15,823,047 $ - $ 14,177,297 50072 Piping System Piping - 16" N/A N/A 60 N/A $ 46,520,727 $ 9,830,772 $ - $ 8,808,277 50073 Piping System Piping - 20" N/A N/A 60 N/A $ 11,734,345 $ 2,937,467 $ - $ 2,631,942 50074 Piping System Piping - 24" N/A N/A 60 N/A $ 35,430,627 $ 6,893,755 $ - $ 6,176,738 50075 Piping System Piping - 30" N/A N/A 60 N/A $ 25,146,047 $ 2,682,764 $ - $ 2,403,731 50076 Piping System Piping - 36" N/A N/A 60 N/A $ 3,589,520 $ 358,952 $ - $ 321,617 50077 Piping System Piping - 42" N/A N/A 60 N/A $ 6,609,256 $ 668,616 $ - $ 599,074 50078 Piping System Piping - 48" N/A N/A 60 N/A $ 3,732,832 $ 498,227 $ - $ 446,407 50079 Piping System Piping - 60" N/A N/A 60 N/A $ 8,356,655 $ 835,666 $ - $ 748,748 50080 Piping System Piping - 66" N/A N/A 60 N/A $ 3,516,809 $ 351,681 $ - $ 315,103 50081 Piping System Piping - 78" N/A N/A 60 N/A $ 11,556,799 $ 1,155,680 $ - $ 1,035,478 50082 Piping System Piping - 90" N/A N/A 60 N/A $ 22,254,291 $ 2,225,429 $ - $ 1,993,963 2,232,636 50083 Piping System Piping - 102" N/A N/A 60 N/A $ 24,918,084 $ 2,491,808 $ - $ 50084 Distribution Assets Customer Laterals - 0.625 N/A N/A 60 N/A $ 697,587 $ 184,030 $ - $ 169,346 50085 Distribution Assets Customer Laterals - 0.75 N/A N/A 60 N/A $ 1,274,287 $ 336,169 $ - $ 309,345 472,423 50086 Distribution Assets Customer Laterals - 1 N/A N/A 60 N/A $ 1,946,059 $ 513,389 $ - $ 50087 Distribution Assets Customer Laterals - 1.25 N/A N/A 60 N/A $ 11,298 $ 2,980 $ - $ 2,743 50088 Distribution Assets Customer Laterals - 1.5 N/A N/A 60 N/A $ 181,783 $ 47,956 $ - $ 44,129 50089 Distribution Assets Customer Laterals - 2 N/A N/A 60 N/A $ 109,815 $ 28,970 $ - $ 26,659 50090 Distribution Assets Customer Laterals - 4 N/A N/A 60 N/A $ 70,555 $ 18,613 $ - $ 17,128 50091 Distribution Assets Customer Laterals - 6 N/A N/A 60 N/A $ 137,479 $ 17,818 $ - $ 16,396 50092 Distribution Assets Customer Laterals - 8 N/A N/A 60 N/A $ 33,510 $ 7,958 $ - $ 7,323 50093 Distribution Assets Customer Laterals - >10 N/A N/A 60 N/A $ 6,749 $ 1,270 $ - $ 1,169 50094 Distribution Assets Meters - 0.625 N/A N/A 60 N/A $ 1,313,761 $ 346,583 $ - $ 318,927 50095 Distribution Assets Meters - 0.75 N/A N/A 60 N/A $ 3,646,839 $ 962,071 $ - $ 885,303 1,884,094 50096 Distribution Assets Meters - 1 N/A N/A 60 N/A $ 7,761,172 $ 2,047,471 $ - $ 50097 Distribution Assets Meters - 1.25 N/A N/A 60 N/A $ 71,550 $ 18,876 $ - $ 17,369 50098 Distribution Assets Meters - 1.5 N/A N/A 60 N/A $ 1,577,496 $ 416,158 $ - $ 382,951 Page 61 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 MRV No. Asset Type Description / Location Fixed Asset Register Placed In Service Year Acquisition Cost Life Expectancy Depreciation To Date Reproduction Cost New Less Physical Depreciation Reproduction Cost (New) Cost Approach Value Functional Obsolescence 50099 Distribution Assets Meters - 2 N/A N/A 60 N/A $ 1,287,521 $ 339,660 $ - $ 312,557 50100 Distribution Assets Meters - 4 N/A N/A 60 N/A $ 6,155,291 $ 1,623,824 $ - $ 1,494,252 50101 Distribution Assets Meters - 6 N/A N/A 60 N/A $ 12,064,511 $ 1,563,600 $ - $ 1,438,833 50102 Distribution Assets Meters - 8 N/A N/A 60 N/A $ 3,674,072 $ 872,536 $ - $ 802,913 50103 Distribution Assets Meters - >10 N/A N/A 60 N/A $ 323,930 $ 38,436 $ - $ 35,369 50104 Distribution Assets Valves - Gate - 6" N/A N/A 60 N/A $ 12,623,012 $ 1,635,983 $ - $ 1,505,441 3,135,385 50105 Distribution Assets Valves - Gate - 8" N/A N/A 60 N/A $ 14,347,299 $ 3,407,266 $ - $ 50106 Distribution Assets Valves - Gate - 10" N/A N/A 60 N/A $ 72,749 $ 8,632 $ - $ 7,943 50107 Distribution Assets Valves - Gate - 12" N/A N/A 60 N/A $ 8,503,579 $ 1,600,795 $ - $ 1,473,060 50108 Distribution Assets Valves - Gate - 16" N/A N/A 60 N/A $ 3,019,694 $ 638,122 $ - $ 587,204 50109 Distribution Assets Valves - Gate - 20" N/A N/A 60 N/A $ 748,457 $ 187,362 $ - $ 172,411 50110 Distribution Assets Valves - Gate - 24" N/A N/A 60 N/A $ 2,872,422 $ 558,889 $ - $ 514,292 50111 Distribution Assets Valves - Gate - 30" N/A N/A 60 N/A $ 948,400 $ 101,182 $ - $ 93,108 105,959 50112 Distribution Assets Valves - Gate - 36" N/A N/A 60 N/A $ 1,151,472 $ 115,147 $ - $ 50113 Distribution Assets Valves - Butterfly - 12" N/A N/A 60 N/A $ 14,967 $ 2,818 $ - $ 2,593 50114 Distribution Assets Valves - Butterfly - 16" N/A N/A 60 N/A $ 1,525,909 $ 322,455 $ - $ 296,725 50115 Distribution Assets Valves - Butterfly - 20" N/A N/A 60 N/A $ 378,922 $ 94,856 $ - $ 87,287 50116 Distribution Assets Valves - Butterfly - 24" N/A N/A 60 N/A $ 1,632,399 $ 317,617 $ - $ 292,273 50117 Distribution Assets Valves - Butterfly - 30" N/A N/A 60 N/A $ 2,817,930 $ 300,637 $ - $ 276,648 50118 Distribution Assets Valves - Butterfly - 36" N/A N/A 60 N/A $ 999,084 $ 99,908 $ - $ 91,936 50119 Distribution Assets Valves - Butterfly - 42" N/A N/A 60 N/A $ 1,806,037 $ 182,705 $ - $ 168,126 50120 Distribution Assets Valves - Butterfly - 48" N/A N/A 60 N/A $ 1,831,417 $ 244,442 $ - $ 224,937 173,754 50121 Distribution Assets Valves - Butterfly - 60" N/A N/A 60 N/A $ 1,888,211 $ 188,821 $ - $ 50122 Distribution Assets Valves - Butterfly - 78" N/A N/A 60 N/A $ 822,707 $ 82,271 $ - $ 75,706 50123 Distribution Assets Valves - Butterfly - 90" N/A N/A 60 N/A $ 928,233 $ 92,823 $ - $ 85,416 50124 Distribution Assets Valves - Butterfly - 102" N/A N/A 60 N/A $ 1,033,759 $ 103,376 $ - $ 95,127 3,725,307 50125 Distribution Assets Fire Hydrants - 6" N/A 50126 Land Cranston N/A $ N/A 50127 Land Providence N/A $ 10,350,000 50128 Land North Providence N/A $ 50129 Land Scituate N/A $ 20,233,450 - 60 N/A $ 31,236,437 $ 4,048,343 $ (1,892,953) $ Indefinite N/A $ 578,965 $ 578,965 $ - $ 578,965 Indefinite N/A $ 3,182,500 $ 3,182,500 $ - $ 3,182,500 Indefinite N/A $ 4,547,950 $ 4,547,950 $ - $ 4,547,950 Indefinite N/A $ 7,734,899 $ 7,734,899 $ - $ 7,734,899 50130 Land Foster N/A $ 3,668,000 Indefinite N/A $ 25,567,248 $ 25,567,248 $ - $ 25,567,248 50131 Land Glocester N/A $ 988,000 Indefinite N/A $ 4,520,250 $ 4,520,250 $ - $ 4,520,250 Page 62 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 MRV No. Asset Type Description / Location Fixed Asset Register Placed In Service Year Acquisition Cost 50132 Land Johnston N/A $ 50133 Land West Warwick N/A $ 50134 Rights-of-Way ROW - 48" Transmission Water Pipe N/A 50135 Rights-of-Way ROW - 60" Transmission Water Pipe N/A Life Expectancy 6,937,000 Depreciation To Date Reproduction Cost New Less Physical Depreciation Reproduction Cost (New) Cost Approach Value Functional Obsolescence Indefinite N/A $ 2,765,900 $ 2,765,900 $ - $ 2,765,900 Indefinite N/A $ 493,625 $ 493,625 $ - $ 493,625 N/A Indefinite N/A $ 5,000 $ 5,000 $ - $ 5,000 N/A Indefinite N/A $ 18,000 $ 18,000 $ - $ 18,000 - 50136 Rights-of-Way ROW - 78" Transmission Water Pipe N/A N/A Indefinite N/A $ 93,000 $ 93,000 $ - $ 93,000 50137 Rights-of-Way ROW - 102" Transmission Water Pipe N/A N/A Indefinite N/A $ 155,000 $ 155,000 $ - $ 155,000 50138 Miscellaneous System Assets SCADA 2001 $ 2,229,330 20 N/A $ 4,200,000 $ 2,730,000 $ - $ 2,730,000 50139 Miscellaneous System Assets Security System 2002 $ 4,271,728 20 N/A $ 6,186,736 $ 1,546,684 $ - $ 1,546,684 2,246,151 50140 Miscellaneous System Assets GIS Mapping System 2006 $ 3,804,205 20 N/A $ 4,991,447 $ 2,246,151 $ - $ 50141 Miscellaneous System Assets Telephone System 1998 $ 350,370 15 N/A $ 350,370 $ 17,519 $ - $ 17,519 50142 Construction In Progress Construction In Progress (As of 12/31/2016) 2016 $ 25,340,000 50 $ 25,340,000 $ 25,340,000 $ - $ 25,340,000 $ - 50143 50144 TOTAL PROVIDENCE WATER SUPPLY BOARD (as of March 31, 2017) $ 1,460,438,229 $ 418,969,669 $ (14,749,263) $ Page 63 404,200,000 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 APPENDIX 4 COMPARABLE SALES DATA MR Valuation Consulting, LLC Page 64 City of Providence Comparable Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Sale 1 Page 65 Comparable City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Sale 2 Page 66 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Comparable Sale 3 Page 67 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Comparable Sale 4 Section 1: 10-K (AWK-10K-20161231) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 to For the transition period from Commission file: number 001-34028 AMERICAN WATER WORKS COMPANY, INC. (Exact name of registrant as specified in its charter) Delaware 51-0063696 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 1025 Laurel Oak Road, Voorhees, NJ 08043 (Address of principal executive offices) (Zip Code) (856) 346-8200 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common stock, par value $0.01 per share Securities registered pursuant to Section 12(g) of the Act: None. New York Stock Exchange, Inc. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.: Large accelerated filer Accelerated filer ☒ ☐ Non-accelerated filer Small reporting company ☐ ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. Common Stock, $0.01 par value—$13,463,200,000 as of June 30, 2016 (solely for purposes of calculating this aggregate market value, American Water has defined its affiliates to include (i) those persons who were, as of June 30, 2016, its executive officers, directors or known beneficial owners of more than 10% of its common stock, and (ii) such other persons who were deemed, as of June 30, 2016, to be controlled by, or under common control with, American Water or any of the persons described in clause (i) above). Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: Common Stock, $0.01 par value per share—178,214,748 shares as of February 16, 2017. DOCUMENTS INCORPORATED BY REFERENCE Portions of the American Water Works Company, Inc. definitive proxy statement for the 2017 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after December 31, 2016 are incorporated by reference into Part III of this report. • • In addition to the acquisitions that closed in 2016 adding approximately 42,000 water and wastewater customers discussed above, we also entered into a number of agreements for which the closing of the transactions remain pending. These pending transactions represent the potential addition of approximately 40,000 new water and wastewater customers. The largest of the pending acquisitions include: ▪ Shorelands Water Company, New Jersey: Shorelands currently provides water service to approximately 11,000 customers in Monmouth County, New Jersey. On August 2, 2016, we agreed to acquire all of the capital stock of Shorelands Water Company (“Shorelands”) in exchange for an equivalent value of our common stock. The maximum number of shares of our common stock to be exchanged upon closing of this acquisition will be less than 500,000 and will be based upon the average price of our common stock. The closing of this acquisition is subject to the satisfaction of various conditions and compliance by the parties with certain covenants, including obtaining the approval of the New Jersey Board of Public Utilities. The Company is seeking to close the acquisition in the first half of 2017. ▪ Municipal Authority of the City of McKeesport, Pennsylvania: The system currently represents approximately 22,000 wastewater customers. On September 9, 2016, PAWC signed an asset purchase agreement to acquire substantially all of the wastewater collection and treatment system assets of the Municipal Authority of the City of McKeesport, Pennsylvania for approximately $156 million, subject to certain adjustments provided in the agreement. In connection with the execution of this agreement, a $5 million non-escrowed deposit was also paid. The closing of this acquisition is subject to the satisfaction of various conditions and covenants, including obtaining the approval of the Pennsylvania Public Utility Commission. We are seeking to close this acquisition in the second half of 2017. Technology and Operational Efficiency – We drove continued cost savings into our businesses. • Our Regulated Businesses achieved an adjusted O&M efficiency ratio (a non-GAAP measure) of 34.9% in 2016; Our adjusted O&M efficiency ratio for the year ended December 31, 2016 was 34.9%, compared to 35.9% and 36.7% for the years ended December 31, 2015 and 2014, respectively. The improvement in the 2016 adjusted O&M efficiency ratio over the 2015 ratio was primarily attributable to an increase in revenue. The improvement in the 2015 adjusted O&M efficiency ratio over the 2014 ratio was attributable to both an increase in revenue and decreases in O&M expenses. Our adjusted O&M efficiency ratio is defined as our regulated O&M expenses divided by regulated operating revenues, where both O&M expenses and operating revenues were adjusted to eliminate purchased water expense. Additionally, from the O&M expenses, we excluded the allocable portion of non-O&M support services cost, mainly depreciation and general taxes that are reflected in the Regulated Businesses segment as O&M expenses but for consolidated financial reporting purposes are categorized within other line items in the accompanying Consolidated Statements of Operations. In addition to the standard adjustments to the O&M efficiency ratio for the year ended December 31, 2016, we have also excluded from operating revenues and O&M expenses the impact from the binding global agreement in principle related to the Freedom Industries chemical spill in West Virginia. Also, for the year ended December 31, 2014, we have also excluded from operating revenues and O&M expenses the estimated impact to revenue and O&M attributable to changes in consumption as a result of abnormal weather and the costs associated with the Freedom Industries chemical spill, as applicable. We excluded all the above items from the calculation as we believe such items are not reflective of management’s ability to increase efficiency of the Company’s regulated operations. We evaluate our operating performance using this measure because management believes it is a direct measure of the improvement to the efficiency of our Regulated Businesses’ operations. This information is intended to enhance an investor’s overall understanding of our operating performance. The O&M efficiency ratio is not a GAAP financial measure and may not be comparable to other companies’ operating measures and should not be used in place of the GAAP information provided elsewhere in this report. Page 68 37 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 APPENDIX 5 SITE PHOTOGRAPHS MR Valuation Consulting, LLC Page 69 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Photograph 1: Scituate Reservoir (Photograph By PWSB) Photograph 2: Scituate Reservoir Illustration (From Site Tour on 4/13/17) MR Valuation Consulting, LLC Page 70 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Photograph 3: Gainer Dam (Photograph By PWSB) Photograph 4: Gainer Dam (From Site Tour on 4/13/17) MR Valuation Consulting, LLC Page 71 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Photograph 5: Regulating Dam – Horseshoe Structure (Photograph By PWSB) Photograph 6: Regulating Dam – Horseshoe Structure (From Site Tour on 4/13/17) MR Valuation Consulting, LLC Page 72 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Photograph 7: Barden Dam (Google Maps 03/2017) Photograph 8: Barden Dam Spillway Section (Google Maps 02/2017) MR Valuation Consulting, LLC Page 73 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Photograph 9: Raw Water Pumps (Photograph By PWSB) Photograph 10: Meter Chamber Building (From Site Tour on 4/13/17) MR Valuation Consulting, LLC Page 74 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Photograph 11: Water Treatment Facility (Photograph By PWSB From April 2015) Photograph 12: Water Treatment Facility (Photograph By PWSB) MR Valuation Consulting, LLC Page 75 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Photograph 13: Water Treatment Facility (Photograph By PWSB) Photograph 14: Aerator at Water Treatment Facility (From Site Tour on 4/13/17) MR Valuation Consulting, LLC Page 76 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Photograph 15: 45 Million Gallon Aqueduct Reservoir Underground Concrete Tank Photograph 16: 45 Million Gallon Neutaconkanut Reservoir Underground Concrete Tank Photographs: Provided by Google Maps MR Valuation Consulting, LLC Page 77 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Photograph 17: 25 Million Gallon Longview Reservoir Underground Concrete Tank Photograph 18: 3.5 Million Gallon Ridge Road Reservoir Aboveground Concrete Tank Photographs: Provided by Google Maps MR Valuation Consulting, LLC Page 78 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Photograph 19: 5 Million Gallon Lawton Hill Reservoir Underground Concrete Tank* Photograph 20: Lawton Hill Reservoir Building (From Site Tour on 4/13/17) Photograph: *Provided by Google Maps MR Valuation Consulting, LLC Page 79 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Photograph 21: 125 Dupont Drive – Main Entrance Photograph 22: 125 Dupont Drive – Future Vehicle Maintenance Bay Photographs: From Site Tour on 4/13/17 MR Valuation Consulting, LLC Page 80 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Photograph 23: Aqueduct Office located at 430 Scituate Avenue Photograph 24: Waterman Avenue House Industrial Storage Garage Photographs: Provided by PWSB MR Valuation Consulting, LLC Page 81 City of Providence Valuation of the Providence Water Supply Board Water Assets August 8, 2017 Photograph 25: Fire Hydrant (P-415) located at 549 Plainfield Street, Providence Photograph 26: Fire Hydrant (J-243) located at 9 Ruth Street, Johnston Photographs: Provided by Google Maps MR Valuation Consulting, LLC Page 82