Investor Presentaiton

Bazalgette Tunnel Limited - Credit Ratings MOODY'S Baal (stable) 1 June 2016 - "The construction counterparties are well-known international contractors with significant experience of complex projects including, in London, Crossrail, the Lee tunnel (which will connect to the main TTT asset) and the Northern Line extension works." "The availability of three construction consortia provides significant protection in a contractor replacement scenario, as other experienced contractors will be on site and familiar with the project, reducing the time and cost to find a replacement." "Comprehensive government support package mitigates key construction risks, primarily by ensuring that sufficient funding will likely remain available in the event of cost overrun and/or delay scenarios. It will also compensate senior debt if construction is not completed." "Strong regulatory framework (albeit with some novel and untested features), overseen by Ofwat, which has an established track record in excess of 20 years for transparently regulating the water and sewerage companies in England and Wales." "Unlike most projects, BTL benefits from significant income during the construction phase. The licence provides for revenues on the basis of a return allowed on forward-looking capex up to the so-called threshold outturn amount." "Once operational, BTL will exhibit a similar risk profile to existing UK water and sewerage companies." " "Covenanted financing structure provides additional creditor protection." "Shareholders' commitment to provide equity and shareholder loan notes of around £1.274 billion upfront provides significant funding at the initial stages of the project." Fitch Ratings BBB+ (stable)- 5 August 2016 "The ratings reflect the substantial protection afforded to the construction of the Thames Tideway Tunnel (TTT, the project) by a supportive, transparent and largely proven regulatory regime and strong support commitments from the UK government against completion and funding risk during construction. Furthermore, the ratings reflect the experience of the parties involved in the project's construction, achievable cost and schedule targets, and Fitch's view that once it is commissioned, the project's operational risk profile will be low." "The project's construction is inherently complex and lengthy. However, in Fitch's opinion, completion risk is well managed and mitigated thanks to the project's detailed planning, the involvement of several experienced contractors and personnel, a supportive regulatory framework under Ofwat's supervision and a strong support package from the UK government, which aims at providing liquidity and additional equity should severe stress scenarios materialise. Consequently, completion risk does not constrain the rating" "The revenue structure is based on the well-established approach used for the UK water sector and regulated by Ofwat, subject to the adjustments for the construction period. The issuer will not be exposed to volume risk, but will have exposure to tariff risk every five years during operations. The company earns a return on capital on its regulated capital value (RCV) and is able to recover depreciation, tax and allowable opex. The RCV will increase with inflation" "The project has very low operating risk as the tunnel uses proven technology, relies on gravity to transfer the sewage and has few moving parts. The main operating responsibilities of the project company are 10 year reviews of tunnel condition" "The company has already proven its ability to access capital markets through the recent successful issuance of GBP350m delayed-draw, index-linked bonds. Market access risk during construction is comprehensively mitigated by several features, such as the receipt of revenues as construction works progress, the covenants requiring capex and debt service liquidity covering 12 months, committed liquidity support from the government in the event of debt market disruption during construction and, upon commencement of operation, WACC adjustment for changes in debt costs during construction" 〃 23 23

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