On October 9, 2019 Steelton Borough Authority (Authority) closed on the sale of its water assets to Pennsylvania-American Water Company for $21.750 million in cash and $35.7 million in committed capital improvements. As a part of the transaction, the Authority and the Borough of Steelton (Borough) repaid or defeased all of their debt, opening the door to reducing sewer rates and property taxes. While it’s easy to focus on the sale price, the fact that the transaction was a privatization of municipal water assets, or even the potential for a reduction in sewer rates or property taxes, the process that was guided by McNees Wallace & Nurick LLC may help other municipalities or authorities to decide if a sale of water or wastewater assets is in the best interest of customers and the community.
Importantly, the transaction started as a process to consider the sale of both water assets (owned by the Authority) and sewer assets (owned by the Borough). After an 18-month process, which included public input hearings and numerous Borough and Authority meetings, the Authority decided that a sale of water assets was in the best interest of the community, while the Borough determined that maintaining the sewer system under Borough ownership would produce a better result.
Several steps in the process were critical to a decision, which benefits the Borough and its residents in both the short and long-term. Initial discussions focused on the goals of the Authority and Borough in considering a sale. A primary goal of the Authority was to mitigate the impact of a major capital project, which would have required the Authority to significantly increase rates. Also considered was the Authority’s reliance on a single large customer for more than 50% of water revenue, but a lesser dependence on sewer revenue. Additionally, most of the large sewer capital projects were in service and although sewer rates were high, they were expected to be stable. The Authority wanted a buyer to retain its employees and a customer assistance program for its customers. The Authority also wanted to be sure that water infrastructure investment in its community, both in water pipes and in the water treatment plant, was addressed after a sale.
After a discussion of the Authority’s and Borough’s goals and how best to achieve those goals, McNees crafted separate RFPs for the water system and the sewer system. A well-designed RFP helped to assess the proposals and assign points to the components of each proposal. Subsequent meetings focused on whether the sale of both water and sewer assets would provide better value for the community. Ultimately, after much debate among the Authority Board members, the Borough Council members and the community, decisions were made to sell the water system and retain the sewer system.
McNees then counseled the Authority through the process of selecting a proposal for the sale of the water assets and the negotiation of the Asset Purchase Agreement, including provisions related to assets to be sold and retained, real estate, including easements, indemnification, accounts receivable, and regulatory approvals, including approval of the transaction by the Pennsylvania Public Utility Commission (PUC).
The PUC is in the developmental stage of a new process for valuing municipal asset acquisitions implemented by Act 12 of 2016 (Act 12). Act 12 offers a significant change in the purchase price that a private company is willing to pay for municipal water or sewer assets. Now a private company can pay for and earn on fair market value rather than merely original cost less developer contributions and grant-funded utility plant. The process to secure PUC approval, though, is still evolving. McNees has not only experience in the process for approval under an Act 12 filing, but an understanding of and experience with the players, i.e., the engineering firms which perform the assessment, the certified appraisers, the financial advisors, and the lawyers who represent buyers.
Subsequent to PUC approval, McNees advised on organizational design and deployment of cash proceeds as well as debt repayment and defeasance.
