City Government and Greg Ballard and Citizens Energy Group and Sewer and Water and Energy & Environment and Utilities and Government & Economic Development

City utility deal treads in murky waters

April 3, 2010

A $1.9 billion proposal to sell the city’s water and sewer utilities splashed into public view last month, but some financial details settling at the bottom line could make the deal harder to swallow.

Others indicate the city might be getting a better deal than first believed.

Although City-County Council has yet to formally consider Mayor Greg Ballard’s proposal, announced March 10, concerns have surfaced in public hearings and, to no surprise, among the mayor’s political opponents.

Ballard wants to “transfer” the utilities to Citizens Energy, the not-for-profit trust that operates 266,000-customer Citizens Gas and the steam and chilled water system serving more than 200 downtown buildings.

Citizens would pay the city $262.6 million in cash. Plus, the city would pocket another $140 million by floating a bond, backed by future taxes (PILOT fees) Citizens will pay annually.

Add those, plus the balance of a wastewater general fund Indianapolis would keep, and the city could net $425 million or more. Plus, the city would shed $1.5 billion in utility-related debt, which Citizens would absorb.

But the 14-page “memorandum of understanding” the mayor struck with Citizens is complex and, in places, vague.

One caveat states the purchase price could be reduced up to $15 million to give Citizens an incentive to assume liabilities in agreements the city had with third parties involving the utilities—deals with vendors who provided goods and services, for example.

City officials say the $425 million figure already takes into account this possible $15 million reduction.

“We feel confident that it won’t affect the purchase price,” said Michael Huber, the mayor’s director of enterprise development.

Another potential financial drain on sale proceeds—albeit a pinhole—is if Citizens decides it doesn’t want the water company’s headquarters property, northwest of downtown. The mayor’s team contends leaving the building out of the deal would have a “nominal” effect on the utility sale proceeds. The building also is in the vicinity of the city’s so-called life sciences corridor, which could make it valuable later as an economic development tool.

Another murky provision is the debt that may have to be incurred as a result of a downgrade of a financial firm’s providing surety bonds that back wastewater system debt. Many such firms suffered downgrades due to the collapse of financial markets. City leaders say the additional debt to satisfy bonding requirements could have a negligible effect on the purchase price.

And then there’s the issue of $127 million sitting in a city fund for wastewater construction projects. Citizens gets that pot of money.

Brian Williams, a Democrat who has announced his candidacy for mayor, contends one might as well write down the anticipated cash value of the sale by that amount.

“We’re selling cash,” Williams said.

Not so, said Huber. The construction fund represents unexpended bond proceeds that are legally obligated for specific wastewater construction projects. Citizens would have the same requirement and also would pay back the debt.

The city would, however, keep $50 million from a wastewater general fund.

Perhaps the squishiest financial aspect of the deal to some critics is the city’s plan to raise $140 million by issuing a bond backed by more than $600 million Citizens would pay the city through 2039 in lieu of taxes.

Currently, the city collects about $9 million a year in PILOT fees from the water and wastewater systems, which helps fund the police and fire departments.

Under the mayor’s plan, Citizens would pay even more each year to reflect the value of capital projects for the wastewater system the utility would own. The system will need an estimated $2 billion in federally mandated improvements in the years ahead.

Citizens could pay as much as $29.4 million in 2023 alone in PILOT–-or a cumulative total of more than $600 million through 2039.

Williams said the mayor’s deal essentially will trade over $600 million in future revenue flowing into the city for less than one-fifth that amount in quick cash—the $140 million in PILOT-backed bond proceeds.

“This is the Powerball,” Williams said, referring to the smaller, upfront cash option for lottery winners.

The mayor’s team disagrees with that, too.

The city will keep the $9 million annually in PILOT fees that help fund the police and fire departments—or $270 million over the 30 years. The city proposes to convert to the $140 million lump sum only the value of anticipated PILOT payments from Citizens on future wastewater system improvements over and above the $270 million.

Williams also questions the value of $1.5 billion in debt elimination. While the debt may come off the city’s books, it travels with the water utility under Citizens’ ownership and “we, as ratepayers, still have to pay it,” he said.

Moreover, along with taking on the $1.5 billion in new debt, Citizens plans to borrow the $262 million it will pay the city in cash. So that cost of borrowing also will trickle into customer rates.

City officials say such analysis obscures the broader value of the deal, including an anticipated $40 million in annual savings by combining Citizens’ existing utilities with the water and sewer utilities.•

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