City Government and Citizens Energy Group and Veolia and Energy & Environment and Water and Utilities and Government & Economic Development and Government and Privatization

Veolia losing water contract, will get $29M termination fee

October 28, 2010
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Veolia will no longer have a role in operating Indianapolis Water after the city sells the utility to Citizens Energy Group—but the company will walk away with $29 million in the form of a contract-termination fee.

Meanwhile, Citizens plans to make job offers to “substantially all” of Veolia’s 436 employees at the water utility.

The contract-termination agreement announced Thursday, which must be approved by the Indiana Utility Regulatory Commission, came as somewhat of surprise. Citizens has been in talks with water system operator Veolia since at least July, when City-County Council members approved the sale.

In the end, however, it became clear that a narrower role for Veolia under Citizens’ ownership would not offer much in the way of profit potential, said Brian Clarke, executive vice president for Veolia North America. The French company operates water and wastewater utilities in more than 650 cities including Atlanta and Buffalo.

Citizens is a public charitable trust that provides natural gas, chilled water and steam service in the Indianapolis area.  The savings from consolidating the back offices of several utilities as well as supply chain efficiencies gives Citizens an edge in costs, and it expects $60 million in annual savings after a three-year integration period.

 “It’s a little tough to argue with the city’s choice here, given the very unique position Citizens holds,” Clarke said. “We’re very proud of what we’ve done” managing Indianapolis Water.

Veolia has managed the city water utility since 2002 under a contract that was to have expired in 2022. Mayor Greg Ballard proposed selling the water and sewer operations as a way to generate cash for city infrastructure improvements.

City officials Thursday said the $29 million termination fee is consistent with the original operating contract and “reimburses Veolia for investments it made to improve the [water] system at the company’s cost,” which had originally anticipated a 20-year rate of return.

“Utility rates won’t go up as a result of this payment,” said Chris Cotterill, chief of staff for Mayor Greg Ballard. That’s because the fee will come from a $40 million escrow account, funded by the sanitary district general fund, set up last summer to cover unanticipated costs in selling the city’s water and sewer operations to Citizens.

The contract termination fee does, however, put a big dent in potential bonus the city could have reaped from the utility sales.

If the $40 million would have remained in the escrow after two years, the city would have been able to keep $25 million of it—raising its take from the sale to $459.7 million versus $434.7 million.

Citizens also would have benefitted, keeping $15 million had the transition been achieved without tapping the $40 million escrow.

Citizens’ President and CEO, Carey Lykins, asked how Citizens could forgo help from Veolia with Citizens having never before operated a water utility, said Citizens expects to retain the bulk of the experienced Veolia personnel who already run the utility. Lykins also said there are similarities  between running a water utility and Citizens existing gas, steam and chilled water units. “You might be surprised how much commonality there is,” he said.

Citizens needs “the fine experienced men and women now providing water and wastewater service to the Indianapolis community,” states an update document on the deal provided by the city and Citizens.

All of the current bargaining-unit employees at the water system will have jobs with Citizens. Meanwhile, all union employees of the wastewater system will continue to be employed by the private operator of that city system, United Water. United’s contract, which runs until 2018, is being assigned to Citizens.

Citizens said it will offer jobs to 34 employees of the city’s Department of Public Works who work at the utilities, and to four employees of the Department of Waterworks. Those who are not hired by Citizens are to be retained by the city.

As for non-bargaining-unit employees, any staff reductions will be done “through attrition whenever possible,” Citizens said.

Documents filed with state regulators show that about two dozen customer-service jobs could be eliminated after Citizens buys the utilities. Another six billing service positions also could be cut as Citizens combines back-office functions of the utilities. Citizens officials said customer service jobs tend to be of a high-turnover nature, so they’re hoping attrition will eliminate the need for pink slips.

Lykins emphasized that the biggest single chunk of the anticipated $60 million a year in savings will come not from reduced headcount but from supply chain efficiencies. Citizens is banking on volume purchasing savings and savings that come from repackaging its contracts in such a way to obtain more attractive pricing from contractors.

“It’s not a significant job loss in my mind," he said. "Savings are not predicated on job losses.”

Citizens still needs IURC approval to close the deal, which likely won’t come until early next year. In the meantime, the city will pay Veolia to continue to manage and operate Indianapolis Water: $3.5 million this month, $4.5 million a month from November to March, and $5.5 million a month thereafter until the deal closes.

Besides selling the deal to City-County Council last July as a way to generate more than $425 million to improve roads, bridges and sidewalks, Ballard said he expects savings from the deal to result in 25 percent lower combined water and wastewater rates than previously projected had the utilties not been sold.

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