MABS Q&A: Debt; valuation; why Sewer Authority isn’t included
KAYLEE LINDENMUTH / SHENANDOAH SENTINEL FILE – The Municipal Authority of the Borough of Shenandoah office and treatment plant in Raven Run.
SHENANDOAH – The Pennsylvania Economy League, the organization advising the Borough of Shenandoah regarding the potential sale of the municipal authority, is continuing their Q&A initiative, and has provided another set for publication.
Questions can still be submitted via an email address has set up, [email protected], and it is expected that answers will be provided weekly.
The question-and-answer initiative is part of the ongoing effort to engage and inform the public about the potential sale of MABS to Aqua Pennsylvania, a private water company based in the Philadelphia area.
As part of the public engagement effort, two public hearings will held on Oct. 19 and Oct 26 at 7:00pm at the Shenandoah Area Senior Citizens Center on North Market Street. As a result of the coronavirus pandemic, in-person attendance will be limited, though the hearings will be broadcast via Zoom.
The following are the answers to submitted questions, published as they were submitted to the Sentinel.
Q: Can you provide some background why the sewer is not included in the sale?
A: When Borough Council initially considered the sale of the water and sewer assets, it authorized the issuance of a Request for Expressions of Interest and Qualifications for both the water and sewer assets. One of the major concerns Council had with the sewer assets was that the treatment plant was in urgent need of capital improvements; regulators had expressed similar concerns. The Council was not sure whether the Sewer Authority could afford the necessary upgrades and was unsure whether the rate increases necessary to service the debt to fund such upgrades would be affordable to the rate payors. That being said, the Sewer Authority was able to obtain a $5M grant and very low cost long-term debt financing to finance the upgrades. Upon presentation of the foregoing information, together with Council’s receipt of a report that the net proceeds from the sale of the sewer assets prior to the plant upgrades would be negligible, Borough Council then decided to hold off on further consideration of the sale of the sewer assets until after the sewer upgrades are completed.
Q: I am hearing conflicting information. What is the total municipal debt for the Borough of Shenandoah?
A: Debt for the Borough is currently $75,467.50 (as of October 2020). This is what remains against an original loan amount of $160,000.
Q: What about the Sewer Authority debt, is that included in debt for the borough of Shenandoah? Is the Sewer Authority debt guaranteed by the borough? What happens if the Sewer Authority cannot meet its obligations?
A: The Sewer Authority’s debt is debt of the Sewer Authority and qualifies as “Self-Liquidating Debt” under Pennsylvania law. Self-Liquidating Debt is not taken into account as debt of the Borough for purposes of determining the Borough’s debt limits. There is a Borough guaranty on $1,025,000 of Sewer Authority Debt (as of November 2, 2020), which could potentially be a liability for the Borough in the future if and to the extent that Sewer Authority rates, fees and charges are insufficient to pay the debt service as and when due. This debt would only become an issue for the Borough if the Sewer Authority does not impose rates and charges sufficient to pay for operations and its debt service. This has not occurred in the past, nor is it expected to occur in the future. If the Sewer Authority were unable to collect sufficient rates, fees and charges to pay its operating expenses and debt service, this would expose the Borough to a demand for payment under the Borough’s guaranty, and could be an additional reason to consider selling the sewer assets once the new upgrades are completed.
Q: How much is MABS worth – all land, buildings, etc?
A: In a utility asset sale such as the one being considered, the value of the water system is usually measured by what a ready, willing and able buyer is willing to pay for it. In this case, the assets were bid in a competitive process; two potential buyers passed on making an offer, one potential buyer was willing to pay $10M, and the other (Aqua PA) was willing to pay $12M. So, the best answer, we believe, is that the water assets are worth $12M. Remember that the highest and best use of the land under the treatment plant is irrelevant, as the land under the treatment plant is necessary to remain, as is, for purposes of operating the plant. The land that surrounds the supply of water is also necessary as a buffer, to preserve the water supply. Most, if not all, of the property owned by MABS is restricted as to use for water purposes. A complete title review of rights, if any, of the Girard Estate and the Pennsylvania Game Commission, among others, is currently underway to ascertain any restrictions other than to maintain the property for use in the water system.
Accordingly, a garden variety appraisal is not relevant, nor is looking at insurable value, which is used to determine risk management issues. Because of the way that the private water utilities are regulated and their rates are approved by the Pennsylvania Utility Commission (“PUC”), an “appraisal” of utility assets, known as an Original Cost Depreciated Study, would be presented by Aqua PA as part of its rate filings with the PUC. An Original Cost Depreciated Study of the MABS water assets was undertaken by AUS Consultants (with state grant money) and resulted in the depreciated original cost being just under $10 M. Finally, if Borough Council moves forward with a sale, the transaction will need to be approved by the PUC. Under Act 12, both Aqua and the Borough will be required to retain Utility Valuation Experts who will determine the fair value of all of the assets (including the land). These valuations will be public documents when completed.
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