Water Industry News

Peoria considers buying out of Illinois American Water
valued at twice earlier estimates

Friday, March 11, 2005

of the Journal Star

PEORIA - The city could curb water rate increases and pour millions into city coffers if council members vote to buy Peoria's division of Illinois American Water Co., according to an analysis commissioned by Peoria Area Advancement Group.

The analysis was presented Thursday to the five-member Water Selection Committee, which unanimously voted to continue studying the buyout. The committee could vote as early as its May 24 meeting on what to recommend to the council, or may request more time to study the proposals.

Former East Peoria Mayor Jeff Giebelhausen, a real estate developer who studied the numbers on behalf of PAAG, said that although the city may not hit the home run it hoped for, his calculations show that buying the utility could still be the equivalent of a double.

It's up to the council to decide then "if a double is good enough," he said.

The projections come on the heels of a three-member appraisal panel pricing the waterworks at an non-negotiable $220 million, more than twice what the city's independent appraiser said it was worth.

Much to the dismay of city officials, that figure was $98 million more than the commission said a private company should pay. The difference accounted for the city's exemptions from sales and property taxes and its ability to borrow money at a cheaper rate.

But Sandra Birdsall, a member of the committee and PAAG, said she believes buying the waterworks could still be a good deal for the city. The process should continue "instead of saying, 'My gosh, the number is higher than we thought' and folding the tent," she said.

Giebelhausen's analysis figured a 2.5 percent rate increase per year, and said the city could be collecting a surplus of as much as $368 million in 33 years, when the bonds used to buy the utility are paid off, he said.

The projections were based on the cost of the water company as well as loose estimates of potential costs for capital improvements, operations, city oversight and other unavoidable expenses. It also assumes the flat rate payment for the life of the bonds, though the city could potentially backload payments and increase cash flow in the early years.

Several members of the committee noted that although the plan includes rate increases, they are lower than the 7 percent average yearly rate increases consumers endured from Illinois American during the past decade. But company official Kevin Hillen said no rate increases are projected until at least 2009.

Compounded over a decade, a 2.5 percent rate increase actually averages to 2.8 percent yearly.

PAAG loaned $1 million to the city early in the process with the stipulation that the city would buy the utility if financially feasible. The Water Selection Committee is made up of chairman Mayor Dave Ransburg, at-large Councilmen Gary Sandberg and John Morris, as well as Rita Kress and Birdsall, members of PAAG.

If council members choose not to under that scenario, the organization must be paid back the $1 million plus 9 percent interest. Ransburg said that although he's disappointed with the utility's price and the method, he also supports completing the process.

"I think we spent so much time and money to get to this point we really owe it to the people to finish the analysis," he said.