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Sewerage System Sale Valued at $156M

By Jason Togyer
The Tube City Almanac
September 12, 2016
Posted in: McKeesport and Region News

The company buying McKeesport's sewerage authority and its three wastewater treatment plants has put a value on the sale of $156 million.

In a joint press release, city officials and Pennsylvania American Water Company said the final price is subject to a complete appraisal of the system, which serves 22,000 customers in 12 municipalities.

Last week, the board of the Municipal Authority of the City of McKeesport joined McKeesport City Council in voting in favor of the sale of the authority's assets to Pennsylvania American.

The sale is subject to approval by the Pennsylvania Public Utility Commission and the state Department of Environmental Protection. Kathy L. Pape, president of Pennsylvania American, said the company expects to close on the sale in the second half of 2017, pending those approvals.

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The money being paid by Pennsylvania American will first be used to pay off any outstanding debts, including bonds issued by the authority as well as loans that have been taken out to upgrade the sewerage system.

The authority recently completed a $62.5 million, multi-year process to upgrade the wastewater treatment system to accommodate additional customers and comply with strict county, state and federal rules that prohibit untreated sewage from being released into the river during heavy rainstorms.

In an interview last week, McKeesport Solicitor J. Jason Elash said that the authority owes at least $90 million in debt, but that it could be as much as $110 million or more.

The uncertainty, he said, is in part because some of the improvements made to the system over the years were financed through the Pennsylvania Infrastructure Investment Authority, or PennVEST.

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Because the authority is selling its assets, Elash said, it's not yet clear which of the funds will be treated by PennVEST as grants --- meaning that they don't have to be repaid --- or loans, meaning that they must be repaid, and with interest.

"There are a lot of moving pieces here," he said.

The city and the municipal authority are being advised by the Pittsburgh law firms of Dilworth Paxson L.L.P.  of Philadelphia and Grogan and Graffam P.C. of Pittsburgh, as well as by Boenning & Scattergood of Scott Twp. and Public Financial Management Inc., of Philadelphia.

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Mayor Michael Cherepko said the sale of the authority is in the best interest of both the customers and city taxpayers and residents.

"It became very clear to this administration that the only way to save our community from municipal bankruptcy, while continuing to offer the same level of services our residents deserve, would be to transfer our local sewage system to a regional or national utility company," Cherepko said, in a prepared statement.

"This transaction will balance the city’s current financial problems, allow this administration to safeguard the city’s future and ensure reliable wastewater service for 22,000 customers," Cherepko said.

McKeesport has been running a $1 million budget deficit for several years, which city officials have closed by selling assets, refinancing debt and seeking short-term solutions.

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As a condition of the sale, Pennsylvania American is advancing the city $5 million, with another $2 million payment scheduled in 2017. Cherepko said last week he will ask council to create a reserve fund for the money that can only be accessed through a council vote.

Substantial sewerage rate hikes in McKeesport --- as well as at other sewerage authorities, including the Allegheny County Sanitary Authority --- have been controversial among homeowners and municipal leaders.

Last week, Cherepko said the sale to Pennsylvania American will benefit ratepayers in two ways. First, he said, the cost of future improvements will be spread over a much larger base of customers --- Pennsylvania American has 2.2 million customers in the state.

Second, Cherepko said, future rate increases will be subject to approval by the Public Utility Commission.

Authorities in Pennsylvania are generally not subject to PUC oversight.

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Pennsylvania American is a subsidiary of Voorhees, New Jersey, based American Water Co., a publicly traded company that is part of the Dow Jones utility average. The company was founded as American Water Works & Guarantee Co. by James S. and W.S. Kuhn in 1886 --- ironically, in McKeesport.

McKeesport's treated water is supplied by Municipal Authority of Westmoreland County, though Pennsylvania American operates water supply systems in several neighboring municipalities, including West Mifflin and Liberty.

"Our company and our employees have been providing water service in the Mon Valley for decades, and we are excited for the opportunity to be the future wastewater provider to the residents of McKeesport, Dravosburg, Duquesne and Port Vue,” Pape said.

"We look forward to closing the proposed acquisition and to providing wastewater services that reflect our commitment to environmental stewardship and quality customer service," she said.

Under the purchase agreement, Pennsylvania American Water will not seek an increase on base sewage rates in the McKeesport area for at least one year after the closing, Pape said. The McKeesport authority's 47 employees are expected to become part of the "Pennsylvania American Water family," she said.

Originally published September 12, 2016.

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