The Allentown Water and Sewer Utility System Concession and Lease Agreement between the City of Allentown, Pennsylvania (City) and the Lehigh County Authority (LCA or Concessionaire) (Concession Agreement), dated as of May 1, 2013, provides for the long-term lease and concession of the Allentown Water Plant and Distribution System and the Sewer Utility System (collectively, Concessioned System) by LCA.
LCA, as the Concessionaire, will generally provide all services related to the operation, maintenance, replacement, improvement, administration and management of the Concessioned System for a period of 50 years (subject to earlier termination or extension as provided in the Concession Agreement), pay the City an up-front concession payment of $220 million3, and pay the City an Annual City Payment of
$500,000 (beginning in 2016 and thereafter adjusted annually for inflation in accordance with the Concession Agreement). The Concession Agreement addresses services and requirements of LCA as the Concessionaire and the City’s continued obligations relative to the Concessioned System. Management of the City’s storm water system and Retained Water Supply System will remain with the City and is not part of the Concessioned System. Capitalized terms not defined in this report are defined in Appendix D to the Official Statement.
Section 2.02 Background
The City and LCA currently operate separate utilities responsible for providing water and sewer services to their respective customer bases. LCA provides drinking water services and wastewater services to suburban communities outside of the City through LCA’s existing water and wastewater systems (Existing LCA System). LCA currently obtains potable water from its own wells and also purchases potable water from the City. LCA owns and operates a pretreatment plant that treats a portion of the wastewater generated in the LCA service area prior to discharging back into the sewer system; the majority of LCA’s wastewater is ultimately treated at the City’s Kline’s Island Wastewater Treatment Plant (KIWWTP). The Existing LCA System is currently a water and sewer customer of the City.
3Preliminary, subject to adjustment.
Independent Engineer’s Report for the Allentown Water and Sewer Utility System Concession
Section 2.03 Purpose of Report
Through a competitive procurement process, the City selected LCA to be the Concessionaire of the Concessioned System. Based on LCA’s need to acquire financing for the up-front concession payment to the City, LCA has requested that Malcolm Pirnie Inc., a wholly owned subsidiary of ARCADIS US Inc. (ARCADIS) prepare this Independent Engineer’s Report for the Allentown Water and Sewer Utility System Concession (Report).
This Report will serve as a prerequisite for LCA to issue Water and Sewer Revenue Bonds, (City of Allentown Concession) Series 2013A, Water and Sewer Capital Appreciation Revenue Bonds, (City of Allentown Concession) Series 2013B, and Water and Sewer Revenue Bonds, (City of Allentown Concession) Series 2013C (Federally Taxable) (collectively the Bonds) to fund the up-front concession payment to the City, fund certain anticipated capital improvements to the Concessioned System, make deposits into reserve and other funds, and fund transaction costs and expenses.
Specifics regarding the Bonds can be found in the Preliminary Official Statement issued by LCA.
This Report provides a summary of the technical and financial aspects of the Concession Agreement and Sludge Agreement, a Condition Assessment of the Concessioned System based on site visits and the documents made available to ARCADIS, a financial review of the proposed lease transaction, and a summary of the key conclusions from the Phase I Environmental Assessment performed by ARCADIS concurrent with the engineering and financial review, including projected operating results. For a complete understanding of the assumptions upon which the opinions in this Report are based, this Report should be read in its entirety.
ARCADIS is being paid by LCA to prepare this Report, but payment is not contingent on Bonds being sold or issued.
Section 2.04 Scope and Limitations of Report
The scope of this Report includes:
1. Review of the key technical, engineering and commercial terms of the Concession Agreement, Sludge Agreement, and operating permits listed in the Concession Agreement (industrial waste permits not reviewed).
Independent Engineer’s Report for the Allentown Water and Sewer Utility System Concession
2. A description of the Concessioned System, including enumeration of significant components.
3. A Condition Assessment, as defined in Article V of this Report, of the Concessioned System based on four days of site visits to the Water Filtration Plant, including the Little Lehigh Creek and the Lehigh River intake structures, Schantz Spring, the KIWWTP, the Federal flood control project in the vicinity of the KIWWTP, 3 reservoirs, 4 storage tanks, and 4 booster pump stations. Site visits performed as part of the Condition Assessment included only limited visual observation of facilities and did not include any engineering analysis of the original designs, surveying, sampling or testing of equipment or water quality, or inspection of retaining walls or tank internals.
4. A review of the operation and maintenance of the Concessioned System, including an assessment of LCA’s approach to operating and staffing the Concessioned System, a review of LCA’s operation and maintenance (O&M) budgets, and assessment of LCA’s capability to operate the Concessioned System.
5. A review of the capital improvements included in the Allentown 2013-2017 Capital Improvement Plan (City’s CIP), LCA’s approach to budgeting capital improvements, key terms of the Concession Agreement related to capital improvements, and potential impact of future regulations on the capital needs of the Concessioned System.
6. A review of the projected capital improvements associated with outstanding and unresolved U.S Environmental Protection Agency (EPA) Administrative Orders against the City (Administrative Orders).
7. An evaluation of the financial feasibility of the concession and lease undertaking and its ability to generate revenues sufficient to pay the costs of operating and maintaining the Concessioned System, to make necessary capital improvements, and to pay debt service on the Bonds, as needed to assess the reasonableness of LCA’s financial forecast. The Bonds for the Concessioned System and the projected financial results do not include revenue from the operation of the Existing LCA System.
In preparation of this Report and the conclusions contained herein, ARCADIS has relied on certain assumptions and information provided by LCA and the City with respect to the conditions that may exist or events that may occur. ARCADIS believes the information and assumptions are reasonable, but has not independently verified information provided by LCA, the City and others. To the extent that actual future conditions differ from those assumed herein or provided to us by others, the actual
Independent Engineer’s Report for the Allentown Water and Sewer Utility System Concession
results will vary from those forecast. ARCADIS has not performed a review of the legality of the Concession Agreement or other agreements that may be relevant to the operation of the Concessioned System. LCA has retained McNees Wallace & Nurick LLC as transaction counsel for the concession transaction.
Section 2.05 Acronyms
A listing of acronyms or abbreviations of terms used in this Report is provided below.
AMR – Automated Meter Reading
AWWA – American Water Works Association BOD – Biochemical Oxygen Demand CCL – Contaminant Candidate List
CCL4 – Fourth Contaminant Candidate List CCTV – Close Circuit Television
CFS – Cubic Feet per Second CIP – Capital Improvement Plan
CMOM - Capacity, Management, Operations and Maintenance CPI – Consumer Price Index
Cr-6 – Chromium 6
CTA – Critical Transition Areas
cVOC – carcinogenic Volatile Organic Compounds DBP – Disinfection By-Products
DRBC – Delaware River Basin Commission DTE – Delta Thermal Energy
EPA – Environmental Protection Agency FOG – Fats, Oils, and Grease
FTE – Full-time Equivalent GAC – Granular Activated Carbon GIS – Geographic Information System GPM – Gallons per Minute
GWR – Ground Water Rule
HHS – Health and Human Services IU – Industrial User
KIWWTP – Kline’s Island Wastewater Treatment Plant LCA – Lehigh County Authority
LCN – Lehigh Coal and Navigation Company LCR – Lead-Copper Rule
Independent Engineer’s Report for the Allentown Water and Sewer Utility System Concession
LF – Linear Feet
LT-LCR – Long-term Lead-Copper Rule MCL – Maximum Contaminant Level MCLG – Maximum Contaminant Level Goal MGD – Million Gallons per Day
MHI – Median Household Income MSW – Municipal Solid Waste
NPDES – National Pollutant Discharge Elimination System NTU – Nephelometric Turbidity Units
O&M – Operations and Maintenance
OSHA – Occupational Safety and Health Administration
PADEP – Pennsylvania Department of Environmental Protection PADWIS – Pennsylvania Drinking Water Information System PCE – Tetrachloroethylene
PP&L – Pennsylvania Power and Light RD3 – Third Regulatory Determination RDII – Rain Derived Inflow and Infiltration REC – Recognized Environmental Condition RTCR – Revised Total Coliform Rule SDWA – Safe Drinking Water Act
SEIU – Service Employees International Union SSO – Sanitary Sewer Overflow
TCE – Trichloroethylene
TCP – 1, 2, 3 – Trichloropropane TCR – Total Coliform Rule TKN – Total Kjeldahl Nitrogen TSS – Total Suspended Solids
WLSP – Western Lehigh Sewerage Partnership
Independent Engineer’s Report for the Allentown Water and Sewer Utility System Concession
Article III. Key Commercial Agreements and Permits