CHICAGO — Indianapolis Mayor Greg Ballard yesterday announced that, pending approval by the city and Indiana, the city would sell its water and sewer systems to a nonprofit group for $425 million and the assumption of $1.5 billion in outstanding debt.

Ballard said he had signed a memorandum of understanding to transfer ownership and management of the water and sewer systems to Citizens Energy Group, the nonprofit trust that currently runs the city’s gas utility.

The payment will come in several forms and from several sources, including cash, the transfer of money from the sewer ­system’s general fund to the city, and an increase in Citizens’ annual payments in lieu of property taxes to the city. Officials said Indianapolis would issue bonds backed by the pledge of the increased ­PILOT payments.

The Indianapolis-Marion County City-County Council and the Indiana Utilities Regulatory Commission need to approve the transaction.

“The benefits of this arrangement are far-reaching and long-lasting,” Ballard said at a press conference yesterday morning. “We will use the cash from this deal to make a transformative investment in our city’s infrastructure.”

The announcement comes nearly eight months after the mayor issued a request for expression of interest from companies interested in taking over the two systems. If completed, the transaction will be the first and largest of Ballard’s proposals to enter into public-private partnerships to raise new revenue.

Citizens Energy’s status as a nonprofit and its ability to issue tax-exempt debt made it the city’s top choice, Ballard said. The water and sewer systems need more than $4 billion in capital upgrades, and Citizens’ plan to issue tax-exempt debt to finance the projects — and its proposal to achieve savings by combining the two systems with the city’s gas utility — are expected to help keep down future rate increases, Citizens’ officials said.

Ballard said the Citizens’ takeover would mean that future rate increases would be 20% lower than previously projected. The city had projected that rates could go up 400% over the next 15 years to finance all infrastructure improvements, ­including federally mandated ­environmental upgrades.

If a final sale is approved, Citizens will pay the city $170.6 million at closing and $92 million on Oct. 1, 2011. An additional $50 million in the wastewater general fund will remain with the city.

The proposed transfer will also increase Citizens’ annual payment in lieu of property taxes to Indianapolis. The city plans to issue roughly $140 million of bonds backed by the increase.

“The $425 million will be the equivalent of a massive jobs bill right here in Indianapolis,” Ballard said.

Citizens also agreed to take over more than $1.5 billion in outstanding debt issued by the two utilities.

Ballard said Indianapolis would hold several public meetings to release more details and gather feedback on the plan before crafting legislation to submit to the city-county council in April.

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