Lehigh Executive: Allentown, Pa., Water Deal Precedent-Setting

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As the Lehigh County Authority began to close in on its deal for the Allentown, Pa., water and sewer concession, calls from all over the country came into Aurel Arndt.

"They came from the Chicago area, Texas, Kentucky, wanting to know more about it," Arndt, the authority's general manager, said in an interview Thursday in New York, where The Bond Buyer honored two Allentown transactions, including the water concession, as co-winners of its Northeast Deal of the Year award for 2013.

The quasi-public authority, based in Allentown, emerged with a winning bid of $220 million after a request-for-proposals and process that resonated throughout the capital markets and featured some of the biggest names in infrastructure, including Macquarie, American Water and United Water.

The other Bond Buyer award-winner was the sale of $224 million of bonds to finance the construction of an 8,500-seat downtown arena, seen as a centerpiece to Allentown's revival.

The LCA sold $308 million of bonds in July to finance the water and sewer transaction. Allentown used the deal proceeds to cover an unfunded pension liability that Mayor Ed Pawlowski called "a 500-pound gorilla," and apply a smaller amount to defray some general obligation debt.

Allentown, with a 119,000 population and the seat of Lehigh County, is Pennsylvania's third-largest city.

"We demonstrated two things: that we can compete toe-to-toe with the large private companies, and we established a new form of partnership. 'P3' can now mean 'public-public partnership' instead of 'public-private partnership,' " Arndt said before the awards banquet.

When the process began, Arndt acknowledged he had mixed feelings about whether the authority would be the only firm standing at the end.

"On one hand, we're local and we're interconnected with the city system already. We felt that gave us a significant advantage. And there was the public nature of the authority, which gives us access to tax-exempt financing.

"That said, while we have done numerous agreements, they had all been small, nothing close to this. I guess as time passed, we started to get good vibes about our chances."

According to Arndt, LCA's local presence also may have offset some opposition during debate over the concession, which became highly emotional. Some public hearings, including a City Council voting session in late April, lasted beyond midnight.

The authority last year completed an interconnection with the city's system. "In some ways, we're a natural," he said.

LCA sold the bonds in July and closed on the acquisition in August. Standard & Poor's affirmed its AA rating and stable outlook for the authority's non-city system operations. S&P cited the authority's history of affordable water rates, strong financial position and debt-service coverage.

"We were very pleased," said Arndt. "Obviously, one always wants to get a triple-A rating, but it was realistically the best, given the underlying economy of the city."

The authority also took a running start to address integration challenges, Arndt added. As a result, 84 of 103 city employees stayed on with LCA, which also hired 25 new employees with an emphasis on operational matters such as regulatory compliance and Internet technology.

"We've been identifying mission control type of issues," said Arndt.

LCA expects to spend about $32 million over five years on city infrastructure, according to Arndt.

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