BUYOUT HISTORY: RULES, VALUATION, REFERENDUM & PAAG

History of the Purchase Option, 2005 Valuation, Referendum & PAAG

PURCHASE OPTION
The franchise agreement between Illinois American Water and City of Peoria was created in 1889. The agreement included many provisions, but after the City’s vote to pursue the buyout in 1998 and in 2002, the Illinois Court of Appeals ruled the only enforceable section of the agreement was the buyout option. While the City has option to consider buying the system every five years, the option left many questions about the procedure unanswered. The following questions needed to be answered:

  • What assets are subject to purchase option?
  • The standard of value?
  • Qualifications for Commissioners?
  • Procedural Rules?
  • Rules of Discovery?
  • Unanimous or majority decision?

Rather than spend more time in court, the City of Peoria and Illinois American Water spent 8 months negotiating the rules. The negotiation resulted in a fair process and procedure to conduct valuation under the buyout option. All parties agreed on the following:

  • The entire system including that providing service outside City limits are subject to purchase.
  • Fair Market Value of the assets is the standard value
  • The ability to present evidence at a hearing in Peoria
  • Qualifications of the third commissioner – must be a qualified appraiser
  • City permitted to inspect system assets and records
  • Majority decision

View the rules in full here.

VALUATION
Following the adoption of the Rules of the Commission, a panel of three qualified appraisers were appointed to the Commission and set the value for the water system following a multi-day hearing in Peoria. Experts for the City and the Company testified to the value and condition of the system.

The award was not weighted against the City. In fact the formula approach gave 60% weight to the income approach and 40% weight to the cost approach. The income approach was weighted equally between an Investor Owned Utility Buyer (IOU) and a Government Owned Utility Buyer (GOU).

  • Income approach: 30% IOU ($122M), and 30% GOU ($235M)
  • Cost approach: $282M
  • ($122M x 30%) + ($235M x 30%) + ($282M x 40%) = $220M

Fair Market Value: $220M
(as of 12/31/2003)

More on the appraisal here.

PUBLIC REFERENDUM
The final valuation was over 3 times higher than the City’s initial valuation of $67.8 million and more than twice the City’s revised valuation of $95 million. In an April 2005 public referendum, residents voted against the buyout by a margin of 82-18 percent. As a result, in September 2005, approximately seven years after the decision to pursue the buyout, the council voted unanimously to end the buyout attempt and notified the Company.

PAAG’S INVOLVEMENT
After was all said and done in April 2005, the City of Peoria had spent $1.5 million in legal fees and expenses. $1 million of that amount was loaned to the City by PAAG with the agreement that it would not have to be paid back if the City conducted due diligence. $500,000 was City funded.

Though the public’s vote in the April 2005 referendum showed overwhelming opposition to a City takeover, PAAG pushed the City to buy the water system at the $220 million price. As stated above, the council disagreed and voted unanimously to end the buyout.

PAAG sued the City of Peoria to collect the $1 million loaned, claiming bad faith by the City. Both parties spent over a decade in court. Click here to learn more about the lawsuit and PAAG. The Illinois Court of Appeals ruled in May 2017 against the City and remand the case to the trial court for a determination of how much interest the City should pay PAAG on the $1 million loan. The City's total liability to PAAG could well exceed $2 million.