In their own words:
How a $45 million deal morphed 
into a $150 million crap shoot

Lancaster Authority minutes shed light on $100 + million trash burner purchase:

• The original purchase price of the Harrisburg incinerator was only $45 million.

• It soon grew to as much as $150 million.

• The higher purchase price was set by Dauphin County commissioners, not the city of Harrisburg or the Harrisburg Authority. Dauphin County strangely is also a creditor: how did the county come to set the price?

• LCSWMA proposes to pay off incinerator operator Covanta’s $25 million loan to the City of Harrisburg.

• There were four feasibility studies, three of which LCSWMA says it won’t release to the public because of a non-disclosure agreement with the Harrisburg Authority.

• LCSWMA’s CEO thought he could convince Moody’s not to rate this bond transaction. He was wrong.

• LCSWMA got into the Harrisburg incinerator deal accidentally, and had first hoped to increase the Lancaster authority’s own capacity.

Details of the proposed sale of the Harrisburg incinerator to the Lancaster County Solid Waste Management Authority (LCSWMA) are hard to come by these days due to the Harrisburg Authority and receiver’s insistence on confidentiality.

But comments made by LCSWMA’s chief executive officer Jim Warner and others to their board in 2008 and 2011 shed much light on various aspects of the complicated deal.

Insights into the sale price, how the price was proposed, the bond deal, borrowing, due diligence studies, Moody’s bond rating, and arrangements to borrow money to pay back up to $20 million loaned to the city of Harrisburg by the plant’s operator, Convanta, are all found in the minutes of LCSWMA’s board of director’s meetings.

For many years, as far back as 2008, Warner told the LCSWMA board that the authority was seeking bids to study the viability of simply upgrading Lancaster’s own incinerator (called the Resource Recovery Facility or RRF) with a fourth burner to increase the authority’s capacity to handle waste.

In board minutes dated February 29, 2008, titled, “System Capacity Study,” the entry reads, “In January, a Request for Proposals (RFP) was sent to five of the best and most qualified waste management consulting firms seeking proposals to evaluate the system capacity of all of the Authority’s programs. One of the primary objectives of the study will be to measure the cost and capacity issues associated with constructing a fourth operating unit at the RRF. Proposals are due by March 7, 2008 and a recommendation will be made to the Board at the April Board meeting.”

Consultant engineering firm Dvirka and Bartilucci was selected for the study.

A May 15, 2009 entry in the minutes reads, “Dvirka and Bartilucci System Capacity Study – This study was done to document what issues may be present if LCSWMA’s system capacity was expanded at the Waste-to-Energy plant (WTE, or incinerator). This report includes an economic model associated with this effort if it is pursued. The Report is finished and is ready for release to the public…. (Authority Solicitor Alex) Henderson explained that the motion is to receive the report and authorize the staff to use the conclusions in the report to engage the general public and municipalities.”

Soon, however, CEO Warner would make it clear that LCSWMA was on two tracks. One track would be upgrading the Lancaster Authority’s own incinerator with a fourth burner to increase available capacity. The second option was to forego the plant upgrade and buy Harrisburg’s incinerator.

Senior Manager Tom Adams explained this two-tracked approach to the board on March 11, 2011:

“LCSWMA is moving forward with proposals received from consultants regarding the fourth unit expansion work at the RRF. As there is no guarantee yet for the outcome of purchasing the Harrisburg facility, it is necessary to continue moving forward to ensure that, in the event the purchase does not occur, the timing for the possible fourth unit expansion is still on track. Proposals have been received and interviews have been scheduled at the end of March for the three companies that submitted proposals. A recommendation will likely be made in April for the Board to approve a consultant if the project is to move forward. (CEO Jim) Warner noted that, though LCSWMA plans to select a consultant, expenses for this project will not be incurred until the outcome on the Harrisburg offer is determined.”

Also on March 11, 2011, Solicitor Henderson explained the purchase price of the Harrisburg incinerator at that time was only $45 million, as outlined by a Memorandum of Understanding, or MOU:

The minutes read: “Mr. Henderson commented that he had had the opportunity to speak with all the Board members about the MOU and everyone has had the opportunity to review it and ask questions. After these preliminary remarks, there will be an opportunity to ask more questions. The MOU is not a Purchase Agreement. It is not an Agreement to purchase the HRRF (Harrisburg incinerator) or even an offer to purchase the HRRF. This document states that LCSWMA would like to enter into a process to determine if agreements can be developed to integrate the HRRF into the Lancaster County system. It is really a document that outlines what the process might be to reach an agreement. This is done because this type of transaction involves a great deal of time, resources, and effort on both sides, but particularly for LCSWMA. It makes sense to have some understanding that the overall parameters are in the ballpark before embarking on this lengthy process.

“The schedule is laid out in the MOU on page 4 of the document. The encouraged execution date for the MOU is April 15, 2011. This MOU was designed to be signed by the owner of the facility, which is the Harrisburg Authority, but also the entities that direct the waste flow control and have guaranteed the Harrisburg Authority’s debt, which are Dauphin County and the City of Harrisburg.

“(Incinerator operator) Covanta will also need to sign the MOU, if executed, as they are the current operator and have a long-term contract with the facility. If the MOU can be executed by mid-April, a six-week due diligence process will be set up to review additional information before final agreements can be put in place.

“There will be another three-week process to finalize the agreements. If the schedule would be implemented as laid-out in the MOU, closing could be possible on August 31, 2011. One of the binding parts of the MOU is that we proceed on this schedule and do our best to accomplish it. The MOU outlines discuss, in great detail, the $45 million purchase price.”

On July 22, 2011, the LCSWMA board was given the following detailed report by CEO Warner:

“Possible Harrisburg RRF Acquisition – This project has kept LCSWMA very busy. Recently, LCSWMA met with (accounting firm) Trout, Ebersole and Groff and discussed expectations on a large list of what will need to be reviewed by them such as Harrisburg’s Accounts Receivable, all types of other accounts, agreements, such as consultants, etc. Harrisburg’s business, as it relates to solid waste, will take some time to figure out as they are an entity that also manages water and sewer assets, although they do budget separately for the waste operations. Trout, Ebersole and Groff’s due diligence will take an estimated 4 to 6 weeks. LCSWMA also met with (consulting engineers) ARM Group who will start looking into some different aspects. Though at this stage LCSWMA does not anticipate acquiring the land where the ash is currently located, LCSWMA plans to lease about 56 acres and all information about existing in-place ash will need to be evaluated to determine if there are opportunities to continue filling ash on that site. The characteristics of the ash will be needed as well; ARM is working on this.

“(Consulting engineers) HDR will also perform some internal work with the hardware at the HRRF (Harrisburg Resource Recovery Facility).

“Each of these three companies will work on due diligence from different aspects. They have not been given the ‘go ahead’ yet. The Non-Disclosure and Due Diligence Agreement was put together as a late development and it is ready as soon as a decision is made to sell the HRRF to LCSWMA.

“The Harrisburg Authority is ready to go. The Harrisburg City Council rejected the Act 47 plan. The Act 47 Team is no longer there to consult with the City. The (Harrisburg) Mayor now has to come up with a plan in the next 14 days, and the City Council will need to approve it. LCSWMA feels confident that any plan will involve selling the HRRF. The debt for the City is $310 million. There can be no plan to pay off the debt by increasing efficiency. The City’s annual budget is similar to LCSWMA’s, at around $50 million. The main part of the plan was to sell HRRF to LCSWMA and do a long-term lease or sale of the parking garages. None of the Council members or the Mayor opposes the sale of the HRRF to LCSWMA, but they do oppose the lease or sale of the parking garages.”

Warner told the board that the original $45 million sale price of the incinerator had swollen to $124, but that the total borrowing could reach $150 million, including “the subordinated debt to pay off the Covanta loan; that principal will likely only be due in 20 or more years which could be another $15 to $20 million, putting the total debt at around $150 million.”

The $25 million here mentioned was a loan made by incinerator operator Covanta to the City of Harrisburg in 2007 to finish the botched $300 million repair of the facility. As terms of the loan, Covanta also won the right of last refusal on the incinerator sale. Covanta currently operates not only the Harrisburg incinerator, but the firm also has operated the Lancaster incinerator for LCSWMA since the late 1980s.

Warner told his board that it was Dauphin County that came up with the incinerator sale price of $124 million, and not the city of Harrisburg or the Harrisburg Authority, which nominally owns the plant.

“The next step is to enter into acquisition negotiations with the Harrisburg Authority. This was already done with the County and that is how the $124 million offer was determined. The Harrisburg Authority is not pleased that the County negotiated a sale price for their asset. The County did this to attempt to enhance the value and to try to develop a plan with the debt guarantor in Act 47. I hope that when negotiations progress with the Harrisburg Authority, they will also conclude that the $124 million is a fair offer. The entire extra value, the additional $79 million (difference between $45 and $124 million), is due to the guarantees from the City of Harrisburg and/or guarantees and contributions from the Commonwealth of PA that are not quite in place yet. LCSWMA’s offer is contingent on these factors.

“One of the things that adds value is the electricity purchase. LCSWMA is meeting with the Secretary of the Department of General Services, which purchases all of the goods and services for the Commonwealth. Some general agreement will likely come from this meeting that the State will purchase all of the electrical output of the Harrisburg plant. There is a proposal drafted that will be given to them to help lock in the electric revenue component of the valuation. The next six months are going to be even busier while working on the due diligence and managing negotiations for this project. The Harrisburg Authority has indicated to the City that it is willing to sell the asset as part of the Mayor’s plan. An Executive Session has been scheduled to discuss some other details.

Board Chair R. Edward Gordon “asked if LCSWMA has begun to discuss the financial aspects of this project?” the minutes relate.

“Mr. Warner replied that LCSWMA has met with Walter Kulakowski (of Guggenheim Securities) about having his company as a partner for underwriting, and with Wells Fargo who has a good, broad, public finance team in Philadelphia. Locally, I met with (financial services firm) Janney Montgomery Scott because they have very strong retail coverage in Pennsylvania. The first two parties are definitely interested and Janney will indicate their interest later.”

Warner continued, “This is likely to be a very large debt issue of about a $150 million. The plans are to finance $120 million, then borrow another $12 million for the 10% that must be put in the reserve account, bringing the cost to $132. The cost of issuance is likely to be $2.5 or $3 million, bringing the total Minutes of the Board of Directors Meeting July 22, 2011 Page 3 of 14 to about $135. Then there is the subordinated debt to pay off the Covanta loan; that principal will likely only be due in 20 or more years which could be another $15 to $20 million, putting the total debt at around $150 million.”

Where did this leave the second option of retrofitting Lancaster Authority’s existing incinerator? Chairman Gordon asked CEO Warner.

“Mr. Gordon asked how this has impacted the engineering for the fourth unit at this point?

“Mr. Warner responded that it has not impacted that potential project at all because that schedule has been set aside while all effort is ongoing with the possible Harrisburg RRF purchase. An acquisition of Harrisburg will put LCSWMA and waste disposal in Lancaster County in a terrific position for a long time. The main component of the purchase would not be because LCSWMA can do a better job than has been done by the Harrisburg Authority, it is because it has extra capacity that can be easily accessed via the Transfer Station as Lancaster County’s capacity grows. At this time, the financial strength of our system is extremely strong and thus will remove the need to raise our rates.

Board member (and current chair) Karen Weibel, “asked if there is still work to be done at LCSWMA’s RRF and at what point might that work be focused?

“Mr. Warner replied that in the combined proforma, assuming LCSWMA owns the Harrisburg RRF, it anticipates borrowing $20 million in 2014 or 2015 with a payback of only 10 years because it is not new construction. This will cover all the items needed to be upgraded, such as new cranes, control room reconfiguration, ash handling system, etc.

“Mr. Houck asked what the approximate timetable is for delivering the financial side of the Harrisburg ‘package.’

“Mr. Warner replied that it depends on how quickly LCSWMA can negotiate the purchase. There is no way to control the speed with which they do business. The Harrisburg Authority has very responsible management and only has a Board of three people. They have been very transparent with their business. Covanta also helped clean up the previous situation at the HRRF, but not without its own struggles with the plant. It takes a lot of care, and money must be invested regularly to keep a RRF running as things begin to break. There is some disagreement between Covanta and the Harrisburg Authority regarding the service agreement that is causing the facility to become further distressed, which is another reason why it must be sold.

“LCSWMA plans to meet with Covanta after the potential purchase to set up a priority list, find out what needs to be done, and make the investments necessary for Covanta to get the plant operating better than it is currently.

“Mr. Houck asked what Wally Kulakowski and Wells Fargo think about the market?

“Mr. Warner replied that LCSWMA has an AA- rating with Standard and Poor’s and everything will be done to ensure that this rating is maintained because having that rating will save LCSWMA millions of dollars. Some work will need to be done with Moody’s, as it currently has LCSWMA’s rating at A3, which is below the S&P’s rating by four notches. There has been some thought of not asking Moody’s to rate this. However, that will be determined later.”

(In late February 2013, Moody’s threatened to downgrade LCSWMA’s credit rating. – editor’s note.)

“The other issue is that this may be a taxable issue because it is not new construction. Most issues for LCSWMA are non-taxable. Hartman, Underhill, and Brubaker’s office is looking into this issue. Every quarter point right now is worth about $4 – $4.5 million in the proforma over 20 years. This has been modeled at 53⁄4%, which might be the taxable portion, but LCSWMA has been trying to be conservative. Rates are great right now; if LCSWMA can do 5 1⁄4%, it will pick up $8 million and there will be a market for the Authority’s bonds.

Also discussed at this board meeting was a “Non-Disclosure and Due Diligence Agreement/Harrisburg Resource Recovery Facility.”

The minutes reflect that, “This was finalized late yesterday afternoon. (Solicitor) Henderson will review the details. Mr. Henderson described, in detail, the relative aspects of the Non-Disclosure and Due Diligence Agreement as drafted and provided to the Board. This document is a truncated version of the Memorandum of Understanding (MOU) that was previously distributed, without the deal points. On July 15, the Harrisburg Authority posted a notice that if there were other interested parties, interest should be indicated by August 5, 2011. There is no promise that a deal will proceed by entering into this Agreement. Staff recommends the Board approve the Non-Disclosure and Due Diligence Agreement as drafted so the Harrisburg Authority will receive the confidentiality it requested.”

But nearly a year and a half later, LCSWMA’s secretive deal to purchase the Harrisburg incinerator would still be pending.