Bending the Curve – Birmingham Water Works’ Strategic Approach to Reducing Utility Debt

Author: Peiffer Brandt, President and CEO (Email)

Birmingham Water Works Board (BWWB) is an award-winning utility providing water service to nearly 200,000 accounts in the Birmingham region. Like many utilities, BWWB is facing the challenges of replacing aging infrastructure, a customer base stressed by rising water service costs, and system growth needs to support the local economy. Unlike many utilities, they are burdened with almost $970 million in long-term debt.


BWWB serves the city of Birmingham and surrounding cities and unincorporated areas in Jefferson County, Shelby County, St. Clair County, Walker County, and Blount County. Birmingham is the largest city in Alabama and the Birmingham-region is the economic engine of the state. BWWB is the largest utility in the state serving a retail population of over 600,000 and a wholesale population of more than 100,000.

On the financial side, the Board’s revenues for 2020 were $202.4 million. Operating expenses were $105.6 million. Debt service was $59.6 million. The Board has outstanding principal of $966 million and net utility plant of $957 million, which equates to a debt equity ratio of just over 1.0, which is quite high.  In addition, the Board has a five-year CIP that includes $400 million in projects. In 2017, the Board’s rate consultant projected that outstanding debt would reach $1.3 billion by 2030 with the then current policy of 25% pay-as-you-go (PAYGO) funding of capital projects

A Legacy of Policy Decisions Creates Challenges

There are two reasons for BWWB’s high debt that have to do with decisions made long ago. In 1998, BWWB turned the water system over to the city.  At that time, the city needed about $200 million to improve its schools. The mayor wanted to sell the water system to a private company, such as United Water or American Water and use the proceeds to improve the schools. The sale of the system required voter approval, and was unsuccessful. BWWB continued to operate the system during the city’s ownership period and due to concern for the system, the Board of Directors decided to offer to pay the city $200 million to get the system back, thus solving the school financing challenge but creating a significant debt challenge for BWWB. The city had also issued about $100 million of debt on the system, which did not go into the system. To get the system back, BWWB also agreed to take on that debt. The result was that BWWB took on over $300 million in debt to get back a system it owned four years before with no improvements to the system.

During its four years of ownership, the city did not implement any rate increases. As a result, the rates did not support much PAYGO funding. Upon receiving the system back, BWWB had to implement a 26% rate increase in 2003 to pay for the additional debt service costs associated with the $300 million repurchase of the system. As a result, BWWB was issuing debt for about 90% of its capital costs, and the capital costs were quite large because BWWB’s system is also old. The Birmingham Water Works Company was founded in 1885 and bought by American Water Company in 1889.  The Birmingham Water Works Board acquired the system from American Water in 1951. The combination of old infrastructure and low PAYGO meant BWWB had to issue a lot of debt. Between 2004 and 2018, the Board issued $640 million in new money as a part of eight separate debt issues.

Forging a Path Forward

BWWB staff prioritized taking Board Directors to meetings with rating agencies to demonstrate the support management had from the Board of Directors. These meetings also fostered understanding among Board Directors of the serious need to reduce the debt that BWWB was carrying. These visits and ongoing discussion resulted in the Debt Reduction Project—and BWWB’s Directors deserve credit for making this project happen.

The project relied on a team of advisors and BWWB management.  The advisors included Terminus Municipal Advisors, BWWB’s financial advisor, Piper Sandler (then Piper Jaffray), one of the underwriters that frequently works with BWWB, and Raftelis, BWWB’s rate consultant.  One of the reasons for the success of this endeavor was bringing together a team of advisors with different perspectives that blended well.

The team identified three opportunities to help reduce debt:

  1. Refinance existing debt and structure future debt
  2. Increase PAYGO/implement larger rate increases than originally projected
  3. Reduce O&M/Capital costs

BWWB was very familiar with refinancing existing debt, and between 2004 and 2018 the Board closed six refinancings in addition to the new money issues mentioned earlier. Given the low interest rate environment, it was anticipated that BWWB would have future refinancing opportunities. One challenge was that BWWB is not in control of the variables that determine whether refunding debt can be beneficial—they are at the mercy of the market. There are also certain limitations that have been placed on advance refunding tax exempt debt.  With respect to structuring future debt, the Board and its financing team have historically wrapped debt to keep relatively equal annual debt service payments.  In the analysis that indicated that the Board’s debt would increase to $1.3 billion, we used a conservative approach of equal annual payments, so a structured approach resulted in potential savings.  Piper Sandler led this analysis.  Using their best assumptions for future interest rates through 2030, they estimated potential savings of $111 million in principal through 2030.

BWWB uses a rate stabilization and equalization (RSE) model to establish rates. This rate setting approach was implemented in 2005 to comply with the Alabama Attorney General’s office request that BWWB establish rates similar to how other regulated utilities in the state establish rates. The AG’s office wanted the Alabama Public Service Commission (PSC) to provide oversight on BWWB’s rates and the utility agreed to this.  However, the PSC Commissioners voted against overseeing the Board because they did not oversee any other water utilities.  BWWB had developed an RSE model in anticipation of going under the PSC and decided to keep it in place.  As a result, BWWB’s Board of Directors does not approve rate increases; instead, it approves the operating budget, the five-year capital plan, the demand projections (as recommended by the rate consultant), and the financial policies, and the RSE model calculates the rate increase that is then implemented.  In the baseline scenario, BWWB anticipated having 3.9% rate increases through 2030.  Raftelis evaluated the impact of having annual 4.9% rate increases as an alternative. We found that having the higher rate increase would potentially allow the Board to reduce its debt load by $154 million by 2030.

In addition, BWWB has historically assumed that operating costs and the capital plan both would increase 3% annually. Raftelis evaluated the impact of limiting operating costs increases to 2% annually.  Staff leadership believed they could manage to this budget level.  Raftelis also evaluated two scenarios with the capital plan: 1) reducing it by $10 million and having it increase annually 3%; and 2) reducing the annual increase from 3% to 2%.  These changes were found to reduce debt between $110 million and $228 million.

BWWB’s Board of Directors decided to plan on the refinancings and structuring of bonds going forward.  This decision was the easiest to make. The Board of Directors was interested in the significant decrease in debt from annual 4.9% rate increases but concerns about affordability led them to decide against the higher increase. Finally, the Board of Directors thought reducing the current capital plan by $10 million was too drastic. Instead, the Board of Directors and staff agreed to limit operating and capital expense escalation to 2%. The Board of Directors also recognize that there may be cost increases that they don’t control that could impact the BWWB’s ability to meet these targets. With these changes, the Board’s outstanding debt is projected to drop from $966 million to $754 million in 2030 as opposed to increasing to $1.3 billion.


BWWB’s Board of Directors stuck to the plan of raising rates 3.9% in 2020 even though they could have forgone this increase because they received savings from a 2019 bond refunding. The Director who had pushed for the Debt Reduction Project passionately argued that they should move forward with the increase because it was in the long-term interest of the customers of the system even though it would require them to pay a little bit more in the short term.  This Director and the rest of BWWB’s Board deserve a lot of credit for making the difficult decision to stay the course so that they could reduce the debt load for future Directors and the customers of the system.