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City soaks in profits with utility deal

But Gulf Breeze's purchase of Florida Water Services isn't water under the bridge yet.

By BRIDGET HALL GRUMET, Times Staff Writer
© St. Petersburg Times
published September 29, 2002


PENSACOLA -- It all started in July with a telephone call to Richard Lott, longtime bond counsel for the Panhandle town of Gulf Breeze.

Plans to sell Florida Water Services to a cluster of counties were unraveling amid bad publicity, bickering among the affected communities and a legislative agency's inquiry into the deal, Miami lawyer Bob Gang told Lott.

The utility's parent company, Allete, feared that it might not finalize a sale to the Florida Governmental Utility Authority before year's end, as it had promised investors. And that meant the Duluth, Minn., conglomerate's stock could take a hit.

"They were thinking they needed to find a new buyer," Lott said. "They were afraid if they didn't find a suitable buyer right away, they would miss their target for selling the system."

Removed from all of the controversy was Gulf Breeze, a tourist town on a slender peninsula not far from the Alabama state line.

Gulf Breeze had built a successful cottage industry financing multimillion-dollar deals, such as the construction of the Hyatt hotel at Orlando International Airport and some of the rebuilding in Homestead after Hurricane Andrew.

Most recently, in May, Gulf Breeze issued about $310-million in bonds for the Seminole Tribe of Florida -- another client of Gang's prestigious law firm, Greenberg Traurig -- to build Hard Rock Cafe casinos on reservations near Tampa and Hollywood, Fla.

So, Gang asked, would the dealmaking town be interested in buying the state's largest private water utility from his corporate client, Allete?

On Sept. 19, the answer was yes. Gulf Breeze and the nearby town of Milton, with a combined population of less than 13,000, astonished communities statewide by purchasing a water and sewer network that serves more than 500,000 customers, including in Spring Hill, Sugarmill Woods, Citrus Springs, Pine Ridge and several other small Citrus County communities.

Neither Panhandle town is served by Florida Water's 152 systems; in fact, the nearest customers are about 100 miles away, in Washington County.

But both Santa Rosa County towns stand to profit from the utility's revenues, with Gulf Breeze guaranteed at least $1.5-million a year. Its one-fifth partner, Milton, will pocket at least $300,000 a year.

The seemingly sudden sale came as a shock to the customers in 27 counties, most of them one time zone away and hundreds of miles removed from the new owners.

"We knew this would take us to the top of the radar screen," said Ed Gray, one of the Gulf Breeze officials who orchestrated the purchase. "But all of the reasons to do it were there."

And the reasons aren't purely profits, Gray said. Customers will see better service and more stable rates under a government-owned Florida Water that remains intact, preserving the economies of scale, he said.

The affected governments, particularly those that have battled Florida Water before, aren't so sure.

The deal drew criticism and a flurry of resolutions last week from the Citrus, Hernando and Hillsborough county commissions, all opposing the sale.

"It appears to be a sweetheart deal for Florida Water Services and for these two Panhandle cities that are hundreds of miles away from the communities they serve," said Kent Weissinger, assistant county attorney in Hernando.

"It's a little suspicious. I've been to Milton. They barely have one traffic light in town," said state Sen. Ginny Brown-Waite, R-Brooksville. "It's not a well populated area, and you just have to wonder about this. And you have to wonder what's behind this."

Yet the fact remains: In three months, two pint-size towns pulled off the half-billion-dollar utility sale that a group of rival counties couldn't do in a year.

Shades of gray

To understand how this small town became a player in the bond market -- and therefore a contender for Florida Water -- you have to know Ed Gray.

A decade has passed since the former Gulf Breeze mayor and council member left elected office, but Gray remains an influential public figure.

A stout man with an easy, Southern demeanor, Gray is a commercial banker who used to coordinate mergers for AmSouth Bank. He also serves on the local hospital board.

Gray's legacy, however, is Gulf Breeze's municipal bond program, which was launched in 1985 while he was mayor. At the suggestion of financial experts, the town opened a $500-million loan pool before Congress closed certain loopholes on tax-free municipal bonds.

(Hernando County, with a special act of Congress in 1986, established a similar, $300-million bond pool, but never made a loan from it because the interest rate on the money was too high. The creators of the pool made several million dollars off of it before it was finally dissolved.)

In many cases, other governments find it cheaper to borrow from such pools than to hire experts to issue their own bonds.

But the program has been so successful in Gulf Breeze -- "We have more demand than we have money to loan," Gray said -- that the town has created other bond programs under the newer, tighter federal rules.

"We look at this as an enterprise to benefit the city," Gray said. "We're a small piece of the action, but we must be good enough for a lot of cities, counties, entities and airports to come to us."

Gulf Breeze earns a minuscule fee from its bonds, he said. The fees are a fraction of a percent, but during the mid to late 1980s, they added up to about $300,000 or $400,000 a year in profit for the city.

Now Gray oversees about $1.2-billion in various bond projects as executive director of Gulf Breeze Financial Services, a $60,000 city post that was created for him this year. As a paid consultant for the past few years, he helped boost the city's bond revenues to about $750,000 a year.

Pretty sophisticated stuff for a town that still pays its mayor and four City Council members $1 a year.

"Gulf Breeze is just something that comes to mind when the question arises: "How do you finance a complicated transaction that is multijurisdictional?' " said Lott, the city's bond counsel, with the firm Miller Canfield Paddock and Stone. "That is something that the city of Gulf Breeze has made a niche for itself in the market."

In fact, J.P. Morgan Chase & Co. approached Gulf Breeze about a year ago, when Florida Water first announced it was for sale, to see whether the town could provide the bonds for another buyer, Lott said.

The idea was scuttled when the utility entered exclusive negotiations with the Florida Governmental Utility Authority last September.

The following July, after an Allete attorney called Lott to suggest negotiations, Lott called Gray.

"People come to (Gray) on a daily basis looking to float financial deals that we could put on our AAA-rated, tax-exempt bonds," said Carl Hoffman, a City Council member and civil servant planner at nearby Eglin Air Force Base. "He's an essential player in Gulf Breeze in our finances."

As the Florida Water purchase came together late this summer, Gray found an ally in homespun Gulf Breeze Mayor Lane Gilchrist.

The 65-year-old retired Gulf Power engineer is no stranger to utility coalitions.

When saltwater intrusion began affecting the drinking water on Fairpoint Peninsula, Gulf Breeze teamed up with the neighboring Midway and Holley-Navarre water systems to seek a solution.

That coalition, the Fairpoint Regional Utility System, is spending $20-million to sink new wells in central Santa Rosa County and pipe the water about 40 miles down to the peninsula. Gilchrist is president of the group.

As the peninsula continues to grow, Florida Water's expertise could help address future water needs, he said.

"Both cities (Gulf Breeze and Milton) operate their own water and sewer systems," said Gilchrist, who casts the fifth vote in all City Council decisions. "We could see in the future utilizing some of this capability to help our systems."

Hints of shadows

Financing a half-billion-dollar deal was no sweat for Gulf Breeze. But ownership was another thing.

In all of its previous projects, Gulf Breeze simply provided the money. It paid for the hotels and casinos, but it didn't run them.

Florida Water would be different. The city would own and operate the utility, an endeavor that requires expertise and opens the city to liability.

But there was another option: Gulf Breeze could form an "authority," a unique creature of state law. An authority's board of directors, experts appointed by the member governments, can issue bonds and run utilities without exposing those member governments to liability.

The group would be similar to the Florida Governmental Utility Authority, the three-county coalition that had been negotiating to buy Florida Water for nearly a year.

To create an authority, Gulf Breeze needed at least one partner, so it looked north to its sister city Milton, a 158-year-old timber town that has largely retained its industrial feel.

Milton City Attorney Roy Andrews reviewed the deal, and Gray answered council members' questions at a special meeting on Sept. 17. With that, the Milton City Council voted 6-0 to join the Florida Water Services Authority.

All Milton had to do was lend its name to the authority, appoint someone to the five-member board and watch its $300,000-plus share of the revenues roll in each year.

"It looked like it was a win-win for the city of Milton," City Manager Donna Adams said from her tidy office in the red-brick City Hall -- coincidentally, a building initially financed through Gulf Breeze's lucrative loan pool nearly a decade ago.

Later that same day, the Gulf Breeze City Council voted 3-1 to join the authority. The dissenting vote came from Beverly Zimmern, a nurse who felt the undertaking was too large for a pair of small towns.

Anticipating the approval of both councils, city officials ran legal ads the previous week in the Pensacola News Journal announcing the authority's first meeting to discuss buying Florida Water. The advertised date changed twice, before the authority settled on Sept. 19 at Pensacola Junior College.

Gray said notices also were posted at Gulf Breeze buildings and sent to local radio and television stations, but no one called the affected counties that had closely followed the Florida Governmental Utility Authority's negotiations with Florida Water.

"All of those communities were involved in a competing proposal," he said.

But those communities had been told "many, many, many times" that other buyers were being sought, said Joe Mason, a Brooksville lawyer who has represented Florida Water in Hernando County.

"You asked me if they weren't paying attention," Mason told the Times last week. "I say, hell yes, they weren't paying attention."

They also were playing under different rules. The Florida Governmental Utility Authority chose to advertise all of its public hearings in 17 newspapers covering every area served by Florida Water.

In the past six months, the Florida Governmental Utility Authority had heard literally days' worth of public comment on its plan to buy the utility.

By contrast, the public comment portion of the Florida Water Services Authority meeting Sept. 19 lasted a few seconds -- just long enough for the chairman to see no one in the audience but the experts who crafted the deal, according to a tape recording of the meeting.

"It was not one of those highly visible projects," Gray said. "We didn't have a roomful of people."

The dismal turnout suggests that the group might have followed the letter, but not the spirit, of public notice laws for such meetings, Citrus County Administrator Richard Wesch said.

"This is exactly as it appears: a hastily created scheme to exclude effective public comment and prevent local governments from protecting the interests of their respective citizenry," he said.

Gilchrist bristles at such accusations. Having watched juries convict two commissioners in neighboring Escambia County for violating the state's open-government law and knowing the Florida Water purchase would be controversial, Gilchrist said, Gulf Breeze officials did everything by the book.

"I don't think there was any secrecy or unscrupulousness on our part," council member Hoffman added. "It was all done in the sunshine. We didn't have any intent of pulling it off behind people's back."

Winds of change

This past week, as horizontal rains from Tropical Storm Isidore pelted Gulf Breeze, communities across the state deluged the coastal town with frustration-filled letters.

"Unfortunately, the formation of the FWSA was made without public input from local governments and citizens affected by the transaction, without determining legitimate public purpose and benefit, without adequate engineering and financial due diligence, without competitive bids for the management and operations contract, without local control over rates, and beyond the control of regulatory authorities," E. Glenn Tucker, chairman of the Marco Island City Council, wrote in a three-page letter.

Separate attorneys for Marco Island, Hernando County and Charlotte County also filed extensive public records requests for information about the deal, foreshadowing legal battles ahead.

A common plea runs through the letters: Please reconsider the purchase.

It is doubtful those pleas will change anybody's mind.

"I have not seen or read anything that would not lead me to believe this is in the best interests of everyone involved," Hoffman said.

-- Staff writers Robert King and Carrie Johnson and researcher Cathy Wos contributed to this report.

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