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WILL VAN SANTThe purchase of Florida Water Services' Spring Hill utility could drain more funds than it appears on the surface of the agreement.
Hernando County officials have championed the purchase of Florida Water Services' Spring Hill utility, not a doubter among them.
Nor has the public raised concerns about the deal's wisdom at the many hearings that have been held.
The din of support from officials has been so pervasive and the lack of public debate on the details of the purchase agreement so complete, it's easy to overlook that the deal will saddle the county with untold millions in debt over the next three decades.
And while few question whether having the utility in county hands rather than under corporate control is a good thing, a close look at the purchase agreement shows that Hernando County has made concessions, some of which could prove costly.
The deal, which might close within weeks, leaves the county liable for legal actions against Florida Water that stem from longstanding pressure problems in the Spring Hill system.
Say a fire struck a development in the area and caused millions of dollars in damage. Investigators determine the fire could have been stopped but for limp hoses. Under such a scenario, the county could get stuck with the bill, not Florida Water.
The company gets to walk away with connection fees customers have paid the utility. The fees, close to $1-million last year, are generally used to pay for system expansion and capital projects.
Unlike public utilities, private utilities like Florida Water don't have to segregate their connection fee revenue, county officials said. They have no idea how much in connection fees the company has in its coffers, but acknowledge Florida Water has brought in millions over the years.
Unspent connection fees, which are supposed to go back into the utility system, will be pocketed by Florida Water as it sells its assets in Florida and gets out of the water and sewer business.
Finally, the actual cost of purchasing the utility will be much greater than the initial $43-million expenditure. In the coming years, the utility's price tag could swell into the hundreds of millions of dollars as debt service is paid on bonds and money goes to maintain the system, parts of which are now more than 30 years old.
The county has long viewed ownership of the Spring Hill utility as key to controlling future growth. In January, county commissioners charged County Attorney Garth Coller with getting the job done for $42.9-million or less.
In addition to Hernando, four other governments and a consortium called the Florida Governmental Utility Authority, all seeking to buy the Florida Water utilities within their jurisdictions, have negotiated the current purchase agreement.
Among the various representatives of local government at the negotiating table, Coller is the lone attorney. The others are administrators. Coller said his legal skills proved to be an advantage. The concessions in the contract are justified, he said, and the results favorable to Hernando.
"Every deal comes with a give and take," Coller said. "The question is whether what you give is more valuable than what you take. I thought we did very well."
County officials say they are acutely aware that Hernando is responsible for legal actions related to low pressure in Spring Hill. Throughout negotiations, Florida Water has stressed that no deal would be possible if it was liable in any way for the condition of the system.
It is being purchased "as is," according to the contract.
Chuck Lewis, the county's regulatory and franchise administrator, is charged with monitoring the Spring Hill system for Hernando. Once the county takes over the utility, Lewis said he and county utility department officials plan to address low-pressure problems swiftly.
"The buck stops here when it comes to liability," Lewis said. "We know that. And from day one we have to start working."
Coller said he recognizes that in the event of some catastrophe the county could be responsible for considerable damages, but he said that was no reason to reject the purchase agreement. Ownership, he said, always involves taking chances.
"If you own a car that kills someone, you are the one that is going to get sued," he said. "If you want the asset, you have to take the risk."
According to county regulator Lewis, Florida Water's Spring Hill system brought in $823,000 in connection fees during 2002. In 2001, Lewis said, $541,000 in connection fees was collected.
The purchase agreement defines connection fees as monies paid by new customers to "defray the cost of making utility service available." They act like impact fees and are used to increase system capacity and cover other costs.
Though Lewis said he has financial reports that show how much in connection fees Florida Water has collected annually, there are no documents that indicate how much of that money is unspent - in essence, how much Florida Water gets to keep once the deal is finalized.
Both Lewis and utility department officials said the connection fee issue doesn't concern them. The bulk of the money, they said, has already gone into improving the system, so the county and customers will not get stiffed.
Mike Twomey, who directs the nonprofit Florida Utility Watch and for 10 years worked at the Public Service Commission, a regulatory arm of state government, takes a different view.
Conceding connection fees, he said, amounts to an unseen increase to the sales price.
"They have . . . accepted all of their liabilities," Twomey said of the county. "And they are letting them keep the best asset you can have, which is cash. But apparently that has been negotiated."
County Attorney Coller, unsurprisingly, disagrees.
The best asset you can have, Coller said, is not cash, but a profit-making entity, such as the Spring Hill utility. Studies show that income from the system will cover all needed expansions, as well as the debt service on the bonds that will be issued to buy the utility, he said.
Given those findings, Coller said, the fee issue is insignificant.
"I don't care whether they get connection fees or whatever," he said. "The bottom line, our key, was to negotiate the lowest possible price."
When negotiations heated up in May, Florida Water demanded a purchase price for the Spring Hill utility of $56-million, but the county balked and said it would pay $35-million. The final purchase price is $35.6-million.
Yet additional costs tacked on to the utility's price tag are considerable.
Some $4.4-million will be bonded for immediate capital projects, low-pressure problems being a priority.
Then there are acquisition and closing costs, in which $3-million will be distributed among the professionals who orchestrate such deals.
These professionals include underwriters who market the bonds; bond counsels who represent buyers; disclosure counsels who ensure that everybody in the deal is telling the truth; financial advisers to represent the county's interests and acquisition counsels to negotiate the deal.
Bond insurance must also be paid.
The total, which has shifted slightly higher as the deal nears completion, now stands at $43-million, just greater than the top price of $42.9-million attorney Coller was told Hernando could pay for the system.
"Our demand was always price," Coller said. "As long as we kept that in mind as the goal, we could give concessions as long as they were comparable to a price reduction."
It appears Hernando did well in this regard. Based on rough estimates, officials said the price Hernando will pay for each of the Spring Hill utility's 33,000 water and sewer customers, about $1,148, is lower than what other governments will pay. By comparison, officials said the City of Marco Island, also involved in the deal, will pay $8,000 per utility customer.
However, engineers hired by the county have found that the Spring Hill utility will need an additional $14.3-million in improvements over the next five years. That brings the near-term cost of the system to $57.3-million, or $1.3-million more than Florida Water demanded as a purchase price in May.
Debt on the purchase price alone, which officials say will be covered by system revenue, amounts to $37-million over the next 30 years. And the true costs over the coming decades could be much greater.
Despite hundreds of thousands of dollars in contracts paid to engineering firms to assess the value of the utility, nobody has put a spade in the ground, dug up a pipe and had a look.
What the engineers have done is examine the surface fixtures of the utility and review reports compiled by state regulators and Florida Water, officials said.
While a direct approach - inspecting the pipes that carry the water to customers and ship their waste to treatment plants - may seem necessary, officials said such subsurface exploration is rarely done.
"As far as digging up pipes and looking at pipes," said county utilities department director Kay Adams, "that's not part of due diligence for a utility system. Why would we do that? We are buying it as is."
According to utility watchdog Twomey, governments often attempt to make a deal look good by obscuring the expense of operating a utility and inflating its revenues. Once a system is in a government's control, he said, costs can tend to balloon.
Coller does not deny the possibility of hefty expenditures in the future, but he stressed how important it is for the county to own the utility, which gives it control of a valuable resource and the power to distribute it.
"If you want to buy a house now," Coller said, "the question is whether you want to buy the house. And we want to buy the house, even if it has to have work done to it down the road."
At the moment, the county not only has a negotiated contract to buy the Spring Hill utility, but also is attempting to acquire the system through an amicable condemnation.
The condemnation was filed in August after the city of Weeki Wachee began its own condemnation bid. County officials are awaiting resolution of Weeki Wachee's lawsuit, which they say will either be settled out of court or thrown out by a judge.
Once that occurs, officials hope to quickly secure bond ratings, insurance and close the sale.
Coller is to update the County Commission Tuesday on the status of the deal.
- Will Van Sant covers Hernando County government and can be reached at 754-6127. Send e-mail to vansant@sptimes.com
Money mattersCosts associated with Hernando County's purchase of Florida Water Services Spring Hill utility.
Purchase price of Florida Water Service Spring Hill Utility: $35.6-million
Amount to be bonded for immediate capital projects: $4.4-million
Acquisition and closing costs: $3-million
Needed for improvements over the next five years: $14.3-million
Debt service over the next 30 years: $37-million
Total: $94.3-million
- Source: Hernando County