HomeMy WebLinkAbout1993 11 24 - Report by Utilities Dir.REPORT ON T H E C TTY OF S E BA ST T A N' S
N E GOT I AT S O N S A N D PURCHASE O F T H E
GENERAL DEVELOPMENT UTSL=T2ES (GDU)
S E BA ST = A N H I G H L A N D S WAT E R A N D
WA ST E W AT E R SYSTEMS
November 24, 1993
By; Richard B. Votapka, P.E.
Utilities Director, City of Sebastian
It is my intent, as Utilities Director, to try to summarize
events which led to a purchase agreement for the GDU Sebastian
Highlands water and wastewater systems between the City of
Sebastian and General Development Utilities over a three year
period.
Since March 5, 1991, when the City received an offer from
Indian River County to relinquish its franchise rights within the
City, the City has pursued its goal of acquiring the General
Development Utilities (GDU) Sebastian Highlands water and
wastewater systems. Once acquired, the system will ultimately be
expanded throughout the entire City. Throughout the lengthy
process of negotiations, several dollar amounts relating to the
purchase price of the GDU system were publicly revealed.
Negotiations at times moved rapidly, then stalled; then proceeded
to an initial offer. Negotiations were terminated by the City
after the initial offer was rejected by GDU; then resumed. Finally,
an agreement was reached between the City and GDU; the required
Chapter 180.301 Public Hearing was held; a purchase and sale
agreement was executed; and closing was scheduled for December 16,
1993 for the acquisition of the GDU systems.
The general feeling expressed by many of the residents of
Sebastian was that they were not properly informed of the status of
negotiations during the entire process; that they only learned
about the conclusion of the negotiations after a purchase price had
been determined.
In March, 1991, the City of Sebastian selected and hired the
consulting engineering firm of Hartman & Associates, Inc. and the
law firm of Gray, Harris & Robinson to provide technical and legal
assistance for the City's negotiations with GDU. In their
preliminary analysis to determine a relative cost value of the GDU
Sebastian Highlands Water and Wastewater System, Hartman &
Associates performed a comparison study. By comparing costs of
other utility systems similar to the GDU system and the number of
customers they served, Hartman and Associates determined the GDU
system to be at least worth $2 million. The $2 million value was
used for initial negotiation purposes.
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In April 1992, GDU offered a package sale of both the GDU Palm
Bay and Sebastian systems for a total price of $50 million. The
GDU Palm Bay System was offered at $47.5 million, the GDU Sebastian
Highlands system for $2.5 million. The City of Palm Bay rejected
this offer in favor of having the purchase price determined through
court ordered arbitration which had been previously scheduled for
May, 1992.
From May, 1992 through October, 1992, GDU did not negotiate
with the City of Sebastian. During that period, GDU was intensely
involved with the Palm Bay and North Port Utility Systems
arbitration rulings. Both Palm Bay and North Port were large
systems in comparison to the Sebastian Highlands system. Together
their arbitrated value was determined to be $48.4 million, $31.9
million for Palm Bay, and $16.5 million for North Port.
From November, 1992 through March 1993, Hartman & Associates
and Robb McClary, City Manager, had several discussions with GDU
officials. As a result, a purchase price of $2.75 million was
agreed upon with Charles Fancher, President of GDU. On April 14,
1993, the purchase price was reviewed independently with each of
the City Council members by the City Manager, Utilities Director,
and officials from Hartman and Associates, Inc. After it was
approved by the City Council, Charles Fancher brought the purchase
price before the governing board of GDU for approval. The GDU
Board of Directors countered with an offer of $3.25 million. The
City maintained its position to offer $2.75 million and broke off
negotiations on June 16, 1993 after GDU filed for a rate increase
on May 1, 1993.
Negotiations between the City and GDU were conducted in
accordance with Florida Statutes, Chapter 166.045. This Chapter of
the Florida Statutes provides for negotiations between the two
parties to be conducted in private, so that the City's negotiating
strategy was not revealed to the seller through the news media.
Otherwise, the City's every move in determining an offering price
would be exposed to the seller. Chapter 166.045 also provides for
private negotiations during collective bargaining with labor unions
for the very same reason. It is only after a purchase price or a
contract is successfully concluded and agreed upon, that the
details of the negotiations are publicly released. Unfortunately,
members of the public feel frustrated during negotiations because
of the lack of information which is released.
The rate increase that GDU filed on May 1, 1993, originally
was intended to be filed in 1992, but was delayed because of
negotiations in progress during that time. Once the rate increase
was filed by GDU in May, 1993, the City was obligated to review the
application in 60 days and take action within 30 days. This
timetable is set forth in City Ordinance 0-92-15 in reference to
utility franchises and in the GDU Water and Wastewater Franchise
Ordinances. It is only through a mutual agreement between the City
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and GDU that the City can extend the time frames as set forth in
the Ordinances. The City nor GDU alone can not extend any
deadlines in regard to the implementation of rates. When GDU did
not want to extend the deadline of September 17 for implementation
of rates prior to negotiations, the City was powerless to extend
the deadline. GDU did so only at the request of Council.
When the public hearing on rates was held on August 18, 1993,
Rachlin and Cohen. CPA's, presented its analysis of GDU's proposed
rates and recommended a slight reduction of rates in comparison.
Unfortunately, the rates recommended by Rachlin and Cohen were
approximately double the existing GDU rates. Since the "Income
Approach" analysis used by Rachlin and Cohen was a commonly
accepted method of rate analysis, no one materially challenged it
at the Public Hearing. Therefore, on September 17, thirty days
from the August 18, 1993 Public Hearing, the new rates would have
gone into effect.
Meanwhile, through telephone calls and personal contacts whom
the Finance Director and Utilities Director had with people in the
business community, the City staff was informed that GDU was
actively marketing its five small remaining utility systems,
including the Sebastian Highlands systems. Just a few days prior
to the Public Hearing, the City staff learned that a large utility
firm in Minnesota was approached by GDU for the purpose of buying
all five remaining systems as a package. Also, a firm in London,
England had been approached and was considering the purchase.
Purchase of the GDU Sebastian Highlands system by others would
prohibit the City of Sebastian from providing water to Units 1 - 17
of Sebastian Highlands for the remaining 18 years of GDU's 30 year
franchise. Units 1 - 17 constitute about 13,000 lots of the
approximate 14,170 commercial and residential lots within the City.
Staff learned that GDU was mandated by the Courts to divest
its utility holdings by 1995 under the Chapter 11 reorganization
plan for the bankrupt General Development Corporation (GDC). GDC
was the sole shareholder of General Development Utilities. By
filing an application for a substantial rate increase and having
the majority of the increase materially unaltered at the conclusion
of the Public Hearing, GDU maneuvered into an excellent position to
market the Sebastian Highlands system as a financially viable
product. The small Sebastian Highlands system most likely was used
by GDU as a tax write off against the much larger systems such as
North Port, Port St. Lucie, and Palm Bay. Rates for the Sebastian
Highlands systems were not increased for extended periods of time.
Furthermore, GDU never implemented an incremental increase to
adjust for inflation. However, once the larger GDU utility systems
were acquired by the various municipal and county governments, the
smaller systems (including Sebastian Highlands) were no longer a
tax write off for GDU but an economic drain on GDU's financial
balance sheet.
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Following the Public Hearing on rates, the GDU Sebastian
Highlands customers were faced with the dim prospect that their
utility bills would nearly double in 30 days. Also, the City was
confronted with the looming prospect of GDU selling the GDU
Sebastian utility system in the near future to another small
utility company as a package deal. The City Finance Director had
personally been involved in eleven (11) utility acquisitions in
Brevard County. When GDU officials hinted at the possibility of
reopening negotiations the day after the August 18, 1993 public
hearing, she seized the opportunity to have a City task force talk
to GDU officials. The task force consisted of the Mayor, Acting
City Manager, Finance Director, Utilities Director, and City
Attorney. They met with GDU officials for several hours during the
next day in the City's Attorney's office. The outcome was that GDU
would be receptive to negotiations by the City. However,
negotiations would have to be speedy since GDU had several
prospects to purchase the system. It was stated that conditions
had changed following the public hearing on rates, so that even the
counteroffer of $3.25 million that GDU had previously offered the
City was no longer on the table. The City would have to
renegotiate a new figure. The Indian River County Property
Appraiser valued the system at $4.3 million. However, when the new
rates went into effect the value of the system would be
considerably higher. Charles Fancher, GDU President, had also
stated that in 1986, the rate base approved by the City (unadjusted
for used and useful) had a net book value of $3.7 million for water
and $1.8 million for sewer, for a total of $5.5 million.
When presented with the fact that GDU was willing to negotiate
with the City, the Sebastian City Council authorized the Task Force
to proceed with negotiations. After looking at alternatives and a
preliminary analysis of expenses vs. rates to support the required
bond, an offer of $3.65 million was made by the City and accepted
by GDU. Per customer, the unit price cost was approximately
$2,938.81 based on 1242 customers.
Indian River County purchased the GDU-Vero Highlands Water and
Sewer System in October for a cost of $3 million. The system
served 1274 water customers and 1185 sewer customers. However,
Indian River County was already serving the water customers with
treated water from its South County Water Treatment plant. GDU
abandoned its Vero Highlands Water Treatment Plant on March 2,
1986.
Once the majority of the City Council approved the purchase
price, the Task Force met with GDU officials for six (6) hours on
October 1 to formulate a substantive, complex "Purchase and Sale
Agreement" for the Sebastian Highlands system. The agreement was
predicated on compromised language of both the GDU purchase and
sales agreement presented to the City and one prepared by the law
firm of Gray, Harris, and Robinson. The final language of the
agreement was concluded by both the City Attorney and GDU Attorney
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on October 8, a week later. The agreement was ratified by both
parties with the final signatures affixed to the document on
October 12, 1993.
Immediately, bond financing had to be procured to finance the
purchase of the system. The Finance Director assembled a bond
procurement team of Raymond James & Associates, as bond
underwriter; Nabors, Giblon & Nickerson, P.A., as bond counsel;
Hartman and Associates, as engineers; Rachlin and Cohen, as rate
analysts; and Hoyman, Dobson & Co., P.A., as Certified Public
Accounts. Because a timely commitment by Rachlin and Cohen was not
submitted, the Financial Management section of Hartman & Associates
was selected to substitute as rate analysts. A schedule was
formulated for procuring the bond and closing the purchase of the
GDU system on November 30, 1993. However, the closing has been
extended to December 16 to allow the bond insurers more time for
their review.
The bonds to be issued are 30 year Utilities System Revenue
Bonds, not to exceed $5 million aggregate principal which will be
financed solely by the water and sewer rates for the system.
Should an additional guarantee be necessary to finance the bond,
the unencumbered 1/2 cent sales tax can be pledged to avoid any
Increase in ad valorem tax. This is stated in the Bond Resolution.
The total amount of the bond will cover the purchase of the GDU -
Sebastian Highlands Water and Sewer System, costs of issuance, bond
insurance premium, a deposit to the debt service reserve fun, cost
of various projects as stated in the engineer's report, and a small
contingency.
During the bond procurement process, GDU officials agreed to
hold the rate increase in abeyance. if they had chosen, the
increase in rates could have been lawfully implemented as early as
September 17, 1993. Had the Sebastian Highlands system been sold
to a private utility company, it could have applied for a rate
increase twice each year in accordance with Section 102-4
"Utilities" in Sebastian's Code of Ordinances. Also, the private
company could have sold the system to another utility company at
any time it chose.
Once the City acquires the GDU system, the City plans to do
the following:
1) Immediately start preparation of a Water and Wastewater
System Master Plan, the primary concern of which is to
supply water to the US Highway 1 and Indian River Drive
business district.
2) Design and install a trihalomethane (THM) control system
for the Filbert Street water treatment plant.
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3) Design and construct a water main to connect the Park
Place/Palm Lake Club System with the GDU system after the
THM control system is operational at the water plant.
4) Design and construct two force mains and a lift station
to divert wastewater flow from Park Place/Palm Lake Club,
which is currently discharged to Indian River County's
system, to the City's (GDU) wastewater system.
The water distribution system will be expanded first because
of the following reasons:
1) There is a much greater reserve capacity in the water
plant than the wastewater plant.
2) Construction and expansion of a pressure water main
system is more easily accomplished than a gravity sewer
system with associated lift stations and force mains.
3) Installation of a water system is less costly than a
sewer system.
4) A water system provides for fire protection as well as
providing treated water.
Policies for expansion will have to be set in the future.
Basically, the City will finance expansion through impact fees and
special assessments. Impact fees would be used toward the capital
expenses for water and wastewater, and for repayment of debt for
Initial Capital outlay. Impact fees should be paid at the time of
building permit application for new construction but the City
Council may wish to look at a deferred payment plan for existing
homes of buildings of possibly 10 years. Connection of the sewer
system will be mandatory as decreed by Florida law. Connections to
the water system will be required of all new residential and
commercial structures. However, all existing residential and
commercial structures within areas where water mains are to be
installed should be strongly encouraged to connect. Where special
assessment projects are required for expansion of the water and
sewer systems, impact fees will be required as well as the cost of
actual main, water and wastewater services, and hydrant
installations. It is hopeful that a well field and water treatment
plant will be constructed on the east side of the airport property
and that a wastewater plant be constructed on the west side. Reuse
water generated from the wastewater treatment plant will be used
for irrigation of the Sebastian Municipal Golf Course.
Events related to the acquisition of the GDU Sebastian
Highlands Utility System have moved very rapidly from the August 15
Chapter 180 Public Hearing to thwart an effort by GDU to sell the
system to a private utility company. Unfortunately, the momentum
of events has caused numerous items to be placed before the City
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Council for their consideration and much stress upon the staff to
achieve the ultimate goal of the GDU system acquisition. Through
the spirit of co-operation and understanding between Council
members, City staff, the public, and the media, it is hopeful that
all will harmoniously proceed through the succession of rapidly
occurring events to a successful conclusion.
Hopefully, this document will provide the public with a
sufficient explanation as to their "right -to -know". If anyone has
any questions, or needs further information, the staff in both the
Utilities Department and Finance Department will be able to provide
additional information upon request.
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