The growing concerns will cost. The original December sale date for the bonds was pushed back after the Panhandle towns that hope to buy the utility with bond proceeds could not secure insurance for the issue. This in turn has generated a poor bond rating of BBB, just a step above junk bond status.
"There are definitely some concerns with this deal," said Karl Jacobs, an analyst with Standard & Poors, the New York credit rating agency.
From its Central Florida base, Florida Water Services operates 152 separate water systems serving dozens of smaller counties and Florida towns.
Roughly 80 percent of those municipal customers had signed off on a sale that would transfer ownership to Florida Governmental Utility Authority, an intergovernmental authority which owns seven utilities in Osceola, Polk, Hillsborough, Sarasota and Naples counties.
Then, according to Gulf Breeze City Manager Edwin Eddy, the utility called that tiny Panhandle city and asked it to place a bid.
In some ways, it was not an unusual move. Gulf Breeze has come under the scrutiny of both the Internal Revenue Service and the Florida Public Service Commission for huge bond-backed financing deals.
A quasi-governmental panel quickly created by Gulf Breeze and nearby Milton offered $507 million for the utility. If finalized, it will be a lucrative deal. Gulf Breeze will receive 2 percent of the utility's annual gross revenue, a minimum of $1.5 million each year. Milton will receive 20 percent of what Gulf Breeze will make, a minimum of $300,000 each year.
Over the life of the 30-year deal, the two cities stand to make a combined minimum of $45 million. Yet, none of the more than 13,000 residents of the towns receives water from Florida Water Services.
Shortly after the new buyer was identified, the lawsuits hit the fan. The cities of Marco Island and Palm Coast have sued to block the deal, as have Volusia, Charlotte, Hernando, Collier and Osceola counties and a number of homeowners and community associations.
More drastic measures may be in store. Two towns have commenced condemnation proceedings, opting to seize the utility under eminent domain rather than allow the sale to go through.
The municipalities' concerns go beyond the unanswered question of why the earlier bid was spurned. An engineering report states an additional $25 million will be needed over the next five years for capital improvements to some of the smaller systems owned by the utility. That, plus the huge bond debt, has triggered fears of sharp rate hikes as the new owners pay off their purchase.
The Panhandle authority has pledged not to raise rates for the first three years it owns the utility. However, at a public hearing held four months ago, the prospective buyers acknowledged connection fees could be increased from $3,300 to $4,200 over the next five years.
Despite the fact that the utility invited the Panhandle towns to bid — and jilted its existing buyer — buyer and seller are now at odds over the asking price.
Florida Water Services says the deal is worth $492.5 million. The panhandle towns are citing a figure of $456.5 million, a difference of $36 million. It appears, together with some concessions such as the utility paying an extra $16.5 million in closing costs and another $18 million for capital improvements, the final figure will be closer to what the panhandle buyers are seeking.
"We forced them to accept a lesser price," says Edward Gray, head of the panhandle towns' Florida Water Services Authority. "We 'hillbillies' up here just got a better deal."
The jury is still out on whether investors will find the deal as sweet.
The bond issue has received the lowest investment grade rating possible, BBB. That is expected to raise interest rates on the bonds, as well as the investment risk.
Although water utility bonds generally tend to do well on the open market, institutional investors tend to shy away from bonds with low ratings because of the high risk involved.
"Water bonds are generally considered highly, but there is less of a market for BBB," says Richard Lehmann, publisher of Income Securities Advisor, a publication tracking municipal bonds.
And, according to Standard & Poor's Jacobs, the proposed management structure of the water utility raised some eyebrows in the bond community.
"It's an untested governance system for water utilities," notes Jacobs. "It calls into question the authority's ability to manage the system effectively."
The buyers, though, appear unconcerned by both the rating and the pending lawsuits.
"The issues in the lawsuits and the legislation have no merit," says Phillip Gildan, an attorney for Florida Water Services. "It's just not a valid answer to say we need to wait until the authority and the company can settle them to get the deal done."
Source: American City Business Journals Inc.
