The request of staff for Council is to review and consider for approval the attached Resolution No. 2017-03 authorizing the acquisition of the Lakewood Villas, Barbara Ann Acres, and Silver Oaks Utility systems for a do not exceed amount of $605,000.00.

This resolution is in accordance with Chapter 180, Florida Statutes, specifically section 180.301.

I.               Brief History of Acquisition Efforts and Direction from Council

As Council is aware, staff began preliminary discussions with the owners of Lakewood Villas, Barbara Ann Acres, and Silver Oaks Utilities and the possible acquisition of the systems.  Subsequent to the completion of the utility valuation reports, negotiations for the purchases took place.  The reports were determined by an average of the asset valuation of the existing facilities, income valuation, and the comparable sales valuations of similar size utilities.  The valuation of the Lakewood Villas system was determined to be $512,999, the Barbara Ann Acres system $40,910, and the Silver Oaks system $53,578.  The sum of the three systems totaled $607,487. The report summary memo from McKim & Creed identified a reasonable purchase price for the three utility systems to be between $560,000 and $610,000. Negotiations between staff and the current owners concluded on January 14, 2016 with an agreed purchase price of $600,000.  On April 19, 2016 Council reviewed and approved the notice of intent to purchase the Utilities and requested staff to conduct a financial review of the most current utility revenue records, conduct a review of the comparable sales criteria and determine the weighted viability, and finally, lower the return on investment.  A date of January 1, 2017 was agreed on by all parties as a fair and reasonable time frame to complete the purchase process. To account for the process discussed in Section III of this staff memo, the parties have agreed to extend the time frame to complete the purchase process to January 20, 2017.

In order to satisfy City Council's requests, review of the proposed purchase and valuations reports was conducted by City staff, the financial firm of Appelrouth Farah & Co., and the Engineering firm of McKim & Creed.  The following items were identified and adjusted accordingly.

• Use the same number of years to calculate both the asset valuation and the income valuation that was used in the previous determination. This gives a more accurate comparison between the valuation performed in January 2016 to this revised version.
• Apply revised billing rates and a 4% annual rate increase to determine revenue generation from the sale of water to the utility customers.  All information collected is to be included in a certification of net revenues form and submitted to the financial institution. 
• Apply an annual increase to the City’s operational cost to produce and distribute water.  Information based on the City's 2013 Water & Sewer Revenue Sufficiency Analysis.
• Apply a weighting factor to the asset valuation and income valuation approaches based on the assumptions made with each approach.
• Discount the comparable sales approach due to the significant difference in the size of the Barbara Ann Acres, Silver Oaks, and Lakewood Villas utility systems relative to the recent Tampa Bay area utility acquisitions, as well as unknown conditions of those utility systems compared to the Barbara Ann Acres, Silver Oaks, and Lakewood Villas utility systems.

Subsequent to the revised reports, included in the McKim & Creed Utility Valuation summary memo dated October 28, 2016 the utility valuations for the three utility systems are as follows:

·       Barbara Ann Acres Utility System            $  59,274

·       Silver Oaks Utility System                        $  42,215

·       Lakewood Villas Utility System                $506,215

The sum for the three (3) utility systems is approximately $608,000 and with the need to make various assumptions during the valuation process, a reasonable purchase price for the three (3) utility system is between $580,000 and $610,000 which falls in line with the proposed purchase price of $600,000.  The return on investment for the three utility systems has been reduced from approximately 12 years to eight and a half year. Based on the review of the City’s Finance Director and the City’s Financial Advisor, it has been recommended that the City solicit financing directly with interested financial institutions, starting first with BB&T, since the City already has an established relationship with this bank. In addition to the $600,000.00 purchase price, a cost estimate of $155,137.50 is included in the loan as a Capital Element for the City to replace the existing meters with the City's Automated Meter Infrastructure System.

Finally, staff has reviewed the operating and maintenance responsibilities of the utilities and have concluded that it will not require a request to Council for additional utility maintenance personnel and equipment to incorporate the utility systems into the City's existing system.

II.             Public Interest Factors (section 180.301, Florida Statutes)

Before approving Resolution No. 2017-03, the City Council is required to consider the following 9 factors to determine if the acquisition is in the public interest:

1.   The most recent available income and expense statement for the utility. Please see attachment 5.

2.     The most recent available balance sheet for the utility, listing assets and liabilities and clearly showing the amount of contributions-in-aid-of-construction and the accumulated depreciation thereon. Please see attachment 6.

3.     A statement of the existing rate base of the utility for regulatory purposes. The existing rate base is for Lakewood Villas: $14.93, Barbara Ann Acres: $14.53 and Silver Oaks Utilities $14.53

4.     The physical condition of the utility facilities being purchased. See attachment 4, section 2.2.

5.     The reasonableness of the purchase price and terms. See attachment 4 and above discussion of valuation in discussion (I) above.

6.     The impacts of the purchase on utility customers, both positive and negative. It is expected that the impact of acquiring the systems on utility customers will be positive in nature. The owners of the systems are motivated to sell the system, either to the City or another private purchaser. Under public ownership and by integrating the system with the City’s existing system potential positives to utility customers include: increase in water quality, improvement in system reliability, growth potential of system and economies of scale, and cost efficient services and management. Potential negative impacts include: rate increase from current rates.

7.      Any additional investment required and the ability and willingness of the City to make that investment. There are no immediate additional investments required; however see sections 2.2 and 2.3 of valuation reports which state useful life of each system and replacement costs for infrastructure. If needed, the City is willing and able to make such investments.

8.     The alternatives to the purchase and the potential impact on utility customers if the purchase is not made. The owners of the system are motivated to sell the system, either to the City or another private purchaser. If the City does not purchase the systems, it is likely that another private purchaser will. The potential impact on utility customers if the systems are sold to a private company include higher rate increases, less reliability, and inherent inefficiencies in a small operation, as opposed to being integrated in the City’s overall system. 

9.     The City’s ability to provide and maintain high-quality and cost-effective utility service. The City, as the general purpose local government, currently operates its public utility systems. Acquiring these systems encourages economies of scale and other efficiencies that will enhance the City’s ability to provide and maintain high-quality and cost-effective utility service.

III.           Acquisition Process Overview

The complete process to acquire and finance the systems is subject to several provisions of Florida law. A summary of the requirements and necessary City Council action items is included in the following table:

TABLE 1.1