The request of staff for Council is to review and consider for approval the attached Resolution No. 2019-01 authorizing the acquisition of the Orangewood Lakes Services, Inc. utility system for a do not exceed amount of $950,000.

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

1. Brief History of Acquisition Efforts and Direction from Council

As City Council is aware, staff began preliminary discussions with the owner of Orangewood Lakes Services, Inc. and the possible acquisition of the system.  Subsequent to the completion of a valuation report on the utility, negotiations for the purchase took place.  The valuation report’s methodology utilized three weighted criteria.  An asset valuation of the existing facilities, income valuation, and the comparable sales valuations of similar size utilities.  The valuation report and summary memo from McKim & Creed identified a reasonable purchase price for the Orangewood Lakes Services, Inc. utility system to be between $800,000 and $900,000 excluding the additional 60 units currently requesting utility services from the existing system. Negotiations between staff and the current owner concluded on June 14, 2018 with an agreed purchase price of $950,000 for the Orangewood Lakes Services, Inc. utility system, contingent on Council's approval and the issuance of a notice of intent to purchase the utility system.  The notice of intent's purpose is to set forth the key terms and responsibility of each party required for the purchase conclusion.  A May 1, 2019 date has been agreed to by all parties as a fair and reasonable time frame to complete the purchase process.

After review by the City's Finance Director and the City's 2018 Utility Revenue Sufficiency Analysis Update (RSA) performed by Stantec Consulting Services, Inc., it has been recommended that the purchase of the system be included in the currently utility borrowing of funds identified in the RSA for capital construction projects.  While the purchase of the utility will occur prior to any borrowing, reimbursement of the existing funds utilized for the purchase is allowed by the IRS with the asoption of a reimbursement resolution.  In addition to the $950,000 proposed purchase price, the valuation report included the cost estimates of capital construction projects for water and sewer tie-ins of the Orangewood Lakes Services, Inc. utility system to the City’s utility system.  The cost of these two (2) construction projects is estimated at $920,000.  The RSA also included the cost to lease the existing wastewater treatment plant at a cost of $3,000 a month until the sewer tie-in project can be completed.  Finally, the cost for the City to replace the existing meters with the City’s Automated Meter Infrastructure (AMI) system in the amount of $241,000 was included in the RSA.  

As City Council may recall, in January of 2017 the City purchased Lakewood Villas, Barbara Ann Acres, and Silver Oaks utility systems.  Staff has reviewed the operating and maintenance responsibilities of the Orangewood Lakes Services, Inc. utility system in conjunction with the three utilities previously purchased and has concluded the need to request approval from City Council for additional utility maintenance personnel and equipment in the form of two (2) water distribution utility mechanics, two (2) sewer collections utility mechanics and, two (2) utility service trucks for the 2019/2020 fiscal budget year.

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

Before approving Resolution No. 2019-01, the City Council is required to consider the following nine (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 A.

    

2. The most recent available balance sheet for the utility, listing assets and liabilities clearly show the amount of contributions-in-aid-of-construction and the accumulated depreciation thereon. Please see attachment B 2017 Tax Return Form 1120S & 4562.

    

3. A statement of the existing rate base of the utility for regulatory purposes. The existing rate base for Orangewood Lakes Services, Inc. is: water $9.02, wastewater: $24.83.

    

4. The physical condition of the utility facilities being purchased. See attachment C, Utility Valuation Section 2.1 and 2.2

    

5. The reasonableness of the purchase price and terms. See attachment D, Utility Valuation March 9, 2018 McKim & Creed memorandum.

    

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 owner of the system is 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. Sections 2.3 and 2.5 of valuation reports 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 owner of the system is motivated to sell the system, either to the City or another private purchaser. If the City does not purchase the system, it is likely that another private purchaser will. The potential impact on utility customers if the system is 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 this system 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.                                                                                                                                                               

1. Acquisition Process Overview

The complete process to acquire and finance the system 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