Meeting Packet — Energy & Utilities Subcommittee, The Florida House of Representatives (December 11, 2019)
Summary
Meeting packet for the Energy & Utilities Subcommittee of the Florida House of Representatives Commerce Committee, Wednesday, December 11, 2019, 9:00 AM - 11:30 AM, in Mashburn Hall (306 HOB), chaired by Charlie Stone with Jose Oliva as Speaker. The agenda is an Overview of Water and Wastewater Utility Acquisitions, presented by Andrew L. Maurey, Director, Division of Accounting and Finance. His slides say the Commission regulates 131 investor-owned water and wastewater utilities in 38 jurisdictional counties, and that the largest, Utilities Inc. of Florida, has annual revenue of $36 million. They explain acquisition adjustments: a negative adjustment is included in rate base when the purchase price is equal to or less than 80 percent of net book value.
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“Meeting Packet — Energy & Utilities Subcommittee, The Florida House of Representatives (December 11, 2019).”
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Energy & Utilities Subcommittee
Wednesday, December 11, 2019
Mashburn Hall (306 HOB)
9:00 AM-11:30 AM
Meeting Packet
Jose Oliva Charlie Stone
Speaker Chair
The Florida House of Representatives
Commerce Committee
Energy & Utilities Subcommittee
Jose Oliva Charlie Stone
Speaker Chair
AGENDA
Wednesday, December 11, 2019
Mashburn Hall (306 HOB)
9 :00 AM - 11 :30 AM
I. Call to Order & Roll Call
II. Welcoming Remarks
III. Overview of Water and Wastewater Utility Acquisitions
IV. Adjournment
303 House Office Build ing, 402 South Monroe Street, Tallahassee, Flori da 32399-1 300
(850) 7 17-4873 Fax: (850) 4 13-04 19
Committee Meeting Notice
HOUSE OF REPRESENTATIVES
Energy & Utilities Subcommittee
Start Date and Time: Wednesday, December 11, 2019 09:00 am
End Date and Time: Wednesday, December 11, 2019 11:30 am
Location: Mashburn Hall (306 HOB)
Duration: 2.50 hrs
Overview of Water and Wastewater Utility Acquisitions
NOTICE FINALIZED on 12/04/2019 4:00PM by Rigas.Amanda
12/04/20 19 4:00:23PM Leagls ® Page 1 of 1
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Overview of
Water and Wastewater Utility Acquisitions
Presentation to the
Florida House
Energy and Utilities Subcommittee
Andrew L. Maurey, Director
Division of Accounting and Finance
December 11 , 2019
Florida Public Service
Commission Jurisdiction
• The Commission regulates 131 investor-owned water and
wastewater utilities in 38 jurisdictional counties.
• The largest company is Utilities Inc. of Florida with annual
revenue of $36 million.
• The majority of systems have only a few hundred customers
and annual revenue of less than $140,000.
• The Commission has authority over the rates charged to a
small percentage of water and wastewater customers in
Florida. The vast majority of water and wastewater customers
in Florida are served by government-owned utilities or utilities
in non-jurisdictional counties.
2
Section 367. 071 , Florida Statutes
• "No utility shall sell, assign, or transfer its
certificate of authorization, facilities or any
portion thereof, or majority organizational control
without determination and approval of the
Commission that the proposed sale, assignment,
or transfer is in the public interest ... "
• The Commission does not have merger
approval authority.
Review of Transfer Applications
(Rule 25-30.037, F.A.C.)
• The Commission reviews an application for transfer of a certificate of
authorization to determine if the buyer has the technical and
financial ability to provide service to the service territory.
• Consideration is given to any needed capital investments or repairs
and the approximate cost to accomplish them.
• Establish net book value of the utility assets to determine whether
an acquisition adjustment should be recognized for rate setting
purposes.
4
History
• 1930s & 40s - Questionable purchasing practices caused the
regulatory framework to shift from setting rates based on
purchase price to basing rates on the utilities' actual value
(original cost).
• 1983 - The Commission's stated policy on acquisition
adjustments for water and wastewater utilities is that, "absent
extraordinary circumstances, the purchase of a utility system
at a premium or discount shall not affect rate base." (Order
No. PSC-02-0997-FOF-WS)
• 2002 - The Commission adopted Rule 25-30.0371, F.A.C.,
regarding acquisition adjustments in the water and
wastewater industry. (Amended 11/22/10)
Technical Definition
• An acquisition adjustment is the difference
between the purchase price of utility system
assets to an acquiring entity and the original cost
of the utility system assets when first placed in
public service less accumulated depreciation
and contributions in aid of construction net of
amortization.
Simple Explanation
• An acquisition adjustment is the difference
between the "net book value" of a utility system
and what the purchaser actually pays for it.
• Net book value is an asset's original cost when
first devoted to public service less accumulated
depreciation and net amortization.
Types of Acquisition Adjustments
• A positive acquisition adjustment exists when
the purchase price is greater than the net book
value.
• A negative acquisition adjustment exists when
the purchase price is less than the net book
value.
General Purpose
The acquisition adjustment rule (25-30.0371,
F.A.C.) is designed to:
• Encourage the purchase of smaller, often troubled
systems by larger, more established utilities
• Keep rate increases to a minimum
• Diminish some of the controversy over acquisition
adjustments and expedite transfer or rate case
proceedings (Order No. PSC-02-0997-FOF-WS).
Positive Acquisition Adjustments
• The Rule formalized the Commission's policy on positive
acquisition adjustments: A positive acquisition adjustment
shall not be included in rate base absent extraordinary
circumstances.
• The company or entity that believes it should receive the
adjustment has the burden to prove the existence of
extraordinary circumstances.
• Examples of extraordinary circumstances include commitment
to improve quality of service and compliance with regulatory
mandates, anticipated cost savings, and potential rate
reductions.
Negative Acquisition Adjustments
• If the purchase price is greater than 80 percent of net
book value, a negative acquisition adjustment will not be
included in rate base.
• When the purchase price is equal to or less than 80
percent of net book value, a negative acquisition
adjustment shall be included in rate base.
• A negative acquisition adjustment is imposed to prevent
an entity from earning a return on the full net book value
of utility assets when it did not invest at least 80 percent
of the net book value of the utility assets.
Reasons to Encourage Small
System Acquisitions
• Large utilities can achieve economies of scale.
• Large utilities have greater technical and managerial expertise.
• Large utilities have easier access to capital at more favorable
terms.
• Large utilities may be able to utilize excess capacities in existing
facilities in the case of interconnections.
• Incorporating smaller utilities into larger ones may be a lower cost
option to expanding or rebuilding the smaller system.
• Large utilities can manage and protect water resources more
effectively/efficiently.
Questions?
13
Florida Governmental Utility Authority
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FLORIDA
GOVERNMENTAL
Florida Governmental Utility
Authority Overview
Stephen Spratt
System Manager
State of Florida
House Energy and Utilities Subcommittee
December 11, 2
2
The Governmental Utility Authority (GUA)
Concept
• Separate utility authorities are authorized under Section 163.01(7)(g)1,
Florida Statutes
• GUA's are governed by a locally-appointed Board; not FPSC regulated
• Participating local governments have control over the GUA but do not incur any
liability for debt or operations
• The GUA is a multi-jurisdictional entity for utility ownership, operation and
management
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Motivations for Joining or Creating a GUA
• Improve infrastructure, customer service and finances
• Alternative mechanism of public ownership
• Provide critical utility resources to and with local governments
• Current or future equity in utility systems retained with public/customers
• Allows dedicated focus on utility issues
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Advantages of a GUA
• Enables local government to better influence service quality and rates of
current system(s) and maintain local control Places no burden on general
purpose local government financial resources
• Having independent bonding capacity; assets and debt remain solely the
responsibility of the GUA and do not adversely affect the local government's
credit ·
• Increased transparency (public records, Sunshine Law, etc.)
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Advantages of a GUA (Cont.)
• Bargaining power and potential enhanced credit
• Improvements financed with state, federal or WMD funds or on a tax-exempt
bond basis
• Economies of scale
• Participating governments can structure inter-local agreement based on local
pol icy preferences
• Regulate Rates
• Approve Cl P
• Set service standards
• Local governments can acquire assets at any time
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Florida GUA Principal Powers
• Acquire, construct, own, operate, manage, improve and expand public facilities
• Provide for mandatory connections
• Levy rates, fees and charges
• Acquire land and rights and interests for utility
• Apply for, receive, and accept State, Federal Grants
• Issue bonds and other indebtedness
• Impose, collect and enforce special assessments
7
FGUA - Summary Facts
• The Florida Governmental Utility Authority (FGUA) was formed in 1999 through
an interlocal agreement between Brevard, Lee, Polk and Sarasota Counties
• Growth to almost $450 million in assets; 213 % customer growth and
$300 million in improvements to facilities owned since the FGUA's inception
• Successfully acquired, improved and transitioned systems to Sarasota,
Brevard, Citrus, Hillsborough and Collier Counties, and TOHO Water Authority
• Visit FGUA.com
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8
FGUA Utility Enterprise Systems
• Lehigh Acres Utility System (Lee County)
• North Fort Myers Utility System (Lee County)
• Pasco Utility System (Pasco County)
• Consolidated Utility System (Pasco County)
• Lindrick Utility System (Pasco County)
• MacDill Air Force Base Utility System Total of 89 utility
(Hillsborough County) systems
• Pasco Aqua Utility System (Pasco County) 120,000 customer
connections
• Lake Aqua Utility System (Lake County)
• Unified Aqua Utility System
• Dunnellon Utility System
9
FGUA Characteristics
• $90.3 million annual operating budget and $109.2 million CIP
• No employees:
• Fully contracted management services/owner's representative
(Government Services Group, Inc.) providing financial administration,
operations contract oversight, capital program management, construction
inspection, communications and customer advocacy
• Fully contracted operations, maintenance, customer service and billing
(U.S. Water Services Corporation)
• Contracted outside counsel
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FGUA Evolution Timeline
2010: Buy
Lind rick
2003- (Pasco)
1999: 2004: Buy and North 2012: Buy 2018: Buy
Formation Florida 2007:Sell Fort Mad City of
Avitar Water Citrus and Myers Hatter in Dunnellon
. :1 . :, . : . I . 1. : . !. :1 . :, •.·• \•
Purchase Services Poinciana (Lee) Pasco Utilities
2000: 2004: Sell 2009: Buy 2011: Buy 2013 : Buy 2018: Sell
Barefoot Carrollwood to Aloha and MacDill Aqua Golden
Bay Sale Hillsborough Consolidated System in Utilities of Gate
To in Pa sco Tampa Florida Utility
Brevard (Collier)
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FGUA Customer History
FGUA Customer Connections
140,000
113,894
111,444
120,000 114,44
111,738
108,463
100,000 93,999
84, 326
77,510
80,000
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60,000
40,000
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20,000
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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
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12
FGUA Acquisition Process
Phase I Phase Ill
Preliminary Due Perform Detailed Financing, Closing,
Diligence Due Diligence and Transition
• Clear with host • Validating/Adjusting • FGUA finalizes bond
government for entry Preliminary Analysis, financing; closing of
• Data requests and site Finalize Acquisition the acquisition
visits; financial, Terms and Various pursuant to terms of
engineering & Agreements, Conduct the asset acquisition
operations analysis Required Public agreement
• Discuss and agree Interest Hearings • FGUA and Seller
upon a preliminary cooperate in transition
and conditioned of ownership and
"order of magnitude" operations
value range and
general terms of asset
acquisition
FGUA Valuation Methodology
Income/Debt Capacity
Approach
• Common Method to Value Utility Systems
• Equivalent to Net Income Method of Value
(how much capital can be generated from
cash flows)
• Lin ks to Budget and Projected Cash Flow
• Supports Rating Agency Criteria (cash flow,
rate covenant compliance)
• All outstanding city utility debts are
extinguished and FGUA assumes all
obligations and risks
FGUA Valuation Methodology 14
Income/Debt Capacity
Approach - (Cont.)
Net System Equity Determined
• Total Utility Revenues (Recurring),
Less:
- Operating Expenses
- Renewal and Replacement Fund (R&R) Deposits (i
- Debt Service Coverage Allowance above R&R Depo
bond financed)
- Any Other Funding Requirements from Revenues
= Available Net Revenues for Financing (Debt Service P
equivalent)
FGUA Valuation Methodology
Income/Debt Capacity
Approach - (Cont.)
Calculate Bendable Capacity from Available
Net Revenues (Principal}
Less Payments from Financing Proceeds,
Including
- Issue and Acquisition I Transition Costs
- Refund of Outstanding City Utility
Bonds
- Working Capital Deposit
- 5-Year Capital Needs Required to Be
Funded
= Net Available to County
16
Dunnellon Transaction and Results
• With FGUA and City concessions no rate increase
required for acquisition; potential for CPI index
adjustment at 2020 but will seek to avoid
• City budget for FY18 required 7.5% t WW and 3.5% t
water; Rate consultant report estimated potential
17.45% rate increase required over forecast period
under continued city ownership
• The negotiated Purchase and Sale Agreement
provided for a $12.2m purchase price- below
appraised value
• Financing of the acquisition is from an approved
USDA Rural Development Loan @ 2. 75% interest 40-
years amortized over 30-years; this defeases high
cost existing city debt saving customers over
$250,000
• After payoff of $10.8m existing City debt, transaction
costs and required cash deposits, net cash to City is
$2M
Dunnellon Transactions and Results
• $2.2m existing State Springs grant to be
reassigned to FGUA by DEP/WMD for
priority environmental project; additional
$2.BM granted since sale
• All governing body action items were
approved unanimously on multiple
occasions by the FGUA Board, City Council
and County Commission
• At all public meetings and hearings, there
were no customer objections and only
support from the Uti Iity Advisory
Committee
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