Water utilities to gamble on more debt

Failing to set aside funds for emergencies has previously meant a financing scramble for the utility collective that provides water to south Santa Rosa, and now officials think they see a solution: take on about $4 million in long-term debt.

Though perhaps unlikely at first glance, the strategy of Holley Navarre Water System and the other two members of Fairpoint Regional Utility System is to essentially extend the umbrella organization’s roughly $9.4 million in bank loans for two decades in order to make smaller payments. Thus the total of the restructured loan would be about $14 million.

Ricki DeSantis, a Holley Navarre Water board member, objected to restructuring Fairpoint Regional’s debt in a manner that he said will needlessly increase its financial burden. He told this newspaper that the co-op “will experience the termination of its current fixed rate debt by the year 2024, and would place it perfectly in the future positions necessary to meets its future needs.”

Meanwhile, Holley Navarre Water’s volunteer directors are considering a separate proposed deal in which that company would gradually pay about $8 million—nearly the equivalent all the financial assets now listed on its balance sheet—for the right to spread treated wastewater on rural land owned by fellow Fairpoint member South Santa Rosa Utility System

The 20-year SSRUS contract is being drafted by the City of Gulf Breeze, which owns that utility. The pact has been in the works for more than a year while Holley Navarre Water explored other options to meet guidelines set by the Florida Department of Environmental Protection to raise its effluent disposal       capacity.

HNWS General Manager Paul Gardner told this newspaper that the cost of the proposed effluent disposal deal with Gulf Breeze is actually lower than the long-discussed alternative — reaching an accord with Eglin Air Force Base to spray effluent on a remote area there. Holley Navarre had already planned to spend at least $11 million on that Eglin eventuality, which includes building a pipeline from its water treatment plant. Gardner added that the building expenses expected in either plan can be paid for without another water rate increase in addition to last year’s 17 percent hike.

All this high finance could either shake or steady Holley Navarre Water’s budgeting tightrope for years to come. The utility now operates at an essentially break-even level while directors try to hold the line on rates for about 14,000 residential and commercial customers.

There’s a dotted line connecting the fiscal futures of Holley Navarre Water and the Fairpoint Regional group of three utilities that makes the collective’s debt load a concern for all of them.

Lowering debt payments through a restructured Fairpoint bank loan could free up cash flow for sudden infrastructure repair needs, such as the one that arose in 2015 when the collective’s water line under East Bay broke, requiring $685,000 in repairs. Although Fairpoint records the cost of such work on its books and thus off the balance sheets of its member utilities, the four companies nevertheless end up footing the bill through water purchases and are subject to price increases.

The rupture of the East Bay line contributed to a 25 percent increase in Fairpoint’s water price in 2016.

Variable rate vagaries

However, advocates of the plan concede it isn’t a sure thing.

“There’s risk. There’s no denying that,” said Buz Eddy, a member of Fairpoint Regional’s volunteer board who is the retired Gulf Breeze city manager and an architect of the debt restructuring plan.

That’s because it means trading in the current debt – most of which has a fixed interest rate and would be paid off in 2024—for a 20-year variable rate loan. The new loan can be obtained at a lower introductory interest rate, good for five years, that would reduce Fairpoint Water’s total annual payments to about $700,000 from $1.4 million.

Some Holley Navarre leaders have openly questioned the change.

“I’m deeply afraid of this,” said James Calkins, a member of the boards at both Holley Navarre Water and Fairpoint Regional. He added, “I like things the way they are. We can be debt-free in 2024 and maybe reduce rates.”

But the lure of possible rate reduction is being offset by concerns that the opposite could happen if there’s a     major infrastructure failure.

Gardner, the salaried general manager of both Holley Navarre Water and Fairpoint, said in an interview: “I see the good and the bad. It means more debt in the long run but it frees up cash in case we need it.”

Some HNWS board members have wondered whether their utility’s insurance policy can at least help cover emergency infrastructure repairs, but Gardner said the benefits are capped at $100,000 or so: “That’s typical in our industry. I don’t think you can buy insurance policies that would pay for the repairs we needed for the broken line under East Bay.”

At least one Fairpoint Regional board member said the utility ought to have planned better to cope with such mishaps. At the collective’s August meeting, Matt Dannheisser, who is also the City of Gulf Breeze’s mayor, said “…We have not operated ourselves like a business should where it has such funds available, and really we should have anticipated that and had arranged our finances long before now so as to have those resources available.”

Still, Eddy is dangling a possible short-term sweetener to the individual utilities in return for supporting longer-term debt: freeing up more cash through smaller loan payments might allow Fairpoint to start refunding the roughly $260,000 that each member paid more than a decade ago to help form the collective. That money helped pay for Fairpoint’s wells, pumps and storage tanks, on which the individual utilities rely.

There’s a blurred line between the dominions of the collective and its members. Although Fairpoint Regional is supposedly a separate entity from the companies it services, it relies on them for everything from engineering and accounting expertise to office space, which it shares with Holley Navarre Water at 8754 Turkey Bluff Road. The goal of this arrangement is to better manage water prices.

The Fairpoint Regional refinancing appears to be stalled as of Tuesday night when the Holley Navarre Water board discussed it at their regular meeting. Four of the seven board members raised doubts about it: Brian Kelly, Troy Bossier, James Calkins and Ricki DeSantis. All board members finally agreed to study the financial particulars and vote on the debt extension at an unspecified future time.

Meanwhile, Kelly expressed sharp criticism: “It makes zero sense.”

Bossier said extending the loan is “not good business sense…”

The change must be approved by officials at each of the collective’s three member utilities. Midway has recently voted in favor of the refinancing.

Read the full article in the Oct. 19 issue of Navarre Press. Subscribe online at navarrepress.com for as little as $38 per year.

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