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Nichols Co. system has costly problems

Published Oct. 13, 2005

In its last public-private venture, the company trying to redevelop downtown St. Petersburg allowed a water system it built to deteriorate so badly it eventually had to be taken over by a government agency. It happened in the mid-1980s in Mission Hills, Kan., an elegant suburb of Kansas City. In the opinion of the Mission Hills city government, Kansas state regulators and area residents, it shouldn't have happened at all.

Faced with a request to fix its problem-plagued, aging Kansas Water Co., the Kansas City-based Nichols Co. instead sold the utility to a group of businessmen for $925,000.

Most of the money for the sale came from a note the buyers gave to Nichols. But the buyers also borrowed $240,000 from a bank whose chairman, Lynn McCarthy, is president of Nichols.

The deal went through even though Kansas regulators told the investors that the water company _ built by Nichols in 1914 to serve the communities that Nichols was building _ was worth only $150,000.

State lawyers initially recommended the sale be blocked because they didn't believe the water company could generate enough money to finance needed repairs.

But the buyers insisted they could make a profit even while paying six times the estimated value of the company.

They were wrong. Last year, the local Johnson County Water District took over the system. Officials estimate it will cost at least $5.6-million to bring the company up to snuff.

Kansas regulators still are smarting over the way Nichols and an independent broker put the deal together.

The broker, Frank Hawkins, had worked as a consultant to Nichols prior to putting together the buyers with the seller.

And McCarthy's banking relationship _ in effect, his role as bank lender and company seller _ was unknown to utility regulators at the time, according to Robert D. Elliott, chief engineer for the Kansas Corporation Commission's (KCC) utilities division.

"That would have been a real red flag for us," he said. "I'm not saying we would have done anything different, I'm saying that it would have been a point of debate to consider that a member of the board of the bank had an incentive to approve the loan."

McCarthy has declined requests for an interview, as has Robert L. Jackson Jr., the Nichols executive and lawyer who last week took charge of St. Petersburg's development project.

Lee Fowler, a Nichols vice president, said Nichols sold the water company because "when we have non-productive assets, we usually try to get rid of them. If it's not doing us any good, we hope that we can get it into the hands of someone who can do something with it."

Fowler said the company disagrees that the water system _ including pipes, pumps and hydrants _ was in disrepair. Part of the problem, he said, was with the source of the water itself in Missouri.

But Kansas regulators contend the Nichols Co. was at fault for neglecting the system. Lawyers for Mission Hills said Nichols took advantage of the system's depreciation on its taxes, but didn't put money back into the system for repairs.

Asked how the experience reflects on Nichols and the public's trust, Fowler said: "We have, to my knowledge, never been anything but highly responsible and highly ethical in our business relationships, and our reputation is untarnished, and it is very, very important to us."

The Nichols Co. wholly owns the Bay Plaza Cos., a company set up with developer Neil Elsey to revitalize the St. Petersburg downtown into an outdoor shopping and entertainment district.

So far, one building in the proposed $200-million plan has been built, but it has no tenants. Nichols chairman McCarthy has said there will be no more construction until tenants and financing are lined up. He blames changes in the tax laws and the sluggish economy for the slow progress.

On Tuesday, Fowler acknowledged that if the Bay Plaza project does not become profitable, Nichols could scrap it.

Although the Nichols Co. has aggressively tried to avoid publicity in its private business dealings, its Kansas Water Co. experience was a matter of state regulation in Kansas. State records show that toward the end, the water business was unpleasant for all involved.

"J.C. Nichols Co. was less than responsive in its maintenance of the water distribution system," said D. Brad Bailey, a lawyer for the Topeka-based Kansas Corporation Commission, in a memo.

Mission Hills Mayor Alfred J. Lane said in testimony to the commission that Nichols "allowed serious service problems of inadequate water pressure to develop . . . without making any new capital improvements to increase the capacity of the water system or to replace any of its aging distribution mains."

But Nichols, according to state records, may have suffered a bit, too.

In order for the Johnson County Water District to ultimately take over the system, Nichols had to forgive some of the debt it extended to the businessmen to whom it sold the system.

Just how much debt was forgiven is not known.