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Presentation to CITY OF PALM COAST, FLORIDA

Presentation to CITY OF PALM COAST, FLORIDA. WATER AND WASTEWATER RATE STUDY AND BOND FEASIBILITY REPORT Prepared in Conjunction with the Issuance of Utility System Revenue Bonds, Series 2013 February 19, 2013. Presented by. Public Resources Management Group, Inc. Agenda.

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Presentation to CITY OF PALM COAST, FLORIDA

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  1. Presentation toCITY OF PALM COAST, FLORIDA WATER AND WASTEWATER RATE STUDY AND BOND FEASIBILITY REPORT Prepared in Conjunction with the Issuance of Utility System Revenue Bonds, Series 2013 February 19, 2013 Presented by Public Resources Management Group, Inc.

  2. Agenda • Financial Forecast • Customer Statistics / Revenue Projections • Capital Improvement Funding • Revenue Requirements • Adequacy of System Rates • Rate Study Results • Rate Design • Bulk Water and Wastewater Charges • Capital Facilities Fees • Address Options / Questions Discussed at Last Council Workshop (2-12-2013) • Conclusions and Recommendations

  3. Introduction • Prepared in Anticipation of the Issuance of the Series 2013 Bonds • Evaluate the Sufficiency of Rates • Five-Year Financial Forecast & Funding Analysis – FY 2013-2017 • Fully Fund System Expenditures • Develop Capital Improvement Financing Plan • Establish Rates Sufficient to Support Issuance of Series 2013 Bonds • Includes Meeting Rate Covenants Defined in the Bond Resolution • Maintain Financial Stability of System and Maintain Favorable Bond Rating

  4. Series 2013 Bonds • Refunding of the Existing Series 2003 Bonds • Low-Interest Rate Environment / Achieve Interest Rate Savings • Annual Savings of Approximately $450,000 to $550,000 • Free-Up Debt Service Reserve Fund of Approximately $6.2 Million • Available to Fund Future Capital Projects • New Money to Fund Capital Improvements = $15,000,000 • Total Funds for Capital Projects = $21.2 million • Series 2013 Bonds-Funded Projects Include: • Water Treatment Plant No. 1 $1,550,000 • Water Treatment Plant No. 2 $12,420,000 • Water Treatment Plant No. 3 $2,225,000 • Water Mains $2,150,000 • Wastewater Treatment Plant No. 1 $1,080,000 • Lift Stations and Pump Stations $1,775,000

  5. Series 2013 Bonds (cont'd.) • Issuance of Series 2013 Bonds Requires: • Preparation of Financial Forecast • Adoption of Utility Rates • Preparation of a Bond Feasibility Report • Debt will be payable from Pledged Revenues which includes Rates and Capital Facilities Fees (Impact Fees) • No Tax Revenues will be used to Support the Debt

  6. FINANCIAL FORECAST

  7. Customer StatisticsRevenues Projections • During FY 2012 the City Served on Average: • 42,720 Water Accounts • 35,102 Sewer Accounts • Active Account Growth of System • Compounded Growth Rate FY 2000 to FY 2006 – 11.60% • Compounded Growth Rate FY 2007 to FY 2012 – Less than 1.0% • Utility Customer Growth Projections FY 2013 through FY 2017 • Forecast Assumes Conservative Growth Projection of Less than 1.0% – Less than 100 Connections per Year • Average Use per Customer • Relatively Consistent by Class • Typical Residential Customer = 4,100 Gallons per Month of Water

  8. Customer StatisticsRevenues Projections (cont'd.) • Projected Revenues from Existing Rates Based on the Following: • Customer and Sales (Use) Forecast • Current Rates and Charges as Adopted • No Indexing to Identify Total Rate Needs

  9. Revenue Requirements • Evaluated Revenue Requirements – Based on Following Formula: + Operating Expenses + Debt Service Payments + Capital Funded from Operations + Deposits to Working Capital / Debt Compliance * – Other Operating Revenues and Income – Use of Working Capital (Fund Balance) = Net Revenue Requirements Funded From Rates * Includes: Maintain Council Fund Balance Policy Maintain Rate Covenant Compliance Maintain Favorable Bond Rating

  10. Revenue Requirements • Operating Expense Forecast Based on FY 2013 Adopted Budget • Forecast Recognized: • System Growth in Accounts Served/Sales and Flows • Inflationary Allowances Ranging from 1.5% to 3.5% Based on Nature of Expense • Labor Cost Increases and Personnel Additions (8 Positions Over the Forecast) • Contingency Allowance of 3.0% was Included in Forecast to Account for Unanticipated Expenses

  11. Capital ImprovementProgram Funding • Capital Improvement Plan Assumed to be Funded as Follows:

  12. Capital ImprovementProgram Funding (cont'd.) • Annual Transfer for Renewal and Replacements • Required Per Bond Resolution (5% Minimum) • Forecast Recognizes 10% of Prior Year's Gross Revenues or Approximately $3,000,000 per Year • 10% Required for Sustainable Long-Term Operations • Series 2013 Bonds – Provide $15.0 Million in New Project Funding • Approximately $400,000 to $500,000 per Year Net Increase in Debt Service Payments after Refunding Benefit

  13. Capital ImprovementProgram Funding (cont'd.) • Future Bonds Recognized: • $43.9 Million Principal Amount of Bonds • Approximately $3,100,000 per Year Increase in Net Debt Service Payments • Assumptions for the Series 2014/2015 Bonds are as Follows: • Assumed Level Debt Service Payments beginning in Fiscal Year 2015

  14. Adequacy of System Rates • Existing Monthly Water and Wastewater Rates Not Anticipated to be Adequate to Meet: • Operating Expenditures and Capital Funding Requirements • Debt Service Payments and Coverage Requirements • Overall System Identified Required Revenue Adjustments:

  15. Adequacy of System Rates (cont'd.) • Reason for the Proposed Rate Adjustments: • Lack of Historical System Growth Affecting Revenues • Utility Absorbed Price Increases Above Indexing Allowance • Significant Reduction in Capital Facilities Fees • Continued Inflationary Impacts on Cost of Operations • Need to Fund Capital Improvements to System • Regulatory Requirements • Increased Debt Service Requirements Associated with Additional Utility System Revenue Bonds

  16. Adequacy of System Rates (cont'd.) • Reason for the Proposed Rate Adjustments: • Need to Have Sufficient Revenues to: • Meet Bond Issuance Requirements • Maintain Financial Creditworthiness and Favorable Bond Ratings • Increase in Annual Transfer to Renewal and Replacement Fund from 5% to 10% per Year of Gross Revenues • Reduces Future Debt Requirements • Improves Long-Term Utility Position • Viewed Favorable by Rating Agencies • Provides Rate Flexibility

  17. Adequacy of System Rates (cont'd.) • Reason for the Proposed Rate Adjustments: • Maintain Adequate Debt Service Coverage Ratios and Bond Ratings in Support of Financing • City Currently an "A" Rated Utility By Fitch and Standard & Poor’s • Fitch “ A " Rated "All-In" Coverage Medium = 1.4X

  18. RATE DESIGN RESULTS

  19. Rate Design • Proposed Cost of Service Analysis to Develop Rates • Proposed Rates Based on FY 2013 Revenue Requirements • Costs Assigned to Water and Wastewater System Separately • Individual Water and Wastewater Revenue Requirements Allocated between Base and Usage Charges • Future Proposed FY 2014 and 2015 Rate Adjustments to be Applied uniformly Across the Board to the Redesigned 2013 Rates • Study Identified Different Level of Rate Adjustments (Not Uniform Application): • Water and Wastewater System • Base and Usage Charges • Class of Service (Residential, Commercial, Bulk, etc.)

  20. Rate Design (cont’d.) • Water and Wastewater System Overall Increase • Overall Combined System – 8.00% • Overall Water System – 3.27% • Overall Wastewater System – 15.61% • Overall Water Base Vs. Usage Increases: • Overall Water System – 3.27% • Overall Water Base Charges – 2.21% • Overall Water Usage Charges – 4.05% • Overall Wastewater Base Vs. Usage Increases: • Overall Wastewater System – 15.61% • Overall Wastewater Base Charges – 19.60% • Overall Wastewater Usage Charges – 11.87%

  21. Rate Design (cont’d.) • Impact to the Various Customer Classes:

  22. Rate Design (cont’d.) • Impact to the Various Customer Classes:

  23. Water and Wastewater Comparison Typical Residential 5/8" Meter Monthly Bill At 4,000 Gallons

  24. Bulk Water and Wastewater Rates • Bulk Water and Wastewater Charges • Based on the System-Wide Revenue Requirements Allocable to Providing Bulk Service • City Currently Provides Bulk Water Service to Flagler County (Beverly Beach Area) Only • City Will Provide Bulk Wastewater Service to Flagler County (Beverly Beach Area) in the Future • City’s Existing Bulk Water Rate was originally developed in 2004 for the Dunes Community Development District (No longer a customer of the City) • Designed for specific circumstances applicable only to the Dunes Development District and not Other Bulk Users

  25. Bulk Water and Wastewater Rates (cont’d.) • Analysis Identified to Need for the following Bulk Rate Adjustments:

  26. Bulk Water and Wastewater Rates (cont’d.) • Estimated Monthly Impact on Typical Flagler County – Beverly Beach Residential Customer:

  27. Capital Facilities Fees (Impact Fees) • Fees Last Established in 2007 Based on Large Capital Improvement Program Required for Anticipated Customer Growth • Proposed Capital Facilities Fees (Impact Fees) • Revised Capital Facilities Fees – Calculated Recognizing Current Fixed Assets and New Capital Improvement Program (FY 2013 through 2017) • Also Recommend a 20% Reduction to the Proposed Fees for Water Star Certified Properties

  28. Capital Facilities Fees (Impact Fees)

  29. Other Issues • Proposed Modification to Annual Rate Indexing Provision Change Section 10(d) The rates, fees and charges involving monthly base and usage charges, private fire protection services, reclaimed water service and bulk rates relating to the Systems of the City as set forth herein shall be adjusted annually on October 1 of each year, commencing on October 1, 2015 and thereafter, by the Consumer Price Index for All Urban Consumers as of June 30 of each year as published by the United States Department of Labor, Bureau of Labor Statistics. The rates, fees and charges involving capital facilities (connection) fees, installation fees, and taps relating to the Systems of the City as set forth herein shall be adjusted annually on October 1 of each year, commencing on October 1, 2013 and thereafter, by the Construction Cost Index as of June 30 of each year as published by the Engineering News-Record.

  30. Options Questions Addressed at Last Workshop • What if we reduced Renewal and Replacement Funding from 10% to 5%? • Would result in a one-time short-term rate decrease. • Increased Capital Funded from Debt – Eventually Results in Permanently Higher Rates • Reduced Debt Coverage / Reduction in Credit Rating • What rate adjustments are required immediately? Two-year rate adoption plan only. • Not viewed as favorably by rating agencies.

  31. Options Questions Addressed at Last Workshop • Why was the current rate phase strategy chosen and are there any alternative rate phasing strategies? What about 5% every year? • Revenues would not meet the expenditure requirements of the system. Would need to reduce Renewal and Replacement Funding. • What if Senior Lien Debt Service Coverage was lowered to 140%. • Revenues would not meet the expenditure requirements of the system. Would need to reduce Renewal and Replacement Funding.

  32. Options Questions Addressed at Last Workshop • What if we increased our revenue growth projections over the forecast period for additional customer growth. Not Recommended. • Growth was based on recent customer growth trends. • Better alternative would be to reduce the capital plan for all growth related projects. • What may be the impact on rates if the System was downgraded by the rating agencies? • Downgrade would add approximately 1.75% increase to monthly rates.

  33. Questions Addressed at Last Workshop • What if we adjusted the capital improvement plan to push-out growth related projects beyond the current forecast period (lower capital improvement plan by approximately $24 million)? • Results in the need to reevaluate rates in Fiscal Year 2015.

  34. Questions / Option 2 (continued) • Potential Risk for this Option. • May not be Able to Adjust Rate Program if Capital Plan Accelerates . • Potential Interest Rate Risk due to Delay in Financing. • If the Wastewater Plant is required during the Forecast Period the System may need an additional 6% rate increase.

  35. Conclusions and Recommendations • Existing System Rates are not Projected to be Adequate to Meet System Expenditures throughout the Forecast Period. • Rate Increases Necessary to Fund Capital Plan / Issue Bonds and Maintain Creditworthiness of the System. • The Financial Forecast Recognizes the Need for Proposed Rate Adjustments. • Council Should Adopt the Proposed Rates for Fiscal Year 2013 Effective April 1, 2013 Based on Proposed Cost Allocation Analysis.

  36. Conclusions and Recommendations • Council Should Adopt the Additional Proposed Rate Adjustments For Fiscal Years 2014 and 2015. • Council Should Adopt the Proposed Decreased Capital Facilities Fees (Impact Fees) Effective February 19, 2013. • Council Should Adopt the Proposed Bulk Water and Wastewater Rates. • Proposed Rates Should be Adequate to: • Comply with the Rate Covenants as Defined in the City's Bond Resolution • Maintain Fund Balance Policy • Maintain Current Bond Rating

  37. Discussion and Questions

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