Presentation to CITY OF PALM COAST, FLORIDA WATER AND WASTEWATER RATE STUDY AND BOND FEASBILITY REPORT Prepared in Conjunction with the Issuance of Utility System Revenue Bonds, Series 2013 October 30, 2012 Public Resources Management Group, Inc. Presented by

Agenda  Background and Purpose  Series 2013 Bonds  Financial Forecast  Customer Statistics / Revenue Projections  Capital Improvement Funding  Revenue Requirements  Adequacy of System Rates  Other Issues  Rate Design  Capital Facilities Fees  Bulk Water and Wastewater Charges  Next Step  Conclusions and Recommendations 2

3 Background and Purpose  Prepared in Anticipation of the Issuance of the Series 2013 Bonds  Last Formal Rate Study Prepared in FY 2007  Support Issuance of Series 2007 Bonds  Rates Adjusted Uniformly 12.5% Effective November 1, 2008  City has Annually Indexed Rates Fiscal Years 2010 to 2012 Average Annual Increase = 1.67%  Evaluate the Sufficiency of Rates  Five-Year Financial Forecast & Funding Analysis – FY  Fully Fund System Expenditures  Develop Capital Improvement Financing Plan  Satisfy Rate Covenants Defined in the Bond Resolution  Maintain Financial Stability of System

Series 2013 Bonds  Refunding of the Existing Series 2003 Bonds  Low-Interest Rate Environment / Achieve Interest Rate Savings  Annual Savings of Approximately $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  Series 2013 Bonds-Funded Projects Include:  Water Treatment Plant No. 1$500,000  Water Treatment Plant No. 2$11,100,000  Water Treatment Plant No. 3$3,020,000  Water Mains$3,000,000  Wastewater Treatment Plant No. 1$1,480,000  Lift Stations and Pump Stations$2,600,000 4

5  Issuance Requires Preparation of Financial Forecast and Bond Feasibility Report  Debt will be payable from Pledged Revenues which includes Capital Facilities Fees (Impact Fees) Series 2013 Bonds (cont'd.)

6 FINANCIAL FORECAST

7  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 Customer Statistics Revenues Projections

8  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 Customer Statistics Revenues Projections (cont'd.)

9 Revenue Requirements  Evaluated Revenue Requirements – Based on Following Formula: + Operating Expenses +Debt Service Payments +Capital Funded from Operations +Deposits to Working Capital (Fund Balance) / Debt Compliance –Other Operating Revenues and Income –Use of Working Capital (Fund Balance) = Net Revenue Requirements Funded From Rates

10 Revenue Requirements  Operating Expense Forecast Based on FY 2013 Adopted Budget  Forecast Recognized:  System Growth in Accounts Served/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 Improvement Plan Assumed to be Funded as Follows: Capital Improvement Program Funding

12  Annual Transfer for Renewal and Replacements  Required for 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 Project Funding  Approximately $400,000 per Year Net Increase in Debt Service Payments Capital Improvement Program Funding (cont'd.)

13  Additional Parity Bonds Recognized:  $38.99 Million in Project Financing / $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: Capital Improvement Program Funding (cont'd.)

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  Identified Rate Adjustments:

Adequacy of System Rates (cont'd.)  Reason for the Purposed 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  Increased Debt Service Requirements Associated with Additional Utility System Revenue Bonds  Need to Have Sufficient Revenues to: – Meet Bond Issuance Requirements – Maintain Financial Creditworthiness and Bond Rating  Increase in Transfer to Renewal and Replacement Fund for 5% to 10% per Year for Blend of Pay-as-you-Go Capital and Debt Financing – Improve Long-Term Utility Position 15

16  Reason for the Purposed Rate Adjustments:  Maintain Adequate Debt Service Coverage Ratios and Bond Rating in Support of Financing – Senior Lien Coverage – Target % Over the Forecast  City Currently an "A" Rated Utility By Fitch and Standard & Poor’s  Fitch “ A " Rated "All-In" Coverage Medium = 1.4X Adequacy of System Rates (cont'd.)

17 Performance Metrics & Dashboards

18 Performance Metrics & Dashboards (cont’d)

19 Performance Metrics & Dashboards (cont’d)

20 Performance Metrics & Dashboards (cont’d)

21 Water and Wastewater Comparison Typical 5/8" Meter Monthly Bill At 5,000 Gallons

OTHER ISSUES AND CHARGES

23 Other Issues  Rate Design  Upon Finalizing Revenue Requirements an Evaluation of the Existing Rate Structure – Base vs. Usage Charges  Capital Facilities Fees (Impact Fees)  PRMG will Calculate Revised Capital Facilities Fees – Recognizing Current Fixed Assets and New Capital Improvement Program (FY 2013 through 2017)  Bulk Water and Wastewater Charges  New Bulk Water and Wastewater Charges Based on the System- Wide Revenue Requirements

24 Next Step  PRMG will Bring Revised Rates, Fees, and Charges To Future Council Meeting for Adoption

25 Conclusions and Recommendations  Existing System Rates are not Adequate to Meet System Expenditures throughout the Forecast Period  The Financial Forecast Recognizes Need for Proposed Rate Adjustment  The Proposed Rate Adjustments are as Follows:  Rate Increases Necessary to Fund Capital Plan / Issue Bonds

26 Conclusions and Recommendations  Proposed Rates Should be Adequate to Comply with the Minimum Rate Covenants as Defined in the City's Bond Resolution and Maintain Current Bond Rating