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
 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
2
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
3
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
Water Treatment Plant No. 2
Water Treatment Plant No. 3
Water Mains
Wastewater Treatment Plant No. 1
Lift Stations and Pump Stations
$1,550,000
$12,420,000
$2,225,000
$2,150,000
$1,080,000
$1,775,000
4
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
5
FINANCIAL FORECAST
6
Customer Statistics
Revenues 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
7
Customer Statistics
Revenues 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
8
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
9
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
10
Capital Improvement
Program Funding
 Capital Improvement Plan Assumed to be Funded as Follows:
Summary of Five-Year Capital Improvement Plan Funding
Total Fiscal Years
2013 – 2017
Five-Year Capital Improvement Plan:
Water System Improvements
$27,991,936
Wastewater System Improvements
45,681,189
Miscellaneous Utility Services [1]
4,733,685
$78,406,810
Total Capital Projects
Funding Sources:
Renewal, Replacement, and Improvement Fund
Release of Series 2003 Bonds – DSR
System Capital Facilities Fees (Impact Fees)
Prior Bond Proceeds
Series 2013 Bond Proceeds
Series 2014/2015 Bond Proceeds
Total Funding Sources
$15,891,810
6,247,823
877,177
1,400,000
15,000,000
38,990,000
$78,406,810
Percent
35.70%
58.26%
6.04%
100.00%
20.27%
7.97%
1.12%
1.79%
19.13%
49.73%
100.00%
__________
[1] Reflects non-CIP capital such as fleet and equipment replacement.
11
Capital Improvement
Program 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
12
Capital Improvement
Program 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:
Total Principal
Amount of
Bonds
$43,905,000

Projected
Issuance Date
Projected
Average Annual
Interest Rate
Estimated Annual
Debt Service
Requirement
October 1, 2014
5.75%
$3,104,796
Assumed Level Debt Service Payments beginning in Fiscal
Year 2015
13
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:
Fiscal Year
2013
2014
2015
2016
2017
Estimated System Average Revenue Percentage Adjustment
Price Indexing Rate
Additional Revenue
Effective Date
Adjustment [1]
Adjustment
Combined Increase
March 1, 2013
N/A
8.00%
8.00%
October 1, 2013
1.50%
5.50%
7.00%
October 1, 2014
1.70%
5.30%
7.00%
October 1, 2015
2.00%
0.00%
2.00%
October 1, 2016
2.20%
0.00%
2.20%
__________
[1] Reflects estimated price index rate adjustment.
14
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
15
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
16
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
Fiscal Year
2013
2014
2015
2016
2017
Calculated
Senior Lien Coverage
(Required 110.00%)
(Target 150.00%)
157.07%
169.65%
151.73%
154.86%
155.60%
Calculated
All In
Coverage
(Target 140.00%)
130.66%
142.34%
132.35%
135.08%
135.73%
 City Currently an "A" Rated Utility By Fitch and Standard &
Poor’s

Fitch “ A " Rated "All-In" Coverage Medium = 1.4X
17
RATE DESIGN RESULTS
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.)
19
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%
20
Rate Design (cont’d.)
 Impact to the Various Customer Classes:
Typical Monthly Bill - 5/8 inch Meter @ 4,000 Gallons
(Represents 99.9% of the Class)
Water
Wastewater
Combined
Residential:
Existing Rates
Proposed Rates
Monthly Increase - Amount
Percentage Increase
$
$
29.54
30.22
$
$
25.10
29.03
$
$
54.64
59.25
$
0.68
2.30%
$
3.93
15.66%
$
4.61
8.44%
Typical Monthly Bill - 5/8 inch Meter @ 4,000 Gallons
(Represents 95% of the Class)
Water
Wastewater
Combined
Multi-Family:
Existing Rates
Proposed Rates
Monthly Increase - Amount
Percentage Increase
$
$
29.94
32.50
$
$
27.78
31.99
$
$
57.72
64.49
$
2.56
8.55%
$
4.21
15.15%
$
6.77
11.73%
21
Rate Design (cont’d.)
 Impact to the Various Customer Classes:
Commercial:
Existing Rates
Proposed Rates
Monthly Increase - Amount
Percentage Increase
Irrigation:
5/8 inch Meter @4,000 Gallons:
Existing Rates
Proposed Rates
Monthly Increase - Amount
Percentage Increase
Typical Monthly Bill - 5/8 inch Meter @ 5,000 Gallons
(Represents 42% of the Class)
Water
Wastewater
Combined
Typical Monthly Bill - 1 inch Meter @ 15,000 Gallons
(Represents 18% of the Class)
Water
Wastewater
Combined
$
$
33.88
37.00
$
$
31.75
36.43
$
$
65.63
73.43
$
$
103.45
112.81
$
$
89.33
102.18
$
$
192.78
214.99
$
3.12
9.21%
$
4.68
14.74%
$
7.80
11.88%
$
9.36
9.05%
$
12.85
14.38%
$
22.21
11.52%
Water
$
$
22.84
24.53
$
1.69
7.38%
22
Water and Wastewater Comparison
Typical Residential 5/8" Meter Monthly Bill At 4,000 Gallons
$100.00
$90.00
$80.00
$70.00
Other Utilities' Average: $56.40
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
$-
Sewer
Water
Average
Capitalized Utilities are either currently involved in a Rate Study or are planning a Rate Study in the next twelve months.
23
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
24
Bulk Water and Wastewater Rates (cont’d.)
 Analysis Identified to Need for the following Bulk Rate
Adjustments:
Bulk Rate Analysis:
Existing Rate Per 1,000 Gallons
Proposed Rate Per 1,000 Gallons
Water
$
$
Proposed Percentage Increase
System Wide Average Cost Per 1,000 Gallons
(Including Base Charges)
2.19
4.08
Wastewater
$
$
86.30%
$
7.02
3.22
3.55
10.25%
$
6.86
25
Bulk Water and Wastewater Rates (cont’d.)
 Estimated Monthly Impact on Typical Flagler County – Beverly
Beach Residential Customer:
Typical Monthly Bill - 5/8 inch Meter @ 5,000 Gallons
Water
Wastewater
Combined
Flagler County (Beverly Beach)
Existing Base Charge
Existing Usage Charge Per 1,000 Gallons
$
$
28.88
6.54
$
$
14.42
4.72
Typical Bill @ 5,000 Gallons - Existing Rates
$
61.58
$
38.02
Bulk Rate Increase Per 1,000 Gallons
$
1.89
$
0.33
Typical Bill @ 5,000 Gallons - Adjusted
$
71.03
$
Estimated Monthly Increase - Amount
Estimated Monthly Increase - Percent
$
9.45
15.35%
$
$
99.60
39.67
$
110.70
1.65
4.34%
$
11.10
11.14%
26
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)
Capital Facilities Fees (Impact Fees):
Existing Rate Per ERC
Proposed Rate Per ERC
Water
$
$
Proposed Percentage Change
Other Neighboring Utilities Average
$
Wastewater
Total
2,679.81 $
2,045.00 $
2,734.95 $
2,265.00 $
5,414.76
4,310.00
(23.69%)
(17.18%)
(20.40%)
1,776 $
2,048
$
3,824
 Also Recommend a 20% Reduction to the Proposed Fees for Water
27
Star Certified Properties
Capital Facilities Fees (Impact Fees)
8,000.00
7,000.00
6,000.00
5,000.00
4,000.00
3,000.00
2,000.00
1,000.00
-
Wastewater
Water
Other Utilities' Average
28
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.
29
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.
30
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.
31
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.
32
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)?
Fiscal Year
2013
2014
2015
2016
2017
Option 2 - Reduce Capital Program for Growth Related Projects
Per
Adjusted Rate
Monthly Increase to Customers Monthly Bill
Rate Study
Increase for
Per Rate
With Reduced
(10% R&R Funding) Reduced Capital Plan
Study
Capital Plan
8.00%
8.00%
$4.61
$4.61
7.00%
4.00%
4.15
2.37
7.00%
4.00%
4.44
2.46
2.00%
2.00%
1.36
1.28
2.20%
2.20%
1.52
1.44
 Results in the need to reevaluate rates in Fiscal Year 2015.
33
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.
34
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.
35
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
36
Discussion and Questions
37