RFP2026-3_2013_Water_and_Sewer_Utility_Rate_Study.PDF

COOPER CITY UTILITIES DEPARTMENT

MEMORANDUM

DATE: October 22, 2013

TO: Bruce D. Loucks, City Manager

FROM: Michael F. Bailey, P.E., Utilities Director/City Engineer

SUBJECT: November 5, 2013 Commission Workshop

Water & Sewer Financial Model Update Presentation

On March 12, 2013, the City Commission authorized Public Resources Management Group Inc.

(PRMG) to perform an update of the financial model for the Utilities Department, including the Water

& Sewer Fund, the Water & Sewer Renewal & Replacement Fund, and the Water & Sewer Capital

Improvement Fund. PRMG has completed their report and will present the results during the

Commission workshop that has been scheduled for November 5, 2013

Attached please find a copy of the 2013 Financial Forecast Update report.

Public Resources Management Group, Inc.

Utili ty, Rate, Financial and Management Consultants

CITY OF COOPER CITY, FLORIDA

2013 FINANCIAL

FORECAST UPDATE

September 2013

Utility, Rate, Financial and Management Consultants

341 NORTH MAITLAND AVENUE – SUITE 300 – MAITLAND, FL 32751

TELEPHONE: (407) 628-2600 FAX: (407) 628-2610 EMAIL: PRMG@PRMGinc.com

September 30, 2013

Mr. Mike Bailey, P.E.

Director of Utilities / City Engineer City of Cooper City 11791 S.W. 49th Street Cooper City, FL 33330

Subject: 2013 Financial Forecast Update

Dear Mr. Bailey:

As requested, Public Resources Management Group, Inc. (PRMG) has conducted a review of the Ten (10) Year Financial Forecast (the "Financial Forecast") on behalf of the City of Cooper City (the "City") water and wastewater utility system (the "System" or "Utility"). The Financial Forecast included the Fiscal Years 2013 through 2023 (the "Forecast Period"). Included in this report is a summary of our findings and conclusions for consideration by the City.

The Financial Forecast relies upon certain information and data provided by the City, including historical customer billing statistics and financial records. To the extent we have performed our analyses using data and information obtained from the City, we have relied upon such information to be accurate and no assurances are intended and no representation or warranties are made with respect thereto.

Based upon the assumptions and findings of this analysis, it is anticipated that the current rates for service will not be sufficient to fund the projected expenditures of the Utility and maintain minimum financial targets for the Forecast Period as previously developed with the City. The following is a summary of the identified rate adjustments recognized within the Financial Forecast effective for water and wastewater bills rendered on or after October 1st for each respective fiscal year:

Summary of Identified Rate Adjustments Fiscal Year Rate Adjustment

2014 1.40% [*] 2015 1.90% 2016 2.00% 2017 2.00% 2018 2.00% 2019 2.00% 2020 2.00% 2021 2.00% 2022 2.00% 2023 2.00%

[*] Reflects adopted rate adjustment.

City of Cooper City

The identified rate adjustments only reflect annual allowances for price index rate adjustment associated with general inflation. The primary need for the identified rate adjustments are to offset the projected increase in the cost of operations and maintenance related to personnel, electrical, chemical, insurance and repair expenses and to provide for a constant re-investment of capital for system improvements (also inflation-adjusted). The following provides a summary of the principal assumptions affecting the Financial Forecast and identified rate adjustments:

1) The City is expected to achieve build-out during the Forecast Period and recognizes account growth of less than one (1%) percent annually, with growth primarily being due to the Monterra development.

2) Inflation in cost of operation and maintenance is assumed at approximately 3.8% or $320,000 annually;

3) All outstanding indebtedness is scheduled to be repaid during the Forecast period with final repayment for:

a. the Utility System Revenue Refunding Bonds, Series 1985A (the "Series 1985A Bonds") expected in the Fiscal Year 2013 resulting in a decline in the annual debt service payments of approximately $2 million; and

b. the subordinate Wachovia Bank loan in Fiscal Year 2015 and the Bank of America loan in Fiscal Year 2016 resulting a combined decline in the annual debt service payments of approximately $550,000; and

4) The capital improvement plan (the "CIP") is estimated at $37 million for the Forecast Period and is funded entirely from internal sources (i.e., existing cash reserves, annual pay-as-you-go funding from rate revenues and no new indebtedness).

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City of Cooper City

We appreciate the opportunity to be of service to the City in meeting its financial goals and objectives and would like to thank the City and its staff for the invaluable assistance and cooperation provided in the development of this report.

Very truly yours, Robert J. Ori President

Thierry A. Boveri, CGFM Senior Rate Consultant

Matthew N. Ori Rate Analyst

RJO/dlc Attachments

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2013 FINANCIAL FORECAST UPDATE

TABLE OF CONTENTS

Title Page No.

Letter of Transmittal

Table of Contents ................................................................................................................... i

List of Tables ......................................................................................................................... ii

General

Existing Water and Wastewater Rates

Methodology

Customer Statistics

Water System

Wastewater System

Projected Revenues

Projected Other Revenues

Projected Revenue Requirements

Projected Utility System Operating Expenses

Projected Existing and Anticipated Annual Debt Service

Summary of Forecasted Capital Improvement Program (CIP)

Projected Fund Transfers

Projected Net Revenue Requirements and Identified Rate Adjustments

Projected Ending Cash Balance

Customer Impact Analysis

Conclusions and Rate Recommendations

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LIST OF TABLES

Table No. Title

1 Historical and Projected Customer Statistics

2 Projected Water and Wastewater System Rate Revenues

3 Projected Other Operating Revenues

4 Projected Impact Fee Revenues

5 Summary of Projected Revenues

6 Projected Fund Cash Balances and Interest Income

7 Development of Projected Escalation Factors

8 Summary of Historical Operating Expenses

9 Fiscal Year 2013 and Fiscal Year 2014 Operating Budget

10 Summary of Projected Operating Expenses

11 Ten (10) Year Projected Capital Improvement Program

12 Existing and Proposed Debt Service Summary

13 Projected Water and Wastewater System Net Revenue Requirements and Rate Adjustments

14 Projected Debt Service Coverage and Rate Covenant Requirements

15 Comparison of Typical Monthly Residential Bills For Water Service

16 Comparison of Typical Monthly Residential Bills For Wastewater Service

17 Comparison of Typical Monthly Residential Bills For Water and Wastewater Service

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GENERAL

The City of Cooper City (the "City") was incorporated in 1959 and provides water and wastewater utility service to approximately 29,100 residents. The City occupies approximately 8 square miles within the Southwestern portion of Broward County and is approaching build-out.

The Monterra Development ("Monterra Development") is a mixed-use residential and retail commercial development representing the primary source of growth to the City.

During November 2007, the City Commission (the "Commission") was presented a Master Plan report identifying the City’s Water and Wastewater Utility System’s (the "System" or "Utility") capital needs over a twenty (20) year forecast period. The Master Plan primarily identified the need for renewals and replacements to the existing infrastructure along with certain improvements in order to provide service to the remaining areas of growth inside the City's utility service area. In order to ensure funding for these capital improvements, a projected ten

(10) year financial forecast (the "Financial Forecast") was developed as part of the Master Plan process. The Financial Forecast is annually reviewed and updated in order to recognize important events that may be or are anticipated to occur and account for changes in underlying assumptions from the prior update. The annual Financial Forecast update is considered to be prudent and allows Utility management to strategically plan the financial position and overall rates of the System.

The primary assumptions and events affecting the Financial Forecast for the 2013 Financial Forecast Update are as follows:

1) The City is expected to achieve build-out during the Forecast Period and recognizes account growth of less than one (1%) percent annually, with growth primarily being due to the Monterra development.

2) Inflation in cost of operation and maintenance is assumed at approximately 3.8% or $320,000 annually;

3) All outstanding indebtedness is scheduled to be repaid during the Forecast period with final repayment for:

a. the Utility System Revenue Refunding Bonds, Series 1985A (the "Series 1985A Bonds") expected in the Fiscal Year 2013 resulting in a decline in the annual debt service payments of approximately $2 million; and

b. the subordinate Wachovia Bank loan in Fiscal Year 2015 and the Bank of America loan in Fiscal Year 2016 resulting a combined decline in the annual debt service payments of approximately $550,000; and

4) The capital improvement plan (the "CIP") is estimated at $37 million for the Forecast Period and is funded entirely from internal sources (i.e., existing cash reserves, annual pay-as-you-go ("pay-go") funding from rate revenues and no new indebtedness).

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EXISTING WATER AND WASTEWATER RATES

The adopted water and wastewater rates for the Fiscal Year 2014 are summarized below:

Monthly Water and Wastewater Rates – Fiscal Year 2014 Water System: Wastewater System:

Monthly Service Charge: Monthly Service Charge:

Individually Metered Residential and Commercial Service

Individually Metered Residential and Commercial Service

Meter Size: 5/8 inch $11.59 Meter Size: 5/8 inch (All Residential) $25.06 1 inch 28.52 1 inch 62.67 1-1/2 inch 56.74 1-1/2 inch 125.30 2 inch 90.58 2 inch 200.47 3 inch 180.90 3 inch 400.94 4 inch 316.78 4 inch 701.62

Master Metered Residential Service Master Metered Residential Service Per Unit $10.40 Per Unit $22.55

Consumption Charge (per 1,000 gallons): Consumption Charge (per 1,000 gallons):

Individually Metered Residential Service All Classes of Service [1] $2.86 0 – 5,000 Gallons $2.87 5,001 – 10,000 Gallons 3.31 10,001 – 20,000 Gallons 4.21 Above 20,000 Gallons 5.53

Master Metered Residential and Commercial

Service $2.99 [1] Billed wastewater is capped at 10,000 gallons of monthly water use per residential unit per month for residential service including Individually

Metered and Master Metered Residential Customers.

As shown above, the City has a conservation-promoting water rate structure. This initiative taken by the City is consistent with the water use policies of the South Florida Water Management District (the "SFWMD") to encourage water conservation efforts.

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METHODOLOGY

In developing the Financial Forecast, the rate revenue requirements are based on an approach that is commonly used by public utilities throughout the industry. The approach included:

1. An evaluation of the service area water demand and wastewater treated requirements for the Utility. This included a review of recent historical customers served and their corresponding usage requirements in order to develop projections of Utility rate revenues and operating expense escalation.

2. A projection of the net revenue requirements from rates, which equates to the expenditure requirements funded from monthly user charges and as summarized below:

+ Cost of Operation and Maintenance + Debt Service Payments (Senior and Subordinate) + Transfers and General Fund Payments + Capital Project Financing +/− Working Capital Reserves − Other Operating Revenue − Interest Income

= Net Revenue Requirements (Funded from Rates)

3. The funding of capital improvements from rate revenues. The capital funding program recognized: i) the use of any available cash balances as a first priority; and ii) the recognition of an increasing pay-as-you-go program for renewal and replacement needs.

4. A review and projection of the City’s enterprise fund and account cash balances to maintain adequate working capital and provide funds for capital expenditures.

5. An evaluation of compliance with rate covenant requirements as outlined in the Bond Resolution which authorize the issuance of the Series 1985A Bonds (the "Bond Resolution") during the Forecast Period.

6. A summary of the identified and projected annual rate adjustments required to fund the Net Revenue Requirements and financial needs of the Utility.

The remainder of this report provides a discussion of the assumptions and projections of customer statistics (i.e., account growth, water demand, wastewater flow, etc.), gross revenues by major components, expenditure requirements by major component, and an evaluation of the projected revenue sufficiency from the adopted Fiscal Year 2014 rates.

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CUSTOMER STATISTICS

An updated projection of the City’s customer service area demands and growth was developed based on discussions with City staff, current economic conditions, and adjustments for existing watering restrictions. The customer statistics, which represent the basis for developing future sales revenues, consist of two main components: i) the number of individual meters in active service (customers); and ii) their respective demand (metered or billed use) for water and wastewater service.

Water System

With respect to recent historical growth levels, the water system has experienced marginal customer growth as a result of the approaching build-out status of the City and the lingering economic downturn. The historical customer statistics are based on reports provided by City staff and include the historical Fiscal Years 2009 through 2012 as shown below:

Historical Water System Customer Statistics by Class [1]

Fiscal Year Ended September 30

2009 2010 2011 2012 Residential – Individually Metered:

Average Annual Accounts 9,817 9,825 9,982 10,388 Average Annual ERCs [2] 9,825 9,833 9,990 10,396 Annual Consumption (000s) 851,876 797,681 851,693 850,886 Average Monthly Use per Account 7,231 6,766 7,110 6,826

Residential – Master Metered Average Annual Accounts 38 38 38 43 Average Annual Units 200 200 200 226 Average Annual ERCs [2] 180 180 180 204 Annual Consumption (000s) 10,947 11,694 11,227 15,659 Average Monthly Use per Unit 4,561 4,873 4,678 5,766

Commercial Customers Average Annual Accounts 662 648 739 731 Average Annual ERCs [2] 1,421 1,391 1,587 1,592 Annual Consumption (000s) 121,602 116,594 119,973 131,412 Average Monthly Use per Account 15,307 14,994 13,529 14,981

Builder / Temporary Customers Average Annual Accounts 6 0 0 0 Average Annual ERCs [2] 8 0 0 0 Annual Consumption (000s) 366 0 0 0 Average Monthly Use per Account 5,083 0 0 0

Total Water System Average Annual Accounts 10,523 10,511 10,759 11,162 Average Annual ERCs [2] 11,434 11,404 11,757 12,192 Annual Consumption (000s) 984,791 925,969 982,893 997,957 Average Monthly Use per ERC 7,177 6,766 6,967 6,821 Average Monthly Use per Account 7,799 7,341 7,613 7,451

Finished Water Produced (000s) 1,054,866 999,370 1,065,113 1,098,650 Unbilled as Percent of Production 6.64% 7.34% 7.72% 9.17%

ERCs = Equivalent Residential Connection [1] Amounts shown derived from Table 1 and based on detailed customer billing data as provided by City staff.

[2] ERCs were calculated based on meter / unit equivalency factors.

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As identified above, the Utility provided service to approximately 11,162 average annual retail water accounts during the Fiscal Year 2012 and experienced customer account growth of approximately 2% per year since Fiscal Year 2009. While the total water sales have generally remained constant, the average use per account has declined 4.5% over the same period which results in a "lower revenue per account" or contribution margin from utility customers. It should be noted that the south Florida region has been experiencing general declines in per customer water use.

For the Forecast Period, we have assumed a decline in the average water use per account recognizing: i) continued water conservation; and ii) anticipated growth in multi-family customer accounts (e.g., apartments / condos) representing a lower average use per residential unit than the single-family customer class. In addition, minor customer account growth is projected during the Forecast Period associated with the planned mixed-use development identified as the Monterra Development. Based on these assumptions, recent historical trends, and discussions with City staff, the following water customer account and demands projections were recognized:

Summary of Projected Water System Customer Statistics [1]

Fiscal Year

Average Annual

Accounts Average Annual

ERCs [2]

Billed Water Flows (000s

Gallons)

Average Monthly Use Per ERC

(Gallons)

Water Production

(000s Gallons) 2012 (Historical) 11,162 12,192 997,957 6,821 1,098,650

2013 (Est.) 11,177 12,213 980,700 6,691 1,077,692 2014 11,302 12,380 993,307 6,686 1,091,546 2015 11,382 12,629 1,009,620 6,662 1,109,473 2016 11,417 12,681 1,013,829 6,663 1,114,098 2017 11,423 12,690 1,014,610 6,663 1,114,956 2018 11,428 12,697 1,015,211 6,663 1,115,616 2019 11,432 12,703 1,015,632 6,663 1,116,079 2020 11,435 12,706 1,015,873 6,663 1,116,344 2021 11,438 12,709 1,016,115 6,663 1,116,610 2022 11,441 12,712 1,016,356 6,663 1,116,875 2023 11,444 12,715 1,016,597 6,663 1,117,140

Growth [3] 0.23% 0.38% 0.17% (0.21%) 0.15%

ERCs = Equivalent Residential Connection

[1] Amounts are derived from Table 1 at the end of this report.

[2] ERCs were calculated based on meter / unit equivalency factors based on information published by the American Water Works

Association.

[3] Represents the average annual compound growth rate as projected from Fiscal Year 2012.

Projections of customer growth related to the Monterra Development were based on estimates provided by City staff and reflect lower estimates when compared to previous financial forecasts to reflect the approaching build-out of the City.

Wastewater System

The majority of the City’s customers receive both water and wastewater service. As of the Fiscal Year 2012, the City provided service to approximately 11,162 water and 10,903 wastewater accounts (wastewater accounts represent 97.7% of all water accounts). As a result, the marginal customer growth and reduced flows experienced by the water system were also observed in the

-6-wastewater system. These trends are primarily due to the approaching build-out status of the City and the economic downturn.

Below is a summary of historical wastewater customer statistics as provided by City staff for the historical Fiscal Years 2009 through 2012 and as derived from Table 1 at the end of this report:

Historical Wastewater System Customer Statistics by Class [1] Fiscal Year Ended September 30

2009 2010 2011 2012 Residential – Individually Metered:

Average Annual Accounts 9,674 9,674 9,828 10,232 Average Annual ERCs 9,675 9,674 9,828 10,232 Billed Flow (000s) 674,679 640,439 624,182 662,649 Average Monthly Flows per Account 5,812 5,517 5,293 5,397

Residential – Master Metered Average Annual Accounts 38 38 38 43 Average Annual Units 200 200 200 226 Average Annual ERCs 180 180 180 204 Billed Flow (000s) 10,788 11,141 11,499 15,408 Average Monthly Flows per Unit 4,495 4,642 4,791 5,673

Commercial Customers Average Annual Accounts 556 542 630 628 Average Annual ERCs 1,139 1,184 1,376 1,372 Billed Flow (000s) 96,710 88,961 88,775 105,815 Average Monthly Flows per Account 14,495 13,678 11,743 14,041

Total Wastewater System Average Annual Accounts 10,268 10,254 10,496 10,903 Average Annual ERCs 10,995 11,038 11,384 11,808 Billed Flow (000s) 782,177 740,541 724,456 783,872 Monthly Billed Flows per ERC 5,928 5,591 5,303 5,532 Monthly Billed Flows per Account 6,348 6,018 5,752 5,991

Treated Wastewater Flows (000s) 819,631 851,727 728,874 961,410 Monthly Treated Flows per Account (Gallons) 6,652 6,922 5,787 7,348

ERCs = Equivalent Residential Connections

[1] Amounts shown based on detailed customer billing data as provided by City staff and is derived from Table 1 at the end of this report.

Customer account growth during the historical period shown was comparable to that of the water system at approximately 2% per year since Fiscal Year 2009. It should be noted that the wastewater system reported a decline in the billed flows per account (based on metered water sales), while treated wastewater flows increased for the same period. This may be attributable to effects of weather (i.e., increased rainfall during the Fiscal Year 2012) resulting in increased wastewater flows treated by City facilities and declines in metered water sales or billed flows.

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Based on discussion with the City regarding future growth, including the Monterra Development, the following projection of wastewater customer accounts and billed flow is assumed for the development of the Financial Forecast:

Summary of Projected Wastewater System Customer Statistics [1]

Fiscal Year Average

Annual Accounts Average

Annual ERCs [2] Billed Flows

(000s Gallons) Wastewater Treatment

(000s Gallons) 2012 (Historical) 10,903 11,808 783,872 961,410 2013 (Est.) 10,918 11,829 785,124 968,208 2014 11,043 11,995 796,245 979,270 2015 11,123 12,244 813,269 986,377 2016 11,158 12,296 817,015 989,481 2017 11,164 12,306 817,721 990,013 2018 11,169 12,313 818,256 990,456 2019 11,173 12,318 818,621 990,811 2020 11,176 12,321 818,815 991,077 2021 11,179 12,324 819,009 991,343 2022 11,182 12,327 819,204 991,609 2023 11,185 12,330 819,398 991,875

Growth [3] 0.23% 0.39% 0.40% 0.28%

ERCs = Equivalent Residential Connection

[1] Amounts were derived from Table 1 at the end of this report.

[2] ERCs were calculated based on meter / unit equivalency factors.

[3] Represents the average annual compound growth rate as projected from the historical Fiscal Year 2012.

As can be seen above and detailed within Table 1 at the end of this section, projected wastewater account growth is consistent with the projection of water account growth for the Forecast Period.

For purposes of this financial forecast, the average residential billed use reported for the Fiscal Year 2012 is assumed for the Forecast Period since it represents the lowest level of reported billed flows in recent history.

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PROJECTED REVENUES

The projection of sales revenues are based on the application of the annual price index to existing rates for monthly water and wastewater service to the forecast of customer and sales forecasts.

The water sales revenue for the Forecast Period is projected as follows:

Projection of Water System Sales Revenues under Existing Rates ($000's) [1][2]

Projected Fiscal Year Ending September 30, Customer Class 2013 Est. 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Water System:

Residential Single-Family

Base Revenue $1,427 $1,462 $1,493 $1,527 $1,557 $1,590 $1,622 $1,655 $1,689 $1,723 $1,758 Use Revenue 2,781 2,851 2,909 2,974 3,036 3,097 3,159 3,220 3,282 3,352 3,422

Total Revenue $4,209 $4,313 $4,402 $4,501 $4,593 $4,687 $4,781 $4,876 $4,971 $5,075 $5,180

Residential Multi-Family

Base Revenue $28 $34 $61 $62 $63 $65 $66 $67 $69 $70 $71 Use Revenue 36 44 79 80 82 83 85 87 89 90 92

Total Revenue $64 $78 $140 $142 $145 $148 $151 $154 $157 $160 $163

Commercial

Base Revenue $217 $222 $232 $241 $247 $253 $258 $263 $268 $274 $279 Use Revenue 391 400 419 435 445 455 464 474 483 493 503

Total Revenue $608 $623 $651 $676 $692 $707 $722 $737 $752 $767 $782

Builder / Temporary Base Revenue $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Use Revenue 0 0 0 0 0 0 0 0 0 0 0

Total Revenue $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Total Water System

Base Revenue $1,672 $1,718 $1,786 $1,830 $1,868 $1,907 $1,946 $1,986 $2,026 $2,067 $2,109 Use Revenue 3,208 3,295 3,407 3,490 3,563 3,635 3,707 3,781 3,854 3,936 4,017

Total Revenue $4,880 $5,014 $5,193 $5,320 $5,431 $5,542 $5,653 $5,766 $5,879 $6,003 $6,126 [1] Derived from Table 2 at the end of this section, amounts shown reflect rate revenues under existing rates based on customer growth and demand projects as previously identified and exclude identified rate adjustments.

[2] Amounts shown in thousands of dollars ($1,000s).

The water system sales revenues are projected to increase at approximately 2.4% per year, which is consistent with assumed application of the price index and assumed growth in customer billing statistics as previously discussed.

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The wastewater sales revenue for the Forecast Period is projected as follows:

Projection of Wastewater System Sales Revenues under Existing Rates ($000's) [1][2]

Customer Class 2013 Est. 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Wastewater System:

Residential Single Family

Base Revenue $3,037 $3,112 $3,179 $3,249 $3,315 $3,382 $3,450 $3,520 $3,591 $3,664 $3,739 Use Revenue 1,872 1,918 1,956 2,000 2,041 2,082 2,123 2,164 2,205 2,253 2,301

Total Revenue $4,909 $5,031 $5,135 $5,249 $5,356 $5,464 $5,573 $5,684 $5,796 $5,918 $6,040

Residential Multi-Family

Base Revenue $60 $74 $132 $135 $137 $140 $143 $146 $149 $152 $155 Use Revenue 38 47 84 85 87 89 90 92 94 96 98

Total Revenue $99 $120 $215 $220 $224 $229 $233 $238 $242 $247 $252

Commercial

Base Revenue $410 $421 $442 $460 $472 $482 $493 $503 $513 $523 $533 Use Revenue 304 312 327 341 350 358 365 372 379 387 395

Total Revenue $714 $734 $769 $801 $821 $840 $858 $875 $892 $910 $929

Total Wastewater System

Base Revenue $3,507 $3,607 $3,753 $3,844 $3,923 $4,004 $4,086 $4,168 $4,252 $4,339 $4,427 Use Revenue 2,214 2,277 2,367 2,427 2,478 2,528 2,579 2,628 2,678 2,736 2,794

Total Revenue $5,721 $5,885 $6,119 $6,270 $6,401 $6,533 $6,664 $6,796 $6,930 $7,075 $7,221 [1] Derived from Table 2 at the end of this section, amounts shown reflect rate revenues under existing rates based on customer growth and demand projects as previously identified and exclude identified rate adjustments.

[2] Amounts shown in thousands of dollars ($1,000s).

The wastewater system sales revenues are also projected to increase at approximately 2.4% per year, which is consistent with the water system and projected customer billing statistics as previously discussed.

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PROJECTED OTHER REVENUES

The majority of other operating revenues are related to late fee charges (reported as miscellaneous revenues) and billing service charges (charge for billing solid waste services). The growth in miscellaneous fee revenues are primarily related to the growth in late fee payments charged at 6% of any customer past due balances. The following Table below identifies the recent historical growth in other operating revenue:

Summary of Historical Other Operating Revenues ($000's) [1]

Description 2009 2010 2011 2012 Combined Water and Wastewater System

Miscellaneous $440 $441 $477 $611 Billing Service Charge 115 113 116 108 Engineering Inspection Fees 26 92 13 3 Meter Set Fees [2] n/a n/a 92 92 BMS Revenue [3] 13 13 13 13

Total System Other Revenues $594 $658 $711 $827 [1] Amounts shown are in thousands of dollars ($1,000’s) and are based on reports provided by City staff.

[2] Amounts collected for the Fiscal Years 2009 and 2010 were included in the capital improvement project fund.

[3] Reflects revenue based on contractual agreement with Budget Mini Storage (BMS).

The Utility observed a notable increase in late payment fees for the Fiscal Year 2012 of $135,000 or 28%. It is anticipated based upon eleven (11) months of reported operating results that the City will generate similar levels of late payment fees for the Fiscal Year 2013. For purposes of the financial forecast and based on discussions with City staff, miscellaneous fee revenues were projected at reduced levels, approximately $460,000, which is more in line with past historical averages. Based on these trends and discussions with City staff, other operating revenues were projected as follows:

Summary of Projected Other Operating Revenues ($000's) [1]

Description 2013 Est. 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Water and Wastewater System

Miscellaneous [2] $614 $460 $460 $460 $460 $460 $460 $460 $460 $460 $460 Billing Service Charge [3] 100 100 102 104 107 110 113 116 120 123 127 Engineering Inspection Fees 15 8 8 8 8 8 8 8 8 8 8 Meter Set Fees 40 50 50 50 50 50 50 50 50 50 50 BMS Revenue [4] 13 13 13 13 13 13 13 13 13 13 13

Total System Other Revenues $782 $631 $633 $635 $638 $641 $644 $647 $651 $654 $658

[1] Amounts shown in thousands of dollars ($1,000s) and derived from Table 3.

[2] Miscellaneous revenues are primarily comprised of late fees, insufficient fund check charges, and other miscellaneous fees and charges and are projected to decline as economic conditions improve.

[3] Billing service charges are to recoup costs associated with providing billing services for Waste Management.

[4] Based on discussions with staff, Budget Mini Storage ("BMS") revenue is a recurring annual payment made per an outstanding developer’s agreement.

As can be seen above, the projection of other operating revenues is anticipated to decline over the Forecast Period. The billing service charge revenues related to providing billing service charges to Waste Management, Inc. were escalated based on inflation to reflect a pass-through of

-11-the inflation in costs to the Utility. Engineering and Meter Set Fees were held constant. Based on discussions with staff, Budget Mini Storage (BMS) revenues were held constant during the Forecast Period reflecting a contractual agreement between the City and Budget Mini Storage (BMS). Overall, other operating revenues are anticipated to average approximately $656,000 or 6% of gross revenues during the Forecast Period.

With respect to other non-operating revenues, such Contributions-in-Aid-of-Construction ("CIAC" or "Impact Fee") revenues, the Utility is expected to collect approximately $1.9 million during the fiscal year 2013 from the Monterra Development. Impact Fee revenues are recognized as non-recurring growth related revenues similar to Engineering Inspection Fees and Meter Set Fees. Based on anticipated customer growth, the following Impact Fee collections are projected for the Forecast Period:

Summary of Projected Impact Fee Revenue ($000's) [1]

Description 2013 Est. 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Impact Fee Revenues

Water System $711 $16 $46 $36 $8 $7 $5 $4 $4 $4 $4 Wastewater System 1,189 26 77 59 13 11 9 7 7 7 7 Total System Impact Fee Revenues $1,899 $42 $123 $95 $21 $18 $14 $11 $11 $11 $11

[1] Amounts shown in thousands of dollars ($1,000s) and derived from Table 4 at the end of this Report.

As shown above, the majority of the revenue collections are anticipated to occur during the Fiscal Year 2013 associated with the Monterra Development. The forecasted collections were developed based on discussions with City staff and reflect assumed prepayment from the Monterra Development. The Impact Fee collections are anticipated to be used to fund: i) payment of expansion-related debt service payments; and ii) expansion-related capital improvements of the Utility. Detailed calculations of the projected Impact Fee collections can be found in Table 4 at the end of this report.

PROJECTED REVENUE REQUIREMENTS

The projection of gross revenue requirements (expenditures) of the Utility can be categorized into four main categories: i) Utility system operating expenses (does not include capital, depreciation, debt service, or transfers); ii) annual debt service payments on existing and future debt; iii) capital improvements funded directly from rates; and iv) transfers to other departments / cost centers of the City. The sums of these expenditures represent the gross revenue requirements of the Utility.

Projected Utility System Operating Expenses

The development of the projected operating expenses for the City's water and wastewater systems was based upon: i) a review of recent cost escalation trends; ii) the Fiscal Year 2013 and 2014 Budget; and iii) certain other assumptions and considerations as identified within this report.

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Recent historical trends in operating expenses for the Utility have seen annual increases of approximately 1.6% annually for Fiscal Years 2009 through 2012. The growth in operating expenses is less than historical averages for inflation and reflect declines in certain expenses such as chemicals and electric related to the recent economic downturn. It is expected that such costs would rebound with the economy as demands for products due to increased construction increase. Below is a summary of historical operating expenses based on detailed operating results as provided by City staff:

Summary of Historical Operating Expenses ($000's) [1]

Description 2009 2010 2011 2012 Estimated 2013 [2]

Combined Systems Personnel $3,247 $3,437 $3,706 $3,608 $3,605 Electricity 854 711 715 676 890 Chemicals 675 446 498 527 644 Insurance 368 341 287 257 294 Other Operating 406 625 669 575 542 Maintenance and Repairs 295 368 342 396 402 Administrative Expense 345 0 0 0 0 Sludge Removal 131 97 104 109 90 Professional Services 93 71 29 33 165 Gas and Oil 43 61 59 76 57 General Fund Transfer [3] 46 432 439 556 600

Total System Operating Expenses $6,504 $6,589 $6,848 $6,813 $7,288 [1] Unless otherwise noted, amounts shown derived from Table 8 at the end of this report and based on detailed historical general ledger reporting, which may vary slightly from reported totals within the historical Comprehensive Annual Financial Reports (CAFRs).

[2] Amounts shown are derived from Table 10 and for comparison purposes exclude budgeted contingencies.

[3] Amounts shown reflect transfers to the General Fund and are not considered operating expense as defined by the

Bond Resolution.

The increase in operating expenses is mainly due to increases in personnel benefits, other miscellaneous expenses, general fund transfers and maintenance and repair expenses. As can be seen, electric and chemical expenses have declined for the same historical period and may be attributable to the recent economic downturn. As evidenced by the Fiscal Year 2013 budget estimate, such costs are anticipated to rebound.

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Based on discussions with staff, the projections of Utility operating expenses took into consideration recent historical trends in costs and anticipation of future increases. The basis of the projection relied upon the current Fiscal Year 2013 and Fiscal Year 2014 operating budgets as adjusted and escalated thereafter using a variety of assumptions as identified within Table 7 at the end of this report. The projections of such operating expenses are considered reasonable for the purpose of this analysis and summarized below:

Summary of Projected Operating Expenses ($000's) [1] Fiscal Year Ending September 30, Estimated 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total System Operating Expenses:

Personnel $3,605 $3,714 $3,862 $4,016 $4,177 $4,344 $4,518 $4,698 $4,886 $5,082 $5,285 Electricity 890 795 847 891 934 980 1,027 1,076 1,128 1,183 1,240 Chemicals 644 690 717 735 753 773 795 819 844 870 896 Insurance 294 294 309 324 341 358 376 394 414 435 457 Other Operating 542 576 586 595 413 424 470 484 499 478 493 Maintenance and Repairs 402 527 548 570 593 616 641 667 693 721 750 Contingency 350 361 375 386 394 405 416 428 440 452 465 Sludge Removal 90 162 169 173 177 182 188 193 199 205 211 Professional Services 165 172 179 186 194 202 210 218 227 236 245 Gas and Oil 57 58 61 64 67 70 74 78 82 86 90 General Fund Transfers [2] 600 700 800 900 1,000 1,100 1,200 1,200 1,200 1,200 1,200 R&R Fund O&M [3] 170 210 218 227 236 246 255 266 276 287 299 Total $7,807 $8,259 $8,672 $9,070 $9,279 $9,699 $10,169 $10,522 $10,888 $11,234 $11,630

Less General Fund Transfer $7,207 $7,559 $7,872 $8,170 $8,279 $8,599 $8,969 $9,322 $9,688 $10,034 $10,430

[1] Amounts shown in thousands of dollars ($1,000s) and derived from Table 10 at the end of this section.

[2] Amounts shown are budgeted within the City’s operating budget, however are not considered as an operating expense to the Utility and were excluded in the determination of rate covenant compliance, but are shown here for informational purposes.

[3] Amounts shown reflect operating expenses funded from the Renewal and Replacement Fund and were identified as an expenditure to be recovered from the rate revenues of the Utility since such expenses are recurring in nature and should be funded from a recurring revenue source and benefit the existing customers of the Utility.

As shown above, the total operating expenses are projected to increase at a 3.8% growth rate (excluding general fund transfers) per year, which is higher than recent historical trends. This is principally due to the assumed increase in chemical and electric expenses associated with general inflation as opposed to recently observed declines in such expenses. The forecast of operating expenses relied upon the Fiscal Year 2013 and Fiscal Year 2014 budget and is escalated thereafter based on the following assumption:

1. Personnel expenses are escalated by a composite factor of 4% annually, reflecting adjustments to salary for cost-of-living, as well as adjustments to the cost of benefits such as health insurance and retirement. Based on discussions with City staff, no additional personnel are assumed during the Forecast Period.

2. Electrical expenses are escalated over the Forecast Period on average by approximately 5% per year based on discussions with staff, recent increases in electrical expenses, anticipation of continued increases in fuels used in the generation of electricity, and marginal adjustments for growth in demand.

3. Insurance expenses associated with liability and property insurance are escalated at 5% per year based on discussion with the City and recent trends in such costs experienced by the City and other southeast urban communities.

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4. Chemicals are escalated based on the growth in water and wastewater flows plus an inflationary factor for a projected average rate of approximately 2.9%.

5. Maintenance and repairs are escalated at a rate of 4% annually based on observed industry averages recognizing inflation for materials and supplies.

6. The Utility has budgeted an approximate $600,000 transfer to the General Fund for the Fiscal Year 2013. Based upon recent analyses performed by the City, the Utility must increase contributions to the General Fund. Pursuant to discussions with City staff the General Fund Transfer is assumed to increase approximately $100,000 annually through the Fiscal Year 2019 at which time it is expected that the City would hold the General Fund transfer constant at approximately $1.2 million annually.

7. Professional services are escalated at a rate of 4% as such costs are primarily labor-related.

8. Sludge removal expenses are escalated at a general inflationary rate plus a factor for the growth in treated wastewater flows resulting in an average annual increase of approximately 3%.

9. Gas and oil expenses are escalated at a rate of 5% annually based on recent historical trends and anticipation of future increases in such costs.

10. Escalation of other operating expenses not fitting the categories addressed above have been projected to increase from current budgetary levels at a general inflation rate of 2.2% - 3.0% during the Forecast Period based upon forecasts prepared by the Congressional Budget Office ("CBO").

11. A contingency allowance of 2% of the projected operating expenses is recognized in each fiscal year of the Forecast Period. The allowance has been included in order to recognize unknown or unplanned expenditures that may occur during such Forecast Period. An allowance for bad debt expense has also been included as a component of the operating expenses to recognize a certain amount of revenues as uncollectible and, therefore, written off throughout the Forecast Period. This estimate, based on trends incurred by utilities statewide, equals 2% of projected sales revenues

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Projected Existing and Anticipated Annual Debt Service

A major revenue requirement for the Utility is the payment of debt service on borrowed funds used to finance capital improvements for the Utility. As of October 1, 2012, the City had approximately $3.8 million in outstanding bonds and loans as summarized below:

Outstanding Bonds and Loans [1] Amount Outstanding as of October 1, 2012 Utility System Revenue Refunding Bonds, Series 1985A [3] $1,994,280 Loan with Bank of America, N.A. dated February 14, 2001 (the "2001 Bank Loan") 1,159,355 Loan with Wachovia Bank, N.A. dated June 30, 2005 (the "2005 Bank Loan") 541,335

Total Outstanding Bonds and Bank Loans $3,767,923 [1] Amounts shown derived from detailed payment schedules as provided by the City.

[2] Amounts shown reflect outstanding balances reduced by payments made on October 1, 2012, where applicable.

[3] Amounts shown include accretion interest liability of $1,860,630 due at time of Bond Maturity.

The debt service requirements included in this section for the outstanding bonds and bank loans are based on the actual debt service repayment schedules for each issue and are presented on a "gross" basis (i.e., not net of interest earnings on any debt service related funds or accounts).

Furthermore, the amounts shown are based on the monthly funding requirements of the various sinking funds (i.e., an accrual basis), as required by the Bond Resolution or Loan Agreements, as opposed to when the debt service requirements are actually paid. The following is a schedule of the Utility’s existing annual debt service:

Summary of Existing Annual Debt Service [1]

Fiscal Year Series 1985A Bonds [2] 2001 Bank Loan 2005 Bank Loan Total Outstanding Debt Service Ending

September 30, Principal Accreted Interest Total Principal Interest Total Principal Interest Total Principal Interest Total

2013 (Est.) $134 $1,861 $1,994 $316 $41 $357 $191 $16 $207 $641 $1,917 $2,558 2014 0 0 0 329 28 357 198 9 207 527 37 564 2015 0 0 0 343 14 357 153 3 155 495 17 512 2016 0 0 0 132 2 134 0 0 0 132 2 134 2017 0 0 0 0 0 0 0 0 0 0 0 0 2018 0 0 0 0 0 0 0 0 0 0 0 0

Total $134 $1,861 $1,994 $1,121 $84 $1,204 $541 $28 $569 $1,796 $1,972 $3,768

[1] Amounts shown reflect the accrual of the debt service payments and vary in relation to actual payments made during the respective fiscal year. Amounts are in thousands of dollars ($1,000s) and summarized on Table 12 at the end of this section.

[2] Series 1985A Bonds represent Capital Appreciation Bonds and cannot be advance refunded per the terms and conditions of the Bond Resolution

No. 85-10-1 as amended and supplemented.

As can be seen above, the aggregate annual debt service payments remaining to be accrued for the outstanding bonds and bank loans is approximately $3.8 million. The majority of such payments are due from the Series 1985A Bonds, with final payment anticipated to occur during Fiscal Year 2013, at which time the City would benefit from a substantial reduction in annual debt service payments of approximately $1.9 million. In addition, the debt service reserve cash balance equivalent to $2 million is anticipated to become unrestricted and transferred to the Capital Improvement Fund (assumed to be initially deposited to System Reserve Account and in turn transferred to the Capital Improvement Fund) to aid in funding capital improvements.

Moreover it is also anticipated that the outstanding bank loans would be repaid by the Fiscal Year 2016 representing a further decline in annual debt service payments of approximately $550,000.

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Summary of Forecasted Capital Improvement Program (CIP)

The CIP is based upon City staff revisions to the Master Plan CIP. The revisions were made to reflect recent declines in overall water demand and delays in anticipated development, which has allowed the City to forego construction of certain capital projects. The following is a summary of forecasted CIP projects and funding sources:

Summary of Forecasted Capital Improvement Program ($000's)[1]

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total Capital Projects:

Water Treatment $0 $143 $147 $0 $0 $0 $0 $0 $0 $0 $0 $290 Water Distribution 0 1,280 909 1,672 1,046 1,081 1,117 971 1,004 1,037 1,072 11,189 Wastewater Treatment 0 600 207 7,811 0 1,711 1,768 183 0 325 336 12,940 Wastewater Collection 120 1,545 920 1,169 1,473 1,015 589 609 629 650 672 9,392 Budgeted Departmental Capital 261 262 216 223 231 238 246 255 263 272 281 2,748

Total Capital Funding Needs $381 $3,830 $2,399 $10,876 $2,750 $4,045 $3,720 $2,018 $1,896 $2,285 $2,361 $36,559

Funding Sources:

Capital Improvement Fund [2] $120 $3,568 $2,183 $8,697 $2,519 $3,806 $3,474 $1,763 $1,633 $2,013 $2,080 $31,855 Impact Fees 0 0 0 1,956 0 0 0 0 0 0 0 1,956 Rate Revenue 261 262 216 223 231 238 246 255 263 272 281 2,748

Total Capital Funding Sources $381 $3,830 $2,399 $10,876 $2,750 $4,045 $3,720 $2,018 $1,896 $2,285 $2,361 $36,559

[1] Amounts shown are in thousands of dollars ($1,000s) and derived from Table 11 at the end of this report. Project costs include adjustments for inflation (3.0%).

[2] The Capital Improvement Fund represents cash balances derived from rate revenues. It should be noted that forecasted cash balances reflect additional transfers to the

Capital Improvement Fund totaling approximately $6 million comprised of: i) $2 million released from debt service reserve associated with final repayment of the Series 1985A Bonds; and ii) $4 million from operating reserves.

As can be seen above, it is anticipated that the Utility will require approximately $33 million in capital funding needs over the Forecast Period. The CIP is anticipated to be funded solely from internal sources (e.g., no new debt) including existing cash reserves, impact fees and projected rate revenues. The CIP is primarily required for the rehabilitation and replacement of existing water distribution and wastewater system collection pipes representing approximately $20.6 million or 55% of the total CIP funding requirements. It should also be noted that the Utility is currently in on-going negotiations with several neighboring utilities to help the City meet compliance with regulatory requirements for utilities with treated wastewater effluent ocean outfalls. The requirement specifies the need to limit future ocean outfall discharges through the production of reclaimed water at 60% of the total treated wastewater effluent. Utility staff has assumed approximately $7 million in funding for purchase of reclaimed water credit from a neighboring utility to achieve regulatory compliance. Recognizing that as of the date of this report the City has not yet entered into an interlocal agreement with another municipality, should the estimated capital cost change it may require the use of additional cash reserves or additional indebtedness to fund the capital investment; in-turn this may affect the recommendations of projected rate adjustments.

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In development of the capital funding plan, certain assumptions were recognized in order to maximize the use of existing and projected cash balances aimed at minimizing rate impacts to customers of the City while maintaining adequate cash reserves and are as follows:

1. Based on discussions with City staff and to ensure long-term rate competitiveness it was determined that the CIP program would be funded with a pay-as-you-go methodology, where possible, for recurring projects associated with the renewal, upgrade, or replacement of existing system infrastructure. Funding projects on a pay-as-you-go basis refers to using revenues generated from Utility operations annually set aside or earned in current or prior fiscal years (e.g., Capital Improvement Fund) to finance the ongoing renewal and replacement needs.

2. The capital funding plan relies upon available and projected cash balances based on projected operating results as discussed in greater detail within subsequent sections of this report. Such projections recognized, among other significant assumptions, the adoption of rate increases.

3. Based on the financial forecast and the projected capital improvement needs, it is estimated that the Utility will not require any further additional indebtedness to fund the CIP.

Projected Fund Transfers

As a component of the Utility gross revenue requirements, projected fund transfers assumed within the Financial Forecast serve to provide: i) dedicated funding for future capital renewals and replacements of the Utility through the Renewal and Replacement Fund (the "R&R Fund") transfers, consistent with pay-as-you-go capital funding; ii) rate stabilization through operating reserve transfers during short-term deficiencies in net revenue requirements; and iii) compliance with the Bond Resolution.

With respect to the projection of R&R Fund transfers, the Bond Resolution, as amended and supplemented, which authorized the issuance of the Series 1985A Bonds, requires that the City establish an R&R Fund. Specifically as defined in the Bond Resolution, the City must fund the R&R Fund Requirement (the "R&R Requirement"), which "…shall mean the greater of (a) the amount, if any, as the City shall determine in its discretion pursuant to the recommendations of the Consulting Engineers under the provisions of Section 9.04 of the Resolution, to be deposited to the credit of the Renewal and Replacement Fund, or (b) $250,000." For purposes of this analysis, a minimum $500,000 ending cash balance was maintained within the R&R Fund for the Forecast Period as a contingency for unanticipated capital funding needs for renewals and replacements (e.g., line breaks, etc.).

It is recommended that the City establish a policy for dedicated annual deposits to a capital-related fund or account to provide a reliable funding source for ongoing renewals and replacements of the Utility system assets. Generally, many bond resolutions adopted by public utilities associated with the issuance of Utility revenue bonds require a minimum of 5.0% of prior year gross revenues to be deposited into a capital related account such as the…