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LTC 478-2017 Moodys Rating on the City of Miami Beach, Florida SMIAMIBEACH City of Miami Beach, 1700 Convention Center Drive, Miami Beach, FL 33139, www.miamibeachfl.gov �-rc # q�7g_2p�7 LETTER TO COMMISSION TO: Mayor Philip Levine and Members ;af the City C FROM: Jimmy L. Morales, City Manager � DATE: October 4, 2017 SUBJECT: Moody's Rating on the City of Miam� Beach, Florida Stormwater Revenue Bonds The purpose of this Letter to Commission is to advise you of the results of a credit review done by Moody's on the City's Stormwater Revenue Bonds. Moody's Investors Service has affirmed the Aa3 rating and changed the outlook from negative to stable on the City of Miami Beach's (FL) $180 million Stormwater Revenue Bonds. Moody's Aa3 rating is based on the Stormwater system's healthy liquidity position, adequate debt service, and mature service area and high leverage. Credit strengths that the City's possesses are strong cash reserves and willingness to raise rates in concert with additional debt. Credit challenges include adequate debt service coverage and highly leveraged system with significant additional debt expected. The Moody's stable outlook reflects their expectation that the City will manage significant additional debt of the system, which provides an essential service given the City's location on a barrier island, with timely rate increases, maintaining coverage and cash levels. Moody's indicates factors that could lead to an upgrade would be significant increase in debt service coverage and significant reduction in debt burden. Moody's also indicates factors that could lead to a downgrade would be additional debt without timely rate increases, resulting in weakened debt service coverage and significant declines in liquidity. Although the City is meeting its legal coverage requirements under the Bond Resolution, its coverage is relatively less than other credits in the Aa3 category, noting specifically that our legal rate covenant of 110% was weak. The Stormwater system will likely maintain adequate financial operations given healthy liquidity and a history of timely rate increases. Management has typically increase rates prior to significant debt issuances, including substantial 84% increase in fiscal 2015 and a 36% increase in 2017. If you have any questions or need additional information please contact John Woodruff, Chief Financial Officer. � //W J LM/JW/AW CREDIT OPINION Miami Beach (City of), FL Stormwater 4 October 2017 Enterprise update Update: Moody's assigns stable outlook and affirms Aa3 on Miami Beach, FL's Stormwater Rev. Bonds Contacts Valentina Gomez 212-553-4861 Analyst valentina.gomez@moodys.com Gregory W. Lipitz 212-553-7782 VRSr C�edit Officer/ Manager gregory.li pitz@moodys. com CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 Summary Rating Rationale Moody's Investors Service has affirmed the Aa3 rating and changed the outlook from negative to stable on the City of Miami Beach's (FL) $180 million Stormwater Revenue Bonds. The Aa3 rating is based on the system's healthy liquidity position, adequate debt service, mature service area and high leverage. Credit Strengths » Strong cash reserves » Willingness to raise rates in concert with additional debt Credit Challenges » Adequate debt service coverage » Highly leveraged system with significant additional debt expected Rating Outlook The stable outlook ref�ects our expectation that the city will manage significant additional debt of the system, which provides an essential service given the city's location on a barrier island, with timely rate increases, maintaining coverage and cash levels. Factors that Could Lead to an Upgrade » Significant increase in debt service coverage » Significant reduction in debt burden Factors that Could Lead to a Downgrade » Additional debt without timely rate increases, resulting in weakened debt service coverage » Significant declines in liquidity .... . . ...... .... . . ...... .... . . ...... .... . . ...... .... . . ...... .... . . ...... .... . . ...... ....... ....... .. ....... ....... .. ....... ....... .. ....... ....... .. ....... ....... .. ....... ....... .. ....... ....... ....... ....... .. ....... ....... .. ....... ....... .. ....... ....... .. ....... ....... .. ....... ....... .. ....... ....... ..... .. ....... ...... .. ....... ...... .. ....... ...... .. ....... ...... .. ....... ...... .. ....... ...... .. ..... , MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE Key Indicators Exhibit 1 MIAMI BEACH (qNOF) FLSfORMWATfftBJT�iPFiISE 9�stem Charaderistics Asset Condition (Net FxedAssets/ Annual Depreaation) 9,istem 9ze- O&M (in $OOOs) ServiceArea W�Ith: MF %of USmedian Legal Provisons RateCovenant (x) Debt Se�vice F�erve F�quirement Management Ft�te Management F�gulatory Complianceand Capital Ranning Fnanaal 3rength Operffiing F�venue ($000) 9,��em 9ze- O&M (in $OOOs) Net Funded Debt ($000) Mnual Debt �ervice Coverage (x) Cash on Hand Debt to Operat ing F�venues (x) Source: Moody's /nvestors Service, Audited Flnancial Statements 96 years 5,551 88.60% 1.10x No explidt DSF�F; or funded with �ecul at ive grade s�rety (Baa and Below) Aa Aa zoiz 11,612 4,252 39,099 2.44x 757 days 3.4x 2013 11,672 3,445 49,266 2.34x 1056 days 42x 2014 11,715 3,722 63,486 1.41x 1083 days 5.4x 2015 21,258 5,566 76,313 2.89x 583 days 3.6x 2016 21,491 5,551 112,540 1.55x 991 days 5.2x Recent Developments Hurricane Irma recently made landfall in Florida. According to management, the stormwater system performed we(l and the system had about 5200,000 in unexpected expenditures. Management expects most of that amount to be reimbursible from FEMA. Detailed Rating Considerations Service Area and System Characteristics: Mature System on Barrier Island Susceptible to Flooding, Hurricane Risks The large stormwater system's service area covers 4,200 acres and extends beyond Miami Beach, induding adjacent islands. Miami Beach is one of 33 municipalities that is a co-permittee with Miami-Dade County through the National Pollutant Discharge Elimination System. The current permit expires in Z020 (they are typically awarded for four-year periods), and the system is in compliance with all relevant regu�atory bodies. Notably, as a barrier island, the city is subject to greater stormwater needs than most US stormwater systems. A significant portion of the system lies at an elevation below z.2-feet. The city's projections indude increased wlnerability to flooding. The capital plan addresses mitigating these challenges. The stormwater fee is imposed on properties based on Equivalent Residential Units (ERUs) which currently stands at 109,000 ERUs, representing a population base of 87,779 according to the 2010 Census. The customer base is expected to remain stable in this mature, tourism dependent service area. The stormwater fee is bi�led as part of the water, sewer and garbage bill, and collection rates have historical�y been high. Debt Service Coverage and Liquidity: Adequate Debt Service Coverage Mitigated by Strong Liquidity The stormwater system will likely maintain adequate financial operations given healthy liquidity and a history of timely rate increases. Management has typically increased rates prior to significant debt issuances, induding a substantial 84% increase in fiscal 2015 and a 36% increase in 2017. Current projections indude an additional rate increase in 2019 of 19% prior to another debt issuance. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2 4 October 2017 Miami Beach (City of), FL Stormwater Enterprise: Update: Moody's assigns stable outlook and affirms Aa3 on Miami Beach, FL's Stormwater Rev. Bonds MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE Debt service coverage has historically been adequate. In fiscal 2016 coverage was 1.55 times. Management projects that coverage will be simi�ar in 2017. Debt service coverage will likely remain in the 1.3- to 1.5-times range over the near term. This level is relatively weak for the Aa3 rating category, and therefore any inability to maintain coverage at these levels as additional debt is issued could represent a significant weakening of credit quality. LIQUIDITY Fiscal Z016 ended with $15 million in unrestricted cash and investments or a strong 991 days cash on hand. Additiona�ly, the system maintains $6 mi�lion in a Rate Stabilization fund. These rate stabilization funds are restricted by designation by the city commission, which can release them as needed. There are no current plans to materially draw on cash, a positive credit factor as the system's strong liquidity is the most meaningfu� counterweight to the system's below average debt service coverage. Debt and Legal Covenants: Highly Leveraged System With Additional Debt Expected The system is highly leveraged and the capital plan indudes significant additiona� debt. The system's debt will more than double over the next five years with a$100 million issuance expected in z018 and another 5100 million issuance in 2020. Proceeds will fund a variety of projects induding conversion to a pump system from a gravity fed system to address the city's vulnerability to flooding. The system's capital plan indudes $500 million of projects, which management expects to address over the next 10 years. Debt to operating revenues was a high 5.2 times in fiscal 2016. As long as revenue increases keep pace with debt issuance, this ratio will not grow. Legal provisions are weak with a rate covenant of 1.1 times annual senior (ien debt service; an additiona� bonds test requiring net revenues for any 12 of the 18 preceding months to be 1.1 times MADS on the current and proposed bonds or 1.1 times MADS on the current and proposed bonds for the future in order to issue parity debt. The flow of funds is liberal in that it al�ows an open loop structure whereby the system can transfer funds to the city's General Fund if needed. There is no debt service reserve fund for the 2015 or 2009 bonds. The 2011 bonds have a debt service reserve funded at MADS. DEBTSTRUCTURE All the system's debt is fixed rate. DEBT-RELATED DERIVATIVES The system has no exposure to derivatives. PENSIONS AND OPEB Pensions are not a significant factor in this methodology. Management and Governance System management is generally strong and has the legal ability to raise rates without third party approval. The utility has independent rate-setting authority. Management is generally conservative in its projections and budgets for a 1.Z times rate covenant annually. Positively, management has implemented significant rate increases prior to additional debt issuances. Any inability to pass future rate increases as additional debt is issued will pressure the rating. Legal Security The bonds are secured by the net revenues of the system. Use of Proceeds Not applicable. Obligor Profile City of Miami Beach Stormwater system covers 4,Z00 acres and services 109,000 ERUs. Miami Beach had a population of 91,026 in 2014. Methodology The principal methodology used in this rating was US Municipal Utility Revenue Debt published in December 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology. 3 4 October 2017 Miami Beach (City of), FL Stormwater Enterprise: Update: Moody's assigns stable outlook and affirms Aa3 on Miami Beach, FL's Stormwater Rev. Bonds �O 2017 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. 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REPORT NUMBER 1093226 4 October 2017 Miami Beach (City of), FL Stormwater Enterprise: Update: Moody's assigns stable outtook and affirms Aa3 on Miami Beach, FL's Stormwater Rev. Bonds U.S. PUBLIC FINANCE MOODY'S INVESTORS SERVICE CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 MOODY'S INVESTORS SERVICE 4 October 2077 Miami 8each (City of), FL Stormwater Enterprise: Update: Moody's assigns stable outlook and affirms Aa3 on Miami Beach, FL's Stormwater Rev. Bonds