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LTC 569-2017 Water and Sewer System Bond Credit RatingsMIAMI BEACH OFFICE OF THE CITY MANAGER LTC# 569-2017 TO: Dan Gelber and Members of the DATE: November 28, 2017 SUBJECT: Water and Sewer System Bo d Credit Ratings LEITER TO COMMISSION The purpose of this L TC is to advise the Mayor and City Commission of recent credit ratings by Standard & Poor's ("S&P") and Moody's for the City's current water and sewer system bonds and bonds anticipated to be sold in December, 2017 . S&P Credit Rating S&P has raised its rating on the Series 1985J and Series 201 O bonds issued by the City of Gulf Breeze, Florida, supported by payments from the City of Miami Beach, Florida to "AA-" from "A+". At the same time, S&P assigned its "AA-" long-term rating to the City of Miami Beach's Series 2017 water and sewer revenue and revenue refunding bonds. The upgrade reflects a positive trend in the City of Miami Beach's overall financial position. The rating reflects the combination of a very strong enterprise risk profile and a very strong financial risk profile. The outlook is stable and reflects expectations that the customer base stability will continue, overall economic conditions will not fluctuate significantly, and the county will continue to provide sufficient water and wastewater supply and treatment capacity. Factors that could lead to an upgrade would depend on the City of Miami Beach maintaining a very strong financial position as increases from the county are absorbed. Conversely, a lower rating could be warranted should the city's financial position deteriorate. This could be due to unexpected economic challenges, or a rapid rise in expenditures related to wholesale charges or ongoing operations . Moody's Credit Rating Moody's has assigned a "Aa3" rating to Miami Beach's $112 million Water and Sewer Revenue and Revenue Refunding Bonds, Series 2017. Concurrently, we maintain the "Aa3" rating on the utilities $84.4 million in outstanding debt. The "Aa3" rating reflects above average debt service coverage, low debt burden, and adequate treatment supply through Miami-Dade County's Water and Sewer System. Outlooks are not typically assigned to securities with this amount of debt outstanding. Factors that could lead to an upgrade would be improved debt service coverage. Factors that could lead to a downgrade are declining debt service coverage, significant increase in outstanding debt, or decline in cash position. On the next page you will find a rating agency credit scale for your information . The S&P and Moody's credit rating reports are attached. If you have any questions or need additional information, please feel free to contact John Woodruff at x6116. JLM/JW @ Letter to Commission W ate r a nd Sewer System Bond Credit Ratings Page 2 of 2 Rating Agency Credit Scale Moody's S&P Fitch Aaa AAA AAA Aal AA+ AA+ Aa2 AA AA Aa3 AA-AA- Al A+ A+ A2 A A A3 A-A - Baal BBB+ BBB+ Baa2 BBB BBB Baa3 BBB-BBB- Bal BB+ BB+ Ba2 BB BB Ba3 BB-BB- BJ B+ B+ 82 B B 83 B-B- * Natio nal Association of Insurance Comm issioners NAIC * ] -] l ] ] Investment ] Grad.e I 2 - 2 2 t 3 t 3 on-Investment 3 3 Grade 3 3 S&PGlobal Ratings RatingsDirect® Summary: Miami Beach, Florida; State Revolving Funds/Pools; Water/Sewer Primary Credit Analyst: James M Breeding, Dallas (1) 214-871-1407 ;j ames .breeding@spglobal.com Secondary Contact: Erin Boeke Burke, New York 212-438-1515; Erin .Boeke-Burke@spglobal.com Table Of Contents Rationale Outlook WWWSTANDARDANDPDDRS .COM/RATINGSDIRECT NOVEMBER 20, 2017 1 Summary: Miami Beach, Florida; State Revolving Funds/Pools; Water/Sewer Credit Profile US$112 .04 mil wtr and swr rev and rev rfdg bods ser 2017 due 09/0112047 Long Term Rating AA-/Stable Gulf Breeze, Florida Miam i Beach, Florida New GulfBreeze (Miami Beach) rev rfdg bods (Miami Beach) (Local Govt Loan Prog) ser 2010 dtd 02117 /2010 due 12/01/20212023 2033 2039 Long Term Rating Preliminary Rating Gulf Breeze (Miami Beach) (local govt loan prog) Long Term Rating Preliminary Rating Rationale AA-/ Stable NR(prelim) AA-I Stable NR(prelim) Upgraded Withdrawn Upgraded Withdrawn S&P Global Ratings has raised its rating on the series 19851 and series 2010 bonds issued by the City of GulfBreeze, Fla., supported by payments from Miami Beach, Fla. to 'AA-' from 'A+'. At the same time, S&P Global Ratings assigned its 'AA-' l ong-term rating to Miami Beach's series 201 7 water and sewer revenue and revenue refunding bonds. The outlook is stable. The upgrade reflects a positive trend in Miami Beach's overall financial position. The rating reflects the combination of a very strong enterprise risk profile and a very strong financial risk profile . The enterprise risk profile reflects our view of the system's: • Service area participation in the broad and diverse Miami-Fort Lauderdale-West Palm Beach metropolitan statistical area economy; • Adequate market position, reflective of above-average utility rates ; • Very low industry risk as a monopolistic service provider of an essential public utility; and • Overall good operational management practices and policies . The financial risk profile reflects our view of the system's: • Very strong debt service coverage, though there is the potential for rising costs as Miami-Dade CountY increases rates, • Very strong liquidity, • Modest capital improvement program (CIP), and • Generally strong financial management practices and policies. WWW.S TANDA RDANDPOOR S.COM/RATING SDIRECT NOVEMBER 20, 2017 2 Summary: Miami Beach, Florida; State Revolving Funds/Pools; Water/Sewer A very strong enterprise risk profile and a very strong financial risk profile map to an indicative rating in our revenue debt criteria matrix of 'aa/ aa-', and we have selected the 'aa-' anchor based on the relatively high utility rates and the potential for rates and expenditures to increase due the significant capital program associated with the system's reliance on Miami-Dade County for water supply and wastewater treatment. Bond proceeds will be used to refinance existing obligations and provide funds for capital improvements. The city's water and sewer system serves a built-out service area of about 90,000 residents spanning about 18 square miles. Overall economic indicators appear stable, but weak in some areas. While the unemployment rate is below the national average at less than 4.0%, median household effective buying income is only at about 84% of the national average, and the county poverty rate is hovering near 20%. Miami Beach owns and operates the water distribution system, but purchases all of its water from Miami-Dade County. The current rate of $1.83 per 1,000 gallons reflects a 10-cent increase from 2016. This rate is likely to continue to increase. To accommodate for these potential increases, the city has established a rate-setting mechanism that automatically raises rates annually to reflect both the rise in the consumer price index and the increase in the wholesale rates charged by Miami-Dade County. Because the customer base has been very stable with little change in the total number of water and wastewater accounts in recent years, the amount of water purchased from the county has not varied much. The same is true for the amount of sewage sent to the county for treatment. Given the limited availability of undeveloped land within the city, adding additional customers in unlikely. Therefore, any increases in expenditures will need to be absorbed by the existing customer base. Currently, the monthly utility bill for water and wastewater service is elevated at about $88.00 for 6,000 gallons of usage. Comparatively, this is high for the region, though several nearby communities are higher. It is likely that all communities served by Miami-Dade County will continue to experience rate increases. Operationally, the system is situated well . The primary responsibilities are distribution and collection, which limits long-term capital needs. These limited responsibilities, combined with management's in-house succession planning and the aforementioned rate-setting practices lead to an overall assessment of "good" with respect to operational management. The city relies on the county for long-term regional water supply and treatment capacity planning. Financially, the system is performing well . During the past five years, operating revenues have grown to $80 .9 million from $68 .6 million, primary due to rate increases. In the same period, operating expenditures have increased to $60.9 million from $49 .7 million. The result is net revenues ranging from $18.6 million to $23.7 million. Given that the city's own debt service ranged from only $8.7 million to $10 .2 million, the resultant debt service coverage was no lower than 1.8x. However, even though there is no minimum take-or-pay charge due to the county, a significant portion of the annual charge by the county is for its own debt. When imputing a portion of the county's debt to Miami Beach, annual coverage levels would decline, but still remain strong. The system ended fiscal 2016 with unrestricted cash and investments totaling about $31.0 million, representing approximately six months of operations. This is down from the prior two years, but still considered very strong. Financial projections indicate a trend of increasing revenues and expenditures. The annual required debt service WWW .STANDARDANDPDORS .COM/RATINGSDIRECT NOVEMBER 20, 2017 3 Summary: Miami Beach, Florida; State Revolving Funds/Pools; Water/Sewer payment increases in 2021 due to another bond issuance, but only slightly. The CIP through 2022 totals about $161.4 million . Funding for the CIP is primarily through this series 201 7 issue, along with additional bond proceeds and about $26 .0 million of operating cash. City officials routinely prepare long-term financial and capital forecasts, but the accuracy of the financial projections could be limited to rate information provided by the county. Miami Beach reviews operating results on a monthly basis, has full rate-setting autonomy, and can make budget adjustments at any time. Outlook The outlook reflects our expectations that the customer base stability will continue, overall economic conditions will not fluctuate significantly, and the county will continue to provide sufficient water and wastewater supply and treatment capacity. The outlook also reflects our expectation for the financial performance of the water and sewer fund to remain strong, evidenced by strong annual debt service coverage levels and a stable liquidity position. Upside scenario The potential for an upgrade would depend on Miami Beach maintaining a very strong financial position as increases from the county are absorbed. The county has a very large capital program to implement and a portion of those costs will be spread among the county's wholesale customers. As the county's CIP is implemented, should the city be able to absorb those rising costs, while maintaining its currently strong financial position, a higher rating may be warranted. Downside scenario Conversely, a lower rating could be warranted should the city's financial position deteriorate. This could be due to unexpected economic challenges, or a rapid rise in expenditures related to wholesale charges or ongoing operations. Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. 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S&P 's public ratings and analyses are made available an its Web sites. www.standardandpoars.com !free of charge), and www.ratingsdirect.com and www.glabalcreditpartal.com (subscription). and may be distributed through other means. including via S&P publications and third-party redistributars. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees. STANDARD & POOR'S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poar's Financial Services LLC. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 20, 2017 5 CREDIT OPINION 16 November 2017 New Issue Rate this Research m Contacts Valentina Gomez + 1.212.553.4861 Analyst valentina.gomez@moodys.com Leonard Jones fv10-Pub/ic Finance + 1.212.553.3806 leonard.jones@moodys.com Edward (Ted) + 1.212 .553.6990 Damutz VP-Sr Credit Officer edward.damutz@moodys.com CLIENT SERVICES Americas Asia Pacific Japan EMEA 1-212-553-1653 852-3551-3077 81-3-5408-4100 44-20-7772-5454 U .S. PUBLIC FINANCE Miami Beach {City of), FL Water & Sewer Enterprise New Issue: Moody's assigns Aa3 to $112M Miami Beach, FL's Water and Sewer Revenue Bonds, Series 2017 Summary Rating Rationale Moody's Investors Service has assigned a Aa3 to Miami Beach, FL's $112 million Water and Sewer Revenue and Revenue Refunding Bonds, Series 2017. Concurrently, we maintain the Aa3 rating on the utilities $84.4 million in outstanding debt. The Aa3 rating reflects above average debt service coverage, low debt burden, and adequate treatment supply through Miami-Dade County's Water and Sewer system (Aa3 stable). Credit Strengths » Adequate debt service coverage and liquidity position » Low debt to operating ratio Credit Challenges » All supply and disposal purchased through Miami-Dade County Rating Outlook Outlooks are not typically assigned to securities with this amount of debt outstanding. Factors that Could Lead to an Upgrade » Improved debt service coverage Factors that Could Lead to a Downgrade » Declining debt service coverage » Significant increase in debt outstanding » Decline in cash position Key Indicators ............................................................................................................... . . .. .. . . ... ... . . . ...... ... . . .. .. . . . .... ....... . . ... ... . . . . . . . . . . ... . ... . . . . .. . .. ... .... .. . . . .. .. . ...... . . ... . . . . .. . .. . ...... . . . ... . . . . . . . . . . . . ... .. ..... .. . ..... . . . . . . ... . .. . . . . . . . ..... ... .. . .. .. .... . . . ... . 2 MOODY'S INVESTORS SERVICE U .S. PUBLIC FINANCE Exhibit 1 Miani Beach (Qty of) Water & Sewer enterprise, R. Sf&em Olaracteri&ics f'..!:ret. Q)ndition (Net Rxed A!!sa.s/ Annual Deprociation) 53 years Sf&em Sze-O&M (in$000s) 61,044 S:lrviceArea Wealth: MR% of US median 88.60% Legal Frovisions Rite Q)venant (x) 1.10x Debt S:lrvice Rlserve A3quirement NoDS'F Management Rite Management A A9gulatory Q)mpliance and Capital Aanning Aa R nanci al S rengt h 2012 2013 2014 2015 2016 Operating Asvenue ($000) 68,623 68,385 70,249 76,119 80,864 $/&em Sze-O&M (in$000s) 49,665 52,881 52,329 57,351 61,044 Net Funded Debt ($000) 66,267 68,367 68,230 70,345 62,874 Annual Debt Service Q)verage (x) 2.21x 1.88x 2.43x 221x 2.67x Cashon Hand 250days 248days 293days 281 (:jays 185days Debt to Operating Asvenues (x) 1.0x 1.0x 1.0x 0.9x 0.8x Source: Moody's Investors Service, Audited Financial Statements Recent Developments Hurricane Irma caused minimal damage to the system. Increased costs were due to the loss of power which required the use of generators and some water line damage. Total additional costs to the water system were $512,000 and to the sewer system were $50,000. The city expects a portion of these costs to be reimbursed by FEMA. Detailed Rating Considerations Service Area and System Characteristics: Transmission and Distribution System in Tourism Dependent Miami Beach The system provides water and sewer transmission and distribution services to the City of Miami Beach. All water supply and treatment are provided through a 20-year contract with Miami-Dade Water and Sewer Department (WASD) expiring in 2028 . Average annual water system ERUs (Equivalent Residential Units) totaled 37,866 in fiscal 2016. According to the feasibility report, annual water system customer growth will remain negligible over the next five years. Unaccounted water was a manageable 14.6% in fiscal 2016. All sewer treatment and disposal are provided by WASD through a 20-year contract expiring in 2034. Average annual sewer system ER Us totaled 29,305 in fiscal 2016. Contracts with the county can be terminated at any time with mutual agreement. Similarly to the water system, customer growth will remain negligible over the next five years . The top ten customers of the combined system accounted for 9.8% of total revenues and are comprised primarily of condominium complexes. Rates for both services include a base charge as well as a usage charge. Typically, the County notifies the City in June of upcoming rate changes which would go into effect on October 1. Any increases or decreases in the rates charged by the County are automatically passed through to ratepayers. This publication does not announce a credit rat ing 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. 16 November 2017 Miami Beach (City of), FL Water & Sewer Enterprise: New Issue: Moody's assigns Aa3 to $1l2M Miami Beach, FL's Wa~er and Sewer Revenue Bo nds, Series 2017 3 MOODY 'S INVESTORS SERVICE U .S PUBLIC FINANCE Debt Service Coverage and Liquidity: Coverage Expected to Remain Stable Coverage is expected to remain stable due to automatic pass-through rate increases from the county and limited additional debt in the near term. Fiscal 2016 annual debt service coverage equaled 2.67 times while proforma maximum annual debt service (MADS) coverage was 2.0 times. Unaudited 2017 projections are for 2.1 times proforma MADS coverage. Projections are for coverage to remain above 2 times until 2021, when management expects to issue additional debt. Assumptions for projections include reasonable water and sewer rate increases of 3-4.5% and 2.3-4.1%, respectively. Projections also assumed an annual 3.5% increase in expenses. LIQUIDITY The system had 185 days cash on hand at the end of fiscal 2016. Management expects to maintain this level going forward. Debt and Legal Covenants: Manageable Debt Burden, Limited Additional Debt Debt is expected to remain manageable due to limited additional debt and the nature of the system as distribution and transmission only. Proforma debt-to-operating revenues will increase to 2.04 times, in line with the rating category. Legal protections are adequate and include an open loop flow of funds (allowing transfers to the general fund), a rate covenant and additional bonds test of 1.1 times, and no debt service reserve on the new issuance. Prior issuances have included a debt service reserve fund. DEBT STRUCTURE All of the system's debt is fixed rate. DEBT-RELATED DERIVATIVES The system does not have any exposure to derivatives. PENSIONS AND OPEB Pensions and OPEB are not significant factors in this methodology. Management and Governance Management is generally strong. The city's water and sewer system is a department of the city Financial policies include the use of 5% of the annual budget to fund capital projects or reserves, a contingency reserve of 6% of budget and an emergency reserve of 11% of budget. While management does have rate setting authority, all water and sewer supply and treatment is purchased from WASD. Management automatically passes through these rate changes to customers with no action required by management or city council. Legal Security The bonds are secured by the net revenues of the city's combined water and sewer system. Use of Proceeds Proceeds will refund $30.8 million Series 2000 bonds, $11.9 million 2006B and $5.7 million 2006E Gulf Breeze bonds for net present value savings of $7.4 million or 15.2% of refunded principal. Proceeds will provide $85 million in new money for various system improvements. Obligor Profile Miami Beach had a population of 91,026 in 2014. The water and sewer system serves 37,866 and 29,305 ERUs, respectively. Methodology The principal methodology used in this rating was US Municipal Utility Revenue Debt published in October 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology. 16 November 2017 Miami Beach (City of), FL Water & Sewer Enterprise: New Issue: Moody's assigns Aa3 to $112M Miami Beach, FL's Wa t er and Sewer Rev enue Bonds, Series 2017 4 MOODY'S INVESTORS SERVICE U .S. PUBLIC FINANCE Ratings Exhibit 2 Miami Beach (City of) FL Wtr & Swr Enterprise Issue Rating Water and Sewer Revenue and Revenue Refunding Bonds, Series 2017 Aa3 Rating Type Sale Amount Expected Sale Date Rating Description Source: Moody's Investors Service 16 November 2017 Underlying LT $112,040,000 11/24/2017 Revenue: Government Enterprise Miami Beach (City of), FL Water & Sewer Enterprise: New Issue: Moody's assigns Aa3 to $112M Miami Beach, FL's Water and Sewer Revenue Bonds, Series 2017 5 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE © 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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PUBLIC FINANCE CLIENT SERVICES Americas Asia Pacific japan EMEA Mooov's INVESTORS SERVICE 6 16 November 2017 1-212-553-1653 852-3551-3077 81-3-5408-4100 44-20-7772-5454 Miami Beach (City of), FL Water & Sewer Enterprise: New Issue: Moody's assigns Aa3 to $112M Miami Beach, FL's Water and Sewer Revenue Bonds, Series 2017