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LTC 400-2021 Credit Ratings for Water & Sewer Revenue Refunding BondsMIAMI BEACH OFFICE OF THE CITY MANAGER NO. LTC# 400-2021 LETTER TO COMMISSION TO: FROM: DATE: Honorable Mayor Dan Gelber and Members of the City Commission Alina T. Hudak, City Man~ September 22, 2021 I/\ . , SUBJECT: Credit Ratings for Water & Sewer Revenue Refunding Bonds The purpose of this L TC is to advise the City Commission regarding the results of a recent credit review completed by S&P Global Ratings and Moody's Investors Service on the City's Water & Sewer revenue refunding bonds. • S&P has affirmed the AA- rating on the City of Miami Beach's Water & Sewer revenue refunding bonds. The outlook is revised to positive from stable. Comments: "There is a one-in-three chance that the rating could be raised during the outlook period, depending on the debt and cash mixture needed to fund Miami Beach's capital plan and the resolution of Miami-Dade County's consent decree." • Moody's has affirmed the Aa3 rating on the City of Miami Beach's Water & Sewer revenue refunding bonds and assigned a positive outlook. Comments: "The positive outlook reflects our expectation that the enterprise's debt service coverage and liquidity will return to its long-term trend of steady improvements given management's demonstrated willingness to increase rates. The city's strong approach to mitigating environmental risks associated with climate change are also incorporated into the rating outlook." Given the significant financial challenges to the City from the impacts of COVID-19, we are proud that we have been able to successfully maintain our current ratings and improve the outlook for our Water & Sewer revenue refunding bonds. Pricing for the refunding is anticipated to take place on Tuesday, September 28" and the results will be shared with the City Commission via L TC. Savings from the refunding of these bonds will fund a portion of the $122 million of critical capital project needs identified in the Hazen & Sawyer report approved by the City Commission in 2020. Please find attached a rating agency credit scale for your information as well as a copy of the two credit rating reports. Should you have any inquiries regarding this information, please contact John Woodruff, Chief Financial Officer. Letter to Commission Credit Ratings for Water & Sewer Revenue Refunding Bonds September 22, 2021 Page 2 of 2 Rating Agency Credit Scale S&P Moody's Rating Description AAA Aaa Prime AA+ Aal AA Aa2 High grade AA- Aa3 A+ Al Upper medium Investment-grade A A2 A- A3 grade BBB+ Baal Lower medium BBB Baa2 grade BBB- Baa3 BB+ Bal Non-investment BB Ba2 grade speculative BB- Ba3 B+ Bl B B2 Highly speculative B- B3 Non-investment CCC+ Caal Substantial risks grade ccc Caa2 Extremely AKA high-yield bonds speculative AKA junk bonds ccc- Caa3 Default imminent cc Ca with little prospect c for recovery c D I In default S&P Global Ratings RatingsDirect' Summary: Miami Beach, Florida; State Revolving Funds/Pools; Water/Sewer Primary Credit Analyst: John Schulz, Centennial + I (303) 721 4385; john.schulz@spglobal.com Secondary Contact: Edward R McG!ade, New York+ I (212) 438 206 I; edward.mcglade@spglobal.com Table Of Contents Rating Action Stable Outlook Credit Opinion Related Research WWW SIANDADANDPOORS COM/RA IINGSDIHECI SEPTEMBER 20, 2021 1 Summary: Miami Beach, Florida; State Revolving Funds/Pools; Water/Sewer Credit Profile US$35.375 mil wtr and swr rev rfdg bnds ser 2021A due 12/01/2039 long Term Rating Miami Beach WS Long Term Rating Gulf Breeze, Florida Miami Beach, Florida GulfBreeze (Miami Beach) (local govt loan prog) long Term Rating Preliminary Rating AA-/Positive New AA-I Positive Outlook Revised AA-I Positive NR(prelim) Outlook Revised Current Rating Action S&P Global Ratings revised its outlook to positive from stable and affirmed its 'AA-' rating on Miami Beach, Fla.'s water and sewer revenue bonds, including the series 1985J and series 201 O bonds, issued by the city of Gulf Breeze, and supported by payments from Miami Beach, Fla. At the same time, S&P Global Ratings assigned its 'AA-' long-term rating to the city's anticipated $35 million series 2021 water and sewer revenue refunding bonds. The positive outlook reflects a positive trend in Miami Beach's overall financial position, primarily in the growth of nominal liquidity while the city addresses its responsibilities with Miami-Dade County's consent decree. There is a one-in-three chance that the rating could be raised during the outlook period, depending on the debt and cash mixture needed to fund Miami Beach's capital plan and the resolution of Miami-Dade County's consent decree. Bond proceeds will be used to refund the series 2009J-1B and 2009J-1C bonds. Bond provisions are permissive in our view. The utility's rate covenant is at 1. lx annual debt service, or 1.0x when including transfers from the rate stabilization fund. The additional bonds test calls for net revenues equaling at least I. lx MADS on bonds outstanding and proposed additional debt. Net revenues must be based on 12 consecutive months of net revenues out of the previous 18 months prior to issuance or projected net revenues. The flow of funds is open. Credit overview Credit strengths include: • Service area participation in the broad and diverse Miami-Fort Lauderdale-West Palm Beach metropolitan statistical area (MSA) economy; • Robust liquidity as evidenced by the system ending fiscal 2020 with unrestricted cash and investments totaling WWW STANDARDANDPOORS COM/RA TINGSDIRECI SEPTEMBER 20, 2021 2 Summary: Miami Beach, Florida; State Revolving Funds/Pools; Water/Sewer about $65.0 million, representing more than a year of operations; and • 100% conveyance water and sewer system supported by a strong management team, long-range planning, and policies to support the system perpetually. Offsetting these strengths are: • Below average market position, reflective of above-average utility rates as reflected by a 6,000-gallon water and sewer bill would be roughly $100, however management indicated the average monthly usage is $80; • All-in debt service coverage, when incorporating portions of treatment costs as a fixed charge, that is below the peers at this rating level ranging from 1.28x to 1.64x during the past three fiscal years (Sept. 30, 2018-Sept 30, 2020); • The potential for rising costs as Miami-Dade County increases rates; and • Modest five-year capital improvement program (CIP) at $133 million that will be funded by cash and revenue (52%), additional parity debt (29%), and prior bond funds (19%). The city plans to issue roughly $32.2 million of additional parity debt in fiscal 2023. Our view of 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. The outlook reflects our expectations that the customer base stability will continue, and the county will 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, as evidenced by strong annual debt service coverage levels and a healthy stable liquidity position. Environmental, social, and governance (ESG) factors In our opinion, there is heightened environmental risk given the county is located on the east coast of Florida with exposure to more significant storm events and hurricanes. Management indicated it has made upgrades to harden structures to withstand storm events and has emergency outfalls, backup generators, and interties with neighboring utilities. Additionally, some risk is transferred to the county as it treats the water and sewer effluent. Ultimately, the cost and risk transfer through the rates is set by the county. In our opinion, social risk is in line with its peers, given that the district's delinquent accounts have not substantially risen due to the COVID-19 pandemic. Lastly, governance is in line with peers. Management is forward looking when addressing future water and wastewater supply reliability and addressing capital needs. Management reviews rate-setting and capital needs annually. Stable Outlook Upside scenario The potential for an upgrade would depend on Miami Beach maintaining coverage at historic trends and maintain or grow their robust unrestricted liquidity as increases from the county are absorbed. The county has a very large capital WWW SIANDAAND)POORS COM/RATINGS)IRECI SEPTEMBER 20, 2021 3 Summary: Miami Beach, Florida; State Revolving Funds/Pools; Water/Sewer 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. Return to stable outlook If debt or a decrease in the unrestricted cash needed to fund Miami Beach's capital plan are more than anticipated to address capital needs, we could return the outlook to stable. Additionally, if the resolution of Miami-Dade County's Consent decree influences Miami Beach's financial capacity by stressing the all-in debt service coverage, we could revise the outlook. Credit Opinion The city's water and sewer system serves a built-out service area of about 94,000 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 4.6%, median household effective buying income is only at about 89% of the national average, and the county's poverty rate is hovering near 16%, which we consider elevated. Miami Beach owns and operates the water distribution system but purchases all of its water from Miami-Dade County. The current rate is $1.86 per 1,000 gallons. This rate is likely to increase. To accommodate 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. 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 but in fiscal 2020 they fell to $81.5 million from $89.6 million in fiscal 2019, primary due to COVID-19 and the travel industry. Management indicated fiscal 2021 operating revenues have rebounded to more historic trends. Since it is a conveyance system, operating expenditures decreased proportionally during the same period to $56.6 million from $61.4 million. The result is net revenue of about $24.9 million for fiscal 2020. Given that the city's own debt service is only $11.7 million, the resultant debt service coverage was no lower than 2.3x. 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 remain WWW STANADANDP0OS COM/PANGS ECI SEPTEMBER 20, 2021 4 Summary: Miami Beach, Florida; State Revolving Funds/Pools; Water/Sewer in line with the rating category. Financial projections indicate a trend of increasing revenues and expenditures. The annual required debt service payment increases in 2023, but only slightly. 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 monthly, has full rate-setting autonomy, and can make budget adjustments at any time. Related Research Through The ESG Lens 2.0: A Deeper Dive Into US Public Finance Credit Factors, April 28, 2020 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. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW STANARD AND)POOHS COM/AI NGSD.RECI SEPTEMBER 20, 2021 5 Copyright € 2021 by Standard & Poor's Financial Services LLC. 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The enterprise has $155 million in debt outstanding. The outlook is positive. RATINGS RATIONALE The Aa3 rating reflects the enterprise's large service area that includes Miami Beach (Aa2 stable), healthy debt service coverage levels and cash despite the effects of the coronavirus pandemic, adequate legal protections, and strong management. RATING OUTLOOK Despite recent revenue declines due to the coronavirus, the positive outlook reflects our expectation that the enterprise's debt service coverage and liquidity will return to its long-term trend of steady improvements given management's demonstrated willingness to increase rates. The city's strong approach to mitigating environmental risks associated with climate change are also incorporated into the rating outlook. FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING - Improved cash and reserve levels FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING - Substantial declines in cash and reserves - Significant additional debt LEGAL SECURITY The bonds are secured by the net revenues of the city's combined water and sewer system. USE OF PROCEEDS Proceeds will be used to refund the outstanding Series 2009J-1B and 2009J-1 C bonds. PROFILE The water and sewer enterprise provide retail water and sewer services to the residents of Miami Beach, Florida, which had a population of 94,000 in 2020. The enterprise serves approximately 13,500 and 10,000 accounts, respectively. Water supply and treatment, as well as wastewater treatment, is provided by Miami- Dade Water and Sewer enterprise. METHODOLOGY The principal methodology used in this rating was US Municipal Utility Revenue Debt published in October 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_ 1095545 . 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