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LTC 388-2023 S&P Credit Ratings for Water & Sewer Revenue BondsMIAMI BEACH OFFICE OF THE CITY MANAGER NO. LTC # 388-2023 LETTER TO COMMISSION TO: Honorable Mayor Dan Gelber and Members of the City �:::: s :::a T. Hudak, City Manag� DATE: September 5, 2023 SUBJECT: S&P Credit Ratings for Water & Sewer Revenue Bonds The purpose of this L TC is to advise the City Commission regarding the results of a recent credit review completed by Standard & Poor's Global Ratings (S&P) on the City's Water & Sewer Revenue bonds. •S&P has affirmed the current AA-rating on the City of Miami Beach's Water & Sewer Revenue bonds with a positive outlook. S&P stated: •"The positive outlook reflects a continued strong trend in the utility's overall financial position, including cash and debt service coverage, which we expect will continue despite additional debt plans, due to approved rate increases." •"We could raise the rating should concrete additional debt plans demonstrate a continued track record of similar financial metrics." Please find attached a rating agency credit scale for your information as well as a copy of the credit rating report. Should you have any inquiries regarding this information, please contact Jason D. Greene, Chief Financial Officer. ,JI & ) ATH/JDG L e tt e r to C o m m is s io n S &P C re d it R a tin g s fo r W a te r & S e w e r R e v e n u e B o n d s S ep t e m b er 1 , 2 0 2 3 P a g e 2 o f 2 R a ting A gency C re d it S cale S&P Moody's Rating Description AAA Aaa Prime AA+ Aa1 AA Aa2 High grade AA- Aa3 A+ A1 Upper medium Investment-grade A A2 A- A3 grade BBB+ Baa1 Lower medium BBB Baa2 BBB- Baa3 grade BB+ Ba1 Non-investment BB Ba2 grade speculative BB- Ba3 B+ B1 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 R a ti ngsDi rect Summary: Miami Beach, Florida; Water/Sewer Primary Credit Analyst: Adam Torres, New York+ 1 (212) 438 1141; adam.torres@spglobal.com Secondary Contact: Alan B Shabatay, New York+ 1 (212) 438 9025; alan.shabatay@spglobal.com Table Of Contents Credit Highlights Outlook Credit Opinion Related Research WWW STANOARDANDPOORS COM/RATINGSOIRECT AUGUST 31, 2023 1 S u m m a r y : Miami Beach, Florida; Water/Sewer Credit Profile Miami Beach WS Long Term Rating AA-/Positive Affirmed Credit Highlights • S&P Global Ratings affirmed its 'AA-' rating on the City of Miami Beach, Fla.'s water and sewer revenue bonds outstanding. • The outlook is positive. Secu rity Bonds are secured by net revenues of the city's water and sewer systems. Although the city owns and operates the water distribution system, it purchases all of its water from Miami-Dade County. Meanwhile, we believe bond provisions are somewhat permissive; given a 1. lx annual debt service rate covenant and sufficiency when including transfers from the rate stabilization fund, along with an open flow of funds. However, historically, the city has not had to rely on such transfers to maintain coverage. Remaining legal provisions are fairly standard. As of fiscal 2022, the system has about $141 million in debt outstanding. Cred it overview The positive outlook reflects a continued strong trend in the utility's overall financial position, including cash and debt service coverage (DSC), which we expect will continue despite additional debt plans, due to approved rate increases. The utility has exhibited very strong to extremely strong financial metrics in recent years. Although these trends are likely to continue, there is some uncertainty as to the projected ranges during the outlook period, due to additional debt plans, likely in fiscal 2024 or fiscal 2025. Likewise, while we expect cash will remain very strong, there is some uncertainty regarding the magnitude and timing of projected drawdowns in concert with the capital plan. Finally, management has made efforts to pro actively absorb capital plan costs, by way of three approved annual rate increases: 5.5% for water and 2.4% for sewer. Furthermore, this is in addition to any automatic pass-through increases from the county relative to water purchases. The rating further reflects: • Service area participation in the broad and diverse Miami-Fort Lauderdale-West Palm Beach metropolitan statistical area economy; • Robust liquidity, as evidenced by the utility having well over a year's worth of operating expenses, along with a similar track record of very strong all-in DSC; • 100% conveyance water and sewer system supported by a strong management team, long-range planning, and WWW.STANDARDANDP0ORS COM/RATINGSDIRECT AUGUST 31, 2023 2 Sum mary: M iam i Beach, Florida; Water/Sewer policies to support the system ; and • T he potential fo r rising costs as M iam i-D ade County increases rates. Environmental, social, and governance In our opinion, there is heightened envi ro nm ental risk gi ven the county is located on the east coast of Fl orida wi th exposure to m or e significant storm events and hurricanes. M anagem ent indicated it has m ade upgrades to harden stru ctur es to wi thstand storm events and has em ergency outfa lls, backu p generators, and interties wi th neighboring utilities. In addition, som e risk is transfe rr ed to the county as it treats the water and sew er effl uent. In term s of social risk, w e believe this is present in the fo rm of rates; w hile ra tes are m anageable fo r the servi ce area's w ealth and incom e levels, that the pass-thro ugh portion is dictated by the county does contribute to potential ongoing un certainty. Lastly, govern ance is in line wi th that of peers. M anagem ent is fo rw ard looki ng w hen addressing fu tur e water and w astew ater supply reliability and capital needs. M anagem ent revi ew s ra te-setting and capital needs annually. Outlook T he positive outlook reflects our expectation that should addi tional debt plans resul t in financial pro jections in line wi th recent history, w e could ra ise the ra ting. We w ould likewi se expect that any potential pass-thro ugh ra tes wi ll not ero de affordability, coupled wi th already-appro ved ra te increases. Downside scenario If debt or a decrease in the un restricted cash needed to fu nd M iam i Beach's capital plan sign ificantly ero de the system 's financial m etri c achievem ents in recent years, w e coul d revi se the outlook to stable. In addition, if the county's actions influence the city system 's financial capacity by stressing all-in D SC , w e could take a negative rating action. Upside scenario We coul d ra ise the rating should concrete additional debt plans dem onstrate a continued tra ck record of sim ilar financial m etri cs. Credit Opinion T he utility serves a diverse set of custom ers, in a built-out area wi th little ro om fo r a significant change in the custom er base. T herefo re, any increases in expenditures m ust be absorbed by the existing custom er base. A ccordingly, w e believe the utility has positioned itself especially well fo r the near term , in that w e expect ra te increases wi ll support debt plans and m aintain existing extrem ely stro ng liquidity. M anagem ent also m aintains a ra te stabilization fu nd, w hich w e believe wi ll help lim it any potential shocks to rates that m ay arise from county pass-thro ugh increases. O verall econom ic indicator s appear stable, but are w eak in som e areas. A lthough the unem ploym ent ra te is below the national avera ge at 1.4% and m edian household effective buyi ng incom e is 97% of the national avera ge, the county's poverty ra te is about 15%, wh ich w e consider elevated. WWWSTANDARDANDPOORS COM/RATINGSDIRECT AU G U ST 31, 2023 3 Summary: Miami Beach, Florida; Water/Sewer Miami Beach, Florida--Economic and financial data Fiscal year-end Most recent 2022 2021 2020 Median (AA) Economic data Water customers 19,445 Sewer customers 19,829 MHHEBI of the service area as % of the U.S. 97.0 110.0 Unemployment rate (%) 1.4 4.3 Poverty rate (%) 15.2 10.5 Water rate (6,000 gallons or actual) ($) 28.3 35.0 Sewer rate (6,000 gallons or actual) ($) 77.4 45.0 Annual utility bill as % of MHHEBI 2.3 0.9 Operational Management Assessment Good Good Financial data Operating revenues ($000s) 96,756 87,830 81,524 21,711 Total operating expenses less depreciation ($000s) 63,393 62,011 56,596 13,767 S&P Global Ratings-adjusted all-in DSC () 2.1 1.5 1.5 2.2 Unrestricted cash ($000s) 80,958 81,328 65,044 22,334 Days' cash of operating expenses 466 479 419 566 Total on-balance-sheet debt ($000s) 158,634 163,285 168,443 33,692 Financial Management Assessment Standard Good Note: Most recent economic data available from our vendors. MHHEBI--Median household effective buying income. DSC--Debt service coverage. Related Research • T hro ugh T he ESG Lens 3.0: Th e Intersection O f ESG Credit Factors A nd U.S. Public Finance Credit Factors, M arch 2, 2022 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.STANDARDANDPOORS.COM/RATINGSDIRECT A U G UST 31, 2023 4 Copyr ight @ 2023 by Stan dard & Poor's Finan cial Servi ces LLC. All rights reserved. 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