Presentation to City of Marco Island, Florida

1. Presentation toCity of Marco Island, Florida FINANCIAL FORECAST AND UTILITY RATE ANALYSIS DRAFT July 20, 2009

2. Agenda What Has Occurred to Date Utility Rate Guiding Principles Major Issues Affecting Utility System Financial Forecast and Projected Revenue Adjustments Recommended Water and Wastewater Rate Adjustments Customer Impact Rate Comparisons Requested City Council Action and Discussion

3. What has Occurred to Date • Acquired FWS Utility in October 2003 • Adopted Rates in Effect at time of Purchase • Agreed to Limit Rate Adjustments for 5 Years (Inflation Indexing Only) • Assumed Continuing System Growth • Assumed Per Capita Use Would Continue • No STRP Program Recognized

4. What has Occurred to Date • City Performed Master Plan in FY 2005 • 2 Plans Presented – Adopted City Plan • Included the STRP Program / Full Assessment Funding • Recognized Following Rate Increases of 11% through FY 2013 • Plan adopted / Rates Not Implemented • Adopted Conservation Rates in FY 2006 • Emphasis to Reduce Excess Water Use • Revenue Neutral Adjustment

5. What has Occurred to Date • Now Have Initiated the STRP Program • Promote Regionalization of Wastewater Service • Will Change Service Requirements • Council Adopted Capital Surcharges • Roadway Resurfacing – at 6% of Rates • STRP Reduction (Benefit Total System) – at 8% of Rates • Limited Duration – Once Capital Facilities Funded • Operating / Capital Plan Requires Action • Revenues Not Sufficient to Fund Expenditures

6. Why We Are Here • Financial Forecast Last Updated Fiscal Year 2006 • Need to Ensure Proper Recovery of Costs and Fund Capital Expenditures • Updated Financial Forecast to Reflect: • Current Economic Conditions • Water Use (Drought) Conditions • Implementation of STRP and Financial Commitments • Current Capital Plan and Financial Market Expectations • Financial Forecast Prepared in Anticipation of Issuance of Series 2009 Bonds • Additional Parity Obligations Test (to Issue New Debt) • Comply with Bond Resolution / Loan Agreement Covenants

7. Major Issues AffectingUtility System • Substantial Slowdown in Customer Growth • Lower Usage per Customer Due to: • Water Use Restrictions • Current SFWMD Phase II Modified Restriction • Reduction In System Revenues of Approximately 8% ($1.6 Million Annually)

8. Major Issues AffectingUtility System (cont’d.) • Five-Year Capital Improvement Program (CIP) = $140,455,270 • Requires Issuance of Series 2009A Bonds • Construction Fund Proceeds = $23,000,000 or 16.38% of CIP • Total Bond Issue Size = $46,990,000 • Total Annual Debt Service = $3,257,913 Beginning in FY 2011 • Need to Fund Debt Service Reserve Fund – Series 2003 Bonds • Previously Secured by Surety Bond • Due to Credit Conditions Now Must Be Cash Funded • Requires Issuance of Series 2009B Bonds • Total Bond Size = $7,335,000 • Total Annual Debt Service = $651,797 Beginning in FY 2010 • Issuance Requires Preparation of Financial Forecast

9. Major Issues AffectingUtility System (cont’d.) • Wastewater Treatment Plant Expansion = $40.6 Million • Allocable to Expansion and Existing Customers • Expansion Funded by Capacity Assessments = $28.3 Million or 69.70% • Calculated as follows: $4,610 x ERCs Served by STRP • Existing Customer By Leverage of Rates = $6.8 Million or 16.75% • $5.5 Million from Series 2009A Bonds • $1.3 Million from Impact Fees • Grants = $5.5 Million or 13.55%

10. Major Issues AffectingUtility System (cont’d.) • Need to Meet Covenants of Bond Resolution / Loan Documents • Additional Bonds Test – Senior Lien and Assessment Notes • Historical Test = Maximum Annual Debt Service • Includes Any Approved Rate Adjustments • Additional Test with BOA Loans • Debt Service Coverage • Minimum Coverage = 1.10 • Needed Coverage for Credit Markets = 1.50 • Receive Wholesale Water From County for Marco Shores

11. Major Issues AffectingUtility System (cont’d.) • Additional Operating Expenses Due to Capital Plan • Additional Employees Required for WWTP • General Effects of STRP Program • Both from a Revenue and Expense Standpoint • Reduced Interest Earnings due to Market Conditions • Ongoing Effects of Inflation on Cost of Operations

12. Financial Forecast • Development of Financial Forecast • 6-Year Financial Forecast – Fiscal Years 2009 Through 2014 • Purpose: To Identify Trends / Issues / Cost Recovery Strategies • Ensure Rates / Revenues Meet Expenditure Requirements / Rate Covenant Compliance / Business Principles • Support Issuance of Series 2009 Bonds • Analysis Included Forecast of: • Customer Growth • Operating Expenses • Capital Improvement Requirements / Funding • Financial Position • Overall Adequacy of Rates

13. Customer Statistics • Historical Customer Trends: • Projected Customer Trends: • Without STRP Program – Wastewater: • Accounts 0.64% • Billed Sewer Flow 0.33%

14. Customer Statistics • Forecast Assumes Continuation of Current Trends /in Customers and Water Use • Reduced Water Sales due to: • Increased Water Conservation • Continuation of Phase II Water Restrictions • Estimated Customer Adjustments Due to Receiving Wastewater Service • Served Basis for the Determination of Rate Revenues from Existing Rates and Surcharges

15. Revenue Requirements • Reflect Total Expenditures Funded From Rates • Must Maintain Financial Stability of Utility • Expenditures Include the Following: • Operation and Maintenance Expenses • Capital Improvements Funding • Expansion Projects (New Capacity) • Road Resurfacing Program • Renewals and Replacements (Deposits to R&R Fund) • Ongoing – Allows Assets to Meet Useful Service Lives • Major – Extends Useful Service Lives of Assets • Debt Service Requirements / Rate Covenant Requirements • Reserves For Financial Performance / Creditworthiness / Emergencies

16. Operating Expenses • Based on Adopted Fiscal Year 2009 / Preliminary 2010 Budgets • City Performed Benchmarking Study • Identified Utility Operating Costs Compared Favorably

17. Operating Expenses • Forecast Recognizes: • System Growth in Service • STRP Costs to Provide Service • Additional Personnel • Wastewater Treatment Plant • Increased Service Requirements (e.g., lift stations) • Purchased Water From County • Inflationary Allowances • Contingency Allowance of 1% of Expenses • Annual Increase in Expenses = 5.8% • FY 2010 Operating Margin (Net Available Revenues for Capital Financing) • Without Increase = 53% • Moody’s / Fitch = 65%

18. Capital Improvement Program

19. Debt Compliance • Most Recent Underlying Utility Bond Rating: A- (Fitch Ratings) • Today’s Credit Market Demanding Higher Rating • Requires Greater Operating Margins / Coverage Factors • Lower Credit Rating = Higher Interest Costs • Estimated Principal Outstanding as of October 1, 2009 • Utility System Revenue Bonds, Series 2003 (Acquisition) = $93.2 Million • Other First Lien Revenue Bonds = $23.7 Million • Second Lien Improvement Notes = $37.5 Million • SRF Loan (Third Lien) = $1.7 Million • Repayment Pledge – Monthly Utility Rates and Capital Facilities Charges

20. General Plan of Finance • Issue Additional Bonds – Series 2009A and 2009B Bonds • Fund Capital Improvements / Road Re-surfacing • Refund Series 2008B Bond • Capitalized Interest / Issue Costs • Debt Service Reserve Fund • Additional Future Bonds – Fiscal Year 2010 and 2012 • Dependant on Capital Plan • Convert Improvement Notes to Permanent Financing – Assessments • Issue SRF Loan for Water Projects – Low Interest Rate

21. Debt Compliance • Target “All-In” Coverage (Senior and Junior Lien Obligations) = 150% • Net Revenues Divided By Annual Debt Service • Supported By Bond Rating Agencies • Allows Capital Reinvestment From Rates • Minimum Senior Lien Coverage Requirement Per Bond Ordinance = 110% • Fitch Ratings (Utility Revenue Bond Rating Guidelines): “For utilities in the most stable operating environments with a suitably diverse and healthy service area economy, 1.5x annual coverage, with consistently maintained unrestricted financial liquidity of at least 90 days of operating revenues, could be sufficient for ‘AA-’ or higher ratings. For utilities with substantial growth, compliance demands, or significant annual volatility in revenues or expenditures, greater financial flexibility may be necessary.”

22. Debt Compliance (cont’d.) • Must Increase Rates to Issue Additional Bonds • Comply with Senior Lien Rate Covenant • Target Coverage Not Met By End of Forecast Period • Assumes Adoption of Proposed Rate Adjustments • Projected Coverage Without Rate Adjustments • Will not be able to Issue Additional Parity Bonds • Will not meet Senior Lien Rate Covenant in Fiscal Year 2010 • Will not Meet “All-in” Debt Coverage Requirement

23. Determination ofProjected Revenue Adjustments • Recommend Adoption of First Two Years of Revenue Adjustments • Effective October 1st of Each Fiscal Year • Combined Rate Includes Price Index Rate Adjustment • Apply Increases Uniformly at this Time • Re-evaluate Rate Structure Prior to Implementation Date • Re-evaluate Financial Forecast after Two Years to Determine if Subsequent Adjustments Needed • Assumes Resurfacing Surcharge Ending Fiscal Year 2015

24. Customer Impact

25. Other Utilities Have Had to Raise Rates Due to Revenue Shortfalls • Boynton Beach 68% FY 2009 Through 2013 • Cape Coral 92.5% FY 2010 Through 2014 • Charlotte County 16% FY 2009 Through 2012 • Collier County 16% FY 2008 Through 2009 • Dania Beach 52% FY 2009 Through 2011 • Davie 139% FY 2008 Through 2011 • Fort Lauderdale 25% FY 2010 • Lake Worth Water: 88%, Sewer: 55% FY 2010 Through 2014 • North Port 15.6% FY 2010 Through 2011 • Margate 44% FY 2009 Through 2011 • Pasco County 11% FY 2009 Through 2012 • Plantation 34.9% FY 2010 Through 2011 • Polk County 21.6% FY 2009 Through 2012 • Sunrise 40% FY 2009 • Tampa 21.5% FY 2009 Through 2012 • West Palm Beach 75.6% FY 2008 Through 2011 Recommend 2 Year Rate Adjustments = 26% Recent Rate Increases of Other Utilities (Planned or Implemented) Increase in line with Other Communities – Facing Similar Circumstances

26. Rate Comparisons

27. Rate Comparisons (cont’d.) • Some Reasons Why Rates Differ Among Utilities • Size of Customer Base / Available System Growth • Demographics (e.g., Customers Density, Types of Service) • Level of Capital Improvements to Meet Service Area Growth • Source of Water Supply and Treatment Process Costs • Amount of Needed Renewals and Replacements / Remaining Service Life of Assets • Plant Capacity Utilization and Assistance in Funding Capacity (e.g., Grants, Impact Fees) • Amount of General Fund and Administrative Fee Transfers • Differences in Bond Covenants • Time Elapsed Since Last Rate Review

28. Results of Rate Adjustments • Conformity With Utility Rate and Financial Objectives • Address Major Issues Affecting Utility • Revenue Shortfalls Due to Circumstances Beyond Utility’s Control • Projected Increases in Operating Costs • Continued Funding of Capital Program Already in Progress • Compliance With Bond Resolution / SRF Loan Agreement Rate Covenants • Promote Creditworthiness of Utility • Operating Reserves Equal to At Least 90 Days of Rate Revenue • Target Debt Service Coverage Approaching 150%

29. Phase II Rate Design Issues • Evaluate Cost Recover Strategy From Monthly User Rates • Base vs. Usage Charge Relationships • Revenue Stability Issues • Customer Class Recovery Levels • Residential, Commercial, Multi-Family, and Bulk • Equitable Relationship • Consistent Between Water and Sewer • Unit Based Rates • Redesigned Rates will Recover the Revenue Requirements Supporting the Issuance of the Series 2009 Bonds • Redesigned Rates May Impact Each Customer Differently • % Increases May Vary By Usage Level and Customer Class -29-

30. Requested City Council Action • Adopt Proposed User Rates Adjustments For Fiscal Years 2010 and 2011 • October 1st Effective Dates • Initiate Customer Notification Process • Finalize Bond Financing Program • Perform Phase II Component of Study • Develop Rate Resolution / Notify Customers • Perform Updated Financial Forecast in Two Years • Monitor Customer Growth and Economic / Environmental Conditions

31. DRAFT Discussion

32. Utility Rate Guiding Principles • Growth Should Pay Its Own Way • Compliance with City Business Objectives • Septic Tank Replacement Program (STRP) • Alternative Water Revenues – Reclaimed Water • Rates Must be Sufficient to Recover Costs of Providing Service • Reflect True Value of Commodities Produced by Utility • Operating Expenses • Renewals and Replacements

33. Utility Rate Guiding Principles (cont’d.) • Utility Should Remain Financially Viable • Maintain Financial Creditworthiness • Compliance with Rate Covenants per Bond Ordinance / Subordinate Bank Notes / State Revolving Fund (SRF) Loan Agreements • Adequate Operating and Capital Reserves • Balanced Debt Risk • Maintain Comparable and Justifiable Monthly User Fees