Presentation to CITY OF PALM COAST, FLORIDA FINANCIAL FORECAST AND CAPITAL FACILITIES FEES ANALYSIS Prepared in Conjunction With the Utility System Revenue Bonds, Series 2007 December 19, 2006 Presented By Public Resources Management Group, Inc.

AGENDA

 Series 2007 Bonds  Financial Forecast  Background and Purpose  Customer Statistics / Revenue Projections  Capital Improvement Funding  Adequacy of System Rates  Debt Service Coverage  Capital Facilities Fees Analysis  Conclusions and Recommendations 2

SERIES 2007 BONDS

 Fund certain capital improvements to the water and wastewater system  Total Construction Fund proceeds = $45,635,000  Primary Projects include:  Water Treatment Plant No. 3$29,950,000  Land Acquisition 7,200,000  Beachside Wastewater Facilities   OKR Master Pump Station & FM Raw Water Mains 5,200,000 2,000,000 1,285,000  Total Loan Principal $50,765,000 • Includes capitalized interest through September 30, 2008 • Coupon Rates ranging from 4.09% to 4.86% • Term of 30 years  Issuance Requires Preparation of Financial Forecast 3

FINANCIAL FORECAST

4

BACKGROUND AND PURPOSE

 Prepared in Anticipation of the Issuance of the Series 2007 Bonds  Evaluate the Sufficiency of Rates      Five-year Financial Forecast and Funding Analysis – FY 2007-2011 Meet System Expenditures Fund Capital Improvement Plan Satisfy Rate Covenants Defined in the Bond Resolution Maintain Financial Stability of System 5

BACKGROUND AND PURPOSE (Con’d)

 Analysis included Forecast of:  Customer Statistics and Revenues  Operating Expenses   Capital Improvement Funding System Cash Flow and Fund Balances 6

CUSTOMER STATISTICS

 During FY 2006, the City Served on Average:  38,796 Water Accounts  29,912 Sewer Accounts  Active Account Growth of System (to FY 2006)  Compounded Growth Rate of 11.60% since 2000  Utility Customer Growth Projections Fiscal Years 2007 – 2011 Annual Average Accounts Annual Average Growth Rate 7 Compound Growth Rate Water Sewer 2,297 1,893 5.32% 5.65%

CUSTOMER STATISTICS REVENUES PROJECTIONS (Con’d)

 Projected revenues from rates based on the following:  Customer and Sales (use) Forecast  Current rates and charges as Adopted at time of Acquisition • No Change for Five Years Ends in Fiscal Year 2008  An Annual Price Indexing Adjustment of 2.2% was assumed for Fiscal Year 2009 – 2011 • Applied to Monthly User Charges, Capital Facilities Fees, and Miscellaneous Charges 8

CUSTOMER STATISTICS REVENUES PROJECTIONS (Con’d)

 Proposed rate adjustment of 12.5% proposed for Fiscal Year 2009 to Recover: • Increased debt service requirements associated with projected Utility System Revenue Bonds • Inflationary Effects on Operating Expenditures • Increase in Capital Improvement Plan/Costs  Construction Cost have Materially Increased  Increased Regulations  Additional Capital Needs (Identified after “owning” system – Improved level of service)  Blend of Pay-as-you-go Capital and Debt Financing • Includes First Year of Price Index Adjustment  Generally Consistent with Capital Finance Plan (SRF) Loan) Presented in May 2006 9

CUSTOMER STATISTICS REVENUES PROJECTIONS (Con’d)

 Existing Monthly Water and Wastewater Rates have not been adjusted since 1995  Exception – Water Conservation Rate Structure in 2005  Represents 13 years without change in rates  Projected Increase in Inflation from the time of the System Acquisition (Nov. 2003 to 2009) approximates 14.5%  Projected Increase in Inflation from last rate increase (1995 to 2009) approximates 38.5% 10

OPERATING EXPENSES

 Forecast Based on FY 2007 Adopted Budget  Forecast Recognized:  System Growth in Accounts Served/Flows  Inflationary allowances  Labor Cost Increases and Personnel Additions  Contingency Allowance of 2.0% was included in the Forecast to Account for Unanticipated Expenses 11

CAPITAL IMPROVEMENT PROGRAM FUNDING

 The City’s Capital Improvement Plan was assumed to be funded with a combination of the following sources:  Capacity Fees • New Development  Series 2007 Bonds • Water Projects  SRF Loans • Low Interest / Wastewater Projects  Renewal and Replacement Fund Deposits • From Operations  Operating Reserves • Available Funds 12

ADEQUACY OF SYSTEM RATES

Description Total Gross Revenues Total Revenue Requirements Revenue Surplus/(Deficiency) Amount Percent of Rate Revenue 2007 $26,188,549 24,424,726 $1,763,823 0.00% 2008

Adequacy of System Rates

Fiscal Year Ending September 30, 2009 2010 $26,890,569 $27,983,505 $33,936,632 26,050,419 31,152,435 34,593,910 $840,150 0.00% ($3,168,930) (12.50%) ($657,278) (2.20%) 2011 $35,207,808 35,903,765 ($695,957) (2.20%) 13

PROJECTED OPERATING RESULTS

Fiscal Year

2007 2008 2009 2010 2011 * Includes rate adjustments.

Senior Lien Debt Service Coverage Ratio's* Required Calculated All Debt* Calculated Without Capital Facilities Fees With Capital Facilities Fees Without Capital Facilities Fees With Capital Facilities Fees Without Capital Facilities Fees With Capital Facilities Fees

110.00% 110.00% 110.00% 110.00% 110.00% 120.00% 120.00% 120.00% 120.00% 120.00% 177.24% 167.09% 138.94% 160.45% 163.02% 227.75% 217.60% 205.28% 226.79% 229.36% 151.88% 132.31% 112.57% 114.74% 116.60% 195.17% 172.31% 166.31% 162.17% 164.04% 14

WATER AND WASTEWATER COMPARISON

Typical 5/8” Meter Monthly Bill At 5,000 Gallons

$80.00

$70.00

$60.00

$50.00

$40.00

$30.00

$20.00

$10.00

$0.00

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PROPOSED CAPITAL FACILITIES FEES

PURPOSE OF CAPITAL FACILITIES FEES

 Application Common in Utility Industry  Historically Used by Utility as a Capital Financing Tool  Recover Capital Cost of Capacity Allocable to New Users  Must Meet “Rational Nexus” Provisions Dictated by Case Law   Fees Must be Reasonable Support Capital Needs for System Growth  Growth Must “Pay Its Own Way”  Long Term Effect = Stabilize Rates for Service (e.g., Reduces Need for Future User Rate Increases”  Shifts Portion of Cost Recovery Burden to Development   Links to Financing of Capital Expenditures for Future Users Reduces Debt Service Component of Rates for Existing Users 17

MAJOR OBJECTIVES

 Can Only Be Used to Provide Funding for Expansion of Water and Sewer Service  Should Not Be Used to Fund Capital Needs Related to Deficiencies in the Existing System or Pay for Any Operating Costs  Should Be Based on System-Level Capital Cost Requirements Anticipated for Providing Service to New Development 18

CRITERIA

 Based on CIP Prepared by City’s Consulting Engineers and Identified in the Five-Year Financial Forecast  CIP Planning Horizon Fiscal Year 2007 – Fiscal Year 2011  Only Water Production/Wastewater Treatment and Backbone Transmission Costs Recognized  Distribution/Collection Project Costs Were not Recognized  Generally Not System-Wide Costs  Benefit Specific Customers Or Funded By Specific Charge (e.g., Meter Installation)  Generally Contributed to Utility as Part of Development Process  Supports Benefit Rule Identified by Case Law 19

PROPOSED WATER AND WASTEWATER CAPITAL FACILITIES FEES

 Water System Capital Facilities = $10.80 Per Gallons of Requested Capacity or $2,430/ERC  Wastewater System Capital Facilities = $13.78 Per Gallon of Requested Capacity or $2,480/ERC  Combined Proposed Fees Represent Increase From Current Fees 20

WATER AND WASTEWATER CAPITAL FACILITIES FEES COMPARISON

Water

Existing Proposed Difference

Wastewater

Existing Proposed Difference Capital Facilities Fees $1,660 2,430 $770 $1,770 2,480 $710 21

COMPARISON OF WATER AND WASTEWATER CAPITAL FACILITIES FEES (Con’d)

 Some Reasons Why Capital Facilities Fees Differ Among Utilities      Source of Supply Proximity to Source of Supply Type of Treatment Availability of Grant Funding to Finance CIP Administrative Decision to Maintain Fees at a Level Below What Could Justifiably Be Charged     Age of System/Level of Renewals and Replacements Utility Life Cycle (Growth-Oriented vs. Mature) LOS Per ERC Standards Density/Size of System 22

WATER AND WASTEWATER CAPITAL FACILITIES FEES COMPARISON

6,000 5,000 4,000 3,000 2,000 1,000 0 City of S ou th Dayton City of JE a A (Cit each kson vil le) S t. Lu cie Palm B y of Jac City of Port City of ay ities Com miss each Util er Fl or id a Ut ion s' A ver age ilitie Port Or an ge City of City of O rmond City of B eac h elb ou rne Me West M City of lb ou rn e - Exi Palm Coast st in g City of T itu svi City of lle E dgew City of S ate ain r t Augu st St. John Volu in si e s Cou a C ou nty S oft ened nty B re var d C ou nty Palm Coast - Pr op osed Oth Ne w S m yrna B

Water Capital Facilities Fee (Impact Fee) Wastewater Capital Facilities Fee (Impact Fee) 23

MONTHLY RATES CONCLUSIONS AND RECOMMENDATIONS

 Existing System Rates Are Not Adequate To Meet System Expenditures Throughout The Forecast Period.

 Adopt The Proposed 12.5% Increase To Monthly User Rates Effective November 1, 2008.

 Adopt Annual Indexing Provision.

 Proposed Rates Should Be Adequate To Comply With The Minimum Rate Covenants As Defined In The City’s Bond Resolution 24

CAPITAL FACILITIES FEES CONCLUSIONS AND RECOMMENDATIONS

 Fees are Based on Recommended Capital Improvement Program and Capacity Requirements  Adopt Recommended Water and Wastewater Fees  Make Proposed Capital Facilities Fees Changes Effective as Soon as legally allowed  Priority of Use of Funds Collected  Fund CIP to Avoid Outside Financing Debt  Fund Future Expansion-Related Debt 25