Florida Governmental Utility Authority (FGUA) Phase Two Due Diligence Evaluation Results. City of Dunnellon September 18, 2017

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1 Florida Governmental Utility Authority (FGUA) Phase Two Due Diligence Evaluation Results City of Dunnellon September 18, 2017

2 FGUA Acquisition Process - Recap Preliminary Phase I Phase I Preliminary Due Diligence Consult with host government for entry Data requests and site visits; financial, engineering & operations analysis Negotiate and agree upon a preliminary and conditioned purchase price range and general terms of asset acquisition Phase II Perform Detailed Due Diligence - Validating/Adjusting Preliminary Analysis, Finalize Acquisition Terms and Various Agreements, Conduct Required Public Interest Hearings Phase III Financing, Closing, and Transition FGUA finalizes financing; closing of the acquisition pursuant to terms of the asset acquisition agreement FGUA and Seller cooperate in transition of ownership and operations 2

3 Preliminary Phase I Activity Performed Obtained County BOCC Resolution of Support and approval of City requests for FGUA holding period and City right of first purchase Site visits/condition assessments - April 6 and April 11 Review of operational, performance and compliance material Review of all provided financial information Review of recent engineering assessments/reports; preliminary CIP recommendations provided by USW/WT (subject to City guidance) Financial Advisor and Underwriting team reviewed outstanding debt and recommended refunding transaction; identified financing alternatives 3

4 Phase I Activity Performed Con t Preliminary debt capacity analysis provided by PRMG Preliminary consents for grant reassignments from FDEP and SWFWMD (Southwest Florida Water Management District) and positive response from USDA Rural Development Loan Program 4

5 Phase 2 Work Performed Operations / Capital / Engineering Kimley-Horn Work Authorizations approved (acquisition & capital PERs Detailed asset inspection, initial Statement of Conditions report Confirm O&M costs and contract pricing Update CIP Requirement Preliminary Engineering Report for acquisition substantially complete Finance Confirm historical financial results, verify cash balances, update projections (detailed customer billing data pending) Complete draft financial feasibility report including updated debt capacity analysis, system valuation and financing alternatives USDA Loan Application Review grants awarded and outstanding debt terms / obligations; pending new grant opportunities 5

6 Phase 2 Work Performed - Cont Other Purchase / Sale agreement initial draft FA and Bond attorney review of current fund restrictions Continue to lend support as needed to city 6

7 Recap - FGUA Valuation Methodology Income/Debt Capacity Approach Net Transaction Price Determined as follows: Total Utility Revenues (Recurring) - Operating Expenses - Renewal and Replacement Fund (R&R) Deposits (10% of Revenue) - Debt Service Coverage Allowance above R&R Deposit at 40% (if bond financed) - Any Other Funding Requirements from Revenues = Available Net Revenues for Financing (Debt Service Payment Equivalent) = Calculate Bondable Capacity from Available Net Revenues (Principal) - Less Payments from Financing Proceeds - Issue and Acquisition / Transition Costs - Refund of Outstanding City Utility Bonds - Working Capital Deposit - Immediate Capital Needs Required to Be Funded = Net Available to CITY 7

8 Recap - Key Financial Assumptions Rate revenue at currently approved city rates Includes 4% increase adopted for FY2018; Assumes 1% annual elasticity adjustment (nets to 3%) No increase required for transaction; and FGUA increase less than City estimated requirement No additional customer growth assumed for evaluation period Operations and management costs indexed to CPI and ERC changes 5% operating contingency reserve for unexpected revenue shortfalls (e.g., lower consumption) and/or unforeseen expenses (e.g., energy costs, market prices, unexpected repairs) 10% annual transfer to R&R Fund for ongoing capital reinvestment $2.742 million initial deposit to 5-year CIP for capital project priority - Rainbow Springs - City Plant interconnect; grant funds could reduce this and benefit customers 8

9 Key Financial Assumptions Con t Assumes Dunnellon WWTP to be re-rated from.335 mgd to.500 mgd capacity for planned interconnects; plant rerating with Juliet Falls capacity expected to accommodate existing flows, 5-year CIP and known reserved capacity w/ ~ 23% remaining $2.5 Million WMD grant assumed to be assignable for 180 Ave. corridor connections No additional State Springs funding assumed pending SWFWMD recommendations FGUA to refund existing $10.8 Million (FY 2018) City debt plus fund capital with USDA Rural Development Loan at current interest rate (2.75%); $100,000 prepayment penalty with Regions 9

10 Key Financial Assumptions Con t Acquisition total value for loan purpose $ million; cash flows set to 30-year repayment term FGUA assumed to be subrecipient on 2017 CDBG Small Cities grant and State appropriation No capacity impact fees assumed Potential post-closing returns to City in the form of Futures payments on new connections at 50/50 split 10

11 Why 40-Year Amortization Alternative Not Chosen As Valuation Method 30-Year Evaluation Period Typical in Industry Representative of General Service Life Cycle of Assets to be Purchased Remaining Service Life of Existing Assets Estimated at Approx. 26 Years 40-year Evaluation Period Longer than Remaining Service Life of Existing Assets Increasing to a 40-Year Evaluation would: Artificially Increase Overall Debt Burden of the System Decrease Available System Cash Flows Needed to Fund Future Capital Improvements Increase Future Rate Pressure on Existing Customers to Recover Cost of Fully Leveraged System May Require Replacement of Major Assets Before Debt has Been Paid Off Evaluation Considerations: Used USDA Interest Rate as Cost of Capital Benefits Transaction 30-year Evaluation Period allows Funding of Loan Reserve from Cash Flow Results in an overall Stronger Credit / Promotes Rate Sustainability 11

12 The CIP Strategy *Excludes existing City funding and encumbrances for projects in process 12

13 The CIP Strategy Funding Fiscal Year Ending September 30 Description Source Total Capital Improvement Projects: Connect Dunnellon & Rainbow Springs WW 2017 Bonds $ 222,000 $ 2,520,251 $ - $ - $ - $ 2,742,251 Lift Station SCADA on 10 key stations Existing Bonds - 55, ,500 Construct Eastern Force Main (Grant Funded) (180th Corridor) Grant 333,000 2,196, ,529,893 Generator Trailer Mount Existing Bonds , ,717 (2) 6 inch AMT Diesel Sewer Pump R&R ,930 36, ,560 Replacement of service Rainbow Springs and Chatmire R&R 55,500 55,500 55,500 55,500 55, ,500 Connect Rio Vista to Rainbow Springs Water Existing Bonds , ,650 Water Meter Replacement W/ I900 Existing Bonds - 333, , ,600 Water Meter Replacement (Normal R/R) Operating 11,375 11,375 11,375 11,375 11,375 56,875 Water Customer Field Audit Operating 7,830 7,830 7,830 7,830 7,830 39,150 Paint 500,000 Gal RSWTP Operating 6,000 6,000 6,000 6,000 6,000 30,000 Hytovick Water main Relocation Existing Bonds - 126, ,540 City & RBS WTP Interconnection Improvements Existing Bonds - 33, ,300 Well 9 Electrical Upgrade Existing Bonds ,750-27,750 Service Area Improvements (CDBG) CDBG Grant 650, ,000 Service Area Improvements (CDBG) - Match Reserves 25, ,000 CRA - Other Needs Line Replacement Leg. Grant 300, ,000 CRA - Other Needs Line Replacement Existing Bonds 105, ,243 Other Water Renewal and Replacement Projects R&R 148, , , , , ,825 Other Wastewater Renewal and Replacement Projects R&R 174, , , , , ,388 Total Water and Wastewater Projects $ 2,038,803 $ 5,615,682 $ 834,328 - $ 489,409 - $ 435,519 - $ 9,413,742 Funding Sources: Series 2017 Bond Proceeds 2017 Bonds $ 222,000 $ 2,520,251 $ - $ - $ - $ 2,742,251 Existing Bond Proceeds Existing Bonds 149, , ,402 88,800-1,309,385 Grant Funding Grant 333,000 2,196, ,529,893 CDBG Grant CDBG Grant 650, ,000 Legislative Grant Leg. Grant 300, ,000 Renewal and Replacement Fund R&R 333, , , , ,314 1,731,188 Operating Reserves (CDBG Grant Match) Reserves 25, ,000 Reclassify as Operating Expense Operating 25,205 25,205 25,205 25,205 25, ,025 Total Funding Sources $ 2,038,803 $ 5,615,682 $ 834,328 $ 489,409 $ 435,519 $ 9,413,742 13

14 Updated Debt Capacity Valuation Results USDA 30 Year Financing Prior Current Description Estimate Estimate Total Water and Wastewater System Revenues $ 2,907,029 $ 2,942,053 Less Operating Expenses 1,831,759 1,885,007 Net Operating Revenues Before Other Deductions $ 1,075,270 $ 1,057,045 Less Other Deductions (Renewal and Replacements and Debt Service Reserves) 290, ,611 Net Annual Cash Flow for Acquisition/Additional Capital Funding $ 784,567 $ 762,435 Present Value of Net Annual Cash Flow (Principal Amount of Borrow) $ 15,886,931 $ 15,520,912 Plus City's Existing Unencumbered Fund Balance Available for Disbursement 1,183, ,515 Total Available Funds For Disbursement $ 17,070,266 $ 16,242,427 Less Expenditures: Bond/Loan Issue Cost $ 476,608 $ 310,418 Utility Transaction Cost 250, ,478 Working Capital Deposit 451, ,582 Working Capital Deposit - Accounts Receivables Purchase - 221,146 Deposit to Project Fund For Capital Expenditures 2,758,400 2,742,251 Net Available for Purchase After Expenditures $ 13,133,591 $ 12,159,553 Disbursement to City: Less City's Existing Outstanding Debt (10,809,633) (10,809,633) Less Prepayment Penalty for Early Extinguishment of City's Debt - (100,000) Net Surplus/(Deficiency) Above City's Current Outstanding Debt $ 2,323,958 $ 1,249,920 Net to City Including Payment of Accounts Receivable $ 2,323,958 $ 1,471,066 14

15 Summary of Significant Changes / Updates in Phase 2 40-year loan cash flow financing excluded as option per financial advice Net available to city with updated 30-year cash flows is $1.471M with purchase of receivables vs. $2.324M previously Updated 5-year CIP is $9.414M (with committed grants) vs. previous $6.538M (more detailed project definition) Assume use of City residual bond proceeds ($1.309 million) for planned capital work (will require City encumber work to FGUA) Transaction costs updated to $411K from $250K based upon updated effort requirement, including legal work 15

16 Recap of Benefits of Dunnellon-FGUA Partnership Three way intergovernmental partnership with City and Marion County with outsourcing benefits Stabalize customer rates lower than City requirement Potential for Futures payments and City credits with additional State grants High quality, experience and depth of FGUA management, operations and technical support; including knowledge gained of City system High public utility performance standards and strong track record (particularly system reliability and customer service) City transfers managerial demands (headaches) and financial liability; removal of debt defeasance City credit standing FGUA financing can be federally tax exempt and/or low cost governmental loans; purchases and property are State tax exempt; avoids investor owned capital profits (ROE) FGUA is eligible to receive and can benefit from all forms of State, Federal and Water Management district grants/loans 16

17 Benefits of Dunnellon-FGUA Partnership Con t Customers operating costs benefit from geographical proximity and size and capabilities of FGUA contractors and systems (significant resource back up capacity) Interlocal agreement can provide city assurances as to how issues can be addressed, policy priorities, transparency and accountability Transparency of public authority owner and alternatives for on-going involvement of customers Employee transferability Important work (service improvements and capital projects) can get underway very quickly with minimal transition hiccups 17

18 Next Steps If approval to move forward: Determine use of Net Proceeds (cash, rates, other) for agreement purposes Confirm 50/50 split of Futures impact fee payments on rerated capacity Complete submission of USDA financing application with required engineering, valuation and environmental reports Continue work w/ city on additional grant funding; particularly Springs $ ; grant could result in credit to customers/city Work with City Attorney on Purchase and Sale, Transition and Interlocal Agreements (including Marion County consents) Schedule Public Interest Hearing Assist City with customer information outreach including conducting necessary meetings/hearings 18

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