mark galvin senior vice president mark.galvin@firstsw 450 s. orange avenue suite 460

Contacts

February 12, 2012 CITY OF PALM COAST, FLORIDA

Mark Galvin

Senior Vice President

[email protected]

450 S. Orange Avenue

Suite 460

Orlando, FL 32801

407.426.9611

407.426.7835 Fax

Utility System WorkshopPreliminary Financing Plan

Member FINRA & SIPC

© 2013 First Southwest Company

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Credit Considerations – Importance of Bond Ratings

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City has an opportunity to refinance their Series 2003 Utility Revenue Bonds and save approximately $500,000 per year and $11 million over the life.

As part of the refunding the City will prepare an official statement that describes the Utility System financial position, the condition of the Utility System, its Capital Improvement Plan, regulatory issues, legal covenants, its financial position and its outstanding and projected utility rates along with estimated debt service coverage. This part of the document includes the engineering and feasibility study currently be prepared by and PRMG.

Since the City has identified significant capital improvements the City has the opportunity to finance

a portion of these CIP improvements at today’s historical low interest rates

Goal is to keep debt service as low as possible while maintain flexibility in order to lessen the impact to water and sewer rate payers.

As part of this refinancing the City will need to update the existing Utility bond ratings.

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Outstanding Utility System ratings: The City’s current unenhanced / underlying rating is “A1” from Moody’s Investors Service (Moody’s),” A+” from Fitch Ratings (Fitch) and “A” from Standard & Poor’s Rating Services (S&P).

The Series 2003 Bonds originally had underlying ratings of A3, A-, A- from Moody’s, Fitch, and S&P respectively. To improve the marketability (interest rates) of the Bonds the City also purchased a bond Insurance policy (credit enhancement) from MBIA to increase the bond ratings to “AAA” from all three rating agencies.

The City issued the Series 2007 Bonds with the underlying ratings being upgraded to A2, A, A by Moody’s, Fitch and S&P respectively. The City also purchased bond insurance from MBIA for the Series 2007 Bonds increasing the bond rating to “AAA”.

In 2008 Moody’s and Fitch recalibrated / upgraded the City’s ratings to Aa3 and AA- respectively.

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In 2008 the Credit Crisis and Bond Insurance Meltdown

Since 2007 there were six (6) “AAA” rated municipal bond insurance companies – today none are rated “AAA” by any of the rating agencies.

Only two bond insurers are actively issuing new policies.

– Assured Guaranty Municipal Corp. “A2” Moody’s and “AA” S&P (January 18, 2013 downgraded by Moody to A2 from Aa3)

– Build America Mutual Assurance Company “AA” S&P only – Start up bond insurer that is presently not licensed in Florida.

The Series 2003 and 2007 Bond Insurer : MBIA now known as National Public Finance is now rated “Baa2” and “BBB” from Moody’s and S&P respectively. The Fitch rating has been pulled.

MBIA downgrade required the City to fund with cash its DSR Accounts requiring the City to transfer from reserves and project funds $9.4 million.

The collapse of the bond insurers means:

– Issuer’s underlying ratings are extremely important.

– Institutional Investors now do their own credit analysis prior to purchasing any bonds.

– At the City’s current ratings bond insurance is currently not cost effective.

Member FINRA & SIPC


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As of January 18, 2013

Municipal Bond Insurers Rating Summary

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Stable Negative Outlook Positive Outlook

Insurer Moody's Standard & Poor's FitchAa1 / Stable Outlook AA+ / Negative Outlook

(as of 7/22/10) (as of 8/08/11)AA / Stable Outlook

(as of 7/23/12)A3 / Stable Outlook AA- / Stable Outlook Ratings Withdrawn

(as of 1/17/13) (as of 11/30/11) (as of 2/24/10)

Assured Guaranty Municipal A2 / Stable Outlook AA- / Stable Outlook Ratings Withdrawn(formerly FSA) (as of 1/17/13) (as of 11/30/11) (as of 2/24/10)

National Public Finance Baa2 / Negative Outlook BBB / Developing Ratings Withdrawn(formerly MBIA Illinois) (as of 12/19/11) (as of 06/21/12) (as of 6/26/08)

Ba1 / Negative Outlook B+ / Negative Outlook Ratings Withdrawn

(as of 4/17/12) (as of 8/2/12) (as of 5/02/08)

Caa2 / Developing B / Negative Outlook Ratings Withdrawn

(as of 11/19/12) (as of 6/21/12) (as of 6/26/08)

Ratings Withdrawn Ratings Withdrawn Ratings Withdrawn

(as of 11/8/12) (as of 7/28/10) (as of 9/05/08)


(as of 4/7/11) (as of 11/30/10) (as of 6/26/08)

FGIC Ratings Withdrawn Ratings Withdrawn Ratings Withdrawn(Certain Policies Covered by National) (as of 3/24/09) (as of 4/22/09) (as of 11/24/08)


(as of 11/11/09) (as of 02/16/10) (as of 10/21/08)

Ratings Withdrawn

(as of 12/15/08)

MBIA

Disclosure : This is a summary of the current outstanding ratings and outlooks of monoline bond insurers as reported by Moody's Investors Service (Moody's), Standard and Poor's Corporation (S&P), and Fitch Ratings (Fitch) as of the approximate date and time set forth on this summary. FirstSouthwest does not guarantee the accuracy or completeness of the data set forth herein. For the most accurate and current information, contact Moody's, S&P, and Fitch. Certain of the insurers' parent companies are currently operating under Chapter 11 of the US Bankruptcy code or other plans of reorganization under applicable insurance regulators. In addition there maybe relationships among insurers that could also affect credit quality.

ACA No Rating No Rating

Syncora

CIFG

Ambac

Legend

Watch Negative / Review for Possible Downgrade / R (Regulatory Intervention)

Significant Recent Actions: On January 17, 2013, Moody's downgraded Assured Guaranty Municipal and Assured Guaranty's ratings to "A2" and "A3," respectively, from "Aa3;" rating was removed from "Review for a Possible Downgrade" and a "Stable" oulook was assigned. On July 23, 2012, S&P assigned an "AA" rating and "Stable" outlook to Build America Mutual.

Radian

Developing Watch / Review With Direction Uncertain

Assured Guaranty

Watch Positive / On Review for Possible Upgrade

Berkshire Hathaway (Columbia and National Insurance Co. "NICO")

No Rating

Build America Mutual No Rating No Rating

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On March 30, 2011 Fitch downgraded the City’s Utility Bonds to A+ from AA-

Rationale

– “Rating reflects system's very low debt service coverage margins in fiscal 2010 and expectations for below-average financial metrics and liquidity for the near to intermediate term….”

– “The system remains highly leveraged”

What Could Make the Ratings Go Down?

– “Further declines in system liquidity may lead to lower overall financial flexibility and could cause additional downward rating pressure”


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Member FINRA & SIPC


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On August 26, 2011 Moody’s downgraded the City’s Utility Bonds to A1 from Aa3

Rationale– “The downgrade to A1 from Aa3 reflects the system's diminished debt service

coverage levels and liquidity position.”

– “The rating also incorporates the system's stable customer base with average wealth levels, a high debt ratio, adequate system capacity, and standard legal covenants.”

– “Challenges include: diminished debt service coverage, new growth is limited, system is highly leveraged”

What Could Make the Ratings Go Down– Sustained decline in debt service coverage

– Failure to implement timely rate increases

– Further deterioration of reserves

– Significantly increase debt burden


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Member FINRA & SIPC


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Why maintaining your rating is so important: The higher the rating the lower the interest rate / yield and lower the interest

cost. The rating comes out just prior to the issuance of bonds. A downgrade just prior to

pricing has a more profound impact on the City’s rates. Strong ratings translate into lower rates not only on the Series 2013 Bonds but future

Bonds (Series 2014/15 Bonds) as well. Highly rated Utility Issues are now issued without a funded Debt Service Reserve

Account (DSR)– Series 2003 DSR Requirement: $6.2 million Cash Funded– Series 2007 DSR Requirement: $3.1 million Cash Funded

Part of the financing plan includes a transfer of $6.2 million from the Series 2003 DSR fund to the Series 2013 Project Fund. The plan also includes not funding a new DSR for the Series 2013 bonds.

Not funding a DSR will save approximately $10 million in total debt service over the life of the financing and $400,000 annually

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Utility Ratings are subjective and based on some of the following criteria

Economics and Demographic of the Area: income indicators and growth potential, residential and commercial and industrial, foreclosures, etc.

Legal and Financial Covenants – rate covenant, additional bonds test, funded debt service reserve (DSR), renewal and replacement covenants, etc.

The City’s Financial Position: Liquidity position, cash reserves and cash policies, current and future debt service coverage

Condition of the System: CIP requirements, future capital needs, renewal and replacement

Management considerations: stability of the elected officials and their willing to raise rates if necessary to maintain the system, the experience of the City’s staff and Utility Staff.

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Financial Impact of ratings downgrades: If either Moody’s or Fitch lowers their bond ratings to A2 from A1 (Moody’s) or A

from A+ (Fitch) – The City should still be able to transfer $6.2 million from the Series 2003 DSR

and not fund a new DSR on the Series 2013 Bonds– Interest rates/ Yields will increase by approximately 5 basis points

o translates into approximately $ 45,000 increase in annual debt serviceo $950,000 over the life of the financing.

If both Moody’s and Fitch or if S&P alone (S&P has the lowest rating A) lowers their rating– The City will need to fund the DSR on the new Series 2013 Bonds and increase

the bond size by over $6.3 million to fund the $21 million project fund. – Interest rates / yields will increase by approximately 15 basis points

o Translates into approximately $ 530,000 increase in annual debt service o $11.3 million over the life of the financing*


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* Excludes the DSR and investment earnings

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MFRAMoody's Investors Service

Boynton Beach, FL

Cap Coral, FL

Citrus County, FL Davie, FL Deltona, FL Lake City,

FLPalm Coast,

FLPort St.

Lucie, FLSt.

Augustine, FL

Stuart, FL

2011 2011 2011 2011 2011 2011 2011 2011 2011 2011General Entity Information

Current Senior Most Rating* A1 A1 A1 A1 A1 A1 A1 A1 A1 A1Revenue Backed Rating Description LT SR REV LT SR REV LT SR REV LT SR REV LT SR REV LT SR REV LT SR REV LT SR REV LT SR REV LT SR REV

Financial Data : Key Financial RatiosTotal Annual Senior Lien Debt Service Coverage (x) 3.19 2.81 2.88 2.56 1.76 4.15 1.51 1.30 1.89 2.61

Total Annual Debt Service Coverage (x) 3.19 2.36 2.63 2.56 1.76 2.66 1.25 1.30 1.89 2.61

* The Rating displayed in MFRA is the most recent derived underlying rating issued by Moody's I nvestors Service, I nc.

Selected Financials and other Datapoints

Member FINRA & SIPC


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In 2011 both Moody’s and Fitch downgraded the Utility Bonds.

Both Moody’s and Fitch have stated they are concerned about Utility's debt service coverage, it’s liquidity / reserves position and it’s debt load.

S&P has not reviewed the credit since 2009.

In order to lessen the impact to water and sewer rate payers our financing plan reduces the amount of debt to be issued by using the existing debt service reserve and not funding a new one.

By not funding a DSR we are reducing the overall security to the rating agencies and bond holders therefore the need to make sure other credit factors remain strong.

A downgrade by any two rating agencies or by S&P alone will require the City to fund a new debt service reserve.

This will increase interest rates / yields by approximately 15 basis points increasing debt service by $530,000 annually and $11.3 million* over the life

At current ratings purchasing bond insurance is currently not cost effective

If downgraded, purchasing municipal bond insurance may reduce the interest rates, but a DSR will need to be funded requiring selling $6.3 million more bonds.

Conclusions

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* Excludes the DSR and investment earnings

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Even if the City enacts the proposed rates there is no guarantee the City’s ratings will not be downgraded.

Increasing the rates as proposed by PRMG increases the chance the City’s bond ratings will not be downgraded.

If the City is downgraded it will still be able to sell it’s bonds and fund it’s capital improvement plan. It will simply cost more - Issue more debt at higher interest rates and more debt more often.

If actual future financial performance is better than the projected, the City has the option when reviewing their rates to make future adjustments.

Conclusions

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mark galvin senior vice president mark.galvin@firstsw 450 s. orange avenue suite 460

Documents

bond insurers

existing utility bond

bond insurance meltdownsince

fitch ratings fitch

a2 moodys

citys ratings

utility revenue bonds

rating agencies