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STANDARD & POOR'SRECF=D 55 W to 5t et 38th FI STANDARD &POOR'S October 13, 2010 City of Clearwater Municipal Services Building lCT a l 2 ti., ?-sa! Finance Department 100 South Myrtle Avenue Clearwater, FL 33756--5520 Attention: Ms. Margaret L. Simmons, Finance Director a r re , onr New York, NY 10041.0003 W 212 438.2066 reference no.: 1143371 Re: US$47,645,000 City of Clearwater, Florida, Water & Sewer Revenue Refunding Bonds, Series 2010, dated: Date of Delivery, due: December I, 2032 Dear Ms. Simmons: Pursuant to your request for a Standard & Poor's rating on the above-referenced obligations, we have reviewed the information submitted to us and, subject to the enclosed Terms and Conditions, have assigned a rating of "AA-". Standard & Poor's views the outlook for this rating as stable. A copy of the rationale supporting the rating is enclosed. The rating is not investment, financial, or other advice and you should not :and cannot rely upon the rating as such. The rating is based on information supplied to us by you or by your agents but does not represent an audit. We undertake no duty of due diligence or independent verification of any information. The assignment of a rating does not create a fiduciary relationship between us and you or between us and other recipients of the rating. We have not consented to and will not consent to being narned an "expert" under the applicable securities laws, including without limitation, Section 7 of the Securities Act of 1933. The rating is not a "market rating" nor is it a recommendation to buy, hold, or sell the obligations. This letter constitutes Standard & Poor's permission to you to disseminate the above-assigned rating to interested parties. Standard & Poor's reserves the right to inform its own clients, subscribers, and the public of the rating. Standard & Poor's relies on the issuer/obligor and its counsel, accountants, and other experts for the accuracy and completeness of the information submitted in connection with the rating. This rating is based on financial information and documents we received prior to the issuance of this letter. Standard & Poor's assumes that the documents you have provided to us are final. If any subsequent changes were made in the final documents, you must notify us of such changes by sending us the revised final documents with the changes clearly marked. To maintain the rating, Standard & Poor's must receive all relevant financial information as soon as such information is available. Placing us on a distribution list for this information would facilitate the process. You must promptly notify us of all material changes in the financial Ms. Margaret L. Simmons Page 2 October 13, 2010 information and the documents. Standard & Poor's may change, suspend, withdraw, or place on CreditWatch the rating as a result of changes in, or unavailability of, such information. Standard & Poor's reserves the right to request additional information if necessary to maintain the rating. Please send all information to: Standard & Poor's Ratings Services Public Finance Department 55 Water Street New York, NY 10041-0003 Standard & Poor's is pleased to be of service to you. For more information on Standard & Poor's, please visit our website at www.standardandpoors.com. If we can be of help in any other way, please call or contact us at n ubliefinance standardand oors.com. Thank you for choosing Standard & Poor's and we look forward to working with you again. Sincerely yours, Standard & Poor's Ratings Services a Standard & Poor's Financial Services LLC business 1 ?C'Z?Lz LC and enclosures cc: Mr. Matthew Sansbury, Vice President Raymond James & Associates, Inc. Primary Credit AnaWts: Le T 4uach New York (1)212-438-5544 le quach@ standardandpoors.corn Secondary Credit Analysts: John 5ugden-Castilla New York (1) 212-438-1670 john_sugdenG standardandpoors.com RadngsDirect Publication Date Oct. 14, 2010 Clearwater, Florida US$47-M mil wtr & swr rev rldg bnds ser 2M0 due 12/ IrM Long Term Rating AA-/Stable New Clearwater wtr & swr Long Term Rating AA-/Stable Affirmed Rationale Standard & Poor's Ratings Services has assigned its `AA-` long-term rating and stable outlook to Clearwater, Fla.'s series 2010 water and sewer revenue refunding bonds and affirmed its `AA-` long-term rating on the city's previously rated water and sewer revenue bonds. The `AA-` rating reflects our view of the system's: ¦ Diverse, primarily residential customer base with a strong historical collections rate; ¦ Strong rate-setting practices with annual rate increases approved through fiscal 2013; Strong historical debt service coverage by net revenues; ¦ Strong working capital levels; and ¦ Limited additional capital needs. These factors are offset, in our opinion, by a weakened local economy partly due to the slowdown in construction activity in the region. Net revenues of the water and sewer system secure the bonds. We understand officials will use bond proceeds to refund all or portions of its outstanding series 2002 water and sewer revenue bonds. Clearwater is in Pinellas County, about 30 miles from Tampa. The city operates a water, sewer, and reclaimed water system that serves an estimated area population of roughly 107,000. According to management, the population of the mostly built-out city should remain level over the next few years. The city's jobless rates tracked below national averages in 2008 CWVW01w, Nc?raL- and 2009, but have stetted to climb in 2010. I-or June 2010, the city's unemployment rate stood at 10.8% (not seasonally adjusted), City income levels, as measured by median household effective buying income, are, in our opinion, good at 93% of the state's level and 90% of the nation's level for 2009. The system's customer base is primarily residential, with commercial accounts accounting for about 18%_ In addition, customer growth has been largely flat over the past three audited fiscals and management is projecting it to remain steady through fiscal 2019. Collection rates have also remained strong, and management has indicated that the number of delinquent payments and total accounts disconnected remained steady or decreased during fiscal 2009 and up to August 2010. The water system consists of two conventional groundwater treatment plants and one reverse osmosis plant as well as interconnections with Pinellas County Utilities water system for the wholesale purchase of water. The agreement with the county allows the city to purchase up to 15 million gallons per day (mgd). The city currently purchases about 9 rngd. The city wellfield is permitted to withdraw up to 6.25 mgd from the Floridan Aquifer, and the combined water treatment permitted capacity is 25 mgd. Pour ground-level storage reservoirs and two elevated tanks provide 22 million gallons of storage capacity . In addition, the sewer system consists of three wastewater treatment plants with a total treatment capacity of 28.5 mgd, providing, in our view, ample capacity to meet the city's needs. Water consumption has decreased over the past five years due to increased water conservation efforts, in response to a regional drought and increased participation in the city's reclaimed water program. Average daily demand dropped to 11.5 mgd in 2009 from 14.2 mgd in 2405. The system's projections show consumption remaining flat for fiscal 2010, then increasing 0.4% for fiscals 2011 to 2019. Rates for both systems remain comparable with surrounding utilities despite annual rate increases. For a less than one-inch residential connection, combined water and sewer charges total $65.52 (for 7,544 gallons). In Oct_ 1, 2008, the system approved a multiyear rate schedule that increased rates annually through 2011. Management reports that in fiscal 2013, the city council will be asked to confirm previously approved rate increases of 6.0% for fiscals 2012 and 2013 and approve 4.5% annual rate increases for fiscals 2014 to 2016. In our opinion, the system's financial performance has been strong in recent years due to its track record of annual rate increases and a manageable capital improvement plan (CIP). Annual debt service (ADS) coverage since fiscal 2006 has ranged from 1.4x to 1.9x. Unrestricted cash and investment levels have also been strong despite some use of cash to fund capital improvements in fiscal 2048. In audited fisca12009, cash reserves significantly improved to $28 million, or a strong 2SS days' operations. Based on the city's projections, ADS coverage is estimated to remain strong at 1.3x or higher through fiscal 2019. The city's CIP is modest and totals approximately $153 million for fiscals 2010 to 2015. We understand the city anticipates issuing $16.1 million in fiscal 2012 and $21.5 million in fiscal 2414. The associated projects were initially planned for fiscal 2011 and 2413, respectively, but due to decreased consumption patterns and projected modest growth in its customer base, management reports that these projects have been delayed slightly. Under the bond ordinance, the city has covenanted to maintain rates that yield net revenues equal to 115% of ADS. Bond provisions also include a 1.2x maximum annual debt service (MADS) additional bonds test and a reserve funded at MADS. 5tand4rd & Poor.; I ANALYZ 2 Clearwater, Florida Outlook The stable outlook reflects our expectation that the system will continue to maintain strong financial operations due to its regular rate increases and modest CIP. We believe rating improvement is likely limited due to the service area's softening economy, although the effects on the system's finances have thus far been small. We further expect capital projects to remain manageable over the rating horizon and to be largely funded by additional debt. 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