Fitch Ratings has affirmed the 'A' rating on the following outstanding
Lee County, Florida (the county) revenue bonds:
--$78.6 million solid waste revenue bonds, series 2006A.
The Rating Outlook is Stable.
SECURITY
Bonds are secured by the trust estate pledged under the indenture which
includes net revenues of the county's solid waste system and funds held
in the system revenue fund and debt service reserve fund (DSRF). The
DSRF is funded in part with an Ambac surety bond and $3 million in cash.
KEY RATING DRIVERS
ECONOMIC GROWTH IMPROVES WASTE FLOW: The county's well established and
sound operating system is benefitting from an improvement in waste flow
as the county has experienced new development and growth in tourism over
the past few years.
VARIED DEBT SERVICE COVERAGE: Solid waste fees have been increased in
fiscal 2016 after having been notably reduced two years ago following
the early retirement of the county's series 2001 bonds. Debt service
coverage declined as a result and excess reserves are expected to
subsidize coverage in fiscal 2015. Fitch expects management to make
future rate increases to increase reserves and support future capital
costs associated with growing levels of waste.
VERY STRONG CASH POSITION: Unrestricted reserves are strong and provide
financial cushion in the event of system interruption or to support
capital needs.
RESIDENTIAL ASSESSMENTS ON TAX BILL: Close to 40% of pledged operating
revenues are produced from a property tax bill assessment or direct tax
levy on a portion of residential customers promoting stability of
revenues. Collection rates are good.
ENERGY REVENUES PRESSURED: Revenues derived from waste-to-energy sales,
which represent approximately one-fifth of total revenues, are projected
to decline by close to 50% beginning in fiscal 2017 as a result of a
termination of its energy sales contract.
WEAK LEGAL COVENANTS: The sum-sufficient rate covenant and additional
bonds test are weak.
RATING SENSITIVITIES
SUFFICIENCY OF RATES AND FEES: Fitch expects management will take
appropriate action to generate sufficient recurring resources to cover
operating and debt service costs; results contrary to this expectation
that materially diminish liquidity could pressure the rating.
SYSTEM CAPITAL INVESTMENT: Potentially large debt issuance in the
intermediate term could pressure system leverage and coverage metrics;
Fitch will closely monitor the system's capital plans as they develop.
CREDIT PROFILE
The solid waste system is an enterprise fund of Lee County (implied GO
rating 'AA'/Outlook Stable) and is a Tier III credit under Fitch's
'Solid Waste Revenue Bond Rating Criteria' whereby the system collects
and disposes of solid waste and operates a waste-to-energy facility. The
system serves all of Lee County and neighboring Hendry County. The
county uses waste-to-energy, landfilling and recycling to manage its
waste materials. A new compost facility opened in 2010 and construction
and demolition debris recycling facility opened in 2011 helping to
reduce landfill use.
DIVERSIFIED REVENUE BASE
Pursuant to state statutes, county ordinances and interlocal agreements,
the county retains both economic and regulatory flow control of waste
generated by all commercial, industrial and residential properties in
the service area. The bulk of system revenues are derived from the
interlocal agreements, franchise agreements supporting waste collection
in the unincorporated areas of the county, and an electric power
purchase agreement.
The county collects an assessment included on the county property tax
bill for households in the unincorporated areas and incorporated cities
of Fort Myers, Bonita Springs, Fort Myers Beach, and Sanibel, and such
assessments are subject to a lien on real property if not paid. Cape
Coral collects ad valorem taxes in lieu of imposing assessments. These
assessments and tax revenues are derived from all of the approximately
285,000 residential and multifamily customers in the service area and
represented approximately 38% of fiscal 2014 pledged system revenues.
Tax collection rates were good, currently at 97%.
WASTE DISPOSAL CONTRACTS IN PLACE
The county-owned waste-to-energy (WTE) facility is currently the primary
method of waste disposal for the county and processes approximately 93%
of all waste. Covanta Lee, Inc. is responsible for the operation,
maintenance and renewal and replacement of the facility via an agreement
which terminates Nov. 30, 2024. The county also has an agreement in
place with neighboring landowners for the use of the Lee/Hendry Regional
Landfill used primarily for the disposal of inert ash and a minimal
amount of municipal solid waste.
The county renewed its interlocal agreements in 2010 with each of the
five incorporated cities. The interlocal agreements will all terminate
Sept. 30, 2020. These incorporated cities accounted for approximately
60% of municipal solid waste in fiscal 2014. In Fitch's opinion,
contract renewal risk is minimal as the current structure provides for
an efficient and affordable level of service provided by the county.
The Village of Estero recently incorporated in November 2014 and is
being served via the existing franchise hauler contract. The county is
entering into negotiations with the Village for a potential 10 year
interlocal agreement similar to its existing agreements with other
incorporated cities. Estero residents currently account for less than 5%
of the total system's municipal solid waste tonnage.
DEFEASANCE OF DEBT RESULTS IN LOWERED RATES; REDUCED COVERAGE
In October 2011 management defeased its outstanding series 2001 solid
waste revenue bonds with excess cash on hand and reserve fund monies.
Annual debt service dropped dramatically from $22.4 million in fiscal
2011 to $4.4 million in fiscal 2012 and fiscal 2013. Debt service ramps
back up to $9.1 million in fiscal 2014 and increases slightly to $9.2
million in 2018 and remains level through final maturity in 2026.
Management lowered waste disposal fees substantially due to lower debt
service costs. As a result, net revenues, which exclude recycling
revenues as per the bond indenture, declined from $19.3 million in
fiscal 2012 to $7.9 million in fiscal 2013 and $11.3 million in fiscal
2014. Coverage of debt service was 1.79x and 1.24x for fiscal years 2013
and 2014, respectively. Fiscal 2014 results were stronger than expected
due primarily to higher energy sales results which came in at $20.3
million or 26% greater than the prior year due to higher natural gas
prices. The original budget had assumed a use of excess reserves to
support debt service. Waste tonnage was up 2% year over year also
contributing to positive results.
For fiscal 2015 rates were not changed and the budget assumed the use of
reserves for debt service. Municipal solid waste flow is projected to be
up by 5% over fiscal 2014 levels reflective of a continued improvement
in the economy. Current projections from management indicate revenues
are up by 3% compared to budget and expenses are down by 3%. Net
revenues are projected at $4.6 million which is $1.2 million higher than
budget. Expenditures also include a budgeted $2.6 million one-time
expense for new recycling carts. Reserves of $4.4 million are needed to
meet the sum-sufficient rate covenant and such practice is permitted
under the bond indenture. Fitch estimates actual net operating coverage
of 1.01x adjusted to include recycling revenues of $2 million and the
exclusion of one-time recycling cart costs from operating expenditures.
RATE INCREASE APPROVED FOR FISCAL 2016
An average 11% increase in residential rates was adopted by the county
board to lower the reliance on the use of reserves and to meet
forecasted declines in energy revenues beginning in fiscal 2017.
Additionally, management has planned this gradual increase in rates to
address future capital and landfill needs as waste flow is projected to
continue to grow. The fiscal 2016 budget forecasts debt service coverage
at approximately 1.04x.
ENERGY PRODUCTION REVENUES PROJECTED TO DECLINE
The county's power purchase agreement with Seminole Electric Cooperative
for the purchase of all net electricity produced by the WTE facility was
recently terminated by Seminole effective Dec. 31, 2016. The county does
not anticipate entering into a new agreement for 2017 and expects to
sell electricity through standard offer contracts or via the spot market
or a combination of both. Current short-term market prices average
roughly 50% less than the county's current contracted price. Budgeted
energy sales of approximately $17 million in fiscal 2016 equate to 20%
of total budgeted operating revenues. The county continues to examine
other potential options and markets for its generated electricity.
LONG-TERM CAPITAL IMPROVEMENTS UNDER EXAMINATION
Management had a rate study conducted this past summer to help determine
rate sufficiency for current operations and for future proposed
expenditures tied to new potential waste processing and disposal
alternatives. The WTE facility has exceeded the contracted annual
through-put capacity of the facility in fiscal 2015. To address the
projected growth in future municipal solid waste and avoid reaching
maximum capacity levels of its current WTE facility, management has
prudently begun to study and plan for an expansion of its current
disposal facilities (WTE or landfill related) and is considering the
potential financing for a new WTE facility. Such projects would likely
occur in a five to 10 year timeframe. Additional debt is anticipated to
be issued to address these needs and depending on the plan could total
close to $250 million.
If debt of this magnitude is issued, projected future debt service costs
could return to levels experienced by the county in the late 1990's and
the 2007 through 2011 time period. Current rates are considered by Fitch
to be average compared to other Florida counties providing it with some
revenue raising flexibility. Current debt matures in 11 years, allowing
new debt to be wrapped around current debt and mitigating the level of
rate increases necessary to fund such project costs.
RESERVE LEVELS REMAIN STRONG
The system's reserves are strong as a result of the system's consistent
generation of operating surpluses since the mid-1990's. Fitch expects
management to gradually increase rates to cover operations fully and
maintain a sufficient cash position to support operations and its
capital needs. Management currently targets minimum cash levels of 400
days of operations. Unrestricted reserve levels as of September 2015
were $79.9 million or 408 days of operations. A depletion of reserves to
narrower levels, due to operational support, could pressure the rating.
COUNTY EXPERIENCING ECONOMIC IMPROVEMENT
Lee County is located on the Gulf Coast of Florida, bordered by
Charlotte County to the north and Collier County to the south. The
county covers over 800 square miles and contains over 679,000 residents
as of 2014. The economy is concentrated in health care, higher
education, and tourism.
The county was severely affected by the housing market correction with
significant price decreases and high foreclosure activity. However,
average home prices in the county have shown improvement since 2012 and
the county's market values experienced growth of 5.6%, 10% and 9.4% in
fiscal 2014, 2015 and 2016 respectively. County statistics also show a
recovery in the area's tourism industry over the past five years with
steady gains in visitor spending, and hotel and motel occupancy rates.
Also supporting the signs of economic improvement are the downward
change in the county unemployment rate to 5.5% for July 2015 compared to
6.7% the prior year. Employment growth was 0.7% over the same period
although workforce experienced a decline of 0.5%. Wealth levels are
slightly above average compared to the state as a whole.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government
tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating
Criteria, dated Sept. 10, 2015). The draft includes a number of proposed
revisions to existing criteria. If applied in the proposed form, Fitch
estimates the revised criteria would result in changes to fewer than 10%
of existing tax-supported ratings. Fitch expects that final criteria
will be approved and published by Jan. 20, 2016. Once approved, the
criteria will be applied immediately to any new issue and surveillance
rating review. Fitch anticipates the criteria to be applied to all
ratings that fall under the criteria within a 12-month period from the
final approval date.
In addition to the sources of information identified in Fitch's
Tax-Supported Rating Criteria, this action was additionally informed by
information from Creditscope, Zillow Group, IHS Global Insight, National
Association of Realtors and Public Resources Management Group, Inc.,
rate consultant to the county.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Solid Waste Revenue Bond Rating Criteria (pub. 04 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868817
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991827
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991827
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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