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 October 5, 2015 - 4:49 PM EDT
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Fitch Affirms Lee County, FL's Solid Waste Revs at 'A'; Outlook Stable

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Kevin Dolan, +1-212-908-0538
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Larry Levitz, +1-212-908-9174
Director
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com


Source: Business Wire (October 5, 2015 - 4:49 PM EDT)

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