NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'A' rating on the following outstanding Lee County, Florida (county) revenue bonds:
--$83.3 million solid waste revenue bonds, series 2006A.
--$2.9 million solid waste refunding revenue bonds, series 2006B.
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
WELL MANAGED SYSTEM WITH IMPROVED FLOW: The county's well established and sound operating system is benefitting from its strong financial management and an improvement in waste flow the last two years as the economy continues to bounce back from the recession.
VERY STRONG CASH POSITION: Unrestricted reserves are strong and support capital expenditures limiting the need for future debt.
REDUCED RATES PRESSURES NET REVENUES: Solid waste fees have been reduced substantially following the early retirement of the county's series 2001 bonds resulting in a significant drop in net revenues. Management plans to subsidize future debt service with excess reserves and gradual rate increases to not burden taxpayers.
RESIDENTIAL ASSESSMENTS ON TAX BILL: Forty percent of 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.
MUNICIPAL CONTRACTS RECENTLY RENEWED: Interlocal agreements with five incorporated municipalities have been recently renewed and provide future stability of waste flow.
ENERGY REVENUES PRESSURED: Revenues derived from waste-to-energy sales, which represent approximately one-fifth of total revenues, have declined as energy prices have seen downward pressure.
WEAK LEGAL COVENENTS: The sum-sufficient rate covenant and additional bonds test are weak.
MANAGEABLE DEBT AND CAPITAL NEEDS: Current debt levels are manageable and the county has no near term debt plans. System facilities have recently been expanded or constructed limiting the need for extensive capital improvements.
RATING SENSITIVITIES
INSUFFICIENT RATES AND FEES: The continued use of reserves to support debt service over the long term, due to an inadequate rate structure, may reduce cash reserves to insufficient levels which could result in rating pressure.
CREDIT PROFILE
The solid waste system is an enterprise fund of Lee County ('AA' Implied GO by Fitch) 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 and construction and demolition debris recycling facility opened in 2010 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. System revenues are derived from the interlocal agreements, franchise agreements supporting waste collection in the unincorporated area 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 lien 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 250,000 residential customers in the service area and represented approximately 40% of fiscal 2012 total system revenues. Tax collection rates were good, currently at 97%.
WASTE DISPOSAL CONTRACTS IN PLACE
The county recently renewed its interlocal agreements through fiscal 2020 with each of the five incorporated cities. The term of the agreement with Hendry County expires 20 years after the landfill reaches capacity which is not expected for another 15 to 20 years. The franchised collection contractors are bound by contract to deliver all waste collected to the county's system.
ENERGY PRODUCTION REVENUES SUBJECT TO MARKET RATE VOLATILITY
The county has a power purchase agreement with Seminole Electric Cooperative that runs through Dec. 31, 2028 for the purchase of all net electricity produced by the waste-to-energy facility. Charges for capacity and renewable energy are negotiated with the next agreement effective Jan. 1, 2017. Electric sales revenues were $16.2 million in fiscal 2012, representing 20% of system income, which is a 2% decline from fiscal 2011 levels. Another 1%-2% decline is expected for fiscal 2013. The decline is attributable to natural gas price declines in calendar 2012 and early 2013.
Fitch notes that the system's exposure to volatile energy markets is mitigated currently by the increase in waste flow to the system the last two years. Total tonnage increased in fiscal 2012 by 8.7% to 680,959 generated tons and is projected to increase in fiscal 2013 by 5.7%. Additionally, management has the ability to raise rates if necessary to meet operational needs as rates are currently at very low levels.
ABOVE-AVERAGE RESERVE LEVELS
The system's reserves are strong as a result of the system's consistent generation of operating surpluses since the mid-1990's. Management reports unrestricted reserves of $94 million through September equivalent to a healthy 545 days operating cash on hand. Capital improvement needs for the near to mid-term are limited to landfill expansion and management anticipates using approximately $15 million-$20 million of reserves to finance these costs over the next few years. There are no current plans for additional debt.
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 has since 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 a projected $4.9 million for fiscal 2013. Coverage of debt service for fiscal 2013 is projected to be a low but adequate 1.12 times (x). Coverage including projected recycled revenues is estimated to be a solid 1.64x. Management reports that fiscal 2013 revenues and expenses are projected to be very close to budget, a reflection of its typically accurate budget forecasting practices.
RESERVES TO BE USED TO HELP SUBSIDIZE DEBT
To meet fiscal 2014 debt service costs of $9.1 million management has slightly reduced solid waste fees from fiscal 2013 levels and budgeted to use a portion of reserves (approximately $4.5 million) to pay debt service. Such practice is permitted under the bond indenture to meet the sum-sufficient rate covenant. Revenues and expenditures are budgeted at slightly less (-0.5%) than fiscal 2013 projections. Management strives to maintain stable or reduced rate structures so that legal flow control is not required, although it is available.
Management intends to gradually increase rates to cover operations fully and maintain a sufficient cash position to support operations and capital needs. Fitch expects cash levels to decline because of the subsidization of debt service and use for current capital needs but expects management will maintain adequate cash levels of greater than 300 days cash on hand going forward. 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 645,000 residents as of 2012. The economy is concentrated in health care, higher education, tourism and, until recently, real estate and construction. 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 are up 10.2% year over year through August and up 20% since August 2011, according to Zillow.com, evidencing a turnaround. Also supporting the signs of economic improvement are the downward change in the county unemployment rate to 6.9% for May 2013 compared to 8.8% the prior year. Employment growth was 2.7% over the same period while workers increased by 0.6%. Wealth levels are slightly above average compared to the state as a whole.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Solid Waste Revenue Bond Rating Criteria' (June 19, 2013);
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Solid Waste Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710712
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=804270
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.