OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating on the following Lee County, Florida (the county) revenue bonds:

--$66,615,000 solid waste refunding revenue bonds, series 2016.

The bonds are scheduled to price via negotiation on or around Aug. 22. Proceeds will be used to refund the county's outstanding series 2006A solid waste revenue bonds.

Additionally, Fitch affirms the 'A' rating on the county's outstanding series 2006A bonds.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by the funds and accounts pledged under the bond resolution 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).

KEY RATING DRIVERS

ECONOMIC GROWTH IMPROVES WASTE FLOW: The county's well established and sound operating system is benefitting from growth in waste flow in connection with the county's strong economic growth.

VOLATILE DEBT SERVICE COVERAGE: The county raised solid waste fees for fiscal 2016 and 2017 significantly boosting debt service coverage (DSC) after a reduction in rates four years ago and a planned use of reserves for debt service in fiscal 2015. The rating assumes management will make future rate increases as needed to maintain adequate DSC and system liquidity.

VERY STRONG CASH POSITION: Unrestricted reserves are very strong and provide financial cushion in the event of system interruption or to support capital needs.

RESIDENTIAL ASSESSMENTS PROVIDE STABILITY: Close to 50% 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.

WEAK LEGAL COVENENTS: The two-pronged minimum 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: The county is developing its system master plan. Should the plan involve large debt issuances in the intermediate term this could pressure system leverage and coverage metrics; Fitch will monitor the system's capital plans as they develop.

CREDIT PROFILE

The solid waste system is an enterprise fund of Lee County (Issuer Default Rating of 'AA'/Outlook Stable). The system 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, composting and recycling to manage its waste materials.

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. Interlocal agreements, franchise agreements supporting waste collection in the unincorporated areas of the county, and through Dec. 31, 2016, an electric power purchase agreement make up the bulk of system revenues.

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 over 360,000 residential and multifamily customers in the service area and represents approximately 48% of projected fiscal 2016 pledged system revenues. Tax collection rates are 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 74% of all waste. Covanta Lee, Inc. is responsible for the operation, maintenance and renewal and replacement of the facility via an agreement which expires 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 expire on Sept. 30, 2020. These incorporated cities accounted for approximately 49% of municipal solid waste and 31% of all waste delivered to the system in fiscal 2015. Fitch views contract renewal risk as minimal since the current structure provides for an efficient and affordable level of service provided by the county.

PRIOR YEARS' RATE DECREASES NEGATE COVERAGE LEVELS

Management lowered waste disposal fees substantially due to lower debt service costs in fiscal years 2012 and 2013. As a result, net revenues 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.

For fiscal 2015, the county did not adjust rates and planned to use reserves for a portion of debt service. A $3 million transfer (4% of revenues) from system reserves was required to provide sum-sufficient debt service coverage and such practice is permitted under the current bond indenture. Municipal solid waste flow was up by close to 6% over fiscal 2014 levels reflective of a continued improvement in the economy. Net revenues, exclusive of system reserve fund transfers, were $6.2 million and exceeded budget by approximately $2.8 million.

RATE INCREASES PROJECTED TO IMPROVE DEBT COVERAGE

The county implemented sizeable residential disposal and collection rate increases in fiscal 2016 and adopted additional increases for fiscal 2017. The total additional fiscal 2016 and fiscal 2017 revenues are estimated at $12 million (16% of fiscal 2015 operating revenues).

Such increases were made 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 for a potential third year of rate increases in fiscal 2018 to address future growth in operating costs and capital and landfill needs as waste flow is projected to continue to grow.

Actual revenues for fiscal 2016 are projected to fall short of budget by approximately 6% or $5 million due to a decline in electric and recycling revenues due to market factors, but expenses are coming in lower than expected offsetting the decline. Fiscal 2016 projections estimate annual debt service coverage of 1.10x from net operating revenues of approximately $9 million.

Fitch expects future DSC to be more in line with the rating category as a result of the expected rate increases and reduction in debt service due to this refunding.

RESERVE LEVELS REMAIN STRONG

The system's reserves are strong as a result of the system's generation of operating surpluses since the mid-1990's. Unrestricted reserve levels as of September 2015 were $78 million and post closure funds were $10 million which combined equate to a very strong 478 days of operation. Management plans to target minimum reserve levels, including post closure funds, of 365 days of operations, which Fitch considers a solid level of reserves for a system with this operating profile.

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 40%-50% less than the county's current contracted price. Energy sales revenues are projected to decline by $4 million in fiscal 2017 from the expected $14 million for fiscal 2016 (19% of projected operating revenues). The county continues to examine other potential options and markets for its generated electricity.

Fitch would expect this relatively small revenue source to remain variable in the future but Fitch assumes that recent waste-related rate increases and conservative budget practices will temper the overall impact from a further decline in these revenues.

LONG-TERM CAPITAL IMPROVEMENTS UNDER EXAMINATION

Management conducted a rate study in 2015 and 2016 to help determine rate sufficiency for current operations and for future proposed expenditures tied to new potential waste processing and disposal alternatives. A new master plan is being prepared by the county's consultants/engineers to better assess the latest technologies, options and alternatives for waste disposal and this plan is expected to be available in 2017.

The determination of future facility improvements and expansions, if necessary, will be decided after the new master plan is completed as well as the plan for funding. Current rates are considered by Fitch to be average compared to other Florida counties providing it with some revenue raising flexibility if necessary. Additionally, current debt matures in 10 years, allowing new debt to be wrapped around existing debt and mitigating the level of rate increases necessary to fund future project costs to be supported through borrowing.

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 has an estimated census population of just over 700,000 for 2015. 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 10%, 9.4% and 8.5% 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.