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26 Jul 2016
New York, July 26, 2016 -- Issue: Solid Waste System Refunding Revenue Bonds, Series 2016 (AMT); Rating: Baa1; Rating Type: Underlying LT; Sale Amount: $66,000,000; Expected Sale Date: 09/07/2016; Rating Description: Revenue: Government Enterprise;
Summary Rating Rationale
Moody's Investors Service has assigned a Baa1 rating to Lee County Solid Waste Enterprise, FL 2016 Refunding Revenue Bonds. Concurrently, Moody's has affirmed the Baa1 rating on all the outstanding parity senior lien bonds. The outlook is stable.
The Baa1 rating reflects the system's necessity to continue increasing its rates to maintain adequate financial metrics, past multi-year rate decreases and weak debt service coverage ratio (DSCR) which required a draw on reserves to meet debt service in 2015.
The Baa1 rating also reflects the upcoming termination of the Power Purchase Agreement (PPA) with Seminole Electric Cooperative (A3, stable) in December 2016, and the ensuing decrease in electric revenues (approximately 20% of total operating revenues) that the system will face. These factors are balanced by rate adjustments recently implemented by the county, the legal flow control of all solid waste in the county and the expectation that existing contracts will continue to renew given no real competitive alternatives in the local area.
The stable outlook is supported by the system's currently low leverage position with efforts such as recent rate increases by management to comply with debt covenants and a stable revenue generating base.
Factors that Could Lead to an Upgrade
Sustained growth of net revenues with debt service coverage above 1.3 timesAdequate liquidity metrics with days cash on hand above 450Implementation of capital improvement plan with maintenance of leverage metrics
Factors that Could Lead to a Downgrade
Revenue decreases that result in less than 1.0 times coverageVolatility of net revenuesDeterioration of liquidity with increased leverage due to implementation of capital improvement plan
The revenue bonds are secured by a pledge on net revenues of the Solid Waste System. The rate covenants are: Net revenues, together with the system's net position, must equal at least 120% of the annual debt service becoming due in such fiscal year; and Net revenues shall be adequate at all times to pay in each fiscal year at least (1) 100% of the annual debt service becoming due in such fiscal year, and (2) 100% of any amounts required to be deposited in the renewal and replacement fund or the debt service reserve account.
Changes to the Bond Resolution and Rate Covenant Compliance
The Bond Resolution provides for the creation of a Rate Stabilization Fund, a reserve available for the needs of the System to minimize the risk of default on the payment of Annual Debt Service for the Bonds, to be funded as the County deems appropriate by resources in deposit in the Solid Water System Reserve Fund.
Transfers from the Rate Stabilization Fund in an amount up to the Rate Stabilization Amount (defined as an amount not greater than 25% of prior year's ending cash balance within the Rate Stabilization Fund) may be recognized as a component of Gross Revenues if transferred within 120 days of the respective close of the Fiscal Year. The new definition of gross revenues also includes revenues derived from the operation of the materials recycling facility ("MRF").
Use of Proceeds
The proceeds of the 2016 revenue refunding bonds will be used to refund the system's Series 2006A revenue bonds outstanding, pay issuance costs of the 2016 bonds, and fund the necessary debt service reserves.
The system provides municipal solid waste service. The system's components include a waste to energy facility, landfill, recycling, and transfer stations. The system's waste-to-energy facility is operated by Covanta Lee (wholly owned subsidiary of Covanta Energy LLC, not rated) under a long-term agreement through 2024 and continues to operate at a satisfactory availability rate above 92% for each of the past five fiscal years.
The principal methodology used in this rating was Waste-to-Energy Projects published in April 2012. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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