FISCAL YEAR 2017 SOLID WASTE REVENUE SUFFICIENCY AND RATE STUDY

Transcription

1 LEE COUNTY, FLORIDA FISCAL YEAR 2017 SOLID WASTE REVENUE SUFFICIENCY AND RATE STUDY May 2017 Public Resources Management Group, Inc. Utility, Rate, Financial and Management Consultants

2 Public Resources Management Group, Inc. Utility, Rate, Financial and Management Consultants May 31, 2017 Mr. Keith A. Howard, P.E. Direct of Integrated Solid Waste Management Lee County Public Utilities Department P.O. Box 398 Fort Myers, FL Subject: Fiscal Year 2017 Solid Waste Revenue Sufficiency and Rate Study Update Dear Mr. Howard: Public Resources Management Group, Inc. (PRMG) has completed our review and analysis for your consideration of the Lee County (the "County") Solid Waste Division (the "Division") revenue sufficiency and rate study update (the "Study"). The Study review period encompassed the Fiscal Years 2017 (current budget year) through 2022 (collectively, the "Forecast Period"). The purpose of the Study was to: Identify the sufficiency of revenues derived from the current charges for solid waste disposal service and ongoing operations of the Division to fund the projected expenditures of the Division and provide sufficient net revenues to fund necessary transfers for future landfill closure, long-term care; Provide an evaluation of the Integrated Solid Waste Management System's (the "System") overall financial position and cash balances / reserves relative to identified need (i.e., accumulated landfill closure and long-term care liabilities, operating expenses, capital expenditures, etc.) and recommendations concerning internal financial targets; Evaluate the cost of service by waste collection and disposal fee and provide recommendations concerning the rates for service; and Develop a financial plan with County staff to maintain or promote the creditworthiness of the Division and assist in the overall strategic planning process with the ultimate objective to promote long-term rate sustainability. The Study is based on information provided by Division staff including, but not limited to, collection and disposal assessment units, historical waste deliveries to County facilities, historical financial operating results, budgetary information, capital plans, operating reports for the County's waste-to-energy facility, long-term liabilities associated with future closure of the County's landfills and other financial and statistical information. Following this letter is a report detailing the principle assumptions, findings, and recommendations of this analysis including an executive summary. 341 NORTH MAITLAND AVENUE SUITE 300 MAITLAND, FL Tel: Fax: PRMG@PRMGinc.com Website:

3 Mr. Keith A. Howard, P.E. Lee County Public Utilities Department May 31, 2017 Page 2 Based on the assumptions and analyses reflected in this report, which should be read in its entirety, we are of the opinion that the current rates of the Division will not be sufficient to meet the projected revenue requirements of the Division for the Forecast Period primarily due to: Forecasted declines in net electric revenues primarily due to the termination of the electric sale and purchase agreement by and between the County and the Seminole Electric Cooperative Inc. effective January 1, 2017 (Fiscal Year 2017); General inflation on the cost of operation and maintenance averaging approximately 3% or $2.2 million annually primarily associated with the cost of contracted operations from private providers which approximate 70% of total expenses or on average $55 million during the Forecast Period; Forecasted declines in other operating revenues of $0.9 million or 2% of disposal fee revenues assumed from the Fiscal Year 2016 associated with the sale of recovered materials from operations of the County's Waste-to-Energy ("WTE"), Construction and Demolition Debris ("C&D") and Materials Recycling Facility ("MRF") facilities operations based on current recovered materials sales prices; and The need to maintain: i) compliance with the rate covenants delineated in the Indenture of Trust previously adopted by the County as a condition of the sale of solid waste bonds and ii) promote the credit worthiness of the System recognizing recent historical declines in debt service coverage ratios (i.e., net revenues / annual debt service). The decline in net revenues is a concern and contributing factor to the recent credit rating downgrade by Moody's Investor Services of the System. The drivers for the need to increase revenues for the Fiscal Year 2018 are consistent with what was communicated in the prior Fiscal Year 2016 Solid Waste Revenue Sufficiency and Rate Study dated April, 2016 (the "Prior Study") supporting the adopted Fiscal Year 2017 solid waste collection and disposal assessment, Municipal Service Taxing Unit (MSTU), rates and fees for service. The following table provides a summary of the identified revenue adjustments for the Forecast Period including a comparison to the Prior Study forecasts: (Remainder of page intentionally left blank)

4 Mr. Keith A. Howard, P.E. Lee County Public Utilities Department May 31, 2017 Page 3 Identified Rate Revenue Adjustments by Fiscal Year [1] Adopted Recommend Identified Description 2017 [2] Disposal Assessment / Tip Fee Rev. Prior Study FY16 Forecast 17.75% 14.0% 5.0% 2.4% 2.4% N/A Current Study FY17 Forecast N/A 14.0% 5.0% 2.4% 2.4% 2.4% Incremental Revenue Addition N/A $5.7m $2.4m $1.2m $1.3m $1.3m Cumulative Revenue Addition N/A $5.7m $8.2m $9.5m $10.9m $12.4m Collection Assessment Revenues Prior Study FY16 Forecast 0.85% 5.5% [3] 2.0% [3] 2.0% [3] 2.0% [3] N/A Current Study FY17 Forecast [3] N/A 0.00% 0.51% [3] 0.53% [3] 1.98% [3] 1.94% [3] Incremental Revenue Addition N/A $0.0m $0.1m $0.1m $0.5m $0.5m Cumulative Revenue Addition N/A $0.0m $0.1m $0.3m $0.8m $1.3m [1] Reflects identified increases to revenues from the collection / disposal assessment and tipping fees for service. Actual increases to customer charges will vary by waste and service. It is important to note that the financial forecast does not assume any investment in expanded or new facilities, which is contingent upon Board approval the recommendations of the Master Plan. [2] Reflects adopted increase to revenues as recommended per the prior year s rate study. [3] Reflects projected increases to recover estimated cost of contracted collection services and will vary by franchised area. As can be seen above, the recommended disposal rate revenue increase for the Fiscal Year 2018 is consistent with what was previously forecasted and represents a continuation of the County s multi-year rate plan. With respect to the collection assessment revenues, the projected increase for the Fiscal Year 2018 was eliminated recognizing no increase to the County s contracted franchise haulers, which would require a pass-through increase to the collection assessment. It should also be noted that due to the growing amount of waste deliveries and limited processing capacity at the WTE facility, the Division is actively evaluating alternative disposal options through a strategic master planning exercise to better assess the latest technologies, options and alternatives for waste disposal (the "Master Plan"). It is important to note that the financial forecast does not assume any investment in expanded or new facilities, which is contingent upon Board approval the recommendations of the Master Plan. To the extent that the Master Plan identifies the need for significant operating or capital investment, additional rate revenues above what is currently identified in this Study may be required. Based on the current needs of the System and market conditions coupled with the anticipated need to have additional waste disposal facilities in the future, it is recommended that the County consider implementation of the Fiscal Year 2018 rate increases to promote the credit worthiness, fund identified requirements of the System and mitigate further declines in the fiscal position of the System. (Remainder of Page Intentionally Left Blank)

5 Mr. Keith A. Howard, P.E. Lee County Public Utilities Department May 31, 2017 Page 4 We appreciate the opportunity to be of service to the County and would like to take the opportunity to thank the staff for their efforts and time in providing necessary assistance in the assimilation of data, insight into recent trends, and general guidance in the development of this study. Very truly yours, Public Resources Management Group, Inc. Robert J. Ori President Thierry A. Boveri, CGFM Associate Nicholas T. Smith, CGFM Senior Rate Analyst Attachments

6 LEE COUNTY, FLORIDA Solid Waste Division Revenue Sufficiency and Rate Study TABLE OF CONTENTS Title Page No. Letter of Transmittal Table of Contents... i List of Tables... iv Executive Summary... ES-1 Revenue Sufficiency and Cost of Service Methodology... ES-1 Principle Findings and Observations... ES-2 Summary of Recommendations... ES-14 Introduction... 1 Section 1: General Overview... 2 Facilities... 2 Waste-to-Energy (WTE) Facility... 3 Material Recycling Facility (MRF)... 4 Construction and Demolition Debris (C&D) Recycling Facility... 7 Lee / Hendry Regional Landfill... 8 Composting Facility... 9 Section 2: Enterprise Fund and Revenue Sufficiency Methodlogy... 9 Section 3: Agreements Contract Operations Franchised Collection Services i-

7 LEE COUNTY, FLORIDA Solid Waste Division Revenue Sufficiency and Rate Study TABLE OF CONTENTS (cont'd.) Title Page No. Waste-to-Energy Facility (WTE) Operations Materials Recycling Facility (MRF) Operations Lee / Hendry Regional Landfill Operations Electric Sales Agreements Seminole Electric Cooperative, Inc Rainbow Energy Marketing Corporation Interlocal Agreements City of Bonita Springs and Town of Fort Myers Beach Village of Estero City of Cape Coral City of Fort Myers City of Sanibel Hendry County Other Agreements Lee / Hendry Regional Landfill / Landowner Agreement Prolime Corporation Biosolids and Compost Purchase Section 4: Solid waste Assessment and Fees Section 5: Historical and Projected Customer / Tonnage Statistics Section 6: Revenue Composition and Forecast Section 7: Revenue Requirements Composition and Forecast ii-

8 LEE COUNTY, FLORIDA Solid Waste Division Revenue Sufficiency and Rate Study TABLE OF CONTENTS (cont'd.) Title Page No. Operating Expenses Contracted Collection of Franchise Areas WTE Contracted Operations Financial Effects of Landfill Diversions Other Expense Forecast Assumptions Capital Expenditures and Major Maintenance Debt Service Closure and Post Closure Transfers Section 8: Revenue Sufficiency and Financial Compliance Collection Revenue Requirements Disposal Revenue Requirements Changes to the Bond Resolution and Rate Covenant Compliance Recommended Financial Targets Section 9: Cost of Service and Rate Design Early Prepayment Discount Customer Impact Rate Comparison Section 10: Recomendations iii-

9 LEE COUNTY, FLORIDA Solid Waste Division Revenue Sufficiency and Rate Study Table. No. LIST OF TABLES ES-1 Dashboard and Summary of Projected Financial Position and Operational Statistics 1 Historical and Projected Assessed Residential Customer Billing Units and Tonnage Statistics 2 Historical and Projected Disposal Facility Assessment Customer Billing Statistics 3 Historical and Projected Waste Flow Summary by Type of Waste 4 Historical and Projected Waste Flow Summary by Disposal Facility 5 Historical and Projected Waste-to-Energy (WTE) Operational Statistics 6 Projected Assessment and Disposal Fee Revenues Under Existing Rates 7 Historical and Projected Electric Sales Revenue 8 Historical and Projected Operating Expenses 9 Projected Operating Expense Escalation Factors 10 Projected Capital Expenditures 11 Projected Annual Debt Service Payments 12 Projected Fund Balance and Interest Income 13 Projected Solid Waste Disposal Net Revenue Requirements from Rates 14 Projected Solid Waste Collection Net Revenue Requirements from Rates 15 Projected Solid Waste Disposal and Collection Net Revenue Requirements from Rates 16 Historical Rate Covenant Compliance 17 Projected Rate Covenant Compliance 18 Historical, Current and Proposed Assessment, Tipping and Gate Fees Title -iv-

10 LEE COUNTY, FLORIDA SOLID WASTE REVENUE SUFFICIENCY AND RATE STUDY EXECUTIVE SUMMARY Public Resources Management Group, Inc. (PRMG) was tasked with the preparation of a solid waste revenue sufficiency and rate study on behalf of the Lee County (the "County") Solid Waste Division (the "Division"). The purpose of the study was to: i) prepare a six (6) year financial forecast of operations to determine the sufficiency of existing disposal and collection fees and other Division revenues to fund necessary expenditures and fund transfers; and ii) allocate costs to the respective fees for service to provide recommendations concerning the level of rates charged for collection and disposal service. The following executive summary is intended to provide a brief overview of the methodology, major findings or observations and recommendations for the study; however, it is encouraged that the report be read in its entirety. Revenue Sufficiency and Cost of Service Methodology The foundation of the study and the primary objective of the solid waste rates are to reasonably recover the cost of providing service, cost of infrastructure investment and compliance with covenants of the outstanding bonds and internal fiscal targets (referred to as the "Revenue Sufficiency" evaluation). Gross Revenues Gross Revenue Requirements Ensuring adequate cash reserves and appropriate cash flows produces a sustainable long-term financial plan that can mitigate the financial and operating risk from unanticipated or sudden events to financial operations (e.g., reduced electric sales, changes in market conditions affecting operations and recovered materials revenues, reduced growth or tonnages, unanticipated or extraordinary outages, unfunded mandates, etc.). The identified revenue requirements to be funded from rates are then allocated among the respective collection and disposal functions. The allocated ES-1

11 costs are then assigned to the respective service and rate (e.g., Collection, Municipal Solid Waste disposal, C&D disposal, Class III disposal, Tire disposal, etc.) to determine the estimated cost of service and divided by the billing units to determine the rates for service. The recommended rates are based on the cost of service and are adjusted to reflect the integrated nature of the solid waste operations, incentivizing particular behavior or to be comparable to current market rates for service. Principle Findings and Observations The County provides waste disposal service to approximately 680,000 residents within unincorporated and incorporated areas of the County and processes over 870,000 tons of waste annually. The chart below provides a recent history and forecast of tonnages: As can be seen above the forecast anticipates growth of approximately 17,000 tons per year primarily associated with increased MSW deliveries. Projected growth in MSW deliveries are expected to average approximately 13,000 tons per year. The balance of the growth in waste deliveries is attributable to increased yard waste and recycling deliveries. To dispose of the waste, the County maintains and operates several facilities including a mass burn Waste-to-Energy ("WTE") Facility, Materials Recycling Facility ("MRF"), Construction and Demolition Debris ("C&D") Recycling Facility, yard waste / tire processing facilities, composting, regional landfill, and household hazardous waste facility. The WTE facility is currently the primary method of waste disposal for the County and processes in excess of 615,000 tons annually or over 70% of all inbound processed waste. The chart on the following page indicates the historical and projected utilization of the WTE facility: (Remainder of page intentionally left blank) ES-2

12 800,000 Waste to Energy Capacity & Processed Waste Projection (Tons) 700, , , , , , , Processed Waste MSW Diversions C&D Diversions Yard Waste Diversion Design Capacity Through Put Capacity Guaranteed Capacity The County primarily processes MSW, yard waste, residuals, and tires at the WTE facility. As can be seen above, the growth in such waste deliveries is expected to result growing diversions from the WTE facility to the County's Lee / Hendry Regional Landfill (the "Lee / Hendry Landfill"). The Division is evaluating disposal options and is in process of preparation of a strategic master planning study to better assess the latest technologies, options and alternatives for waste disposal (the "Master Plan") expected to be completed during the Fiscal Year It is important to note that the financial forecast does not assume any investment in expanded or new facilities, which is contingent upon the findings of the Master Plan. To the extent that the Master Plan identifies the need for significant operating or capital investment, the County may be required to increase rate revenues above what is currently identified in this Study to finance the potential additional capital investment associated with securing additional disposal capacity. For more information about waste diversions and deliveries to the Lee / Hendry Landfill, please reference Section 5 of this report. Electricity is generated as a by-product of processing waste at the WTE facility. Historically, the County sold electricity to the Seminole Electric Cooperative Inc. ("Seminole Electric") pursuant to an electric power purchase agreement dated August 15, However, effective January 1, 2017, Seminole Electric terminated the electric sale agreement with the County thereby forcing the County to sell electricity to the open market and other investor owned utilities ("IOUs") [1]. The current market rates per mega-watt hour (MWh) of electricity sold to the open market is materially lower than the contractual rates included in the prior agreement with Seminole Electric. In terms of annual revenues, at its high the County was generating approximately $20.3 million during the Fiscal Year 2014 and today is forecasted to generate approximately $7.3 million for the Fiscal Year While pursuant to federal law the County can sell directly to Florida Power and Light, in order to reach a larger market and maximize electric revenue sales, the County entered into a [1] The Public Utility Regulatory Policies Act of 1978 ("PURPA"), as amended, requires IOUs to purchase electricity generated by the County's WTE facility since the facility qualifies as a small renewable energy producer, which is defined as an entity not engaged in the electric business and generates renewable energy from a facility of eighty (80) megawatts or less. ES-3

13 non-firm power purchase, sale, and marketing agreement with Rainbow Energy Marketing Corporation ( REMC ) effective November 1, The agreement allows REMC to represent the County in the sale of electricity to the open market as well as other IOU s under PURPA. Through the County s various recycling operations including curbside collection, metal separation at the WTE facility, C&D recycling, sale of electronics, sale of compost, etc., the County minimizes the amount of waste landfilled, while also generating a revenue stream through the sale of the recovered materials including paper, fiber, plastic, metal, etc. The average value of the material sold has generally been in decline the last several years, however has recovered significantly in the current fiscal year. The following chart provides detail of the average monthly commodity price change for the sale of curbside recovered recyclables at the MRF: Mar-17 The County reported declines in net recycled material revenue generated from operation of the MRF from $3.0 million in FY 2011 to $1.6 million in FY 2016 or an approximate 47% decline. While the average monthly rate has generally declined, the County has reported a significant rebound in the average monthly commodity price in the current FY While the rebound is encouraging, due to price volatility and recognizing the County is still in process of approval of a new contracted recycling operations agreement, which would affect forecasted revenues, for purposes of this analysis the forecast assumes $1.0 million in recycling revenues beginning with the Fiscal Year 2018 and held constant for the remainder of the Forecast Period. It is assumed that should the County realize excess funds derived from additional curbside recycling revenues, such amounts could be used to fund additional future capital needs. The following table was developed in order to provide additional detail concerning the recent and projected trends in recovered material pricing: ES-4

14 Summary of Principal Other Operating Revenues for the Historical and Projected Forecast Period Curbside Recycling Ferrous Non-Ferrous Electric Fiscal Tons Revenue $/Ton Tons Revenue $/Ton Tons Revenue $/Ton Net MWh Revenue $/MWh Year ($000s) ($000s) ($000s) ($000s) ,739 $2,328 $ ,663 $2,347 $ $294 $ ,837 $11,461 $ ,821 2, ,570 1, ,164 10, ,306 2, ,973 2, ,177 1, ,686 14, ,320 1, ,686 1, ,007 1, ,427 13, ,611 1, , ,410 1, ,309 9, ,194 1, , ,860 1, ,239 7, ,638 1, , ,890 1, ,241 7, ,834 1, , ,890 1, ,176 7, ,044 1, , ,890 1, ,109 7, ,267 1, , ,890 1, ,496* 6, ,500 1, , ,890 1, ,913* 6, * Amounts shown reflect a reduction in the electrical generation associated with projected planned generator major maintenance. In addition to the investment in recycling oriented disposal facilities and public outreach programs, the County has enacted local regulation to further promote recycling. County Ordinance requires the mandatory recycling of commercial and Multi-family solid waste and C&D debris. The collective measures by the County, residents, and businesses to recycle have helped in meeting compliance with recycling goals for the State pursuant to F.S (7) (the "Recycling Regulation"). The goal of the Recycling Regulation is to achieve a recycling rate of 75% by the Fiscal Year The County has achieved an overall recycling rate of 69% for the most recently reported Fiscal Year 2015, which places them within the top 5 large counties in the state for recycling credits. The following chart as reported by the FDEP indicates the overall recycling rates for the top ten (10) most populace counties (in order from least to most populace counties): ES-5

15 To achieve the required recycling rate of 75% by 2020, the County will require continued investments to disposal facilities and education to the public regarding recycling programs and benefits. To address the issue of increased recycling goals and increasing waste deliveries, as previously discussed, the Division has contracted for a Master Plan to explore all options such as construction of new facilities, regional partnerships, new services, etc. It should be noted that any additional capital investment determined as part of the Master Plan activities may result in the need for additional indebtedness or additional rate revenue increases in order to finance such expenditures. The County issued debt in 2006 primarily to fund an expansion of the WTE facility and to refinance certain outstanding debt at that time through the issuance of the Solid Waste System Revenue Bonds, Series 2006A (the "2006A Bonds") and the Solid Waste System Refunding Revenue Bonds, Series 2006B (the "2006B Bonds" and, collectively with the 2006A Bonds, the "Series 2006 Bonds"). The WTE facility expansion financed by the Series 2006 Bonds increased the waste processing capacity from 1,200 tons per day to 1,836 tons per day. In 2016 the County refinanced the Series 2006A Bonds, issuing the Solid Waste System Refunding Revenue Bonds, Series 2016 (AMT) ( the 2016 Bonds ). The following page provides a summary of the remaining debt service payments for the Series 2016 Bonds: $12,000,000 Summary of Debt Service Payments $9,000,000 $6,000,000 $3,000,000 $0 Series 2006 Bonds Series 2016 Bonds As can be seen above, the Series 2016 Bonds will be repaid by the Fiscal Year 2026, which is beyond the Forecast Period. It should be noted that the subsequent reduction in debt service payments in the Fiscal Year 2026 may provide for additional bonding capacity for future capital improvements identified by the Master Plan. With respect to the cost of operating expenses, the Study assumes an approximate growth rate of approximately 3% a year. The increase is primarily uncontrolled due to increases in the cost of contracted operations and collection as set by agreement (indexing of contract costs is customary ES-6

16 in the industry). The following table provides an indication of the revenue sufficiency and recommended / identified rate adjustments for the Forecast Period: Disposal Net Revenue Requirements and Revenue Sufficiency ($1,000s) [1] Projected Fiscal Year Ending September 30, Description Operation and Maintenance Expenses [2] $47,374 $50,396 $51,184 $52,522 $54,130 $55,804 Annual Debt Service: Series 2016 Bonds $8,535 $8,541 $8,547 $8,558 $8,564 $8,575 Transfers and Capital [3] $962 $3,582 $5,904 $6,691 $6,490 $6,965 Gross Revenue Requirements $56,871 $62,519 $65,635 $67,771 $69,183 $71,344 Less Income / Funds from Other Sources: Investment Income $214 $282 $343 $420 $525 $638 Net Electric Revenue 8,636 7,328 7,307 7,285 6,534 6,547 Franchise Fees County 1,789 1,832 1,876 1,922 1,961 2,001 Franchise Fees Municipalities [2] WTE Ferrous / Non-ferrous County WTE Ferrous / Non-ferrous Covanta [2] Recovered Materials & Misc. Rev. [4] 1,684 1,480 1,480 1,480 1,480 1,480 Compost Sales Other Revenues [5] 2,627 2,624 2,467 2,499 2,531 2,561 Total $17,284 $15,915 $15,854 $15,999 $15,433 $15,640 Net Disposal Funding Requirements $39,587 $46,604 $49,781 $51,772 $53,750 $55,703 Existing Assessment and Tip Fee Revenue $39,580 $40,881 $41,588 $42,238 $42,824 $43,340 Current Period Rate Revenue Adj. [6] N/A 14.00% 5.00% 2.40% 2.40% 2.40% Adjusted Disposal Revenue $39,580 $46,604 $49,781 $51,772 $53,750 $55,703 Surplus / (Deficiency) [7] ($7) $0 $0 $0 $0 $0 [1] Amounts shown derived from Table 13 at the end of this report. [2] Amounts shown include the gross expenses of the system, including the cost of shared or remitted revenues such as, franchise fees collected on behalf of the County and shared electric revenues due to the County's contracted WTE facility operator. [3] Reflects transfers to the landfill closure fund, transfers to the recycling fund from recovered materials revenues and funding for certain capital equipment identified from the capital program. [4] Amounts shown reflect declines in other operating revenues associated with the reduction in recovered materials revenue from operation of the MRF. [5] Includes revenues from advance disposal fees related to the C&D ordinance, contracted disposal of sludge and other miscellaneous revenues. [6] Reflects the current period percent (%) increase in disposal revenues. [7] Reflects Assumed transfers to / (from) operating reserves. As can be seen above the existing disposal assessment and tip fee revenues are not projected to be sufficient to fund the disposal-related revenue requirements of the System due to increases in the cost of operation and declines in other operating revenues (e.g., electric revenues) which serve to offset the funding requirements of the disposal assessment and fees. ES-7

17 With respect to the collection system operations and revenues, the following table provides an indication of the revenue sufficiency and recommended / identified rate adjustments for the Forecast Period: Collection Net Revenue Requirements and Revenue Sufficiency ($1,000s) [1] Projected Fiscal Year Ending September 30, Description Operation and Maintenance Expenses $23,716 $24,022 $24,437 $24,840 $25,591 $26,332 Annual Debt Service Transfers and Capital Gross Revenue Requirements $23,716 $24,022 $24,437 $24,840 $25,591 $26,332 Less Income / Funds from Other Sources: Investment Income $0 $0 $0 $0 $0 $0 Contracted Fines [2] Total $25 $25 $25 $25 $25 $25 Net Collection Funding Requirements $23,691 $23,997 $24,412 $24,815 $25,566 $26,307 Existing Collection Assessment Revenue $23,700 $24,002 $24,288 $24,558 $24,809 $25,042 Rate Revenue Adjustments [3] N/A 0.00% 0.51% 0.53% 1.98% 1.94% Adjusted Disposal Revenue $23,700 $24,002 $24,412 $24,815 $25,566 $26,307 Net Transfers To / (From) Reserves [4] $10 $5 $0 $0 $0 $0 [1] Amounts shown derived from Table 14 at the end of this report. [2] Reflects minor revenues from fines related to the monitoring of contracted collection. [3] Reflects the current period percent (%) increase in collection revenues. [4] Reflects assumed transfers to / (from) reserves. As can be seen above the existing collection component of the assessment revenues are projected to be sufficient through the Fiscal Year 2018, however is expected to require future increases to fund the collection-related revenue requirements of the System due to assumed increases in the cost of contracted operation. Based on implementation of the identified rate revenue adjustments and recognizing the assumptions made for purposes of this Study, which should be read in its entirety, the Division is expected to maintain compliance with the requirements of the bond resolution adopted August 16, 2016 (the Bond Resolution ). The following chart provides a recent history and projection of calculated debt service coverage [2] compliance with the rate covenant of the Bond Resolution. A detailed calculation of compliance with the Bond Resolution can be found in Table 17 at the end of this report. [2] The calculation of coverage recognizes Gross Revenues less operating expenses (exclusive of depreciation, amortization or closure expenses) should produce net revenues at least equal to 100% of the annual debt service and required transfers. ES-8

18 As previously discussed, the County refinanced the Series 2006 Bonds and issued the Series 2016 Bonds. The Series 2016 Bonds were issued under the new Bond Resolution. The primary differences among the calculated ratios of debt service coverage over the Forecast Period relate to the recognition of recycling revenues from operation of the MRF facility for compliance of the Bond Resolution (i.e., prior Trust Indenture calculation excluded such revenues). For more information concerning the associated changes with the Bond Resolution, please reference Section 8 of this report. The following chart provides an illustration of the recent historical calculation of coverage (before required transfers) and for the Forecast Period assuming application of the identified rate revenue adjustments under the Bond Resolution: 200% 180% Bond Resolution Debt Service Coverage (Net Revenue) 168% 177% 175% 180% 160% 140% 120% 130% 110% 141% 111% 114% 111% 118% 122% 124% 100% 80% 60% 40% 20% 0% w/o Rate Stabilization Bond Resolution Coverage Minimum Target Forecast Target The Division has experienced recurring declines in the debt service coverage since the Fiscal Year 2012, which has resulted in the recent credit rating downgrade by Moody's Investor Service ("Moody's") from A3 to Baa1 [3]. Pursuant to the Moody's credit surveillance opinion dated December 21, 2015, the Division could face further credit rating downgrade should debt service coverage fall below 1.0x and / or unrestricted cash reserves fall below 12 months operating expenses. As can be seen from the chart above the recommended and identified rate revenue increases are projected to produce sufficient revenues to generate debt service coverage equal to or above the minimum target for the majority of the Forecast Period. With respect to the liquidity (cash position) of the system, the Study assumes targeting overall unrestricted cash reserves equal to 12 months of operating expenses as mentioned in the credit surveillance opinion by Moody's. The following table provides a summary of the projected cash reserves by fund: [3] Moody's provides the following rankings for investment grade credits from highest to lowest as follows: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3. ES-9

19 Projected Ending Fund Balance ($1,000s) Fiscal Year Ending September 30, Description Fund Operations $14,583 $14,583 $14,583 $14,583 $14,583 $14,583 Fund Subaccount Customer Deposits Fund Solid Waste Management Fund Subaccount R&R 1,500 1,500 1,500 1,500 1,500 1,500 Fund Subaccount System Reserve Fund 25,425 21,177 11,385 10,871 10,428 10,025 Fund Rate Stabilization 24,999 27,282 32,140 37,219 41,714 46,505 Fund Recycling 7,345 5,299 5,299 5,299 5,299 5,299 Fund Right Of Way (ROW) Cleanup Fund Closure Fund 11,091 11,129 11,179 11,677 12,438 13,254 Fund 40162/63/64 Debt Service Sinking ,139 1,295 1,453 1,623 Fund 40170/71 Debt Service Reserve 7,711 7,711 7,711 7,711 7,711 7,711 Total Projected Available Fund Balances $93,696 $89,856 $85,116 $90,334 $95,304 $100,679 Cash Reserve Target Compliance: Projected Fund Balance Less Restricted Funds [1] $85,122 $81,149 $76,266 $81,329 $86,140 $91, Months Operating Expenses 71,089 74,418 75,621 77,361 79,721 82,136 Amount Above or Below Target $14,033 $6,731 $645 $3,968 $6,419 $9,208 [1] Amounts shown exclude debt-related funds and customer deposits. Although landfill closure reserves are restricted for purposes of this analysis such funds are considered to be available for the needs of the System recognizing that the restriction is established by BOCC action and such funds could be available during times of need or emergency should the BOCC unrestrict such funds. As can be seen from the table above, it is projected that cash reserves are expected to decline during initial period of the Study, but retain sufficient reserves to meet or exceed the minimum targeted cash reserves equal to 12 months of operating expenses. The decline in cash is associated with the low debt coverage during the initial period of the Study; absent any significant capital investment identified from the Master Plan and recognizing implementation of the recommended and identified rate adjustments the System should produce sufficient revenues to result in an increase in cash reserves by the end of the Forecast Period. For purposes of this analysis and based on discussions with Division staff, PRMG has assumed certain minimum financial performance metrics based on industry best practices in order to maintain and ultimately improve the creditworthiness of the System. The following provides a summary of the principal minimum financial metrics relied upon in development of this Study: 1. Annual debt service coverage equal to or greater than 1.2x; 2. Operating cash reserves equal to or greater than 150 days of operating expenses to provide for necessary working capital and a hedge against declines in other operating revenues (e.g., electric revenues); 3. Capital cash reserves at the greater of either: a. 6.0% of prior year's reported depreciable assets (e.g., roughly equal to 2 years of depreciation equivalent); or b. The average annual cost of the identified five (5) year or ten (10) year CIP; ES-10

20 4. Landfill closure reserves equal to at least the reported liability for closure plus one (1) year of long-term care costs incurred subsequent to the closure of the landfill; 5. Maximum amount of system outstanding debt to gross revenues ranging from 4.0x to 6.0x; and 6. Minimum amount of capital reinvestment to the System equal to five (5) percent of prior year's Gross Revenues, excluding collection revenues, or as may be determined by the County's consulting engineers. For additional information concerning compliance with these financial targets, please reference Section 8 of this report. Based on the recommended financial targets, projected cost of revenue requirements and identified rate adjustments, the net system revenue requirements were evaluated relative to the current rate structure comprised of: Residential Collection and Disposal Assessments; Disposal Facility Assessment; Assessed Billing Charge; Solid Waste Operations and Right of Way Surcharges; and Tipping Fees by Type of Waste. Costs were allocated by budgetary line item to the various charges based on a rational nexus among the costs and the respective fees. Adjustments to the allocated rates were then made to recognize benefits of an integrated solid waste operation, market comparisons, pricing incentives to discourage out-of-town waste and general rounding of rates for ease of billing. Additionally, consideration was also given to the municipal agreements, which indicated restrictions to the annual increase to the tip fees for Municipal Solid Waste ("MSW") and yard waste disposal. For additional detail concerning the methodology, allocation and design of the proposed Fiscal Year 2018 rates please reference Section 9 of this report. (Remainder of Page Intentionally Left Blank) ES-11

21 The following table provides a brief summary of the principal assessments and fees recommended for the Fiscal Year 2018: Summary of Historical, Existing, and Recommended Rates Historical Existing Recommended Description Assessments: Collection (Avg. Areas 1-5) [1] $ $ $ Disposal MSW ( Tons) Disposal Yard Waste ( Tons) Disposal Facility Assessment Charge ( Tons) Surcharges Billing Fee Early Prepayment Gross Up (4%) Gross Assessment Average for Areas 1-5 [2] $ $ $ Assessment Paid in February = 1% Discount $ $ $ Assessment Paid in January = 2% Discount Assessment Paid in December = 3% Discount Assessment Paid in November = 4% Discount Tip Fees per Ton by Waste Type MSW w/o Surcharges $31.75 $37.45 $45.45 MSW w/ Surcharges [3] Horticulture / Yard Waste C&D Class III Tires Surcharges per MSW Ton [3][4] $0.55 $0.00 $0.00 Disposal Facility Assessment per Ton [5] $12.40 $16.65 $17.25 [1] Amounts shown reflect the average fee charged for the franchise collection areas 1-5. The recommended Fiscal Year 2017 collection rates reflect the projected average cost of contracted collection per residential single family dwelling unit. [2] Reflects gross assessments before early prepayment discounts as allowed by F.S. Chapter 197. [3] Unincorporated waste generated by Commercial and Multi-Family customers is charged a gate fee per ton including the addition of the base tip fee plus applicable surcharges per ton for MSW deliveries. [4] Amounts shown are not charged to municipal customers, with exception to Fort Myers Beach, Bonita Springs, and the Village of Estero for which the County provides collection services and assess any applicable surcharges pursuant to interlocal agreement. [5] Presented for informational purposes only since the disposal facility assessment charge is charged to all customers by assessment, with exception to Hendry County customers. The bill for residential solid waste collection and disposal is collected by non-ad valorem assessment included on the ad valorem tax bill as allowed by Florida Statutes, Chapter 197, which provides a reliable basis for solid waste services and the ability to lien a property for non-payment. As can be seen above the overall residential collection and disposal assessment for unincorporated residents of the County include a mark-up to the calculated fee for the early payment discount that is extended to customers as part of the ad valorem billing process (pursuant to Florida Statutes, customers may elect to receive a discount of up to 4% if they pay all of the charges and taxes included on the ad valorem tax bill prior to the due date of the bill). Therefore, if the full 4% discount is recognized by a property owner (the majority of the property owners elect to pay early and obtain the 4% discount) the County will collect the full rate for service (after the discount is ES-12

22 applied); the mark-up of fees included on the ad valorem tax bill is customary and allows the solid waste enterprise fund to fully collect the fees for service. As can be seen above, the residential solid waste bill for collection and disposal services is expected to increase by $11 a year on average or less than a $1 per month increase. Disposal cost increases for residential customers within municipalities (excluding residents of the City of Bonita Springs, the Town of Fort Myers Beach, and the Village of Estero) served by the County may see their annual charges increase (excludes collection increases) by approximately the same amount at $11 [4] a year or less than $1 a month (i.e., assumes 0.85 tons MSW tons Horticultural times the respective disposal fee tons x the Disposal Facility Assessment charge). In order to provide additional information relative to the fees charged for service, the following table provides a summary of comparable fees charged by other Florida Counties for collection and disposal service to the existing and proposed fees for the County: Solid Waste Fee Comparison with Other Florida Counties Residential Assessment Tipping Fees Description Collection Disposal Total MSW C&D Yard Waste Tires Lee County Existing[1] [2] $ $ $53.59 $ $ $37.45 $31.75 $24.00 $80.00 Lee County FY18 [1] [2] $ $ $64.73 $ $ $45.45 $32.95 $24.72 $80.00 Other Counties with Waste-to-Energy Facilities: Broward County [3] N/A N/A $ N/A $40.00 $50.00 $ Hillsborough County [4] $ $91.32 $ $68.16 $61.81 $38.01 $ Miami-Dade County [5] N/A N/A $ $66.79 $66.79 $66.79 $ Palm Beach County [4] $ $ $ $ $ $42.00 $45.00 $25.00 $35.00 Pasco County [4] $ $62.00 $ $56.70 $56.70 $56.70 $ Pinellas County [4] N/A N/A $ $37.50 $37.50 $37.50 $37.50 Other Counties without Waste-to-Energy Facilities: Charlotte County [2] $ $41.56 $ $36.00 $36.00 $36.00 $ Collier County [4] N/A N/A $ $ $60.23 $73.92 $40.13 $ Hernando County [4] $ $ $63.05 $ $ $53.00 $20.00 $20.00 $ Manatee County [4] N/A N/A $ $40.00 $61.00 $40.00 $86.00 Polk County [2] $ $44.00 $ $36.50 $36.50 $22.00 $2.00 / Tire Sarasota County [2] N/A N/A $ $57.56 $48.96 $41.37 $ Other System Averages $ $78.66 $ $50.40 $48.68 $39.46 $ [1] Amounts shown reflect the gross assessment before early prepayment discounts. [2] Denotes residential collection service at one (1) day per week for garbage, recycling and yard waste collection. [3] Broward County residential collection includes two (2) days per week for garbage collection, one (1) day per week for recycling collection and one (1) day per month yard waste collection. [4] Denotes residential collection service at two (2) days per week for garbage collection and one (1) day per week for recycling and yard waste collection. Note garbage collection service in Pinellas County is for one (1) or two (2) days per week depending on location. [5] Miami-Dade County residential collection service includes two (2) days per week for garbage / yard waste collection and one (1) day every other week for recycling collection. As can be seen above, the County's proposed rates being recommended for adoption by the BOCC for the Fiscal Year 2018 are projected to remain comparable to and / or below the average charged by the other surveyed Counties for similar solid waste service. [4] Note that residential customers within municipalities are responsible for collection services within their boundaries and pay a separate charge for collection. Amounts shown reflect only the estimated increase in cost to the average residential customer if they were to pay the County's proposed disposal MSW and Horticultural (Yard Waste) tip fee and the assumed Disposal Facility Assessment charge per ton of delivered waste. Actual impacts to residential customers may vary due to fee application through MSTU or assessment. ES-13

23 Summary of Recommendations Based on the findings of this study the following observations and recommendations are provided for consideration by the BOCC and County administration: The existing disposal and collection fees for service are projected to be insufficient to fund the identified funding requirements of the System and it is recommended that the BOCC consider adopting and implementing the recommended rates for the Fiscal Year 2018; Recognizing the uncertainty surrounding the loss of electric revenues, changes in market conditions and pricing for recyclables, and the timing of the need for additional disposal capacity, staff should continue to closely monitor and perform annual financial projections to assess the sufficiency of System revenues to meet the expenditure needs of the System and for compliance with the rate covenants and flow of funds requirements delineated in the Bond Resolution and need for additional rate adjustments; and It is recommended that the County continue its efforts to promote recycling of waste within the County to achieve targeted recycling goals as enacted by the Florida Legislature. (Remainder of Page Intentionally Left Blank) ES-14

24 LEE COUNTY, FLORIDA SOLID WASTE REVENUE SUFFICIENCY AND RATE STUDY INTRODUCTION On behalf of the Lee County (the "County") Solid Waste Division (the "Division") of the Public Utilities Department, Public Resources Management Group, Inc. (PRMG) was tasked with the preparation of a six (6) year revenue sufficiency and rate study of the integrated solid waste management system (the "System") encompassing the Fiscal Years 2017 (the current budget year) through 2022 (the "Forecast Period"). Specifically, PRMG was tasked with: Updating the financial forecast model to analyze the financial and business activities of the Solid Waste Enterprise Fund, including evaluating changes over-time to the following components of the enterprise operations: Growth or declines in assessed units and waste tonnage deliveries by customer type, category of waste and disposal facility; Capacity utilization of the County's disposal facilities; Inflation of expenses or changes in System operations affecting costs; Contractual operating expenses and shared revenues; Long-term liabilities for landfill closure and post-closure costs; Capital funding requirements and issuance of additional debt; Cash reserves and investment income recognized by fund type and purpose (e.g., operating versus capital funds); and Compliance requirements of the System, including Financial Assurance requirements of the Florida Statutes from landfill closure and the rate covenants associated with the outstanding debt. Evaluation of the System's overall financial position and recommended financial management policy. This report provides a summary of the recent trends, study methodology, principal assumptions, findings, and an overview of the projected financial position of the Division. (Remainder of Page Intentionally Left Blank) -1-

25 SECTION 1: GENERAL OVERVIEW The Division is responsible for the disposal of solid waste for approximately 680,000 residents throughout the County and contractually responsible for disposal of waste deliveries from Hendry County associated with the shared Lee-Hendry Regional Solid Waste Disposal Facility (the "Lee / Hendry Landfill"). The Division processes approximately 870,000 tons of solid waste annually comprised primarily of: i) Garbage or Class I waste (also referred to as MSW); ii) Horticultural or Yard Waste; iii) single-stream recycling; iv) Class III waste (i.e., waste that does not leach) and Construction and Demolition debris ("C&D"); and v) biosolids or sludge from wastewater treatment plant operations. Facilities The County has received numerous awards and recognition of the System's facilities and staff operations, which represent both a significant achievement and investment made by the County and staff. The operations and facilities for the County are oriented towards minimizing landfilling of waste and promoting recycling. For the Fiscal Year 2015 the County was fourth (4 th ) in the State with a reported recycling rate by the FDEP of approximately 69%. To achieve the high rate of recycling the County provides, among other things, once a week residential single-stream recycling collection and has adopted ordinances which require mandatory recycling for commercial and multi-family residential waste, as well as, mandatory recycling of C&D wastes. The following section provides an overview of the primary disposal facilities. The Buckingham Campus shown above provides synergies for the integrated solid waste management system and includes the collocated WTE, MRF, C&D Recycling, MSW Transfer station (not pictured), fleet maintenance, tire and yard waste processing facilities. Not shown are the County's other disposal facilities including: Lee / Hendry Landfill, Compost Facility, household chemical waste, and Hendry County Transfer Stations. -2-

26 Waste-to-Energy (WTE) Facility The County's WTE facility is the primary means of disposal for all inbound waste. During the Fiscal Year 2016, the County burned approximately 642,000 tons of waste or approximately 74% of the total inbound waste delivered. Waste burned at the WTE facility is referred to as processable waste and is primarily comprised of MSW, Yard Waste, residuals from residential and C&D recycling programs, and some tire waste. Burning waste produces approximately 535 kwh of net electricity per ton, while reducing the total volume and weight of MSW by 90% and 75%, respectively. This means burning 30 tons of waste results in enough electricity to power a typical residential home in Florida for one (1) year and producing a dense ash by-product that weighs approximately 7.5 tons, but has the same volume as 3 tons of MSW. The following diagram provides an overview of a typical WTE facility operation: Source: In addition to the production of electricity and significant reduction in the volume of waste landfilled the WTE also recovers ferrous and non-ferrous metals, which are sold and recycled to help offset the cost of operation. The FDEP provides a recycling credit for each MWh of energy production equal to one (1) ton of recycling waste. For the Fiscal Year 2016, the County generated a gross electrical production of 0.61 MWh per ton processed resulting in a 0.61 recycling credit for every ton burned. It should be noted that if the County achieves a traditional recycling rate above 50% (excluding waste burned at the WTE) the credit for electrical production is equal to 1.25 tons per MWh of energy production. -3-

27 The facility operates seven (7) days a week and 24 hours a day through a contractual agreement with Covanta Lee Inc. ("Covanta"). The agreement was amended in 2006 for the expansion of the current WTE from 1,200 tons per day to the full design capacity of 1,836 tons per day. The expansion was primarily funded by the issuance of the Series 2006 Bonds. The agreement with Covanta is valid through November 30, 2024 and identifies, among other things, that: i) a minimum amount of waste must be delivered by the County (the "Guaranteed Tonnage") and processed by Covanta (the "Process Guarantee"). The Process Guarantee by Covanta is equal to 569,619 tons annually (assuming no uncontrollable events impairing operations). The Guaranteed Tonnage is established annually by written notification from the County to Covanta 90 days prior to the start of the subsequent Billing Year and must be less than or equal to the Process Guarantee; ii) Covanta is contractually responsible for the operation, maintenance, renewal and replacement of the facility and has certain performance guarantees related to the use of energy, materials and supplies required for the operation of the WTE facility; iii) Payment to Covanta is primarily comprised of an increasing service fee based on the amount of waste processed plus revenue sharing provisions equal to ten (10) percent of electrical energy sold and fifty (50) percent of any ferrous and non-ferrous metal sales. Recognizing the WTE facility is the primary means of disposal for the County it is important to note the associated risks to operations. A primary concern of operation is related to a prolonged failure of equipment due to an uncontrolled circumstance or other event impairing the function of the facility, which would result in the lack of electrical production and / or inability to process waste at the WTE. The County can divert waste to the Lee / Hendry Landfill under such circumstances but would increase the cost of disposal associated with transport and disposal, which was estimated at approximately $31 per ton pursuant to a March 2013 memorandum by the Division's then legal counsel, R. Stuart Broom (the "Broom Memo"). Pursuant to the Broom Memo, a similar event occurred to the Stanislaus Resources Recovery Facility in California in late 2011 from a failure of the generator resulting in a lack of electrical generation for an eleven (11) month period. For reference, the County generated approximately $12.1 million in net electric revenue sales for the Fiscal Year Other risks identified in the Broom Memo include the contractual obligation to pay Covanta for the guaranteed waste deliveries, as well as, a loss of parasitic electrical production from a loss in operation of the generators at the WTE facility requiring the purchase of electricity and gas for the continued burning of waste. As a result, it is important that the County maintain adequate reserves to provide financial margins to account for the potential catastrophic or uncontrollable prolonged facility outages. Recommendations concerning Division reserves are discussed in more detail in subsequent sections to this report. Material Recycling Facility (MRF) The County's MRF is collocated with the WTE at the Buckingham campus and is responsible for the processing all of the County's single stream recycling materials, which have averaged over 83,000 tons for the last four (4) years. The MRF operates using electricity produced by the WTE facility. During processing, not all materials can be recycled resulting in residuals that are routed to the WTE facility to be burned. The MRF recycling residuals have approximated 14%-15% of total inbound recycling materials for the last four (4) years. The FDEP provides credits for every ton of recycled waste. The following illustration provides an overview of the facility equipment and sorting stations. -4-

28 The processing facility is equipped with an electronically-controlled conveyor belt, an optical sorter, several screens, and magnets that sort the recyclable material by product. The MRF can process up to 30 tons of recyclable material per hour. The following chart indicates the materials processed by weight and by revenue generation for 2016: 100% FY 2016 Recycled Materials by Weight and Revenue 80% 60% 40% 20% Aluminum Other Plastic Cardboard Glass Paper 0% -20% % By Weight % By Revenue

29 As can be seen from the prior table, over 85% of the recycled materials by weight is represented by paper, glass, and cardboard and accounts for approximately 60% of the revenue. This is primarily due to the cost of recycling glass and relatively higher market rates for the sale of aluminum and plastics. Operations for the County's MRF is contractually provided by ReCommunity and are responsible for the processing, recycling, marketing, and sale of recycled materials. The agreement for operation of the MRF was extended through April 30, Pursuant to the service agreement, the contractor is paid a service fee, which is netted against the revenue from the sale of recyclables. The County shares in revenue from the sale of recyclables based on a function of the total amount, composition, and market value of the materials. The recent declines in average commodity rate for recycled materials have had a negative effect on revenues. The chart below provides an illustration of the recent values for recycled materials: The County reported declines in net recycled material revenue generated from operation of the MRF from $3.0 million in FY 2011 to $1.6 million in FY 2016 or an approximate 47% decline. While the average monthly rate has generally declined, the County has reported a significant rebound in the average monthly commodity price in the current FY While the rebound is encouraging, due to price volatility and recognizing the County is still in process of approval of a new contracted recycling operations agreement, which would affect forecasted revenues, for purposes of this analysis the forecast assumes $1.0 million in recycling revenues beginning with the Fiscal Year 2018 and held constant for the remainder of the Forecast Period. It is assumed that should the County realize excess funds derived from additional curbside recycling revenues, such amounts could be used to fund additional future capital needs. -6-

30 Construction and Demolition Debris (C&D) Recycling Facility The County's C&D Recycling Facility is collocated with the WTE and MRF facilities at the Buckingham Campus and is responsible for the recycling of delivered Class III and C&D materials, which have averaged approximately 75,000 tons for the last four (4) years. Of the processed waste approximately 23,050 tons were reported as recovered and recycled or repurposed as a landfill amendment for drainage or road maintenance. Approximately 41,000 tons were burned for energy at the WTE facility and the remainder of the waste that could not be recycled or burned was landfilled. The C&D Recycling Facility provides a benefit to the County by way of increasing the recycling rate of waste and consequently reducing the amount of landfilled waste. The facility is owned and operated by the County and incorporates mechanical separation and manual separation of materials. The following illustration provides a photograph of the initial mechanical separation of C&D materials: Lee County C&D Debris Recycling Facility shown above. The following link provides a demonstration of the facility in operation: -7-

31 Lee / Hendry Regional Landfill The Lee / Hendry Regional Landfill (the "Lee / Hendry Landfill") was constructed and placed in service to support the disposal of waste associated with operation of the System. It is located in Hendry County in close proximity to the County and State Road 82. The Lee / Hendry Landfill primarily serves to receive and dispose of inert ash produced by the WTE facility approximating 160,000 tons annually, Class III waste approximating 12,000 tons annually, 10,0000 tons of MSW waste and minor amounts of sludge not used for composting. The following provides an overview of the facility: The Lee / Hendry Regional Landfill shown above includes an Ash Monofill, Class I and Class III landfill sites, leachate management and deep injection well, and the County's composting facility. The Lee / Hendry Landfill primary disposal sites include: Ash Monofill: 36 active acres / Fully developed / Capacity Utilization = 37%; Class III: 25 active acres / Expandable up to 128 acres/ Capacity Utilization = 15%; and Class I: 38 active acres/ Expandable up to 90 acres / Capacity Utilization = 52%. The County entered into an interlocal agreement with Hendry County whereby the County is required to receive and dispose of waste generated by residents and businesses within Hendry County. In addition, the County is responsible for the operation and maintenance of two (2) transfer stations located in Hendry County to receive and transfer waste to the County's disposal facilities. Only waste generated within Lee and Hendry Counties may be landfilled at the Lee / Hendry Landfill. As a condition of securing adjacent landowner support for the development of the Lee / Hendry Landfill, the County entered into a separate agreement (the "Hendry Landowner Agreement") which provided for, among other things, limitations on the landfill height, runoff -8-

32 mitigation / setbacks and landfill use being primarily for the disposal of ash and minimal disposal of MSW waste. Composting Facility The County owns and operates a composting facility at the Lee / Hendry Landfill (shown in the below photograph), which receives approximately 35,000 tons of mulched yard waste and approximately 64,000 tons of sludge to produce approximately 30,000 tons of compost annually. The compost is primarily sold in bulk to local landowners for agricultural uses (e.g., orange groves, etc.). The remaining compost is sold to retail customers in bags or by cubic yard / ton at the County s facilities. The County's composting facility utilizes specialized equipment, shown above, to periodically turn the mulch and sludge amendment to reduce heat buildup from bacteriological decomposition to more efficiently produce compost for resale. SECTION 2: ENTERPRISE FUND AND REVENUE SUFFICIENCY METHODLOGY The Division operates and is established as an enterprise fund. As such, the enterprise fund must have revenues equal to the cost of services provided by the System and the County must establish rates sufficient to cover the cost of operating, maintaining, repairing and financing the System. According to the Governmental Accounting Standards Board, "Enterprise Funds should be used to account for operations that are financed and operated in a manner similar to private business enterprises where the intent of the governing body is that costs of providing services to the general public on a continuing basis be financed or recovered primarily through user charges." The Division has historically maintained a positive financial position and annually reevaluates the sufficiency of rate / fee revenues through the budgetary and residential assessment setting procedures. The management within the Division is also responsible for evaluation of monthly financial and operating statistics. -9-

33 In order to evaluate the existing and forecasted financial position of the System the following methodology was recognized: 1. An evaluation of the service area requirements for the Division was reviewed. This included an analysis of the recent historical trends in customers served and waste generation tonnage statistics in order to provide: i) a representative forecast of System needs from a financial standpoint; and ii) a projection of rate revenues consistent with the projected service area needs. 2. Collection and Disposal service related costs were independently evaluated in order to determine the sufficiency of the respective collection and disposal fees for services. A revenue and cost allocation review was performed by budgetary line item and reviewed with staff. 3. A projection of the Net Revenue Requirements funded from disposal fees was analyzed utilizing the following approach: Gross Revenues Gross Revenue Requirements + Cost of Operation and Maintenance + Capital Expenditures + Fund Transfers / Covenant Compliance Electric / Other Revenue and Income = Net Revenue Requirements (Funded from Assessment / Tip Fees) 4. Included as a component of Net Revenue Requirements was the development of a funding plan for the System capital equipment and facility improvements. The funding of these capital expenditures recognized the use of available cash reserves or user fees. Additional debt was assumed to aid in financing new disposal facilities during the Forecast Period. 5. The cash position of the System was evaluated and taken into consideration through the identification of targeted minimum ending cash balances in order to adequately reserve working capital balances for operational risks (e.g., electrical production outages, changes in market values of recyclables, etc.) and provide for finance of future capital needs of the System. 6. Estimate the necessary annual System rate adjustments that would be required to fund the Net Revenue Requirements and meet the overall financial needs of the System. -10-

34 SECTION 3: AGREEMENTS Approximately seventy percent (70%) of the operating expenses of the System are related to payments to private providers for contractual operations or contracted services. In addition, the County generates a significant portion of revenues through contractual agreements including municipal interlocal agreements for waste disposal and from electrical sales agreement with Rainbow Energy Marketing Corporation (REMC). This section provides a brief overview of the principal agreements affecting operations for the County. Contract Operations The principal contractual operating expenses are associated with the solid waste collection services and operations of the various disposal facilities of the System. The following agreements are discussed in order of greater to lesser cost of operation to the System: Franchised Collection Services Franchised collection services represent approximately $23.7 million or 33% of total operating expenses of the System. The County has contracted with several waste haulers to collect and dispose of waste for the following six (6) franchised collection areas: Franchise Areas: Area 1 - Incorporated: South / Bonita Springs, Fort Myers Beach, Village of Estero [*] Area 2 - Unincorporated: Southwest / Captiva, Iona, McGregor Area 2 - Incorporated: Village of Estero [*] Area 3 - Unincorporated: Southeast / San Carlos Area 3 - Incorporated: Village of Estero [*] Area 4 - Unincorporated: Northeast / Leigh Acres, Alva Area 5 - Unincorporated: Northwest / Pine Island, North Fort Myers Area 6 - Unincorporated: Northwest / Boca Grande [*] The Village of Estero was recently incorporated and subsequently entered into interlocal agreement with the County. Residents of the Village of Estero are provided collection service through franchise areas 1, 2, and 3. Collection services include automated collection and are serviced by several private hauling providers. Collection services include once-a-week garbage, yard waste, and recycling collection for single-family residences. Commercial and multi-family customers may contract directly with franchised haulers for service. With exception to commercial and multi-family customers, the -11-

35 County pays the franchise haulers on a monthly basis for collection services. Each franchise area is charged an established rate per residential unit, which may be indexed annually. To administer the collection program, the County charges the franchise haulers a franchise fee at 5.5% of the haulers total collection revenues. With respect to the City of Bonita Springs, the Town of Fort Myers Beach, and the Village of Estero the County remits any associated franchise fee collections to the respective municipalities. To recover the cost of collection from residents the County in turn charges an annual collection assessment that varies by service area. It should be noted that due to the location of approximately 1,230 residences in Boca Grande (Area 6), located on the Gasparilla barrier island, the County has entered into a service extension agreement with Waste Management Inc. of Florida to dispose of collected waste in Boca Grande at the Charlotte County disposal facilities. Waste-to-Energy Facility (WTE) Operations Contract operations for the WTE represent a net cost of approximately $23.1 million (gross expense before revenue sharing = $24.6 million) or 33% of total operating expenses of the System. The County entered into agreement with Covanta Lee, Inc. ("Covanta") dated January 31, The agreement is valid through November 30, 2024, unless otherwise terminated or extended in accordance with the agreement. Covanta is responsible for the operation, maintenance, and repair of the WTE, with exception to repairs related to uncontrollable circumstances such as hurricane, flooding, etc. The agreement provides for certain performance guarantees on behalf of both parties. The County is responsible for providing a minimum amount of processable waste, defined as the Guaranteed Tonnage, which was 569,619 tons (i.e., 85% of WTE design capacity) for the Fiscal Year The County exceeded this requirement during the Fiscal Year 2016 by approximately 72,000 tons or 12% of the guarantee. Covanta has a responsibility to process the tonnage delivered up to the Processing Guarantee as defined by agreement. Covanta also has a maximum performance guarantee on the use of certain materials and supplies used in the burning and generation of electricity. Pursuant to Section 6.01 of the agreement, Covanta is compensated based on the following formula: Service Fee = OM + ETF + PT + EC - RRR - LC +/- MD =/- MA OM = Operation and Maintenance Charge represents a base fee of $19.9 million for a Process Guarantee of 569,619 during the Fiscal Year 2016, which includes annual allowances for increases to the OM charges for inflation ETF = Excess Tonnage Fee represents an additional charge per ton of processed waste above the Processing Guarantee of 569,619 to incentivize the additional processing of waste by Covanta. The fee varies based on if the tonnage above the Process Guarantee is below or exceeds 90% Availability of the WTE facility. The ETF represents approximately $1.8 million for the Fiscal Year PT = Pass Through Costs represents costs associated with operation of the WTE including electric, water, sewer, reclaimed, taxes, insurance, environmental testing, etc. Pursuant to discussions with -12-

36 Division staff, beginning in the Fiscal Year 2017, the purchase of chemicals will also be included as a PT cost. Such amounts are based on actual costs exclusive of any markup for profit and were approximately $1.3 million (exclusive of chemical expenses) for the Fiscal Year EC = Energy Credit represents sharing in the electric sales revenues generated from the operation of the WTE at 10% of the net electric revenues. The EC was approximately $1.3 million for the Fiscal Year 2016; however, has averaged approximately $1.6 million annually during the recent historical period. The shared revenue is deducted from the County's charges. RRR = Recovered Resources Revenues representing the sharing in the recovered material sales (i.e., sale of recovered ferrous and non-ferrous metal scrap) revenues generated from the operation of the WTE at 50% of the gross sales revenues. Covanta handles marketing and sales of the metals and provides an offset to the County's bill. The County recently upgraded the metal recovery equipment through an improvement to the magnet, which is expected to improve metal recovery separation from wasted ash. The total revenues from the sale of metals were approximately $1.8 million during the Fiscal Year 2016 of which approximately $0.9 million or 50% was remitted to the County by way of a reduction to the County's contract operations charges. LC = Landfill Charge represents a credit to the County for Bypassed Waste (i.e., waste which was processable and which the contractor elected not to process) equal to the tons of Bypassed waste times the Landfill Charge. No landfill charges were assessed during the Fiscal Year MD = Monthly Damages represents credits from Covanta to the County for exceeding performance guarantees on the maximum use of supplies or materials such as dolomitic lime, propane and / or water consumption. MA = Monthly Adjustment represents a true-up performed monthly and at the close of the fiscal year. The end of year annual settlement for the Fiscal Year 2016 resulted in a $0.2 million increase in charges to the County primarily related to invoicing of dolomitic lime and the Availability bonus for exceeding 90% Availability. Materials Recycling Facility (MRF) Operations The MRF is contractually operated by ReCommunity Holdings doing business as FCR LLC ("ReCommunity"). ReCommunity is responsible for the processing and remarketing of single stream recycling delivered and processed at the County's MRF facility. The agreement for operation of the MRF has been amended several times since originally entered into August 24, The current contract is valid through September 30, 2017 and Division staff has indicated that it plans to recommend approval of a new agreement with ReCommunity to the Board at its regular June 20, 2017 meeting, which would govern contracted recycling operations for a five (5) year period commencing Fiscal Year 2018 through Fiscal Year 2022 with an option for two (2) 2- year renewals. However, for purposes of this analysis it is assumed that the contracted services agreement for recycling operations would be renewed or extended under the current terms and conditions for the duration of the Forecast Period. Pursuant to agreement, ReCommunity must compensate the County monthly for a portion of the recycling revenues derived monthly plus a host fee and any overages for excessive residue -13-

37 generated from operations. Therefore, the actual cost of operation is not reported to the County. The shared revenues with the County are calculated based on the addition of a base fee of $10.30 per ton of material delivered + 70% x $16.01 per ton for materials received with an Average Commodity Revenue ("ACR") of marketed recyclables exceeding $62.85 for total deliveries. Based on the delivery of recyclables and market value of the recyclables the County received approximately $1.2 million in net recycling revenues (i.e., net of remittances to municipalities), during the Fiscal Year It should be noted that the County has budgeted for the Fiscal Year 2017 approximately $0.4 million in recycling revenue remittances pursuant to interlocal agreements to the Cities of Cape Coral, Fort Myers, and Sanibel pursuant to interlocal agreements with the municipalities and based on the municipalities proportionate share recyclable tonnage delivered to the County. Lee / Hendry Regional Landfill Operations Contract operations for the Lee / Hendry Landfill represent a cost of approximately $1.2 million annually or 2% of total operating expenses of the System. The County entered into agreement with Waste Management Inc. of Florida ("WMI") on February 2, 1994 with an initial ten (10) year term and an additional ten (10) year renewal option. Pursuant to information provided by Division staff, the current agreement is indicated to terminate with no additional renewal options on September 30, The agreement provides for the reimbursement of actual cost plus (+) an approximate thirty percent (30%) markup for applicable costs plus (+) reimbursement of equipment taxes and other costs of operation plus (+) an indemnity rate of $1.33 per ton of waste landfill by WMI. Electric Sales Agreements Seminole Electric Cooperative, Inc. The County entered into the electric power purchase agreement with the Seminole Electric Cooperative Inc. (previously defined as "Seminole Electric") on August 15, The original agreement term was established through December 31, 2028; however, it was terminated by SEC effective as of December 31, 2016 pursuant to Section of the electric sale agreement. It should be noted that Seminole Electric terminated the agreement with the County associated with excess electrical capacity resulting from the recent loss of its second largest member / customer the Lee County Electric Cooperative in December The prior agreement, which was active for three months of Fiscal Year 2017, identifies three (3) payments to the county including: i. Energy sales payment based on the net electricity sold to Seminole Electric times (x) the offpeak or on-peak rate (i.e., approximately $27 per MWh) indexed monthly based on the twelve (12) month rolling average of Seminole Electric's fuel costs. The County reported approximately $9.0 million in energy sales during the Fiscal Year Such payments terminated with the agreement subsequent to December 31, 2016; PLUS ii. Capacity payment is based on $8.13 per kw month beginning on January 1, 2012 and escalated at three and three quarters percent (3.75%) each calendar year, with the first adjustment to take place on January 1, 2013, and continuing each January 1 throughout the -14-

38 Capacity Payment Term. For the Fiscal Year 2016, the County reported a capacity payment of $4.6 million. Such payments terminated with the agreement subsequent to December 31, 2016; PLUS iii. Renewable energy credit ("REC") payment is based on $5.00 per kw as of January 1, 2012 and escalated at three and three quarters percent (3.75%) each calendar year, with the first adjustment to take place on January 1, 2013 through the REC Term. The REC Term terminated effective December 31, 2014 and the County no longer receives REC payments from Seminole Electric. Rainbow Energy Marketing Corporation. On November 1, 2016 the County entered into an agreement with Rainbow Energy Marketing Corporation (REMC) to locate wholesale markets for electric energy and to sell and dispatch energy to such markets. REMC offers three (3) services to the County: i. Short-term Marking Services, which represents services less than 31 days of duration; ii. Long-term Marketing Services, which represents services greater than 31 days and less than 365 days of duration; and iii. Scheduling Services When REMC enters into a transaction with a customer, REMC purchases energy from the County, which is then sold and dispatched. The County s revenues associated with energy market sales are net of transmission, marketing, and imbalance fees. It should be noted that the Public Utility Regulatory Policies Act of 1978 ("PURPA"), as amended, requires that all investor owned utilities (IOUs) purchase electricity generated by the County's WTE and conveyed to the grid since the WTE is considered a qualified small renewable energy producer [5]. The projection of gross annual electric revenue sales are estimated at approximately $6.5 million by the end of the Forecast Period, representing a material decline in revenues. The County will need to offset such losses in revenues, to the extent possible, with reductions in controllable expenses or increases to disposal fees. Interlocal Agreements As previously discussed, the County provides waste disposal services to incorporated residents throughout the County. Services to municipalities within the County are provided through interlocal agreements with the Cities of Bonita Springs, Cape Coral, Fort Myers, Sanibel, the Town of Fort Myers Beach, and the Village of Estero. The current interlocal agreements will all terminate September 30, The County also entered into interlocal agreements with Collier, Charlotte and Hendry County for other purposes as discussed in greater detail below: [5] Defined as an entity not engaged in the electric business which generates renewable energy from a facility of eighty (80) megawatts or less. -15-

39 City of Bonita Springs and Town of Fort Myers Beach The City of Bonita Spring's and the Town of Fort Myers Beach entered into the current agreements for collection and disposal services with the County in August 2010 and September 2010, respectively. The term for the agreements shall terminate September 30, 2020 with the option for the parties to renew for up to two (2) additional five (5) year terms. Pursuant to the terms of the agreement between the parties, the County is and shall be responsible for the collection, billing, customer service, and disposal of MSW, vegetative waste, and residential recyclable material from within the municipalities. The County shall also be responsible for planning and developing additional solid waste disposal capacity and / or facilities that are environmentally sound and economically practical in order to provide disposal services for additional MSW generated by the municipalities due to growth. The municipalities agree, to the extent that it may lawfully do so, to cause its MSW, vegetative waste and recyclable materials to be directed to the County's System, or other County designated facilities, for the term of the agreement. The County is also responsible for providing a collection point for the disposal of household hazardous waste. The County provides equivalent service and charges residents within the municipalities in the same manner as it does the unincorporated residents of the County. It should be noted that: i) the County remits all franchise fee revenues collected from the franchise haulers for the municipalities in franchise Area 1; and ii) the County is limited by the rate at which it may escalate the MSW tip fee charged to residents at a not-to-exceed factor of six percent (6%) per year from the then current Fiscal Year 2011 MSW tip fee of $54.00 per ton. The revenue from current charges associated with the municipalities of Franchise Area 1 is estimated at approximately $4.8 million annually and does not consider any revenues generated from the sale of recycled and recovered materials from operation of the WTE and MRF, which the County retains to offset the cost of operation. Village of Estero The Village of Estero was recently incorporated during the Fiscal Year 2015 on December 31, Subsequent to its incorporation the Village of Estero began negotiations with the County in order to continue solid waste collection and disposal activities. On September 7, 2016 the County entered into agreement with Estero under similar terms and conditions as that of the interlocal agreements with the City of Bonita Springs and the Town of Fort Myers Beach. The new agreement will terminate concurrently with the interlocal agreements of the City of Bonita Springs and Town of Fort Myers Beach on September 30, 2020 with the option for the parties to renew for up to two (2) additional five (5) year terms. Pursuant to the agreement, the County remits any associated franchise revenues back to the Village of Estero. City of Cape Coral The City of Cape Coral entered into the current and amended agreement for disposal only services (i.e., the County does not administer or provide collection services) with the County on November 8, The term for the agreement shall terminate September 30, 2020 with the option for the all parties to renew for up to two (2) additional five (5) year terms. Pursuant to the terms of the agreement between the parties, the County is and shall be responsible for the disposal of MSW, vegetative waste, and recycled materials recovered from within the municipality. The County shall also be responsible for planning and developing additional solid waste disposal capacity and / or facilities that are environmentally sound and economically practical in order to provide disposal -16-

40 services for additional MSW generated by the municipality due to growth. The municipality agrees, to the extent that it may lawfully do so, to cause its MSW, vegetative waste and recyclable materials to be directed to the County's System, or other County designated facilities, for the term of the agreement. The County is also responsible for the administration and collection of household hazardous waste within the municipality. Pursuant to a recent amendment to the interlocal agreement with the City, the County shall accept all biosolids produced by the City's wastewater treatment facilities per wet ton delivered and charged at the same rate as that charged to the City of Fort Myers, which may be escalated annually as allowed by agreement. The County charges the customers within the municipality through both a Municipal Services Taxing Unit (previously defined as the "MSTU") and a tip fee for MSW or Yard Waste delivered to the County. Pursuant to the agreement, the County is limited by the rate at which it may: a) charge customers through the MSTU not-to-exceed 0.5 mils; and b) escalate the MSW and Yard Waste tip fee not-to-exceed a factor of six percent (6%) per year from the established MSW tip fee of $55.00 per ton and Yard Waste tip fee of $17.60 per ton during the Fiscal Year The County has since lowered the MSTU and tip fees below levels established during the Fiscal Year It should also be noted that the County charges customers within the municipality the same tip fee as all other customers of the System, with exception to the exclusion of the solid waste operation and right-of-way surcharges. The municipality benefits from the remittance of the net recovered material sales revenues from the proportion of recycled materials delivered by the municipality to the County's MRF. The revenues derived from charges for disposal service under existing rates from waste generated and delivered to the County is estimated at approximately $5.9 million annually. This does not consider any revenues from the disposal of sludge or sale of recovered materials from operation of the WTE facility, which are retained by the County (i.e., ferrous and non-ferrous revenues) to offset the cost of operation for the WTE facility. City of Fort Myers The City of Fort Myers entered into the current agreement for disposal only services (i.e., the County does not administer or provide collection services) with the County in June The term for the agreement shall terminate September 30, 2020 with the option for both parties to renew for up to two (2) additional five (5) year terms. Pursuant to the terms of the agreement between the parties, the County is and shall be responsible for the disposal of all MSW, residential vegetative waste, and residential recycled materials recovered from within the municipality. The County shall also be responsible for planning and developing additional solid waste disposal capacity and / or facilities that are environmental sound and economically practical in order to provide disposal services for additional MSW generated by the municipality due to growth. The municipality agrees, to the extent that it may lawfully do so, to cause all its MSW, residential vegetative waste and residential recyclable materials to be directed to the County's System, or other County designated facilities, for the term of the agreement. The County is also responsible for the grinding, shredding, screening, etc. of a portion of the municipality's horticultural waste and produces a mulch, graded material substantially free of plastics and other non-organic contaminates and make available and load into municipal vehicles, up to 15 tons per week of this mulch material for the municipality's use. The County charges the customers within the municipality through both a non-ad valorem assessment and a tip fee for MSW / Yard Waste delivered to the County. The County agrees that -17-

41 to the extent that it may lawfully do so, the tipping fee charged to the municipality shall be the same as the fee charged to similar users within the unincorporated areas of the County and other municipalities within the County. Pursuant to the agreement, the County is limited by the rate at which it may: a) charge customers a disposal facility assessment charge not-to-exceed $40.00 per ERU as defined by the agreement; and b) escalate the tip fee at a not-to-exceed a factor of six percent (6%) per year from the established Fiscal Year 2009 MSW disposal tip fee of $54.00 per ton and Yard Waste disposal tip fee of $17.60 per ton. The County has since lowered the disposal facility assessment charge and tip fees below levels established during the Fiscal Year It should also be noted that the County does not charge customers within the municipality any solid waste operation and right-of-way surcharges. The municipality also benefits from the remittance of the net recovered material sales revenues based on the relative proportion of recycled materials delivered by the municipality to the County's MRF. Pursuant to the agreement, the County shall also accept all biosolids produced by the City's wastewater treatment facilities at a rate of $27.00 for disposal and $5.30 for transportation per ton (rates established effective October 1, 2011) which may be escalated per conditions of the agreement. The revenues derived from charges for disposal service under existing rates from waste generated and delivered to the County, including biosolids, is estimated at approximately $2.6 million annually. This does not consider any revenues from the sale of recovered materials from operation of the WTE facility, which are retained by the County (i.e., ferrous and non-ferrous revenues) to offset the cost of operation for the WTE facility. City of Sanibel The City of Sanibel entered into the current agreement for disposal only services (i.e., the County does not administer or provide collection services) with the County in August The term for the agreement shall terminate September 30, 2020 with the option for both parties to renew for up to two (2) additional five (5) year terms. Pursuant to the terms of the agreement between the parties, the County is and shall be responsible for the disposal of MSW, vegetative waste, and recycled materials recovered from within the municipality. The County shall also be responsible for planning and developing additional solid waste disposal capacity and / or facilities that are environmental sound and economically practical in order to provide disposal services for additional MSW generated by the municipality due to growth. The municipality agrees, to the extent that it may lawfully do so, to cause its MSW, vegetative waste and recyclable materials to be directed to the County's System, or other County designated facilities, for the term of the agreement. The County charges the customers within the municipality through both a non-ad valorem assessment and a tip fee for MSW / Yard Waste delivered to the County. The County agrees that to the extent that it may lawfully do so, the tipping fee charged to the municipality shall be the same as the fee charged to similar users within the unincorporated areas of the County and other municipalities within the County. Pursuant to the agreement, the County is limited by the rate at which it may: a) charge customers a disposal facility assessment charge not-to-exceed $40.00 per ERU as defined by the agreement; and b) escalate the tip fee at a not-to-exceed a factor of three percent (3%) per year from the established Fiscal Year 2011 MSW disposal tip fee of $55.00 per -18-

42 ton and Yard Waste disposal tip fee of $17.60 per ton. The County has since lowered the disposal facility assessment charge and tip fees below levels established during the Fiscal Year It should also be noted that the County does not charge customers within the municipality any solid waste operation and right-of-way surcharges. The municipality also benefits from the remittance of the net recovered material sales revenues based on the relative proportion of recycled materials delivered by the municipality to the County's MRF. The revenues derived from charges for disposal service under existing rates from waste generated and delivered to the County is estimated at approximately $0.3 million annually. This does not consider any minor revenues from the sale of recovered materials from operation of the WTE facility, which are retained by the County (i.e., ferrous and non-ferrous revenues) to offset the cost of operation for the WTE facility. Hendry County As previously discussed, the County entered into an interlocal agreement with Hendry County whereby the County is required to receive and dispose of waste generated by residents and businesses within Hendry County. In addition, the County is responsible for the operation and maintenance of two (2) transfer stations located in Hendry County to receive and transfer waste to the County's disposal facilities. Only waste generated within Lee and Hendry Counties may be landfilled at the Lee / Hendry Landfill. As a result, the County was allowed to construct the landfill within Hendry County. Services are charged to customers of Hendry County through tip fees, which may include a $5 surcharge or higher surcharge for tires remitted back to Hendry County pursuant to the agreement. Other Agreements Lee / Hendry Regional Landfill / Landowner Agreement As previously discussed, in order to mitigate objections in the permitting of the Lee / Hendry Landfill from neighboring landowners, the County entered into the agreement June 23, 1993 with several neighboring landowners including Duda & Sons, Inc., Cooperative Producers, Inc., and Turner Foods Corporation. The agreement provides for, among other things, limitations on the landfill height, runoff mitigation / setbacks and intended use of the landfill being primarily for the disposal of inert ash and minimal disposal of MSW waste. Prolime Corporation Biosolids and Compost Purchase The County entered into agreement with Prolime Corporation on September 25, 2012 for the processing of wastewater treatment plant biosolids and resale of compost. The Prolime Corporation collects wastewater sludge within Collier County for disposal at the County's composting facility. The fees for service may be escalated for inflation based on the consumer price index as published by the United States Bureau of Labor Statistics. The revenues derived from the delivery of biosolids to the County during the Fiscal Year 2016 were approximately $165,000. (Remainder of Page Intentionally Left Blank) -19-

43 SECTION 4: SOLID WASTE ASSESSMENT AND FEES The County provides waste disposal services to unincorporated and incorporated residents throughout the County. Services to municipalities within the County are provided through interlocal agreements as discussed in Section 3 of this report. The County principally charges customers for waste disposal services through: i) an annual non-ad valorem assessment or MSTU included as a component of the tax bill as allowed by Florida Statutes, Chapter 197, which provides a reliable source of revenues and the ability to lien a property for non-payment; and / or ii) a tipping fee paid per ton of waste delivered to the County's disposal facilities. The following provides a brief discussion of the existing rate structure components as understood by PRMG: Residential Collection Assessment: Charged to franchised residential customers receiving collection services (i.e., the franchised areas 1-6) administered by the County and to recover the direct cost of collection services from private franchised haulers. Residential Disposal Assessment: Charged to franchised residential customers for MSW and Yard Waste disposal services. The fee is currently based on average disposal rates of 0.8 tons of MSW and 0.24 tons of yard waste per residential unit. However, it is assumed that for Fiscal Year 2018 the assessed disposal rates will increase to 0.85 and 0.26 tons for MSW and yard waste, respectively, to reflect actual historical tonnage generation Disposal Facility Assessment: Charged to all customers of the System to recover a portion of the disposal costs which benefits all disposal customers of the System (e.g., costs related to WTE, Landfill, etc.). The fee is typically a fixed fee charged either by non-ad valorem assessment, but may also be charged pursuant to interlocal agreement with the municipalities by MSTU. In some instances, the Disposal Facility Assessment may be considered as a means to promote flow control for the System. Billing Charge: Charged to all customers of the System related to assessments, MSTU or other fees associated with the tax roll for which the Division is charged a fee by the County's property tax appraiser and collector. The billing fee represents a direct pass-through of such costs to the Division. Solid Waste Operations and Right of Way Surcharges: Charged to customers within the County's franchised service areas, including residential customers via the non-ad valorem assessment and commercial / multi-family customers via the gate / tip fees. No Solid Waste Operations surcharges were applied to the residential assessment for the current Fiscal Year Tipping Fees by Type of Waste: Charged to customers not assessed the Residential Disposal Assessment for delivery of waste based on actual weighed deliveries. The following presents the recent and current rates charged by the County for collection and disposal services: -20-

44 Summary of Recent Historical and Existing Rates Description Assessments: Collection (Avg. Areas 1-5) [1] $ $ $ Residential Credit [2] (5.72) Disposal MSW Disposal Yard Waste Disposal Facility Assessment Charge Surcharges Billing Fee Early Prepayment Gross Up (4%) Gross Assessment Average for Areas 1-5 [3] $ $ $ Assessment Paid in February = 1% Discount $ $ $ Assessment Paid in January = 2% Discount Assessment Paid in December = 3% Discount Assessment Paid in November = 4% Discount Tip Fees per Ton by Waste Type: MSW w/o Surcharges $30.00 $31.75 $37.45 MSW w/ Surcharges [4] Horticulture / Yard Waste C&D Class III Tires Surcharges per MSW Ton [4][5] $4.33 $0.55 $0.00 Disposal Facility Assessment per Ton [6] $6.00 $12.40 $16.65 [1] Amounts shown reflect the average fee charged for the primary franchise collection areas 1-5. [2] Represents a reduction to the franchised residential assessment from recycling fund reserve balances derived from retained recycling revenues from prior periods and generated by the same customer class to mitigate increases in the cost of service. No credits were applied to the residential assessment for the current Fiscal Year 2016 or [3] Reflects gross assessments before early prepayment discounts as allowed by F.S. Chapter 197. [4] Unincorporated waste generated by Commercial and Multi-Family customers is charged a gate fee per ton including the addition of the base tip fee plus applicable surcharges per ton for MSW disposal. [5] Amounts shown are not charged to municipal customers, with exception to the City of Bonita Springs, the Town of Fort Myers Beach, and the Village of Estero for which the County provides collection services. [6] Presented for informational purposes only since the disposal facility assessment charge is charged to all MSW customers by assessment, with exception to Hendry County customers. As can be seen above, the residential collection and disposal assessment for unincorporated residents of the County include an early payment discount that is extended to customers as part of the ad valorem billing process; pursuant to Florida Statutes, customers may elect to receive a discount of up to 4% if they pay all of the charges and taxes included on the ad valorem tax bill prior to the due date of the bill. The majority of customers elect to pay early and receive the full 4% discount; mortgage payments for residential homes typically include an allowance for escrow for the early prepayment of the estimated tax bill, which contributes to the high rate of early prepayments. The County began adjusting for the early prepayment with the Fiscal Year The following chart as prepared by Division staff provides additional history of the average residential assessment: -21-

45 As can be seen from the table above, the residential assessment was increased from the Fiscal Year 2005 through 2007, which coincides with the expansion of the WTE and issuance of the refunded Series 2006 Bonds. Approximately $34 million in cash reserves were subsequently utilized during the Fiscal Year 2011 to defease portions of the then outstanding Solid Waste System Revenue Refunding, Series 2001 Bonds (the "Series 2001 Bonds" / no longer outstanding). The reduction in debt service was a factor in the reduction of the residential assessment and tip fees as shown below: Historic Tipping Fees for the Solid Waste System Fiscal Year Unincorporated Area [*] Incorporated Area 2005 $54.82 $ $57.51 $ $58.40 $ $59.77 $ $59.93 $ $61.48 $ $61.44 $ $47.62 $ $37.74 $ $34.93 $ $34.33 $ $32.30 $ $37.45 $37.45 Source: Lee County Solid Waste Division [*] Includes Surcharges As can be seen above, the tip fees were reduced subsequent to the defeasance of the Series 2001 Bonds during the Fiscal Year It is notable that for the unincorporated areas the fees are currently below levels charged during the last eleven (11) years and also below levels in effect -22-

46 from the Fiscal Years when the County had entered into the current interlocal agreements for service with municipalities as described in Section 3 of this report. In order to provide additional information relative to the fees charged for service, the following table provides a summary of comparable fees charged by other Florida Counties for collection and disposal service to the existing and proposed fees for the County: Solid Waste Fee Comparison with Other Florida Counties Residential Assessment Tipping Fees Description Collection Disposal Total MSW C&D Yard Waste Tires Lee County Existing[1] [2] $ $ $53.59 $ $ $37.45 $31.75 $24.00 $80.00 Lee County FY18 [1] [2] $ $ $64.73 $ $ $45.45 $32.95 $24.72 $80.00 Other Counties with Waste-to-Energy Facilities: Broward County [3] N/A N/A $ N/A $40.00 $50.00 $ Hillsborough County [4] $ $91.32 $ $68.16 $61.81 $38.01 $ Miami-Dade County [5] N/A N/A $ $66.79 $66.79 $66.79 $ Palm Beach County [4] $ $ $ $ $ $42.00 $45.00 $25.00 $35.00 Pasco County [4] $ $62.00 $ $56.70 $56.70 $56.70 $ Pinellas County [4] N/A N/A $ $37.50 $37.50 $37.50 $37.50 Other Counties without Waste-to-Energy Facilities: Charlotte County [2] $ $41.56 $ $36.00 $36.00 $36.00 $ Collier County [4] N/A N/A $ $ $60.23 $73.92 $40.13 $ Hernando County [4] $ $ $63.05 $ $ $53.00 $20.00 $20.00 $ Manatee County [4] N/A N/A $ $40.00 $61.00 $40.00 $86.00 Polk County [2] $ $44.00 $ $36.50 $36.50 $22.00 $2.00 / Tire Sarasota County [2] N/A N/A $ $57.56 $48.96 $41.37 $ Other System Averages $ $78.66 $ $50.40 $48.68 $39.46 $ [1] Amounts shown reflect the gross assessment before early prepayment discounts. [2] Denotes residential collection service at one (1) day per week for garbage, recycling and yard waste collection. [3] Broward County residential collection includes two (2) days per week for garbage collection, one (1) day per week for recycling collection and one (1) day per month yard waste collection. [4] Denotes residential collection service at two (2) days per week for garbage collection and one (1) day per week for recycling and yard waste collection. Note garbage collection service in Pinellas County is for one (1) or two (2) days per week depending on location. [5] Miami-Dade County residential collection service includes two (2) days per week for garbage / yard waste collection and one (1) day every other week for recycling collection. As can be seen above, the County's existing rates for the Fiscal Year 2017 are competitive and / or below the averages charged by the other solid waste divisions surveyed. (Remainder of Page Intentionally Left Blank) -23-

47 SECTION 5: HISTORICAL AND PROJECTED CUSTOMER / TONNAGE STATISTICS The County provides waste disposal service to approximately 660,000 residents within unincorporated and incorporated areas of the County and processes incoming waste of over 800,000 tons annually, including waste deliveries from Hendry County residents. The table below provides an indication of the recent trends and projections of in the number of units served: Historical and Projected Disposal Customer Statistics by Class / Area [1] Historical Fiscal Year Ended September 30, Projected Fiscal Year Ending September 30, Franchised Area Statistics Area 1-5 [2]: Avg. Residential Units 154, , , , , , , , , , ,928 Avg. Multi-family Units 85,038 85,211 85,503 85,815 86,457 86,966 87,138 87,304 87,465 87,619 87,767 Avg. RV Units 6,629 6,742 6,625 6,545 6,747 6,948 6,949 6,950 6,952 6,953 6,955 Commercial (000s Sq.Ft.) 95,897 95,673 96,107 97,314 98,368 98,734 99,111 99,484 99, , ,569 Hendry County [3] N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Municipalities / Not Franchised Primary Cape Coral [4] N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Fort Myers Avg. Residential Units 16,019 16,565 17,119 17,798 18,640 19,469 20,213 20,915 21,567 22,165 22,702 Avg. Multi-family Units 17,222 17,305 17,552 17,717 18,020 18,401 18,580 18,752 18,916 19,072 19,220 Avg. RV Units Commercial (000s Sq.Ft.) 37,414 37,576 37,847 38,072 38,270 38,321 38,359 38,398 38,436 38,474 38,513 Sanibel Avg. Residential Units 3,996 4,000 3,958 3,978 4,054 4,064 4,064 4,064 4,064 4,064 4,064 Avg. Multi-family Units 3,763 3,762 3,762 3,762 3,762 3,762 3,762 3,762 3,762 3,762 3,762 Avg. RV Units Commercial (000s Sq.Ft.) 1,743 1,731 1,732 1,731 1,731 1,726 1,726 1,726 1,726 1,726 1,726 [1] Amounts shown derived from Tables 1-4 at the end of this report. [2] Amounts shown reflect statistics for franchise areas 1 through 5, which include statistics associated with the City of Bonita Springs, the Town of Fort Myers Beach, and the Village of Estero. Amounts shown exclude statistics for Boca Grande (Area 6) and the Outer Islands (Area 7). [3] Amounts shown not reported since the Hendry County customers are not assessed for service and pay based on actual tonnage deliveries. Per the 2010 census, the County reported a population of 39,000 with approximately 14,300 housing units (note census indicated occupied of 11,200 households for the same period). [4] Amounts shown not reported since the City of Cape Coral elects billing for the Disposal Facility Assessment by MSTU. Per the 2010 census, the City had a population of 154,000 with approximately 78,950 housing units (note census indicated occupied households of 56,300 for the same period). As noted above the majority or 58% of residential units served during the Fiscal Year 2016 are located within the franchised service areas of the County at approximately 160,400 residential single family disposal units, including approximately 40,300franchised residential units within the municipalities of Bonita Springs, Fort Myers Beach and the Village of Estero. By contrast, other customers within Hendry County and the Cities of Cape Coral, Fort Myers and Sanibel are estimated to represent approximately 116,000 residential housing units. The forecast assumes growth in franchised residential units of approximately 1.2% annually. The following table provides a projection of the primary waste streams by customer classification / location. (Remainder of page intentionally left blank) -24-

48 Historical and Projected Disposal Customer Statistics [1] Historical Fiscal Year Ended September 30, Projected Fiscal Year Ending September 30, Franchised Area Statistics Area 1-5 [2]: Delivered MSW Tons 273, , , , , , , , , , ,263 Yard Waste 56,201 59,336 59,112 61,821 65,356 64,848 65,985 67,112 68,229 69,332 70,419 C&D / Class III 65,595 82,940 70,236 65,444 67,896 68,575 69,260 69,952 70,651 71,357 72,070 Recycling 46,013 66,505 53,477 57,146 59,469 58,745 60,091 61,430 62,758 64,073 65,371 Hendry County Delivered MSW Tons 30,396 30,157 29,378 29,003 31,942 31,942 31,942 31,942 31,942 31,942 31,942 Yard Waste 3,429 3,456 3,755 3,380 4,523 4,523 4,523 4,523 4,523 4,523 4,523 C&D / Class III 1,731 2,139 2,751 3,036 4,899 4,948 4,997 5,047 5,097 5,148 5,199 Municipalities / Not Franchised Primary MSW Waste Generation Cape Coral MSW 84,447 88,793 91,334 97, , , , , , , ,379 Fort Myers MSW 56,789 58,738 60,576 64,687 67,039 70,391 73,559 76,501 79,179 81,554 83,593 Sanibel - MSW 8,221 8,085 8,296 8,385 8,750 9,187 9,600 9,984 10,334 10,644 10,910 Total 149, , , , , , , , , , ,881 Recycling Generation Cape Coral Recycling 15,936 17,032 17,293 18,077 18,555 19,483 20,262 20,870 21,496 22,141 22,806 Fort Myers Recycling 4,502 4,814 5,055 5,549 6,078 6,382 6,637 6,837 7,042 7,253 7,470 Sanibel Recycling 1,289 1,470 1,482 1,548 1,508 1,584 1,647 1,697 1,748 1,800 1,854 Total 21,727 23,316 23,830 25,174 26,142 27,449 28,547 29,403 30,286 31,194 32,130 [1] Amounts shown derived from Tables 1-4 at the end of this report. [2] Amounts shown reflect statistics for franchise areas 1 through 5, which include statistics associated with the City of Bonita Springs and the Town of Fort Myers Beach. Amounts shown exclude statistics for Boca Grande (Area 6) and the Outer Islands (Area 7). For the Fiscal Year 2016, the relationship of MSW waste generation among the franchised (329,100 tons / 61%) and non-franchised (211,500 tons / 39%) customers is generally consistent with relationship of residential units as previously discussed. The forecast assumes average annual growth in MSW waste of approximately 13,000 tons annually. The County and in particular the City of Cape Coral were at the center of the housing crisis in 2008 and were negatively affected by the subsequent economic downturn. However, the County and municipalities within the County have experienced a moderate rebound in growth and waste generation tonnages since the downturn. The following chart provides a historical summary and projected forecast of inbound waste to the County: (Remainder of page intentionally left blank) -25-

49 As can be seen from the prior chart, the forecast anticipates growth in the amount of waste being disposed at County facilities. As previously discussed, the County maintains and operates several facilities including a mass burn Waste-to-Energy Facility, Materials Recycling Facility, Construction and Demolition Debris Recycling Facility, yard / tire processing facilities, composting, regional landfill and household hazardous waste facility. A critical issue is the capacity utilization of the County's existing WTE facility. The chart below indicates the historical and projected utilization of the WTE facility: 800,000 Waste to Energy Capacity & Processed Waste Projection (Tons) 700, , , , , , , Processed Waste MSW Diversions C&D Diversions Yard Waste Diversion Design Capacity Through Put Capacity Guaranteed Capacity The WTE facility is currently the primary method of waste disposal for the County and processes over 615,000 tons annually or over 70% of all in-bound processed waste. The existing WTE facility currently exceeds the estimated through-put capacity of the facility. Due to the growth in waste deliveries to the WTE facility waste diversions to the County's landfill are expected to grow. -26-

50 The following table provides a summary of estimated landfilled waste over the recent historical and projected period: 300,000 Historical and Projected Landfilled Waste by Type (Tons) 250, , , ,000 50, Ash Residue Yard Waste / Mulch Cover / Storage Class III / C&D MSW/Tire/Other Sludge As can be seen from the prior chart, landfilling of C&D waste is expected to grow due to continued growth in MSW deliveries to the WTE facility, which is expected to result in increasing diversions of other processable waste out from that facility, such as C&D. Pursuant to discussions with Division staff, it is the current practice of the County to land apply any excess yard waste that is not either: i) burned at the WTE facility or; ii) processed into composting. Depending upon operational situations, the County may choose or be required to dispose of yard waste to the Class III landfill, although no yard waste is assumed to be disposed of to the landfill for purposes of this financial forecast. Beyond the Forecast Period it is expected that increasing amounts of MSW deliveries may result in an increase to MSW being landfilled. As previously discussed, the County is limited by agreement with adjacent landowners as to the disposal of MSW to the Lee / Hendry landfill. To provide a long-term solution for the future growth in waste deliveries, Division staff has contracted for the preparation of a strategic Master Plan to evaluate new facilities or options of waste disposal. The findings of the master plan are expected later this fiscal year. For additional detail concerning the historical and projected customer statistics and assumptions, please reference Tables 1 through 5 at the end of this report. SECTION 6: REVENUE COMPOSITION AND FORECAST The Department is expected to generate or collect approximately $80.5 million in revenue for the Fiscal Year This amount includes approximately $2.4 million in remittances to municipalities for franchise fees and shared recycling revenues and to the WTE facility contractor associated with shared electric revenues and ferrous and non-ferrous revenues. Such reimbursements are budgeted as a cost of operation in order to present the gross revenues and track the benefits shared of shared revenues with municipalities or contracted operators. For the Fiscal Year 2017, the majority of the revenue can be categorized as follows: 82% is generated from the collection, disposal and other service fees (e.g., compost sales); -27-

51 11% is generated from gross electric sales; and 7% is generated from other revenues primarily comprised of franchise fees, recycling and recovered material revenues and other miscellaneous fees / investment income. The revenue forecast for collection and disposal fee revenues were developed based upon the forecast of customer billing and tonnage statistics as previously discussed in Section 5 of this report and applied to the existing and projected rates for service. Electric sales revenues were based on the forecast of electrical production as presented in Table 5 at the end of this report and recognize the termination of the existing electric purchase power agreement with Seminole electric during the Fiscal Year Other revenues were primarily escalated from historical or budgeted levels based on discussions with Division staff, such as recycling revenues which were held constant at $1 million annually beginning in the Fiscal Year 2018 and for the remainder of the Forecast Period. The following chart provides the forecasted revenue composition assuming implementation of the identified rate adjustments: Projected Revenue Composition (w/ Rate Increases) $100,000,000 $90,000,000 $80,000,000 $70,000,000 $60,000,000 $50,000,000 $40,000,000 $30,000,000 $20,000,000 $10,000,000 $ Disposal / Other Svc Fees Collection Fees Gross Electric Sales Gross Recycling / Metal Sales Other Income / Revenue The projected growth in disposal and collection fees are due to increase in customers served, tonnages delivered and application of the identified rate increases as previously discussed. The projected reduction to operating revenues is associated with uncontrolled revenues associated with reduced electric and recycling revenues beginning in the Fiscal Year SECTION 7: REVENUE REQUIREMENTS COMPOSITION AND FORECAST The revenue requirements of the System are comprised of expenditures and required transfers: Expenditures: includes annual operating expenses, major maintenance, capital expenditures and debt service payments; and Required Transfers: includes transfers for landfill closure, transfers to operating cash reserves for maintaining minimum reserve balances and transfers to capital reserves for funding future capital expenditures. -28-

52 This section provides a detailed discussion of the revenue requirements and principal assumptions relied upon in development of the forecast for the System. Operating Expenses The operating expenses of the Division represent the primary recurring expenditure of the System. Unless otherwise noted operating expenses are exclusive of closure, post-closure and periodic major maintenance (funded from the Renewal and Replacement Fund), which is consistent with the definition of operating expenses pursuant to the Bond Resolution. Approximately seventy percent (70%) of the operating expenses are related to contracted services for the franchised collection and operation of the System. The remaining operating expenses are primarily related to labor, materials / supplies and repairs / maintenance. The chart below provides a summary of the total operating expenses for the Forecast Period: Projected Operating Expenses $90,000,000 $80,000,000 $70,000,000 $60,000,000 $50,000,000 $40,000,000 $30,000,000 $20,000,000 $10,000,000 $ Contractual Services Personnel Materials and Supplies Other Expenses Repair and Maintenance The forecast assumes average annual increases in the cost of operation equal to approximately 3% annually, which is considered reasonable when considering long-term trends of inflation. The forecast of operating expenses was based on a five (5) year review of historical operating expenses, the adopted Fiscal Year 2017 operating expense budget, modeling of the Division's principal contracted expenses and based on discussions and review projections by Division staff. It should be noted that the projection of personnel expenses includes a minor allowance for Other Post- Employment Benefits ("OPEB") at approximately $32,000 annually. The allowance recognizes that it is the County s policy to fund OPEB expenditures on a pay-as-you-go basis. Table 8 at the end of this report provides a detailed listing of recent historical expenses and the forecast of operating expenses. (Remainder of page intentionally left blank) -29-

53 Contracted Collection of Franchise Areas As discussed in Section 3, the County administers six (6) franchised collection areas. The cost of collection represents a significant component (i.e., approximately 33%) of total operating expenses. The County makes monthly payments to the haulers for each residential collection unit. The following presents the historical trend and projected collection expense assumptions: Historical and Projected Franchised Hauler Collection Expense Historical Fiscal Year Ended September 30, Projected Fiscal Year Ending September 30, Description AREA 1 Bonita & FMB Growth Average Monthly Units 22,507 22,740 23,131 24,116 24,656 24,876 25,597 26,276 26,906 27,485 28,007 Rate Change (%) 2.0% 0.0% 1.8% 1.1% 2.0% 0.0% 0.0% 0.0% 0.0% 2.0% 2.0% Collection Rate $ $ $ $ $ $ $ $ $ $ $ Expense ($1,000s) $2,974 $3,004 $3,112 $3,279 $2,974 $3,429 $3,500 $3,563 $3,618 $3,738 $3,853 AREA 2 SFM West, Iona-McGregor, Captiva Growth Average Monthly Units 23,686 23,832 24,033 24,275 24,434 24, ,750 24,973 25,185 25,387 25,577 Rate Change (%) 2.0% 0.0% 1.9% 1.1% 0.0% 0.0% 0.0% 0.0% 0.0% 2.0% 2.0% Collection Rate $ $ $ $ $ $ $ $ $ $ $ Expense ($1,000s) $2,876 $2,894 $2,973 $3,035 $3,055 $3,107 $3,157 $3,204 $3,249 $3,357 $3,465 AREA 3 SFM East, San Carlos Park Growth Average Monthly Units 40,418 40,724 41,257 41,531 42,221 42,009 42,471 42,917 43,346 43,758 44,152 Rate Change (%) 2.0% 0.0% 1.8% 1.0% 0.6% 0.0% 0.0% 0.0% 0.0% 2.0% 2.0% Collection Rate $ $ $ $ $ $ $ $ $ $ $ Expense ($1,000s) $5,917 $5,962 $6,149 $6,255 $6,399 $6,484 $6,569 $6,651 $6,732 $6,945 $7,163 AREA 4 East, Lehigh, Alva Growth Average Monthly Units 46,301 46,418 46,583 46,799 47,050 47,057 47,292 47,505 47,695 47,862 48,005 Rate Change (%) 2.0% 0.0% 2.6% 1.0% 2.1% 0.0% 0.2% 2.0% 2.0% 2.0% 2.0% Collection Rate $ $ $ $ $ $ $ $ $ $ $ Expense ($1,000s) $6,262 $6,278 $6,462 $6,559 $6,730 $6,797 $6,875 $7,076 $7,279 $7,484 $7,691 AREA 5 Pine Island, NFM Growth Average Monthly Units 21,592 21,672 21,808 21,975 22,076 22,140 22,295 22,440 22,574 22,698 22,812 Rate Change (%) 2.0% 0.0% 1.9% 1.0% 0.6% 0.0% 0.0% 0.0% 0.0% 2.0% 2.0% Collection Rate $ $ $ $ $ $ $ $ $ $ $ Expense ($1,000s) $3,493 $3,506 $3,593 $3,657 $3,696 $3,720 $3,743 $3,765 $3,785 $3,879 $3,973 Table continued on following page. (Remainder of page intentionally left blank) -30-

54 Historical and Projected Franchised Hauler Collection Expense (cont'd.) Historical Fiscal Year Ended September 30, Projected Fiscal Year Ending September 30, Description AREA 6 Boca Grande / Gasparilla Growth (98) Average Monthly Units 1,225 1,229 1,234 1,338 1,240 1,225 1,338 1,338 1,338 1,338 1,338 Rate Change (%) (12.4%) 0.0% 0.0% 0.0% 0.0% (12.4%) 0.0% 0.0% 0.0% 5.7% 0.0% Collection Rate $ $ $ $ $ $ $ $ $ $ $ Expense ($1,000s) $167 $167 $168 $182 $169 $167 $185 $185 $185 $196 $196 ALL AREAS Franchise Hauler Expense Growth ,041 1,003 1,103 1,591 1,546 1,483 1,417 1,348 1,277 Average Monthly Units 155, , , , , , , , , , ,922 Rate Change (%) 1.9% 0.0% 2.0% 1.0% 0.9% 0.1% 0.1% 0.6% 0.6% 2.0% 2.0% Collection Rate $ $ $ $ $ $ $ $ $ $ $ Expense ($1,000s) $21,689 $21,811 $22,457 $22,968 $23,401 $23,723 $24,029 $24,444 $24,847 $25,599 $26,340 The cost of collection has marginally increased over the recent historical period; however, the majority of the franchise area agreements will terminate during the Forecast Period. As previously discussed in Section 3, the County has entered into new agreement for collection service for Area 4 and will be required to enter into new agreement with the remainder of the service areas prior to the Fiscal Year Forecasts of such costs were based on assumptions provided by Division staff, which may vary from the actual realized cost of collection. WTE Contracted Operations As previously discussed, the County contracts operation for the WTE facility. The cost of operation is another significant component (i.e., approximately 34%) of total operating expenses. The cost of operation is based on forecasts of processable tonnage statistics, as previously discussed (reference Section 5), and the charges for service by Covanta. The following table provides a summary of the projection of gross and net contracted operating expenses: Historical and Projected WTE Facility Contract Operations ($1,000s) Historical Fiscal Year Ended September 30, Projected Fiscal Year Ending September 30, Tons Processed 568, , , , , , , , , , ,000 % Change N/A 6.8% (0.0%) 1.3% 4.4% (3.5%) 1.6% 0.0% 0.0% 0.0% 0.0% Service Fee [*]: OM $17,659 $18,224 $18,998 $19,619 $19,883 $20,169 $20,673 $21,190 $21,720 $22,263 $22,819 ETF 716 1, ,089 1,782 1,237 1,527 1,562 1,598 1,634 1,672 PT 1,143 1,129 1,351 1,232 1,296 1,361 1,395 1,430 1,217 1,248 1,279 EC 1,479 1,416 1,814 1,780 1, RRR (1,320) (1,097) (1,625) (1,580) (898) (749) (761) (761) (761) (761) (761) True up Net Fee $19,766 $21,217 $21,587 $22,305 $23,532 $23,118 $23,811 $24,402 $24,756 $25,297 $25,930 % Change N/A 7.3% 1.7% 3.3% 5.5% (1.8%) 3.0% 2.5% 1.5% 2.2% 2.5% [*] Service Fee (SF) = Operation and Maintenance (OM) Charge + Excess Tonnage Fee (ETF) + Pass-Through (PT) + Energy Credit (EC) Resources Recovery Revenue (RRR) Landfill Credit (LC) +/- Monthly Adjustment (MD) -31-

55 The recent historical growth in the cost of contracted operations for the WTE is primarily due to increases in the amount of waste processed. The forecast assumes two and one-half percent (2.5%) indexing to the Operation and Maintenance (OM) charge. On average, the cost of contracted operations for the WTE is expected to average 1.6% during the Forecast Period. Financial Effects of Landfill Diversions The primary cost affected by increasing diversions of waste to the landfill is the contracted cost of operation. This cost has averaged approximately $1.1 million annually for the last five (5) years. Similar to today and prior to the expansion of the WTE in 2007, the County had waste deliveries in excess of the capacity at the WTE. During that period, the County had been required to divert increasing amounts of waste for disposal to the Lee / Hendry Landfill. For reference, the Division reported approximately 202,000 tons landfilled in 2016 as compared to 360,000 tons in As a result, the cost of contracted operations was previously greater as evidenced below: Cost $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 Historical Contracted Landfill Operations Cost Fiscal Year 400, , , , , , ,000 50,000 0 Tons Contracted Expense Est. Tons Landfilled Amounts shown above are provided based on reports from Division staff and the County's contracted landfill operator. Such amounts may vary with reported inbound tonnage reports to the landfill associated with: i) tonnages processed for disposal by the County through the composting operations; ii) timing of receipt and ultimate disposal of waste in the landfill; iii) lack of recognition of C&D cover materials as shown above; and iv) other variances. The cost of contracted operation for the landfill has generally declined with the level of waste deliveries over time. The current agreement for operation of the landfill is based on "actual cost plus mark-up". Labor and other operating costs for the landfill can be scaled to the level of waste deliveries. The following chart presents the forecast of contracted landfill operating expenses: (Remainder of page intentionally left blank) -32-

56 Cost $1,800,000 $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 Projected Contracted Landfill Operations Cost Fiscal Year 230, , , , , , , ,000 Tons Contracted Expense Est. Tons Landfilled Note amounts shown do not reflect tonnages assumed for cover. In addition to the growth in the cost of contracted operations, increasing waste diversions also has the effect of increasing costs related to preparation for and transportation of waste. Based on discussions with Division staff such transfer costs are assumed within the Fiscal Year 2017 operating expense budget (i.e., Solid Waste Operations) and were escalated for increases in diversions from the Buckingham Campus to the landfill. Such costs are expected to average approximately $221,000 a year during the Forecast Period. As previously discussed the Buckingham Campus has a transfer station collocated with the WTE. The primary purpose of the facility is for diverting MSW waste. Recognizing that the County currently diverts minimal quantities of MSW the facility is not in use. This forecast assumes that due to anticipated growth in waste deliveries the County would prioritize and divert increasing amounts of yard waste (may conditionally require use of the transfer station for diversion) to the landfill. This is expected to provide additional capacity at the WTE for disposal of increasing amounts of MSW waste. However, there are limitations on the amount of additional capacity that can be provided from diverting yard waste and or other processable materials (i.e., C&D) away from the WTE to the landfill. For example, seasonality of waste deliveries also has a material effect on diversion of MSW to the landfill. Therefore, it is important to note that this forecast has not assumed any increases in the cost of operation for the Buckingham Campus transfer station operations and should the County be required to operate the transfer station will result in increased cost of operation above what is contemplated in this study. Other Expense Forecast Assumptions The remaining operating expenses after the payment of contracted operations comprise approximately 30% of the total operating expenses are primarily related to the payment of Division employee labor costs and materials and supplies for operation of the facilities. In particular, the Division must fund operating expenses related to operation of the scales, transfer stations, C&D recycling facility, composting operations, fleet / vehicle maintenance, etc. The forecast of these -33-

57 costs were developed based on a five (5) year review of the historical expenses, application of assumed escalation factors (for more information please reference Tables 8 and 9) based on the nature of the expense (e.g., certain variable costs may be escalated based inflation + tonnage, etc.) and a detailed review with Division staff. Capital Expenditures and Major Maintenance The forecast of capital and major maintenance was provided by Division staff and generally represents the periodic renewals, replacement and improvements to the System. As previously discussed, major maintenance is not a capitalized expenditure for purposes of financial reporting (i.e., operating expenses), however the County views such periodic expenditures as capital related and funds such expenditures from the Renewal and Replacement Fund (i.e., excluded from Operating Expenses pursuant to the Bond Resolution). For example, the County has identified the need to repave the main road leading to the Lee/Hendry Landfill and has funded this expenditure through the Renewal and Replacement Fund as a major maintenance expenditure. The following table provides a listing of the capital projects identified. Listing of Identified Capital and Major Maintenance Expenditures Capital Project Description Start Year Project Cost [1] Recycling Equipment Improvement 2017 $2,111,000 Recycling Facility ,150 Landfill Gas Collection System ,604,100 Landfill Phase Expansion ,426 Electric System Improvements ,000 Scale Improvements ,580,394 Waste-to-Energy ,558 Labelle Transfer Station Expansion ,684,000 C&D Facility Improvements ,025 Ash Separation ,644,000 WTE Transfer Station Improvements ,900 Glass Processing ,841,400 Burner Retrofit ,000 Fleet Storage Building ,040 HCW Flammable Storage Shed ,250 Capital Project Subtotal $19,069,243 Major Maintenance [2] $5,213,522 Operating Budget Capital Outlay [3] ,250,103 Total $31,532,868 [1] Amounts shown derived from Table 10 and adjusted for inflation for projects identified in the Fiscal Year 2018 and for the remainder of the Forecast Period. [2] Amounts shown reflect periodic major maintenance expenses that are not capitalized, however are funded from the Renewal and Replacement Fund (i.e., excluded from Operating Expenses as defined in the Bond Resolution) and more similar to a capital expenditure (e.g., road repaving). [3] Represents annually recurring purchases of minor capita, equipment and other capitalized expenses included in the annual operating budget. As can be seen above, the County has identified approximately $31.5 million in total funding. The following table provides a summary of the funding plan for the Forecast Period: -34-

58 Capital Funding Fiscal Years [1] Rate Revenue $7,250, % System Reserve Fund - SW Management 16,718, % Renewal and Replacement Fund 5,213, % Recycling Fund 2,351, % Total Funding $31,532, % [1] Amounts shown derived from Table 10. Table 10 at the end of this report provides additional detail concerning the projected capital and major maintenance needs and funding sources for the Forecast Period. As previously discussed, the County is in process of a Master Plan to address the issue of the disposal facility capacity of the System. This financial forecast does not recognize any additional capital needs that may be identified as part of the Master Plan, which could result in the need to raise rates beyond what is currently identified in this Study. Debt Service As of October 1, 2016, the System had debt outstanding of approximately $66.2 million, which is exclusive of amortized premiums and discounts. The outstanding debt is associated with the Series 2016 Bonds. The associated debt service for the Series 2016 Bonds represents level payments of $8.5 million annually with final repayment in Fiscal Year As previously discussed, the forecast does not assume the issuance of additional bonds. The chart below provides a summary of the existing and projected annual debt service payments: $12,000,000 Summary of Debt Service Payments $9,000,000 $6,000,000 $3,000,000 $0 Series 2016 Bonds -35-

59 It should be noted that the subsequent reduction in debt service payments in the Fiscal Year 2026 may provide for additional bonding capacity for additional capital improvements identified as an outcome to the Master Planning activities. Closure and Post Closure Transfers Pursuant to the Florida Administrative Code (the "Code") , landfill operators within the State are required to demonstrate financial assurance for the final closure and subsequent ongoing post-closure costs. The code identifies several methods for demonstrating financial assurance, but the most common is to set aside funds as landfill capacity is used in a restricted fund. This is the method employed by the County in demonstrating financial assurance. The Florida Department of Environmental Protection (the "FDEP") requires the County to annually submit proof of compliance with the financial assurance requirements of the Code. The projected costs of closure and post-closure or long-term care are estimated at the time of permit renewal, typically every five (5) years. The costs are determined based upon surveys of costs associated with closure and long-term care at the time of the permit renewal, which are reviewed by engineers and FDEP staff. While the closure cost is a one-time event, long-term care or postclosure expenses represent the cumulative cost of annual operating expenses such as grounds maintenance, security, site monitoring, or other operating costs for a thirty (30) year period after closure. Once the closure and long-term care costs have been estimated during permitting, such costs are then escalated annually to account for inflation based on approved inflation factors by the FDEP. Closure and post-closure cost estimates are then not formally re-evaluated until the subsequent permit renewal or there are changes to the closure and long-term care plan. Additionally, closure liability is only calculated for active landfill cells that have received or are currently receiving waste. In order to estimate the capacity utilization of the landfill to determine the allocable closure liability / costs that are required for determination of financial assurance compliance, the County annually contracts for a fly-over to define the elevation of the landfill surface and calculate the volume of permitted landfill volume used during the previous year. This data provides accurate information to allow the Division to identify the remaining air space or volume of permitted capacity remaining in the constructed cells. The following table provides a comparison of the estimated liability based on the landfill's capacity utilization and the corresponding cash reserves reported to be held by the Division within the Closure Fund: Estimated Closure and Post-Closure Liability as of September 30, 2016 Active Landfill Sites Closure Post-Closure [1] Total Restricted Funds Ash Monofill $2,816,023 $1,644,471 $4,460,494 N/A Class I Landfill 5,213,409 2,650,462 7,863,871 N/A Class III Landfill 825, ,278 1,440,174 N/A Deep Injection Well 128,462 N/A 128,462 N/A Total $8,983,790 $4,909,211 $13,893,000 $11,062,821 [1] Amounts shown reflect the cumulative post-closure liability allocable to the County based on the pro-rata share of the capacity utilized calculated assuming a 30 year maintenance expense liability for the ash monofill, and Class III landfill. -36-

60 As can be seen from the prior table, the County has restricted approximately $11.1 million representing approximately 80% of the allocable long-term liability. The Division funds the closure liability to the FDEP requirement including 100% of the Closure Liability and one (1) year of the Post-closure liability. Recognizing the financial constraints to the System from the loss of electric revenues, the forecast assumes maintaining 100% of the Closure Liability and one (1) year of the Post-closure liability for the remainder of the Forecast Period. If financial conditions improve, it is recommended the County consider fully funding the combined closure and postclosure liability in order to match the cost of closure with the disposal of waste. The chart below presents a forecast of the cumulative liability and restricted funds for closure: $25,000,000 Projected Closure & Post Closure Liability $20,000,000 $15,000,000 $10,000,000 $5,000,000 $ Restricted Funds Closure / Post Closure Liability It is projected that the County will require transfers to the Closure Fund beginning in Fiscal Year 2020 to maintain the minimum balance mentioned above. The forecast assumes transfers to the closure funds averaging approximately $613,000 annually for the Forecast Period. It should be noted that closure fund liability is expected to grow at a faster rate than in recent years due to increased diversions that will be necessary until the County has constructed the expanded WTE and MRF facilities. (Remainder of Page Intentionally Left Blank) -37-

61 SECTION 8: REVENUE SUFFICIENCY AND FINANCIAL COMPLIANCE The foundation of the study and the primary objective of the solid waste rates are to reasonably recover the cost of providing service, cost of infrastructure investment and compliance with covenants of the outstanding bonds and internal fiscal targets (referred to as the "Revenue Sufficiency" evaluation). Gross Revenues Gross Revenue Requirements Based on the assumptions and findings of this analysis the following table provides a summary of the identified revenue adjustments for the Forecast Period recognizing financial projections under current operations. Identified Rate Revenue Adjustments by Fiscal Year [1] Recommend Identified Description 2018 [2] Disposal Assessment / Tip Fee Rev. Percent Adjustment 14.00% 5.00% 2.40% 2.40% 2.40% Incremental Revenue Addition $5.7m $2.4m $1.2m $1.3m $1.3m Cumulative Revenue Addition $5.7m $8.2m $9.5m $10.9m $12.4m Collection Assessment Revenues Percent Adjustment 0.00% [3] 0.51% [3] 0.53% [3] 1.98% [3] 1.94% [3] Incremental Revenue Addition $0.0m $0.1m $0.1m $0.5m $0.5m Cumulative Revenue Addition $0.0m $0.1m $0.3m $0.8m $1.3m [1] Reflects identified increases to revenues from the collection / disposal assessment and tipping fees for service. [2] Reflects recommended rate revenue increases to the respective systems identified. [3] Reflects projected increases to recover estimated cost of contracted collection services and may vary based on actual realized increases in such costs. The revenue increases are necessary to ensuring adequate cash reserves and appropriate cash flows produce a sustainable long-term financial plan that can mitigate the financial and operating risk -38-

62 from unanticipated or sudden events to financial operations (e.g., reduced electric sales, reduced growth or tonnages unanticipated or extraordinary outages, unfunded mandates, etc.). Collection Revenue Requirements The allocation of the revenue requirements among the disposal and collection operations is straight forward and assumes that the collection fee as a component of the residential solid waste assessment only recover the direct contracted cost of collection. The following table presents the allocated collection system revenue requirements: Collection Net Revenue Requirements and Revenue Sufficiency ($1,000s) [1] Projected Fiscal Year Ending September 30, Description Operation and Maintenance Expenses $23,716 $24,022 $24,437 $24,840 $25,591 $26,332 Annual Debt Service Transfers and Capital Gross Revenue Requirements $23,716 $24,022 $24,437 $24,840 $25,591 $26,332 Less Income / Funds from Other Sources: Investment Income $0 $0 $0 $0 $0 $0 Residential Credit [2] Contracted Fines [3] Total $25 $25 $25 $25 $25 $25 Net Collection Funding Requirements $23,691 $23,997 $24,412 $24,815 $25,566 $26,307 Existing Collection Assessment Revenue $23,700 $24,002 $24,288 $24,558 $24,809 $25,042 Rate Revenue Adjustments [4] N/A 0.00% 0.51% 0.53% 1.98% 1.94% Adjusted Disposal Revenue $23,700 $24,002 $24,412 $24,815 $25,566 $26,307 Net Transfers To / (From) Reserves [5] $10 $5 $0 $0 $0 $0 [1] Amounts shown derived from Table 14 at the end of this report. [2] Reflects transfers from reserves to offset the cost of the residential assessment. None assumed during the Forecast Period. [3] Reflects minor revenues from fines related to the monitoring of contracted collection. [4] Reflects the current period percent (%) increase in collection revenues. [5] Reflects assumed transfers to / (from) reserves. Based on the allocation of costs a primary driver for the increase in the identified residential collection assessment is related to increases in the cost of contracted collections. (Remainder of page intentionally left blank) -39-

63 Disposal Revenue Requirements The balance of all other revenue requirements is, therefore, allocable to the disposal function of operation for the System. The following table presents the allocated disposal system revenue requirements: Disposal Net Revenue Requirements and Revenue Sufficiency ($1,000s) [1] Projected Fiscal Year Ending September 30, Description Operation and Maintenance Expenses [2] $47,374 $50,396 $51,184 $52,522 $54,130 $55,804 Annual Debt Service: Series 2016 Bonds $8,535 $8,541 $8,547 $8,558 $8,564 $8,575 Transfers and Capital [3] $962 $3,582 $5,904 $6,691 $6,490 $6,965 Gross Revenue Requirements $56,871 $62,519 $65,635 $67,771 $69,183 $71,344 Less Income / Funds from Other Sources: Investment Income $214 $282 $343 $420 $525 $638 Net Electric Revenue 8,636 7,328 7,307 7,285 6,534 6,547 Franchise Fees County 1,789 1,832 1,876 1,922 1,961 2,001 Franchise Fees Municipalities [2] WTE Ferrous / Non-ferrous County WTE Ferrous / Non-ferrous Covanta [2] Recovered Materials & Misc. Rev. [4] 1,684 1,480 1,480 1,480 1,480 1,480 Compost Sales Other Revenues [5] 2,627 2,624 2,467 2,499 2,531 2,561 Total $17,284 $15,915 $15,854 $15,999 $15,433 $15,640 Net Disposal Funding Requirements $39,587 $46,604 $49,781 $51,772 $53,750 $55,703 Existing Assessment and Tip Fee Revenue $39,580 $40,881 $41,588 $42,238 $42,824 $43,340 Current Period Rate Revenue Adj. [6] N/A 14.00% 5.00% 2.40% 2.40% 2.40% Adjusted Disposal Revenue $39,580 $46,604 $49,781 $51,772 $53,750 $55,703 Surplus / (Deficiency) [7] ($7) $0 $0 $0 $0 $0 [1] Amounts shown derived from Table 13 at the end of this report. [2] Amounts shown include the gross expenses of the system, including the cost of shared or remitted revenues such as, franchise fees collected on behalf of the County and shared electric revenues due to the County's contracted WTE facility operator. [3] Reflects transfers to the landfill closure fund, transfers to the recycling fund from recovered materials revenues and funding for certain capital equipment identified from the capital program. [4] Amounts shown reflect declines in other operating revenues associated with the reduction in recovered materials revenue from operation of the MRF. [5] Includes revenues from advance disposal fees related to the C&D ordinance, contracted disposal of sludge and other miscellaneous revenues. [6] Reflects the current period percent (%) increase in disposal revenues. [7] Reflects Assumed transfers to / (from) operating reserves. As can be seen above the existing disposal assessment and tip fee revenues are not projected to be sufficient to fund the disposal-related revenue requirements of the System due to increases in the cost of operation, issuance of additional debt for capital financing, and anticipated declining income and funds from other sources (e.g., electric revenues) which serve to offset the funding requirements of the disposal assessment and fees. For more information on the recommended -40-

64 Fiscal Year 2019 rates for service, please reference Section 9 of this report, which provides detail concerning the application of the identified rate increases to proposed rates. Changes to the Bond Resolution and Rate Covenant Compliance Upon issuance of the Series 2016 Bonds, the Bond Resolution took effect and superseded the prior Trust Indenture. The Bond Resolution recognizes certain changes to the definitions, creation of funds and calculation of compliance with the Rate Covenant, among other changes. As such, the following provides a listing of the primary changes to the definitions and creation of funds, which affect the determination of projected operating results and compliance with the Rate Covenant. The following does not represent an authoritative or complete listing of changes from the prior Trust Indenture to the Bond Resolution. 1. The Bond Resolution provides for the creation of the Rate Stabilization Fund. The Rate Stabilization Fund represents 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. For compliance with the Rate Covenant, transfers from the Rate Stabilization Fund may be recognized as a component of Gross Revenues up to the Rate Stabilization Amount if transferred within 120 days of the respective close of the Fiscal Year, further defined as an amount not greater than 25% of prior year's ending cash balance within the Rate Stabilization Fund. Conversely, Funds transferred to the Rate Stabilization Fund have the effect of reducing Gross Revenues for determining compliance with the Rate Covenant. 2. The definition of Gross Revenues was revised to include: a. Recovered Materials Revenues derived from the operation of the MRF; b. Transfers from the Rate Stabilization Fund, up to the Rate Stabilization Amount, having the effect of increasing Gross Revenues; and c. Transfers to the Rate Stabilization Fund having the effect of decreasing Gross Revenues. 3. The definition of Operating Expenses was revised to exclude: a. OPEB accruals and instead recognizes actual OPEB outlays; and b. Expenses funded from the Renewal and Replacement Fund (i.e., major maintenance). 4. The required transfer to the Renewal and Replacement Fund are governed by the flow of funds described in Section 4.05 of the Bond Resolution and the definition of the Renewal and Replacement Fund Requirement. The specific changes to the Bond Resolution are related to the required minimum annual deposit should the balance within the Renewal and Replacement Fund be less than the Renewal and Replacement Fund Requirement. The minimum annual transfer is established as either: a. Five (5) percent of prior year's Gross Revenues; or -41-

65 b. Such other amount as recommended by the Consulting Engineers. The change is intended to support a minimum transfer to the Renewal and Replacement Fund that may be more appropriate, at times, than the default of five (5) percent of prior year's gross revenues. 5. As previously discussed, the Debt Service Reserve Account Requirement, is defined as an amount equal to the lesser of: a. Maximum Annual Debt Service for all Outstanding Bonds secured thereby; b. 125% of the average Annual Debt Service for all Outstanding Bonds secured thereby; c. the maximum amount of Bond proceeds which may be deposited to the Debt Service Reserve Account without subjecting the same to yield restriction under the Code; provided; or d. The County may establish by Supplemental Resolution a different Debt Service Reserve Account Requirement with respect to any particular Series of Bonds, which Debt Service Reserve Account Requirement may be $ The Rate Covenant for the Bond Resolution is a two (2) part test as follows: a. Net Revenues, together with the Net Position, must equal at least 120% of the Annual Debt Service becoming due in such Fiscal Year; and b. 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 by the terms thereof to be deposited in the Renewal and Replacement Fund or the Debt Service Reserve Account or with any issuer of a Debt Service Reserve Account Letter of Credit or Debt Service Reserve Account Insurance Policy in such Fiscal Year to pay Policy Costs. For informational purposes, projected compliance with the Rate Covenant with and without rate stabilization transfers was evaluated for the Forecast Period and presented as follows: (Remainder of page intentionally left blank) -42-

66 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Bond Resolution Debt Service Coverage (Net Revenue) 168% 177% 175% 180% 130% 141% 122% 124% 110% 110% 114% 111% 118% w/o Rate Stabilization Bond Resolution Coverage Minimum Target Forecast Target The Division has experienced recurring declines in the debt service coverage since the Fiscal Year 2012, which has resulted in the recent credit rating downgrade by Moody's Investor Service ("Moody's") from A3 to Baa1 [6]. Pursuant to the Moody's credit surveillance opinion dated December 21, 2015, the Division could face further credit rating downgrade should debt service coverage (exclusive of transfers from Rate Stabilization) fall below 1.0x and / or unrestricted cash reserves fall below 12 months operating expenses. With respect to the Forecast Period and assuming implementation of the recommended and identified rate revenue increases, the Division is expected to meet or exceed minimum debt service coverage requirements of the Bond Resolution. For additional information concerning the calculation of historical and projected compliance with the Rate Covenant, please reference Tables 16 and 17 found at the end of this report. Recommended Financial Targets Recognizing the recent credit downgrade as previously discussed and the desire for the long-term financial sustainability of the County's solid waste enterprise fund, it is recommended that the County consider minimum financial targets in order to promote the creditworthiness of the System. The following objectives were recognized in consideration of the financial targets: Maintain adequate reserves to provide hedges against unplanned events associated with: i) sudden changes in market demand for sale of recovered materials; ii) revenue reductions / increased costs associated with short- or long-term facility outages, including changes in the determination of the rates earned from the sale of electricity generated from the County's existing or future facilities; and iii) non-recurring expenditures needed in instances of emergencies or Force Majeure Incidents (as later defined); [6] Moody's provides the following rankings for investment grade credits from highest to lowest as follows: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa

67 Target minimum financial metrics greater than those required by the Bond Resolution or subordinate loan agreements to promote the increased ability to be in compliance with the various rate and financial covenants of such agreements; Maintain adequate rates and charges to produce sufficient revenues and financial margins to fully cover operating expenses, debt service payments, identified capital expenditures, required transfers and funding for cash reserve targets; Maintain and promote a strong financial condition aimed at preserving and enhancing the Enterprise Fund bond ratings to minimize capital project financing costs and promote longterm System sustainability; and The desire to maintain reasonable and well-justified levels of rates and fees over the longrun, in accordance with good business practices and this Financial Policy. In general, the financial targets are more restrictive than the minimum legal requirements as may be contained in Bond Resolution or subordinate loan agreements as later defined. The following table provides a brief summary of the principal financial metrics and targets recommended: Financial Metrics and Targets Description Basis Purpose Minimum Cash Reserves: 1.1) Operating Reserve Target Maintain 150 days of operating expenses within operating reserve cash balances. 1.2) Capital Reserve Target Maintain the greater of: a) six (6) percent of prior year's gross assets; or b) the average annual cost of the five or ten year CIP. 1.3) Closure Target Maintain the estimated liability of landfill closure costs + one (1) year of post-closure liability. 1.4) Aggregate Reserve Target Maintain an aggregate reserve balance at least equal to one (1) year of budgeted Operating Expenses. Debt Capacity and Coverage: 2.1) Debt Capacity Maintain a minimum Debt to Revenue Ratio from 4.0x to 6.0x calculated as: =[Outstanding Principal All-in Debt Cash Balance in Debt Service Reserve Account] / [Gross Revenues Transfers from Rate Stabilization Fund] To promote the maintenance of a minimum working capital reserve balance for operating needs of the System and unexpected loss of revenues (e.g., reduction in electric revenue) or increases in costs. To promote the maintenance of a minimum capital reserve balance for System capital needs (e.g., renewals and replacements). Represents a minimum cash funded reserve for the future closure and post closure care of the landfill. Reflects an aggregate cash reserve balance in order to maintain the credit worthiness of the System. Provides a maximum range of indebtedness to be issued by the System based on financial metrics utilized by credit rating agencies in the evaluation of the debt capacity of a solid waste enterprise fund. It should be noted that the debt to revenue ratio was assumed in lieu of the debt to net equity ratio since it may be difficult to estimate the net equity associated with the County's WTE facility since repairs and replacements are performed by the County's Contract Operator. 2.2) All-in Coverage Maintain at least 1.20x all-in debt coverage. Represents a key financial metric used in assessing the creditworthiness of the Division. Capital Reinvestment: 3.1) Capital Reinvestment Transfer at least five (5) percent of prior year's gross revenues, excluding collection revenues, to capital reserves. Intended to promote a minimum transfer for capital needs of the System. -44-

68 The County is expected to meet or exceed the recommended targets assuming implementation of the recommended and identified rate revenue adjustments by the end of the Forecast period. The following charts provide a demonstration of compliance with the 1.4) Aggregate Reserve Target: 100,000,000 90,000,000 80,000,000 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 Ending Cash Balances (Excludes Cust. Deposits / Sinking Fund) System Reserve Fund Operations SW Mgt & Bond Proceeds Closure Fund Rate Stabilization Recycling Right Of Way Cleanup Renewal And Replacement 365 Days As can be seen above, it is expected that, recognizing the inclusion of the closure fund reserve balances, the System will maintain adequate cash balances to meet the financial target assuming implementation of the recommended and identified rate adjustments. The decline in cash reserves projected through the FY 2019 is associated with anticipated timing of the identified capital and major maintenance expenditures. SECTION 9: COST OF SERVICE AND RATE DESIGN Based on the recommended financial targets, projected cost of revenue requirements and identified rate adjustments, the net system revenue requirements were evaluated relative to the current rate structure comprised of: Residential Collection and Disposal Assessments; Disposal Facility Assessment; Assessed Billing Charge; Solid Waste Operations and Right of Way Surcharges; and Tipping Fees by Type of Waste. -45-

69 Costs were allocated by budgetary line item to the various charges based on a rational nexus among the costs and the respective fees. Adjustments to the allocated rates were then made to recognize: i) benefits of an integrated solid waste operation; ii) market comparisons iii) pricing incentives to discourage out-of-town waste; iv) consideration was also given to the municipal agreements, which indicated restrictions to the annual increase to the tip fees; and v) general rounding of rates for easy of billing. The following table provides a brief summary of the principal assessments and fees recommended for the Fiscal Year 2018: Summary of Historical, Existing, and Recommended Rates Historical Existing Recommended Description Assessments: Collection (Avg. Areas 1-5) [1] $ $ $ Disposal MSW ( Tons) Disposal Yard Waste ( Tons) Disposal Facility Assessment Charge ( Tons) Surcharges Billing Fee Early Prepayment Gross Up (4%) Gross Assessment Average for Areas 1-5 [2] $ $ $ Assessment Paid in February = 1% Discount $ $ $ Assessment Paid in January = 2% Discount Assessment Paid in December = 3% Discount Assessment Paid in November = 4% Discount Tip Fees per Ton by Waste Type MSW w/o Surcharges $31.75 $37.45 $45.45 MSW w/ Surcharges [3] Horticulture / Yard Waste C&D Class III Tires Surcharges per MSW Ton [3][4] $0.55 $0.00 $0.00 Disposal Facility Assessment per Ton [5] $12.40 $16.65 $17.25 [1] Amounts shown reflect the average fee charged for the franchise collection areas 1-5. The recommended Fiscal Year 2017 collection rates reflect the projected average cost of contracted collection per residential single family dwelling unit. [2] Reflects gross assessments before early prepayment discounts as allowed by F.S. Chapter 197. [3] Unincorporated waste generated by Commercial and Multi-Family customers is charged a gate fee per ton including the addition of the base tip fee plus applicable surcharges per ton for MSW deliveries. [4] Amounts shown are not charged to municipal customers, with exception to Fort Myers Beach, Bonita Springs, and the Village of Estero for which the County provides collection services. [5] Presented for informational purposes only since the disposal facility assessment charge is charged to all customers by assessment, with exception to Hendry County customers. As can be seen above, although the recommended rates are designed to recover the targeted revenues as indicated in Section 8 of this report, the recommended fees did not recognize uniform or across-the-board increases. In particular, with respect to the disposal fees the most significant change is related to the proposed increase to the MSW tip fee. Additionally, based on recent trends and historical tonnages, the County is increasing the assessed generation rates for MSW and yard -46-

70 waste from 0.80 to 0.85 and from 0.24 to 0.26 tons per unit, respectively. The recommended disposal fees and collection fees are targeted to generate a net increase in revenues of approximately $5.7 million and $0.0 million, respectively. The following provides a brief discussion concerning the rate design assumptions in development of the recommended rates: Disposal Fees: Tip Fees: The interlocal agreements with the municipalities for disposal services provide limitations to the annual increase to the tip fee. Based on discussions with Division staff although the principal municipal agreements limit the increase to approximately six percent (6%) per year, with the exception of Sanibel which limits increases to three percent (3%) per year, the maximum limit is assumed to be from the original tip fees identified in the respective interlocal agreement. The cost of service allocations for the various tip fees were performed based on discussions with Division staff and reflected consideration of: i) the pro-rata share of the cost of disposal recognizing the actual means of disposal for each respective type of waste processed by the County; ii) the principal purpose of the WTE facility is for the disposal of MSW waste and will aid in maintaining a more stable fee design as the growth in MSW waste deliveries continues to limit capacity at the WTE facility for disposal of other types of waste streams; and iii) maintaining existing fee relationships for tip fees in support of all other wastes, which may currently be disposed of at the WTE facility. The Division will need to closely monitor the cost of service associated with such tip fees as the County continues to receive more waste deliveries and the cost of service increases. The increase in revenues from recommended changes to the tip fees, excluding the tire fee, is estimated at approximately $5.3 million annually. Surcharges: No surcharges are proposed in the Fiscal Year 2018 recommended rate design. Identified costs associated with solid waste operations and right of way operations were funded through the application of net franchise fee and net curbside recycling revenues. The nexus of the application of the franchise fee and recycling revenues to the surcharges relates to the link among the unincorporated customers associated with the generation of the franchise fee and recycling revenues and those same customers, which would pay the surcharges. Disposal Facility Assessment: The Disposal Facility Assessment is designed to recover the fixed costs of the System associated with operation of the disposal facilities. The recommended increase to the Disposal Facility Assessment is expected to generate approximately $0.4 million in additional annual revenue. Billing Fees: The billing fee represents a pass-through of the cost associated with charges from the County's property appraiser and tax collector. The recommended fee is equivalent to the proposed fee to be charged by the property appraiser and tax collector. Collection Fees: The recommended increase to the collection assessment reflects the estimated / actual cost of collection by franchise area. -47-

71 Early Prepayment Discount Pursuant to Florida Statutes, customers may elect to receive a discount of up to 4% if they pay all of the charges and taxes included on the ad valorem tax bill prior to the due date of the bill. The residential solid waste assessment is collected with the tax bill as allowed by Florida Statutes, Chapter 197. The majority of residential customers in the County pay taxes and the solid waste assessment early and receive a discount. The recommended assessment for the Fiscal Year 2018 assumes a mark-up to the calculated fee for the early payment discount. Therefore, if the full 4% discount is recognized by a property owner the County will collect the full rate for service (after the discount is applied); the mark-up of fees included on the ad valorem tax bill is customary and allows the solid waste enterprise fund to fully collect the fees for service. Customer Impact The residential solid waste bill is expected to increase from $11.15 to $11.46 a year or approximately $11.21 a year on average (i.e., $0.93 a month) assuming the residential customer receives the same discount from the prior year. Due to the early prepayment discount, the actual charge a customer pays may vary. Residential customers within the municipalities of Cape Coral, Fort Myers, and Sanibel disposing of waste to County facilities may see their annual disposal charges increase approximately $11 a year (i.e., $0.92 a month) assuming application of the proposed tip fees to assumed deliveries of 0.85 tons of MSW and 0.26 tons of yard waste. It should be clarified that the County is not responsible for collection nor charges such customers for curbside collection for which the respective municipalities administer and control. Additionally, actual impacts to residential customers from application of the Disposal Facility Assessment charge may vary to customers within Cape Coral since the application of the fee is assessed by MSTU. (Remainder of page intentionally left blank) -48-

72 Rate Comparison In order to provide additional information relative to the fees charged for service, the following table provides a summary of comparable fees charged by other Florida counties for collection and disposal service to the existing and proposed fees for the County: Solid Waste Fee Comparison with Other Florida Counties Residential Assessment Tipping Fees Description Collection Disposal Total MSW C&D Yard Waste Tires Lee County Existing[1] [2] $ $ $53.59 $ $ $31.75 $31.75 $24.00 $80.00 Lee County FY18 [1] [2] $ $ $64.73 $ $ $45.45 $32.95 $24.72 $80.00 Other Counties with Waste-to-Energy Facilities: Broward County [3] N/A N/A $ N/A $40.00 $50.00 $ Hillsborough County [4] $ $91.32 $ $68.16 $61.81 $38.01 $ Miami-Dade County [5] N/A N/A $ $66.79 $66.79 $66.79 $ Palm Beach County [4] $ $ $ $ $ $42.00 $45.00 $25.00 $35.00 Pasco County [4] $ $62.00 $ $56.70 $56.70 $56.70 $ Pinellas County [4] N/A N/A $ $37.50 $37.50 $37.50 $37.50 Other Counties without Waste-to-Energy Facilities: Charlotte County [2] $ $41.56 $ $36.00 $36.00 $36.00 $ Collier County [4] N/A N/A $ $ $60.23 $73.92 $40.13 $ Hernando County [4] $ $ $63.05 $ $ $53.00 $20.00 $20.00 $ Manatee County [4] N/A N/A $ $40.00 $61.00 $40.00 $86.00 Polk County [2] $ $44.00 $ $36.50 $36.50 $22.00 $2.00 / Tire Sarasota County [2] N/A N/A $ $57.56 $48.96 $41.37 $ Other System Averages $ $78.66 $ $50.40 $48.68 $39.46 $ [1] Amounts shown reflect the gross assessment before early prepayment discounts. [2] Denotes residential collection service at one (1) day per week for garbage, recycling and yard waste collection. [3] Broward County residential collection includes two (2) days per week for garbage collection, one (1) day per week for recycling collection and one (1) day per month yard waste collection. [4] Denotes residential collection service at two (2) days per week for garbage collection and one (1) day per week for recycling and yard waste collection. Note garbage collection service in Pinellas County is for one (1) or two (2) days per week depending on location. [5] Miami-Dade County residential collection service includes two (2) days per week for garbage / yard waste collection and one (1) day every other week for recycling collection. As can be seen above, the recommended rates for adoption by the BOCC for the Fiscal Year 2018 are projected to remain comparable to and / or below the averages charged by the other surveyed Counties for similar solid waste service. SECTION 10: RECOMENDATIONS Based on the findings of this study the following observations and recommendations are provided for consideration by the BOCC and County administration: The existing disposal and collection fees for service are projected to be insufficient to fund the identified funding requirements of the System and it is recommended that the BOCC consider adopting and implementing the recommended rates for the Fiscal Year 2018; Recognizing the uncertainty surrounding the loss of electric revenues, changes in market conditions and pricing for recyclables, and the timing of the need to construct the proposed WTE (or other disposal and MRF facilities), staff should continue to closely monitor and perform annual financial projections to assess the sufficiency of System revenues to meet the -49-

73 expenditure needs of the System and for compliance with the rate covenants and flow of funds requirements delineated in the Bond Resolution and need for additional rate adjustments; and It is recommended that the County continue its efforts to promote recycling of waste within the County to achieve targeted recycling goals as enacted by the Florida Legislature. (Remainder of the Page Intentionally Left Blank) -50-

74 LEE COUNTY, FLORIDA Solid Waste Division Revenue Sufficiency and Rate Study Table. No. LIST OF TABLES ES-1 Dashboard and Summary of Projected Financial Position and Operational Statistics 1 Historical and Projected Assessed Residential Customer Billing Units and Tonnage Statistics 2 Historical and Projected Disposal Facility Assessment Customer Billing Statistics 3 Historical and Projected Waste Flow Summary by Type of Waste 4 Historical and Projected Waste Flow Summary by Disposal Facility 5 Historical and Projected Waste-to-Energy (WTE) Operational Statistics 6 Projected Assessment and Disposal Fee Revenues Under Existing Rates 7 Historical and Projected Electric Sales Revenue 8 Historical and Projected Operating Expenses 9 Projected Operating Expense Escalation Factors 10 Projected Capital Expenditures 11 Projected Annual Debt Service Payments 12 Projected Fund Balance and Interest Income 13 Projected Solid Waste Disposal Net Revenue Requirements from Rates 14 Projected Solid Waste Collection Net Revenue Requirements from Rates 15 Projected Solid Waste Disposal and Collection Net Revenue Requirements from Rates 16 Historical Rate Covenant Compliance 17 Projected Rate Covenant Compliance 18 Historical, Current and Proposed Assessment, Tipping and Gate Fees Title

75 TABLES