FISCAL YEAR 2015 SOLID WASTE REVENUE SUFFICIENCY AND RATE STUDY

Transcription

1 LEE COUNTY, FLORIDA FISCAL YEAR 2015 SOLID WASTE REVENUE SUFFICIENCY AND RATE STUDY June 2015 Public Resources Management Group, Inc. Utility, Rate, Financial and Management Consultants

2 Public Resources Management Group, Inc. Utility, Rate, Financial and Management Consultants June 30, 2015 Ms. Pamela S. Keyes P.E. Utilities Director Lee County Public Utilities Department P.O. Box 398 Fort Myers, FL Subject: Fiscal Year 2015 Solid Waste Revenue Sufficiency and Rate Study Dear Ms. Keyes: Public Resources Management Group, Inc. (PRMG) is pleased to submit this report for your review and consideration regarding the preparation of solid waste revenue sufficiency and rate study (the "Study") for the Solid Waste Division (the "Division") of the Public Utilities Department on behalf of Lee County (the "County"). The projected forecast period being evaluated encompasses the Fiscal Years 2015 (current budget year) through 2020 (the "Forecast Period"). The following identifies the primary purpose of the Study: Identify the sufficiency of revenues derived from the current charges for solid waste disposal service to fund the projected expenditures of the Division and provide sufficient net revenues to fund necessary transfers for future landfill closure, long-term care, as well as, for future landfill expansion; Provide an evaluation of the Integrated Solid Waste Management System's overall financial position and cash balances / reserves relative to identified need (i.e., accumulated landfill closure and long-term care liabilities, operating capital, etc.) and best management practices and financial targets; and Evaluate the cost of service by waste collection and disposal fee and provide recommendations concerning the rates for service. 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 information provided by staff. 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 Ms. Pamela S. Keyes, P.E. Lee County Utilities Department June 30, 2015 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 of approximately $9.5 million or 32% of disposal fee revenues primarily due to the termination of the existing electric sale and purchase agreement by and between the County and the Seminole Electric Cooperative Inc. effective beginning January 1, 2017; General inflation in the cost of operation and maintenance averaging approximately 4% annually or $2.9 million annually (after adjusting for one-time purchases purchase of equipment) primarily associated with the cost of contracted operations from private providers which approximate 70% of total expenses or on average $53 million during the Forecast Period; and Increase in debt service of $13.7 million (assumes 30 year repayment) beginning in Fiscal Year 2019 for construction of a new Waste-to-Energy Facility (WTE) due to projected increases in the receipt of waste flows and declining capacity available at the County's existing WTE facility. The following table provides a summary of the identified revenue adjustments for the Forecast Period recognizing financial projections under current operations. It is recommended that the County consider adopting rate adjustments for the Fiscal Year 2016 to offset declines in electric, continued inflation of the cost of operations and the recommended elimination of the residential credit / subsidy for the solid waste assessment. With respect to the disposal and collection assessment it is recommended that the County also gross up the assessments for the early prepayment discounts of 4% as allowed by Florida Statutes as part of the ad valorem billing process. Identified Rate Revenue Adjustments by Fiscal Year [1] Recommend Identified Description Disposal Assessment / Tip Fee Rev. Percent Adjustment 13.5% 13.5% 13.5% 35.0% 7.5% Incremental Revenue Addition $4.0m $4.5m $5.2m $15.6m $4.6m Cumulative Revenue Addition $4.0m $8.5m $13.9m $29.7m $34.7m Collection Assessment Revenues Percent Adjustment 9.4% [2] 0.5% [3] 5.5% [3] 2.0% [3] 2.0% [3] Incremental Revenue Addition $2.0m $0.1m $1.3m $0.5m $0.5m Cumulative Revenue Addition $2.0m $2.2m $3.5m $4.1m $4.7m [1] Reflects identified increases to revenues from the collection / disposal assessment and tipping fees for service. [2] Reflects recommended increase to revenues associated with the elimination of the residential credit, gross up for early prepayment of the collection assessment and any identified increases which may result from an increase in cost of contracted collection by service area. [3] Reflects projected increases to recover estimated cost of contracted collection services and may vary based on actual realized increases in such costs.

4 Ms. Pamela S. Keyes, P.E. Lee County Utilities Department June 30, 2015 Page 3 Based on the findings of this analysis the recommended and identified rate revenue adjustments are anticipated to adequately fund the revenue requirements and generate sufficient revenues to maintain compliance with financial policies and covenants of the trust indenture which authorized the issuance of the currently outstanding bonds. 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 Supervising Consultant RJO/dlc Attachments Nicholas T. Smith Rate Analyst

5 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-15 Introduction... 1 Section 1: General Overview... 2 Facilities... 2 Waste-To-Energy (WTE) Facility... 3 Material Recycling Facility (MRF)... 5 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 i-

6 LEE COUNTY, FLORIDA Solid Waste Department Revenue Sufficiency and Rate Study TABLE OF CONTENTS (cont'd.) Title Page No. Section 3: Agreements Contract Operations Franchised Collection Services Waste to Energy Facility (WTE) operations Materials Recycling Facility (MRF) Operations Lee / Hendry Regional Landfill Operations Electric Sales Agreement Interlocal Agreements City of Bonita Springs and City of Fort Myers Beach 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 ii-

7 LEE COUNTY, FLORIDA Solid Waste Department Revenue Sufficiency and Rate Study TABLE OF CONTENTS (cont'd.) Title Page No. Section 7: Revenue Requirements Composition and Forecast Operating Expenses Contracted Collection of Franchise Areas WTE Contracted Operations Financial Effects of Landfill Diversions Other Expense Forecast Assumptions Capital Expenditures Debt Service Closure and Post Closure Transfers Section 8: Revenue Sufficiency and Rate Covenant Compliance Collection Revenue Requirements Disposal Revenue Requirements Financial Position and Financial Compliance Section 9: Cost of Service and Rate Design Early Prepayment Discount Customer Impact Rate Comparison Section 10: Recomendations iii-

8 LEE COUNTY, FLORIDA Solid Waste Division Revenue Sufficiency and Rate Study LIST OF TABLES Table No. ES-1 Title 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 and Projected Rate Covenant Compliance 17 Historical, Current and Proposed Assessment, Tipping and Gate Fees -iv-

9 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 is to: i) prepare a six (6) year financial forecast of operations to determine the sufficiency of existing disposal and collection fees to fund necessary expenditures and fund transfers; and ii) allocate costs to the respective fees for service and provide recommendations concerning rates. 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 adopted fiscal policies (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, 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 costs are then assigned to the respective service and rate (e.g., Collection, Municipal Solid Waste disposal, C&D disposal, Class III disposal, Tire ES-1

10 disposal, etc.) and divided by the billing units to determine the cost of service. The recommended rate is based on the cost of service and may be 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 660,000 residents within unincorporated and incorporated areas of the County and processes incoming waste of approximately 800,000 tons annually. The chart below provides a recent history and forecast of tonnage: Waste by Type (Tons) 1,000, , , , , , , , , , MSW / Other Process. C&D / Class III Yard Waste Sludge Recycling (less Rejects) Tires As can be seen above the forecast anticipates growth in the amount of waste being disposed at County facilities. 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 / tire processing facilities, composting, regional landfill and hazardous waste facility. At 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: (Remainder of page intentionally left blank) ES-2

11 700,000 Waste-to-Energy Capacity & Processed Waste Projection (Tons) 650, , , , , , , Processed Waste Projected Diversions Design Capacity Through-Put Capacity Guaranteed Capacity The WTE facility is currently the primary method of waste disposal for the County and processes over 600,000 tons annually or 75% of all in-bound processed waste. The existing WTE facility is anticipated to exceed the estimated through-put capacity of the facility beginning in the current fiscal year of the Forecast Period. Due to projected population growth and the general improvement in the economy, growth in waste deliveries to the WTE facility is expected to result in growing waste diversions. While the County may divert waste to the Lee / Hendry Regional Landfill (the "Lee / Hendry Landfill") pursuant to existing agreements with adjacent landholders the County is restricted in the type of waste that may be disposed of at the landfill. For more information about waste diversions and the Lee / Hendry Landfill please reference Section 5 of this report. To provide a longer-term solution for disposal of growing waste deliveries, Division staff has assumed the construction of new disposal facilities as discussed in greater detail within subsequent sections of this executive summary and report. To offset the cost of contracted operation and maintenance for the facility, the County sells electricity generated from the burning of waste to the Seminole Electric Cooperative Inc. ("Seminole Electric") pursuant to an electric power purchase agreement dated August 15, 2008 (the "Electric Sale Agreement"). During the Fiscal Year 2014 the County generated and sold more electricity than in any other prior year and generated net sales of electricity of approximately $18 million. However, in a recent letter dated October 2014, Seminole Electric notified the County of its intent to terminate the Electric Sale Agreement effective December 31, 2016 (FY17). Seminole Electric intends to terminate the agreement with the County because of excess electrical capacity resulting from the recent termination as of December 2013 of its second largest member / customer the Lee County Electric Cooperative. The Public Utility Regulatory Policies Act of 1978 ("PURPA"), as amended, requires that Florida Power and Light ("FPL") purchase electricity generated by the County's WTE and conveyed to the grid since the WTE is considered a qualified small renewable energy producer [1]. Sale of electricity to FPL is expected to result in a roughly 50% reduction to current electric sales revenues for the County. The County is not required to sell electricity to FPL if it can secure another electric sales [1] Defined as an entity not engaged in the electric business which generates renewable energy from a facility of eighty (80) megawatts or less. ES-3

12 agreement with another entity, however no other potential purchasers have been identified and it is unknown if the County will be successful in securing a similar agreement to the one entered into with Seminole Electric. Net electric revenues sales are assumed to decline to $8.5 million annually by the Fiscal Year 2018, which represents over a $9 million annual reduction from Fiscal Year 2014 levels. In addition to the anticipated loss of electric revenue, due to the rise in the value of the dollar and reduced energy prices [2], among other factors, the market price for sale of recovered materials has declined. For the Fiscal Year 2014, the County reported the net revenues of recovered materials derived from operation of the MRF, C&D and WTE facilities at approximately $4.6 million. The recycling operations recover various types of materials including paper, fiber, plastic, metal and glass with open market values that can fluctuate materially at times. For example the price of heavy metals, which is a significant source of recycling revenue, has seen a 38% reduction since May 2014 as reported by American Metal Market ("AMM"). The following chart illustrates the recent history for the heavy metal index as reported by AMM: It should be noted that the County has made recent investments to the metal recovery equipment at the WTE, which has helped to offset some of the recent declines in the market price of ferrous metals. The following chart provides additional information concerning the overall change in the average monthly commodity price for the sale of recyclables at the MRF: (Remainder of page intentionally left blank) [2] Wall Street Journal Recycling Becomes a Tougher Sell as Oil Prices Drop by Georgi Kantchev and Serena Ng. ES-4

13 $ $ $ $ $80.00 Average Monthly Commodity Price ($/Ton) for Recycled Materials Sales FY12-FY15 (YTD - April) $ FY2012 FY2013 FY2014 FY2015 $60.00 $77.01 $40.00 $20.00 $0.00 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 The County is affected by changes in commodity prices in two ways: i) direct increase or reduction in revenues from the sale of materials affecting cash flows and cash balances; and ii) the long run cost of contracted operations and maintenance for the MRF. The existing contract for the operation of the MRF is predicated on a business model which relies on a minimum value for the sale of recyclables. Based on discussions with Division staff, should prices continue to decline it is expected that the cost of operation for the MRF will increase above what is currently assumed in this forecast, which may result in additional future rate adjustments. It should be noted that the existing agreement for contract operations of the MRF was renewed for an additional two (2) year period through April 30, 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 currently achieves an overall recycling rate of 70% for the Fiscal Years 2014 and 2013, which is second (2 nd ) among all counties within the State. The following chart as reported by the FDEP indicates the overall recycling rates for the top ten most populace counties (in order from most populace counties): (Remainder of page intentionally left blank) ES-5

14 Miami-Dade Broward Palm Beach Hillsborough Orange Pinellas Duval Lee Polk Brevard County Reycling Credits Large Counties (2013) 0% 10% 20% 30% 40% 50% 60% 70% Traditional Recycling Renewable Energy Recycling Credits Source: Credits_2013.pdf 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, Division staff has assumed the construction of a new WTE and MRF facility at a total estimated cost of over $273 million. The forecast assumes the issuance of debt to fund the capital expenditures with repayment over a thirty (30) year period. The following chart provides a projection of the annual debt service payments relative to existing payments for debt service associated with the currently outstanding Series 2006 Bonds (issued for the construction of the current WTE facility): (Remainder of page intentionally left blank) ES-6

15 Summary of Debt Service Payments $27,000,000 $24,000,000 $21,000,000 $18,000,000 $15,000,000 $12,000,000 $9,000,000 $6,000,000 $3,000,000 $0 Series 2006 Bonds Additional Bonds 1 To minimize the financial impacts to existing customers the proposed bonds assumed interest only payments through the Fiscal Year The interest only payments were assumed at approximately $13.7 million annually with level debt service thereafter of approximately $20.8 million. It should be noted however that based on discussions with the County's Financial Advisor the repayment term may be limited to a maximum of twenty (20) years which would have the effect of increasing the associated debt service payment by approximately $6 to $7 million annually and would require further rate adjustments above what is already contemplated in this study. In addition to the financial pressures from the expected reduction to electric revenues and increase in debt service the financial forecast assumes inflation on the cost of operating expenses of approximately 4% a year. This increase is primarily due to application of the price index applications associated with contracted operations and collection. The following table provides an indication of the revenue sufficiency and recommended / identified rate adjustments for the Forecast Period: (Remainder of page intentionally left blank) ES-7

16 Disposal Net Revenue Requirements and Revenue Sufficiency ($1,000s) [1] Projected Fiscal Year Ending September 30, Description Operation and Maintenance Expenses [2] $45,214 $44,382 $45,594 $47,460 $49,562 $51,732 Annual Debt Service: Series 2006A Bonds $6,165 $9,127 $9,137 $9,147 $9,152 $9,162 Series 2006B Bonds 2, Series 2019 Bonds ,664 13,664 Total $9,126 $9,127 $9,137 $9,147 $22,816 $22,826 Transfers and Capital [3] $1,413 $1,802 $1,901 $1,988 $2,024 $1,801 Gross Revenue Requirements $55,753 $55,312 $56,632 $58,595 $74,401 $76,359 Less Income / Funds from Other Sources: Investment Income $238 $287 $343 $322 $663 $863 Net Electric Revenue 16,997 16,542 11,385 9,609 9,607 9,606 Franchise Fees 1,759 1,785 1,809 1,834 1,858 1,881 Recovered Materials & Misc. Rev. [4] 2,241 2,241 2,241 2,241 2,241 2,241 Compost Sales Other Revenues [5] Total $22,317 $22,028 $16,954 $15,196 $15,568 $15,770 Net Disposal Funding Requirements $33,436 $33,284 $39,677 $43,399 $58,833 $60,590 Existing Assessment and Tip Fee Revenue $29,008 $29,245 $29,505 $29,992 $30,471 $30,941 Current Period Rate Revenue Adj. [6] N/A 13.5% 13.5% 13.5% 35.0% 7.5% Adjusted Disposal Revenue $29,008 $33,194 $38,009 $43,852 $60,146 $65,655 Surplus / (Deficiency) [7] ($4,428) ($91) ($1,668) $453 $1,313 $5,065 [1] Amounts shown derived from Table 13 at the end of this report. [2] Amounts shown include the cost of contracted operation and maintenance for the WTE facility, which is net of revenues derived from the sale of ferrous and non-ferrous metals. [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 include approximately $740,000 of miscellaneous revenues primarily related to the sale of metals and approximately $1.5 million of recovered materials from the operation of the MRF facility. Amounts shown do not include revenues from the sale of ferrous and non-ferrous revenues from the operation of the WTE facility. Also reference Note [2] above. [5] Includes revenues from advance disposal fees related to C&D operations, 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. (Remainder of page intentionally left blank) ES-8

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 $23,052 $23,542 $24,022 $25,701 $26,559 $27,426 Annual Debt Service Transfers and Capital Gross Revenue Requirements $23,052 $23,542 $24,022 $25,701 $26,559 $27,426 Less Income / Funds from Other Sources: Investment Income $0 $0 $0 $0 $0 $0 Residential Credit [2] Contracted Fines [3] Total $936 $20 $20 $20 $20 $20 Net Collection Funding Requirements $22,117 $23,522 $24,002 $25,681 $26,539 $27,406 Existing Collection Assessment Revenue $21,169 $21,500 $21,822 $22,133 $22,432 $22,718 Rate Revenue Adjustments [4] N/A 9.4% 0.5% 5.5% 2.0% 2.0% Adjusted Disposal Revenue $21,169 $23,522 $24,002 $25,681 $26,539 $27,406 Surplus / (Deficiency) [5] ($948) $0 $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. [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. As can be seen above the existing collection assessment revenues are not projected to be sufficient to fund the collection-related revenue requirements of the System due to the recommended elimination of the residential credit / subsidy (essentially the use of reserves), increases in the cost of operation and for the lack of recognition of the early prepayment discounts of up to 4% as allowed by Florida Statutes as part of the ad valorem billing process in the historical rate setting process which had the effect of reducing collection assessment revenues received. In determination of the revenue sufficiency for the financial forecast an evaluation of the existing cash reserves, credit worthiness of the System and compliance with the Indenture of Trust dated June 15, 1991, as amended and modified from time to time (the "Trust Indenture") was performed. Two (2) primary financial metrics were recognized to assess the financial strength of the System. These two primary metrics included: i) debt service coverage from net revenues (without transfers from reserves) and ii) the level of liquidity or cash reserves. The solid waste ES-9

18 system for the County is currently rated A3 [3] as of June 2014 by Moody's Investor Service ("Moody's"), however has been placed under a negative outlook / watch. The identified challenges to the credit rating are related to multi-year declines in debt service coverage, contractual agreements which expire prior to the full repayment of debt and weak legal protection for bond holders. In addition, Moody's identified that the System could be downgraded if the System did not maintain: i) at least a 1.0x all-in debt service coverage (i.e., net revenues >= debt service payments) and ii) cash reserves equal to or greater than 18 months of operating expenses (i.e., $93 million based on FY 2014 actual expenses). In developing the recommended financial targets, consideration was given to the credit challenges, but was also balanced against the financial impact to customers of the System. The determination of debt service coverage was calculated in accordance with Section 711 of the Trust Indenture [4] and a detailed calculation of compliance with the Trust Indenture can be found in Table 16 at the end of this Report. The following chart provides an illustration of the recent historical calculation of coverage (before required transfers) as reported in the County's Comprehensive Annual Financial Report (the "CAFR") for the fiscal years 2013 and 2014 and for the Forecast Period assuming application of the identified rate revenue adjustments: 200.0% 180.0% 160.0% 179.0% Debt Service Coverage (w/o Use of Reserves) 140.0% 120.0% 100.0% 80.0% 124.0% 94.0% 78.0% 102.0% 105.0% 120.0% 60.0% 40.0% 32.0% 20.0% 0.0% Calculated w/o Reserve Transfers Minimum Target Forecast Target [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. [4] The calculation of coverage recognizes gross revenues (exclusive of recycling revenues from the MRF) 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-10

19 As can be seen above, the recommended and identified rate adjustments target a 1.0x debt service coverage from Net Revenues (exclusive of transfers from reserves) over a phased three (3) fiscal year period (i.e., 1.0x achieved in FY 2018) with a 1.2x debt coverage by the end of the Forecast Period. The notable decline in debt service coverage for the Fiscal Year 2015 is related to a forecasted reduction in net revenues of approximately $8 million due to: a) one-time increase in expenses of $2.5 million for the purchase of recycling toters; b) net reduction to revenues of $2 million primarily associated with loss of the renewable energy credit and lower electric revenues, and c) $3.5 million increase in the cost of operation. With respect to the liquidity (cash position) of the system, it is recommended that the County attempt to maintain the current overall cash liquidity of the System; however, this is only possible if the system can improve net revenue margins and generate net revenues in excess of 1.0x debt coverage. As a result of the rate phasing and low net revenue margins, cash reserves are expected to be drawn down primarily due to identified capital spending for the proposed acquisition of land and construction of the additional MRF facility. To phase in the need for the identified rate adjustments and maintain liquidity in subsequent years to the Forecast Period, the County should consider exploring alternative disposal options to delay the need for the construction of the additional MRF and WTE facilities. The following table provides a summary of cash reserves by fund: Projected Ending Fund Balance ($1,000s) Projected Fiscal Year Ending September 30, Description Fund Operations $5,196 $5,196 $5,196 $5,196 $5,196 $5,196 Fund Subaccount Customer Deposits Fund Solid Waste Management 33,553 31,921 28,740 6,973 85,836 2,007 Fund Subaccount R&R 1,500 1,500 1,500 1,500 1,500 1,500 Fund Subaccount System Reserve Fund 25,748 25,657 23,989 24,442 25,755 30,820 Fund Recycling 11,136 11,497 3,918 4,364 4,751 4,944 Fund Right Of Way (ROW) Cleanup Fund Closure Fund 10,100 10,832 11,617 12,498 13,444 14,487 Fund 40162/63 Debt Service Sinking 1,896 2,024 2,166 2,316 9,301 9,466 Fund Debt Service Reserve 3,069 3,069 3,069 3,069 23,830 23,830 Total Projected Available Fund Balances $92,762 $92,260 $80,759 $60,922 $170,177 $92,814 (Remainder of page intentionally left blank) ES-11

20 Although the County is projected to maintain approximately $93 million in average annual cash balances, the majority of such funds are restricted to a specific purpose or use such as landfill closure, debt service payments or future capital funding as shown below: Projected Ending Fund Balance Minimum Reserve Target ($1,000s) Projected Fiscal Year Ending September 30, Description Total Projected Available Fund Balances $92,762 $92,260 $80,759 $60,922 $170,177 $92,814 Less Restricted Funds: Debt Service Related Fund Balances ($4,965) ($5,093) ($5,236) ($5,385) ($33,131) ($33,296) Restricted for Landfill Closure (10,100) (10,832) (11,617) (12,498) (13,444) (14,487) R&R Fund Requirement per Trust Indenture (1,500) (1,500) (1,500) (1,500) (1,500) (1,500) Restricted Purpose Recycling and ROW (11,687) (12,049) (4,469) (4,915) (5,302) (5,495) Restricted Purpose Capital and Bond Funds (33,553) (31,921) (28,740) (6,973) (85,836) (2,007) Customer Deposits (13) (13) (13) (13) (13) (13) Net Available for Operating Reserve Targets $30,944 $30,853 $29,185 $29,638 $30,951 $36,016 Targeted Operating Reserve Balances: 120 Days of Operating Expenses $22,444 $22,331 $22,887 $24,053 $25,026 $26,025 One (1) Year of Electric Revenue 16,997 16,542 11,385 9,609 9,607 9,606 Total $39,441 $38,873 $34,272 $33,661 $34,633 $35,631 Net Available Funds Above / (Below) Target ($8,497) ($8,020) ($5,087) ($4,024) ($3,682) $385 As can be seen from the prior table after deductions for the identified restrictions net available cash balances for operating reserves average approximately $36 million during the Forecast Period. For purposes of this study, it is recommended that the County target minimum operating reserve balances to reduce financial risks equal to: a) 120 days of operating expenses; plus b) twelve (12) months of budgeted electric revenues in order to provide a partial contingency for interruption of service to the WTE facility. Although the forecast does not currently recognize compliance with the recommended targets, it is expected that stronger cash flow targets will help improve cash reserve targets by the final year of the Forecast Period. 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 ES-12

21 recognize benefits of an integrated solid waste operation, market comparisons, pricing incentives to discourage out-of-town waste and general rounding of rates for easy 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 2016 rates please reference Section 9 of this report. The following table provides a brief summary of the principal assessments and fees recommended for the Fiscal Year 2016: Summary of Historical, Existing, and Recommended Rates Historical Existing Recommended Description Assessments: Collection (Avg. Area 1-5) [1] $ $ $ Residential Credit (4.00) (5.72) 0.00 Disposal MSW (0.80 Tons) Disposal Yard Waste (0.24 Tons) Disposal Facility Assessment Charge (0.80 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 $30.00 $30.00 $31.75 MSW w/ Surcharges [3] Horticulture / Yard Waste C&D Class III Tires Surcharges per MSW Ton [3][4] $4.93 $4.33 $0.55 Disposal Facility Assessment per Ton [5] $6.00 $6.00 $12.40 [1] Amounts shown reflect the average fee charged for the franchise collection areas 1-5. The recommended Fiscal Year 2016 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 and Bonita Springs for which the County provides collection services and represented as Franchise Area 1. [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 along with 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. As can be seen above the overall residential collection and disposal assessment for unincorporated residents of ES-13

22 the County includes 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 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 is expected to increase from $18.51 to $21.64 a year or approximately $19 a year on average (i.e., $1.60 a month) assuming the residential customer receives the same discount from the prior year. Residential customers within municipalities (excluding residents of Bonita Springs and Fort Myers Beach) disposing of waste to County facilities may see their annual disposal charges increase approximately $7 [5] a year or $0.60 a month (i.e., assumes 0.80 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 $ $ (Net of Res. Credit) $40.07 $ $ $30.00 $28.00 $22.65 $55.00 Lee County FY16 [*] $ $ $45.75 $ $ $31.75 $31.75 $24.00 $80.00 Other Counties with Waste-to Energy Facilities: Broward County N/A N/A $ $ $50.00 $30.00 $50.00 $ Hillsborough County $ $91.32 $ $68.16 $61.81 $38.01 $71.50 Miami-Dade County N/A N/A $ $66.34 $66.34 $66.34 $ Palm Beach County $141 - $209 $ $ $ $42.00 $45.00 $25.00 $50.00 Pinellas County N/A N/A $ $37.50 $37.50 $37.50 $37.50 Other Counties without Waste-to Energy Facilities: Charlotte County N/A N/A $ $36.00 $36.00 $36.00 $ Collier County $ $ $49.66 $ $ $53.61 $65.80 $77.85 $ Hernando County $ $ $63.05 $ $ $53.00 $20.00 $20.00 $ Manatee County $ $48.36 $ $36.00 $61.00 $36.00 $86.00 Pasco County $ $62.00 $ $56.70 $56.70 $56.70 $ Polk County $ $44.00 $ $36.50 $36.50 $22.00 $2.00 / Tire Sarasota County $95.69 $63.79 $ $57.56 $48.96 $41.37 $ Other System Averages $ $74.65 $ $49.45 $47.13 $42.23 $99.53 [*] Amounts shown reflect the gross assessment before early prepayment discounts. [5] 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 as a result of the method of fee application through MSTU or assessment. ES-14

23 As can be seen above, the County's proposed rates being recommended for adoption by the BOCC for the Fiscal Year 2016 are projected to remain very comparable to and / or below the average charged by the other surveyed Counties for similar solid waste service. 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 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 2016; 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 expenditure needs of the System and for compliance with the rate covenants and flow of funds requirements delineated in the Trust Indenture and need for additional rate adjustments; Develop a formal financial policy to outline near-term and long-term financial goals to provide guidance in the operations of financial management intended to help minimize certain financial risks and promote the overall credit worthiness of the System. Specifically, the policy should identify minimum targeted debt coverage or cash flows, operating reserve and capital reserve targets; Evaluate possible alternatives to the near term construction of the new WTE and MRF facilities in order to delay use of reserves and the issuance of the corresponding proposed bond issuance identified in the Fiscal Year 2019, which might provide for a general improvement to the fiscal strength of the System (assuming delaying such improvements are operationally feasible and do not result in operating costs greater than forecasted) and reduce future rate adjustments identified in this report; and Continue efforts to promote recycling of waste within the County to achieve targeted recycling requirements as required by State regulation. (Remainder of Page Intentionally Left Blank) ES-15

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 2015 (the current budget year) through 2020 (the "Forecast Period"). Specifically, PRMG was tasked with: Developing a 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: o o o o o o o o 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 minimum fund balance reserves relative to best management practices. 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 650,000 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 800,000 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 2014, the County was second (2 nd ) in the State with a reported recycling rate by the FDEP of approximately 70%. 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 primary satellite 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 2014 the County burned over 600,000 tons of waste or 75% 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 545 kwh of net electricity per ton, while reducing the total volume of the waste by 90%. This means burning 30 tons of waste results in enough electricity to power a residential home in Florida for one (1) year and producing a dense ash by-product that is landfilled with a volume equal to only 3 ton of MSW. The following diagram provides an overview of the WTE facility operations: 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 2014, the County generated a gross electrical production of 0.64 MWh or recycling credit for every ton burned. It should be noted that if the County achieves a recycling diversion 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. 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 Outstanding Series 2006 Bonds. The agreement with Covanta is valid through November 30, 2024 and identifies, among other things, -3-

27 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 $18 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. (Remainder of Page Intentionally Left Blank) -4-

28 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 80,000 tons for the last three (3) years. The MRF operates using electricity produced by the WTE facility. During processing not all materials can be recycled resulting in residuals which are routed to the WTE facility to be burned. The MRF recycling residuals have approximated 13% of total inbound recycling materials for the last three (3) years. The FDEP provides credits for every ton of recycled waste. The following illustration provides an overview of the facility equipment and sorting stations. (Remainder of page intentionally left blank) -5-

29 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 2013: Estimated 2013 Recycled Materials by Weight / Revenue 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % by Weight % by Revenue Source: ReCommunity 2013 Annual Sustainability Report & County Invoices Aluminium #1 Plastic Other Cardboard Glass Paper As can be seen from the prior table, over 85% of the recycled materials by weight includes 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 are 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 recently 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: (Remainder of page intentionally left blank) -6-

30 $ $ $ $ $80.00 Average Monthly Commodity Price ($/Ton) for Recycled Materials Sales FY12-FY15 (YTD - April) $ FY2012 FY2013 FY2014 FY2015 $60.00 $77.01 $40.00 $20.00 $0.00 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 As can be seen above, the average monthly rate from recycled materials has declined since For reference, the County reported declines in recycled material revenue sharing from $3.0 million in FY 2011 to $2.2 million in FY 2014 or an approximate 26% decline. For purposes of this analysis and recognizing continued declines in the average market rates for recycled materials the forecast of such revenues were conservatively assumed at approximately $1.5 million annually or approximately 30% below reported FY 2014 levels. 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 over 58,000 tons for the last three (3) years. Of the processed waste approximately 23,000 tons were reported as recovered and recycled, of which a portion was repurposed as a landfill amendment for drainage or road maintenance, while approximately 35,000 tons were burned for energy at the WTE facility. 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. (Remainder of page intentionally left blank) -7-

31 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: 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 150,000 tons annually, Class III waste approximating 12,000 tons annually and some minor amounts of MSW waste. The County also landfills sludge not used for composting which approximates 7,000 tons annually. The following provides an overview of the facility: (Remainder of page intentionally left blank) -8-

32 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 = 12%; Class III: 25 active acres / Capacity Utilization = 10% / Expandable up to 128 acres; and Class I: 38 active acres / Capacity Utilization = 52% / Expandable up to 90 acres. 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 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 prior photograph), which receives approximately 20,000 tons of mulched yard waste and approximately 40,000 tons of sludge. The facility generates approximately 20,000 tons of compost annually with a majority of the material sold in bulk to local landowners for agricultural -9-

33 uses (e.g., orange groves, etc.). The remaining compost is sold to retail customers in bags or by cubic yard / ton at County 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. 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 -10-

34 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. 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, which is exclusive of contracted professional 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 the Seminole Electric Cooperative, Inc. This section provides a brief overview of the principal agreements affecting operations for the County. -11-

35 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 million or 34% 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: Incorporated Areas: Area 1: South / Bonita Springs and Fort Myers Beach Unincorporated Areas: Area 2: Southwest / Captiva, Iona, McGregor Area 3: Southeast / San Carlos Area 4: Northeast / Leigh Acres, Alva Area 5: Northwest / Pine Island, North Fort Myers Area 6: Northwest / Boca Grande 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 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 and Fort Myers Beach, 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 -12-

36 agreement with Waste Management Inc. of Florida and special agreement with Charlotte County in order for waste for this minor service area to be collected and delivered to Charlotte County. Additionally, the County recently entered into a new agreement for collection services with Progressive Waste Solutions of Fl. Inc. for service to Franchise Area 4. The current agreement is valid for seven (7) years commencing with service in Fiscal Year 2016 with two (2) optional one (1) year renewals. The agreement allows for indexing of collection rates after the initial year. The initial term for the existing franchise collection agreements for service areas 1, 2, 3 and 5 will terminate September 30, 2015 and may be extended for two (2) one (1) year renewals. Based on discussions with Division staff the County plans to solicit bids for new agreements during the Forecast Period. Waste to Energy Facility (WTE) operations Contract operations for the WTE represent a net cost of approximately $21.5 million (gross expense before revenue sharing = $23 million) or 32% 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 2014 by approximately 39,000 tons or 7% of the guarantee. Covanta has a responsibility to process the tonnage delivered up to the Processing Guarantee as defined by agreement, which for the Fiscal Year 2014 was also 569,619. 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 $14,347,000 for a Process Guarantee of 569,619 during the Fiscal Year 2014, which is allowed to be adjusted for the cumulative effects of inflation from the effective date of the agreement based on a composite index. The OM fee for the Fiscal Year 2014 after adjusting for inflation was approximately $19 million, which represents the majority of the expense. ETF = Excess Tonnage Fee represents an additional charge per ton of processed waste above the Processing Guarantee 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 $0.9 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. Such amounts are -13-

37 based on actual costs exclusive of any markup for profit and were approximately $1.4 million 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 WTE generated record electric sales during the Fiscal Year2014 and therefore the EC was approximately $1.8 million for the period, however has averaged approximately $1.5 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 $3.25 million during the Fiscal Year 2014 of which approximately $1.6 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. For the Fiscal Year 2014 the MD credited to the County was approximately $40,000. 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 2014 resulted in a $0.3 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"). The contract was recently extended through April 30, The agreement for operation of the MRF has been amended several times since originally entered into August 24, ReCommunity is responsible for the processing and remarketing of single stream recycling delivered and processed at the County's MRF facility. 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 generated from operations. Therefore, the actual cost of operation is not provided to the County. The shared revenues with the County are calculated based on the addition of a base fee of $10.00 per ton of material delivered + 70% x $16.01 per ton for materials received with an Average Commodity Revenue ("ACR") of marketed recyclables exceeding $61.00 for total deliveries less than 60,000 tons or 78% x $22.01 for ACR of recyclables above $55.00 and tonnage delivered greater than -14-

38 60,000 tons. Based on the delivery of recyclables and market value of the recyclables the County received approximately $3 million during the Fiscal Year It should be noted that the County remitted approximately $1.0 million in recycling revenues 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 $1.34 per ton of waste landfill by WMI. Electric Sales Agreement Gross electrical sales revenues (i.e., prior to remittance of 10% electrical revenue sharing with Covanta / WTE contract operator) were reported at approximately $20.3 million during the Fiscal Year 2014 and represented a record year for electrical energy production and sales revenues. The County entered into an electric power purchase agreement with the Seminole Electric Cooperative Inc. (previously defined as "Seminole Electric") on August 15, 2008 (previously defined as "Electric Sale Agreement"). The original agreement term was established through December 31, 2028; however, is being terminated by SEC effective as of December 31, 2016 pursuant to section of the Electric Sale Agreement. It should be noted that Seminole Electric intends to terminate 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 existing agreement identifies three (3) payments to the county including: i. Energy sales payment based on the net electricity sold to Seminole Electric times (x) the off-peak or on-peak rate (i.e., approximately $40 per MWh) indexed monthly based on the twelve (12) month rolling average of Seminole Electric's fuel costs. The County reported approximately $14.3 million in energy sales during the Fiscal Year Such payments will terminate 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 Capacity Payment Term. For the Fiscal Year 2014 the County reported a capacity payment of $4.2 million. Such payments will terminate with the agreement subsequent to December 31, 2016; -15-

39 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 County reported revenue from REC payments of approximately $1.7 million during the Fiscal Year The REC Term terminated effective December 31, 2014 and the County no longer receives REC payments from Seminole Electric. It should be noted that the Public Utility Regulatory Policies Act of 1978 ("PURPA"), as amended, requires that Florida Power and Light ("FPL") purchase electricity generated by the County's WTE and conveyed to the grid since the WTE is considered a qualified small renewable energy producer [6]. Sale of electricity to FPL is expected to result in a roughly 50% reduction to current electric sales revenues for the County. The County is not required to sell electricity to FPL if it can secure another electric sales agreement with another entity, however no other potential purchasers have been identified and it is unknown that the County will be successful in securing a similar agreement to the one entered into with Seminole Electric. Gross annual electric revenue sales are assumed to decline from a high of approximately $20 million reported during the Fiscal Year 2014 to approximately $10 million by the Fiscal Year 2018, representing a material decline in revenues which the County will need to offset with 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 and Town of Fort Myers Beach. 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: City of Bonita Springs and City of Fort Myers Beach The Cities of Bonita Spring's and 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 environmental 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 [6] Defined as an entity not engaged in the electric business which generates renewable energy from a facility of eighty (80) megawatts or less. -16-

40 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 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. 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 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 is also responsible for the administration and collection of household hazardous waste within the municipality. 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 no-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 $3.3 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. -17-

41 Pursuant to the recent amendment, the County shall accept all biosolids produced by the City's wastewater treatment facilities and is charged at the same rate as the City of Fort Myers, which may be escalated annually thereafter as allowed by agreement. 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 municipal'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 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 $2.7 million annually. This does not consider any revenues from the sale of recovered materials from -18-

42 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 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 -19-

43 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 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 current fees for service are $32.60 per ton for receipt of biosolids and $7.21 per ton for the sale of compost per ton which 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 2014 were approximately $150,000. 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. Residential Assessment Credit: represents a reduction to the franchised residential assessment from recycling fund reserve balances derived from retained recycling revenues from prior periods and generated by from the same customer class to mitigate increases in the cost of service. 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 -20-

44 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 passthrough 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. Tipping Fees by Type of Waste: charged to customers not assessed the Residential Disposal Assessment for delivery of waste based on actual weighed deliveries. (Remainder of page intentionally left blank) -21-

45 The following presents the recent and current rates charged by the County for collection and disposal services: Summary of Recent Historical and Existing Rates Description Assessments Collection (Avg. Area 1-5) [1] $ $ $ Residential Credit (3.00) (4.00) (5.72) Disposal MSW Disposal Yard Waste Disposal Facility Assessment Charge Surcharges Billing Fee 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 $32.00 $30.00 $30.00 MSW w/ Surcharges [3] Horticulture / Yard Waste C&D Class III Tires Surcharges per MSW Ton [3][4] $5.74 $4.93 $4.33 Disposal Facility Assessment per Ton [5] $6.00 $6.00 $6.00 [1] Amounts shown reflect the average fee charged for the primary franchise collection areas 1-5. [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 disposal. [4] Amounts shown are not charged to municipal customers, with exception to Fort Myers Beach and Bonita Springs for which the County provides collection services and is represented as Franchise Area 1. [5] 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. The fees for service shown above have generally declined while the cost of operations has increased over the same period. Additionally, the residential collection and disposal assessment for unincorporated residents of the County includes 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 does not adjust or gross up for early prepayment. The following chart as prepared by Division staff provides additional history for the average residential assessment: -22-

46 $250 Average Residential Assessments $200 $150 $100 $50 $ 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 currently outstanding Solid Waste System Revenue, Series 2006A and the Solid Waste System Revenue Refunding, Series 2006B (Collectively the "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 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 $30.00 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 fees are currently below levels charged during the last eleven (11) years and also below levels in effect 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. -23-

47 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 $ $ (Net of Res. Credit) $40.07 $ $ $30.00 $28.00 $22.65 $55.00 Other Counties with Waste-to Energy Facilities: Broward County N/A N/A $ $ $50.00 $30.00 $50.00 $ Hillsborough County $ $91.32 $ $68.16 $61.81 $38.01 $71.50 Miami-Dade County N/A N/A $ $66.34 $66.34 $66.34 $ Palm Beach County $141 - $209 $ $ $ $42.00 $45.00 $25.00 $50.00 Pinellas County N/A N/A $ $37.50 $37.50 $37.50 $37.50 Other Counties without Waste-to Energy Facilities: Charlotte County N/A N/A $ $36.00 $36.00 $36.00 $ Collier County $ $ $49.66 $ $ $53.61 $65.80 $77.85 $ Hernando County $ $ $63.05 $ $ $53.00 $20.00 $20.00 $ Manatee County $ $48.36 $ $36.00 $61.00 $36.00 $86.00 Pasco County $ $62.00 $ $56.70 $56.70 $56.70 $ Polk County $ $44.00 $ $36.50 $36.50 $22.00 $2.00 / Tire Sarasota County $95.69 $63.79 $ $57.56 $48.96 $41.37 $ Other System Averages $ $74.65 $ $49.45 $47.13 $42.23 $99.53 [*] Where applicable, amounts shown reflect the gross assessment before early prepayment discounts. As can be seen above, the County's existing rates for the Fiscal Year 2015 are competitive and / or below the averages charged by the other solid waste divisions surveyed. (Remainder of Page Intentionally Left Blank) -24-

48 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 approximately 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 153, , , , , , , , , , ,614 Avg. Multi-family Units 84,438 84,789 85,038 85,211 85,503 85,698 85,895 86,073 86,231 86,370 86,488 Avg. RV Units 6,437 6,482 6,629 6,742 6,625 6,547 6,554 6,560 6,564 6,568 6,571 Commercial (000's Sq Ft) 95,084 95,703 95,897 95,673 96,107 96,586 96,877 97,158 97,429 97,690 97,941 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 15,569 15,676 16,019 16,565 17,119 17,622 18,031 18,387 18,685 18,923 19,098 Avg. Multi-family Units 16,923 17,115 17,222 17,305 17,552 17,852 18,138 18,392 18,612 18,798 18,949 Avg. RV Units Commercial (000's Sq Ft) 36,753 37,237 37,414 37,576 37,847 37,983 38,127 38,257 38,372 38,472 38,556 Sanibel Avg. Residential Units 3,970 3,994 3,996 4,000 4,012 4,020 4,020 4,020 4,020 4,020 4,020 Avg. Multi-family Units 3,766 3,765 3,763 3,762 3,762 3,762 3,762 3,762 3,762 3,762 3,762 Avg. RV Units Commercial (000's Sq Ft) 1,766 1,764 1,743 1,731 1,732 1,727 1,727 1,727 1,727 1,727 1,727 [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). [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 can be seen above the majority of customers served during the Fiscal Year 2014, approximately 58%, are located within the franchised service areas of the County at approximately 157,000 residential single family disposal units, including approximately 23,700 franchised residential units within Bonita Springs and Fort Myers Beach. By contrast other customers within Hendry County and the Cities of Cape Coral, Fort Myers and Sanibel are estimated to represent approximately 114,400 residential housing units. The forecast assumes growth in franchised residential units of approximately 1.4% annually. The following table provides a projection of the primary waste streams by customer classification / location. (Remainder of page intentionally left blank) -25-

49 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 278, , , , , , , , , , ,819 Yard Waste 76,281 68,453 69,248 67,045 65,662 66,764 67,867 68,483 69,078 69,649 70,197 C&D / Class III 46,523 55,530 65,595 82,940 70,236 71,394 72,576 73,781 75,010 76,264 77,543 Recycling 38,205 44,327 46,013 66,505 53,477 54,415 55,208 55,976 56,719 57,433 58,115 Hendry County Delivered MSW Tons 30,115 31,679 30,396 30,157 29,378 29,378 29,378 29,378 29,378 29,378 29,378 Yard Waste 5,477 3,809 3,429 3,456 3,755 3,755 3,755 3,755 3,755 3,755 3,755 C&D / Class III 4,975 2,184 1,731 2,139 2,751 2,751 2,751 2,751 2,751 2,751 2,751 Municipalities / Not Franchised Primary MSW Waste Generation Cape Coral MSW 88,156 83,080 84,447 88,793 91,334 94,074 96,803 99, , , ,479 Fort Myers MSW 55,498 56,672 56,789 58,738 60,576 62,393 64,203 66,001 67,783 69,545 71,284 Sanibel - MSW 7,976 8,080 8,221 8,085 8,296 8,544 8,792 9,038 9,282 9,524 9,762 Total 151, , , , , , , , , , ,524 Recycling Generation Cape Coral Recycling 10,806 15,673 15,936 17,032 17,293 17,812 18,347 18,897 19,464 20,048 20,649 Fort Myers Recycling 925 4,263 4,502 4,814 5,055 5,206 5,362 5,523 5,689 5,860 6,035 Sanibel Recycling 1,355 1,231 1,289 1,470 1,482 1,526 1,572 1,619 1,668 1,718 1,769 Total 13,087 21,167 21,727 23,316 23,830 24,545 25,281 26,039 26,821 27,625 28,454 [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 2014, the relationship of MSW waste generation among the franchised (289,000 tons / 60%) and non-franchised (189,600 tons / 40%) customers is generally consistent with relationship of residential units as previously discussed. The forecast assumes average annual growth in MSW waste of approximately 8,000 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 rebound has helped to offset increases in costs as shown below: (Remainder of page intentionally left blank) -26-

50 Waste by Type (Tons) 1,000, , , , , , , , , , MSW / Other Process. C&D / Class III Yard Waste Sludge Recycling (less Rejects) Tires 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 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: 700,000 Waste-to-Energy Capacity & Processed Waste Projection (Tons) 650, , , , , , , Processed Waste Projected Diversions Design Capacity Through-Put Capacity Guaranteed Capacity The WTE facility is currently the primary method of waste disposal for the County and processes over 600,000 tons annually or 75% of all in-bound processed waste. The existing WTE facility is anticipated to exceed the estimated through-put capacity of the facility beginning in the current fiscal year of the Forecast Period. Due to the growth in waste deliveries to the WTE facility waste diversions to the County's landfill are expected to grow. The following table provides a summary of estimated landfilled waste over the recent historical and projected period: -27-

51 300,000 Historical and Projected Landfilled Waste by Type (Tons) 250, , , ,000 50, Ash Residue Yard Waste Cover / Storage Class III / C&D MSW/Tire/Other As can be seen from the prior chart, diversion of yard waste is expected to grow due to the combination of the full utilization of capacity at the WTE facility and increasing growth in MSW and other waste flows. As previously discussed, the County is limited in the waste that may be diverted to the Lee / Hendry landfill pursuant to the landowner agreement. To provide a longerterm solution for disposal of growing waste deliveries, Division staff has assumed the construction of new disposal facilities as discussed in greater detail within subsequent sections of this report. For additional detail concerning the historical and projected customer statistics and assumptions please reference Table 1 through 5 at the end of this report. SECTION 6: REVENUE COMPOSITION AND FORECAST The Department generates approximately $75 million in annual revenues, including net recycled and recovered material revenues. For the Fiscal Year 2014, the majority of the revenue can be categorized as follows: 67% is generated from the collection and disposal fees; 27% is generated from gross electric sales; and 6% is generated from other revenues primarily comprised of net franchise fees, net 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 -28-

52 electric. Other revenues were primarily escalated from historical or budgeted levels based on discussions with Division staff. The following chart provides the Fiscal Year 2014 and forecasted revenue composition assuming implementation of the identified rate adjustments: $120,000,000 Historical and Projected Revenue Composition (w/ Rate Increases) $100,000,000 $80,000,000 $60,000,000 $40,000,000 $20,000,000 $ Disposal Fees Collection Fees Gross Electric Sales Net Recycling / Metal Sales Other Income / Revenue As can be seen above, increases to the disposal fees will be necessary to offset the projected decline in electric revenues assumed beginning in the Fiscal Years 2016 through Revenues are projected to increase significantly during the forecast associated with application of the identified rate increases as previously discussed and principally for the purpose of maintaining operating margins (i.e., debt coverage compliance) and fund additional debt service necessary to finance the capital investment of the System as discussed in greater detail within the following section of this report. 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, 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. 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. Approximately seventy percent (70%) of the operating expenses are related to contracted services for the franchised collection and operation of the disposal facilities of the -29-

53 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 (excludes closure / post closure expenses) for the Fiscal Year 2014 and the Forecast Period: Historical and 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 operating expenses for the Fiscal Year 2015 reflects a one-time expenditure of $2.7 million related to the purchase of recycling toters / carts for automated collection. Excluding nonrecurring operating expense the forecast assumes average annual increases in the cost of operation equal to approximately 3.8% annually, which is considered reasonable for purposes of this analysis. The forecast of operating expenses was based on a five (5) year review of historical operating expenses, the adopted Fiscal Year 2015 operating expense budget, modeling of the Division's principal contracted expenses and based on discussions and review projections by Division staff. 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) -30-

54 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 34%) 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 N/A Average Monthly Units 22,321 22,331 22,507 22,740 23,131 23,940 24,718 25,460 26,160 26,814 27,417 Rate Change (%) N/A 2.0% 2.0% 0.0% 1.8% 1.1% 0.0% 0.0% 7.0% 2.0% 2.0% Collection Rate $ $ $ $ $ $ $ $ $ $ $ Expense ($1,000s) $2,834 $2,891 $2,974 $3,004 $3,112 $3,255 $3,361 $3,462 $3,806 $3,979 $4,150 AREA #2 SFM West, Iona-McGregor, Captiva Growth N/A (112) Average Monthly Units 23,697 23,584 23,686 23,832 24,033 24,394 24,748 25,094 25,433 25,763 26,085 Rate Change (%) N/A (12.5%) 2.0% 0.0% 1.9% 1.1% 0.0% 0.0% 7.0% 2.0% 2.0% Collection Rate $ $ $ $ $ $ $ $ $ $ $ Expense ($1,000s) $3,225 $2,807 $2,876 $2,894 $2,973 $3,050 $3,094 $3,138 $3,403 $3,516 $3,631 AREA #3 SFM East, San Carlos Park Growth N/A Average Monthly Units 39,993 40,219 40,418 40,724 41,257 42,082 42,903 43,718 44,527 45,328 46,121 Rate Change (%) N/A 0.1% 2.0% 0.0% 1.8% 1.0% 0.0% 0.0% 7.0% 2.0% 2.0% Collection Rate $ $ $ $ $ $ $ $ $ $ $ Expense ($1,000s) $5,733 $5,772 $5,917 $5,962 $6,149 $6,338 $6,461 $6,584 $7,175 $7,450 $7,732 AREA #4 East, Lehigh, Alva Growth N/A Average Monthly Units 46,099 46,203 46,301 46,418 46,583 46,863 47,121 47,356 47,569 47,760 47,927 Rate Change (%) N/A (8.1%) 2.0% 0.0% 2.6% 1.0% 2.0% 2.0% 2.0% 2.0% 2.0% Collection Rate $ $ $ $ $ $ $ $ $ $ $ Expense ($1,000s) $6,649 $6,126 $6,262 $6,278 $6,462 $6,568 $6,738 $6,907 $7,077 $7,248 $7,419 AREA #5 Pine Island, NFM Growth N/A Average Monthly Units 21,531 21,562 21,592 21,672 21,808 22,069 22,323 22,569 22,806 23,034 23,252 Rate Change (%) N/A 0.2% 2.0% 0.0% 1.9% 1.0% 0.0% 0.0% 7.0% 2.0% 2.0% Collection Rate $ $ $ $ $ $ $ $ $ $ $ Expense ($1,000s) $3,408 $3,421 $3,493 $3,506 $3,593 $3,673 $3,715 $3,756 $4,061 $4,184 $4,308 Table continued on following page. (Remainder of page intentionally left blank) -31-

55 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 N/A (13) Average Monthly Units 1,060 1,048 1,225 1,229 1,234 1,234 1,234 1,234 1,234 1,234 1,234 Rate Change (%) N/A 23.8% (12.4%) 0.0% 0.0% 0.0% 2.0% 2.0% 2.0% 2.0% 2.0% Collection Rate $ $ $ $ $ $ $ $ $ $ $ Expense ($1,000s) $133 $163 $167 $167 $168 $168 $172 $175 $179 $182 $186 ALL AREAS Franchise Hauler Expense Growth N/A ,041 1,727 1,686 1,643 1,598 1,550 1,501 Average Monthly Units 154, , , , , , , , , , ,620 Rate Change (%) N/A (3.5%) 1.9% 0.0% 2.0% 1.0% 0.6% 0.6% 5.6% 2.0% 2.0% Collection Rate $ $ $ $ $ $ $ $ $ $ $ Expense ($1,000s) $21,982 $21,181 $21,689 $21,811 $22,457 $23,052 $23,542 $24,022 $25,701 $26,559 $27,426 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 32%) 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 560, , , , , , , , , , ,000 % Change N/A (3.0%) 4.6% 6.8% (0.0%) 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% Service Fee [*]: OM $16,275 $16,846 $17,659 $18,224 $18,998 $19,778 $20,415 $21,028 $21,658 $22,308 $22,977 ETF , ,014 1,041 PT 1,098 1,047 1,143 1,129 1,351 1,390 1,431 1,474 1,519 1,564 1,611 EC 1,588 1,538 1,479 1,416 1,814 1,653 1,652 1, RRR (651) (1,332) (1,320) (1,097) (1,625) (1,520) (1,520) (1,520) (1,520) (1,520) (1,520) True up Total $18,929 $18,437 $19,766 $21,217 $21,587 $22,442 $23,150 $23,311 $23,838 $24,566 $25,316 % Change N/A (2.6%) 7.2% 7.3% 1.7% 4.0% 3.2% 0.7% 2.3% 3.1% 3.1% [*] 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) -32-

56 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 three percent (3%) indexing to the Operation and Maintenance (OM) charge, which is offset by declines in the Energy Credit (EC) associated with termination of the current purchase power agreement with Seminole Electric. On average the cost of contracted operations for the WTE is expected to average 2.7% 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 175,000 tons landfilled in 2014 as compared to 360,000 tons in As a result the cost of contracted operations was previously greater as evidenced below: Historical Contracted Landfill Operations Cost Cost $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500, , , , , , , ,000 50,000 Tons $ Fiscal Year 0 Contracted Expense Est. Tons Landfilled 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) -33-

57 Projected Contracted Landfill Operations Cost 250, , ,000 Cost 100,000 Tons 50,000 $2,000,000 $1,800,000 $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $ Fiscal Year - Contracted Expense Est. Tons Landfilled 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. It is assumed that the County may experience annual transportation costs ranging from approximately $150,000 to $750,000 annually based on the amount of waste diverted. 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 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 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) -34-

58 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 The forecast of capital expenditures was provided by Division staff. The following table provides a listing of the capital projects identified. Capital Project Description Start Year Project Cost [1] MRF Expansion 2015 $132,567 Landfill Gas Collection System ,843,750 Landfill Phase Expansion ,565,947 Scale Improvements ,000 Electric System Improvements ,000 Recycling Equipment ,237 Recycling Facility ,861,300 Waste-to-Energy Design / Land ,810,000 Household Chemical Waste Facility ,256,000 Labelle Transfer Station ,882,000 Waste-to-Energy Construction ,050,000 R&R - Facilities and Equipment ,116,259 Equipment Replacement ,882,856 Total $304,441,916 [1] Amounts shown derived from Table 10 and adjusted for inflation for projects identified in the Fiscal Year 2016 and for the remainder of the Forecast Period. As can be seen from the prior table, the highlighted projects associated with the assumed expansion / construction of a new WTE and MRF facilities represent approximately 90% of the total identified capital expenditures. This represents a significant investment and will require the issuance of additional bonds to finance the improvements. The remaining capital needs are related to investments associated with equipment or existing facilities. The following table provides a summary of the funding plan for the Forecast Period: Capital Funding Fiscal Years [1] Rate Revenue $3,882, % SW Management Fund 44,952, % Series 2019 Bonds [2] 247,050, % Recycling Fund 8,556, % Total Funding $304,441, % [1] Amounts shown derived from Table 10. [2] Assumes 30 year repayment and interest only for the initial 8 years to wrap the existing debt service payments. Table 10 at the end of this report provides additional detail concerning the projected capital needs and funding sources for the Forecast Period. -35-

59 Debt Service As of September 30, 2014, the County reported the System debt outstanding at approximately $81 million. The outstanding debt is associated with the Series 2006A Bonds and Series 2006B Bonds (the "Series 2006 Bonds"). Final repayment for the Series 2006B Bonds will occur during the current Fiscal Year The associated debt service for the Series 2006 Bonds represents level payments of $9.2 million annually with final repayment in Fiscal Year As previously discussed the forecast also assumes the issuance of additional bonds to finance the construction of new WTE and MRF facilities. The chart below provides a summary of the existing and projected annual debt service payments: $27,000,000 $24,000,000 $21,000,000 $18,000,000 $15,000,000 $12,000,000 $9,000,000 $6,000,000 $3,000,000 $0 Summary of Debt Service Payments Series 2006 Bonds Assumed Series 2019 Bonds The proposed Series 2019 Bonds assume the following terms and conditions as provided by the County's Municipal Financial Advisor: i) construction fund deposit of $247,050,000; ii) 2% issuance expense / $5,465,600; iii) debt service reserve deposit of $20,761,221; iv) interest rate of 5.0%; and v) 30 year repayment term with 8 years of interest only payments to wrap around the currently outstanding Series 2006A Bonds. The interest only payments were assumed to minimize the financial impacts to existing customers. The interest only payments are approximately $13.7 million annually with level debt service thereafter of approximately $20.8 million. It should be noted however that based on discussions with the County's Financial Advisor the repayment term may be limited to a maximum of twenty (20) years which would have the effect of increasing the associated debt service payment by approximately $6 to $7 million annually and would require further rate adjustments above what is already contemplated in this study. 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 on- -36-

60 going 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 post-closure 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 reevaluated until the subsequent permit renewal. 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 which 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, 2014 Active Landfill Sites Closure Post-Closure Total Restricted Funds Ash Monofill $1,925,195 $1,124,916 $3,050,108 N/A Class I Landfill 4,589,812 5,579,529 10,169,342 N/A Class III Landfill 543, , ,256 N/A Total $7,058,303 $7,114,405 $14,172,706 $9,324,213 As can be seen from the prior table, the County has restricted approximately $9.3 million representing approximately 67% 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 the current relationship of funding at 67% for the remainder of the Forecast Period. If financial conditions improve it is recommended the County consider fully funding the combined closure and post-closure 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: -37-

61 $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 The forecast assumes transfers to the closure funds averaging approximately $800,000 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 which will be necessary until the County has constructed the expanded WTE and MRF facilities. SECTION 8: REVENUE SUFFICIENCY AND RATE COVENANT 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 adopted fiscal policies (referred to as the "Revenue Sufficiency" evaluation). Gross Revenues Gross Revenue Requirements -38-

62 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 Disposal Assessment / Tip Fee Rev. Percent Adjustment 13.5% 13.5% 13.5% 35.0% 7.5% Incremental Revenue Addition $4.0m $4.5m $5.2m $15.6m $4.6m Cumulative Revenue Addition $4.0m $8.5m $13.9m $29.7m $34.7m Collection Assessment Revenues Percent Adjustment 9.4% [2] 0.5% [3] 5.5% [3] 2.0% [3] 2.0% [3] Incremental Revenue Addition $2.0m $0.1m $1.3m $0.5m $0.5m Cumulative Revenue Addition $2.0m $2.2m $3.5m $4.1m $4.7m [1] Reflects identified increases to revenues from the collection / disposal assessment and tipping fees for service. [2] Reflects recommended increase to revenues associated with the elimination of the residential credit, gross up for early prepayment of the collection assessment and any identified increases which may result from an increase in cost of contracted collection by service area. [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 from unanticipated or sudden events to financial operations (e.g., reduced electric sales, reduced growth or tonnages unanticipated or extraordinary outages, unfunded mandates, etc.). (Remainder of page intentionally left blank) -39-

63 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 $23,052 $23,542 $24,022 $25,701 $26,559 $27,426 Annual Debt Service Transfers and Capital Gross Revenue Requirements $23,052 $23,542 $24,022 $25,701 $26,559 $27,426 Less Income / Funds from Other Sources: Investment Income $0 $0 $0 $0 $0 $0 Residential Credit [2] Contracted Fines [3] Total $936 $20 $20 $20 $20 $20 Net Collection Funding Requirements $22,117 $23,522 $24,002 $25,681 $26,539 $27,406 Existing Collection Assessment Revenue $21,169 $21,500 $21,822 $22,133 $22,432 $22,718 Rate Revenue Adjustments [4] N/A 9.4% 0.5% 5.5% 2.0% 2.0% Adjusted Disposal Revenue $21,169 $23,522 $24,002 $25,681 $26,539 $27,406 Surplus / (Deficiency) [5] ($948) $0 $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. [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. In addition to the increase in the contracted cost of collection the principal drivers for the identified increase in revenues for the Fiscal Year 2016 are associated with: The recommended elimination of the "Residential Credit", which represents the use of cash reserves to subsidize operations of collection as previously discussed in greater detail within Section 4 of this report; and Gross up of the residential solid waste assessment for the early prepayment discounts, which range from 0% to 4% as allowed by Florida Statutes as part of the ad valorem billing process. -40-

64 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] $45,214 $44,382 $45,594 $47,460 $49,562 $51,732 Annual Debt Service: Series 2006A Bonds $6,165 $9,127 $9,137 $9,147 $9,152 $9,162 Series 2006B Bonds 2, Series 2019 Bonds ,664 13,664 Total $9,126 $9,127 $9,137 $9,147 $22,816 $22,826 Transfers and Capital [3] $1,413 $1,802 $1,901 $1,988 $2,024 $1,801 Gross Revenue Requirements $55,753 $55,312 $56,632 $58,595 $74,401 $76,359 Less Income / Funds from Other Sources: Investment Income $238 $287 $343 $322 $663 $863 Net Electric Revenue 16,997 16,542 11,385 9,609 9,607 9,606 Franchise Fees 1,759 1,785 1,809 1,834 1,858 1,881 Recovered Materials & Misc. Rev. [4] 2,241 2,241 2,241 2,241 2,241 2,241 Compost Sales Other Revenues [5] Total $22,317 $22,028 $16,954 $15,196 $15,568 $15,770 Net Disposal Funding Requirements $33,436 $33,284 $39,677 $43,399 $58,833 $60,590 Existing Assessment and Tip Fee Revenue $29,008 $29,245 $29,505 $29,992 $30,471 $30,941 Current Period Rate Revenue Adj. [6] N/A 13.5% 13.5% 13.5% 35.0% 7.5% Adjusted Disposal Revenue $29,008 $33,194 $38,009 $43,852 $60,146 $65,655 Surplus / (Deficiency) [7] ($4,428) ($91) ($1,668) $453 $1,313 $5,065 [1] Amounts shown derived from Table 13 at the end of this report. [2] Amounts shown include the cost of contracted operation and maintenance for the WTE facility, which is net of revenues derived from the sale of ferrous and non-ferrous metals. [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 include approximately $740,000 of miscellaneous revenues primarily related to the sale of metals and approximately $1.5 million of recovered materials from the operation of the MRF facility. Amounts shown do not include revenues from the sale of ferrous and non-ferrous revenues from the operation of the WTE facility. Also reference Note [2] above. [5] Includes revenues from advance disposal fees related to C&D operations, 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 -41-

65 requirements of the disposal assessment and fees. For more information on the recommended Fiscal Year 2016 rates for service please reference Section 9 of this report which provides detail concerning the application of the identified rate increases to proposed rates. Financial Position and Financial Compliance In determination of the revenue sufficiency for the financial forecast an evaluation of the existing cash reserves, credit worthiness of the System and compliance with the Trust Indenture was performed. Two (2) primary financial metrics were recognized to assess the financial strength of the System including: Debt Coverage: generally calculated as the net revenues (i.e., gross revenues less operating expenses) as a ratio to the annual debt service payment. For example, debt coverage ratio of 1.0x would imply that net revenues are equal to the annual debt service payment in a given year. And Liquidity / cash reserves: refers to the amount cash reserves on hand generally recognized as an indicator of the financial strength of an enterprise to provide financial stability for unexpected or future expenditures of the System. Essentially, debt service coverage can be viewed as a metric of net cash flows, while liquidity can be viewed as a metric of financial solvency. The two metrics are interrelated where often degrading financial margins and cash flows will result in the use of cash reserves and the degradation of liquidity levels. For example, a debt service coverage at 1.0x implies that the revenues of the System only provide for the payment of operating expenses and debt service and do not contribute to funding in the current period for current or future capital needs and is generally viewed as a financial weakness in most cases. The following chart presents the calculation of debt service coverage based on application of the identified rate revenue increases as previously discussed: (Remainder of page intentionally left blank) -42-

66 200.0% 180.0% 160.0% 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Debt Service Coverage (w/o Use of Reserves) 179.0% 124.0% 120.0% 94.0% 102.0% 105.0% 78.0% 32.0% Calculated w/o Reserve Transfers Minimum Target Forecast Target As can be seen above, the recommended and identified rate adjustments target a 1.0x debt service coverage from Net Revenues (exclusive of transfers from reserves) over a phased three (3) fiscal year period (i.e., 1.0x achieved in FY 2018) with a 1.2x debt coverage by the end of the Forecast Period. The notable decline in debt service coverage for the Fiscal Year 2015 is related to a forecasted reduction in net revenues of approximately $8 million due to: a) one-time increase in expenses of $2.5 million for the purchase of recycling toters; b) net reduction to revenues of $2 million primarily associated with loss of the renewable energy credit and lower electric revenues, and c) $3.5 million increase in the cost of operation. The forecast of debt service coverage can be considered weak since it falls below 1.0x and implies that use of System Reserves will be necessary to make payments. Based on application of the identified rate revenue adjustments and the use of system reserves the Division is still expected to maintain compliance with the rate covenant of the Trust Indenture. For detailed calculation of compliance with the rate covenant please reference Table 16 at the end of this report. It should be noted that the solid waste system for the County is currently rated A3 [7] as of June 2014 by Moody's Investor Service ("Moody's"), however has been placed under a negative outlook / watch. The identified challenges to the credit rating are related to multi-year decline in debt service coverage, contractual agreements which expire prior to the full repayment of debt and weak legal protection for bond holders. In addition, Moody's identified that the System could be downgraded if the System did not maintain: i) at least a 1.0x all-in debt service coverage (i.e., net revenues >= debt service payments) and ii) cash reserves equal to or greater than 18 months of operating expenses (i.e., $93 million based on FY 2014 actual expenses). In developing the recommended financial targets, consideration was given to these credit challenges, but was also balanced against the financial impact to customers of the System. [7] 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 With respect to the liquidity (cash position) of the system, it is recommended that the County attempt to maintain the current level of cash liquidity; however, this is only possible if the system can improve net revenue margins in excess of 1.0x debt coverage. As a result of the rate phasing and low net revenue margins, cash reserves are expected to be drawn down primarily to fund identified capital expenditures and make debt service payments. The following table provides a summary of cash reserves by fund: Projected Ending Fund Balance ($1,000s) Projected Fiscal Year Ending September 30, Description Fund Operations $5,196 $5,196 $5,196 $5,196 $5,196 $5,196 Fund Subaccount Customer Deposits Fund Solid Waste Management 33,553 31,921 28,740 6,973 85,836 2,007 Fund Subaccount R&R 1,500 1,500 1,500 1,500 1,500 1,500 Fund Subaccount System Reserve Fund 25,748 25,657 23,989 24,442 25,755 30,820 Fund Recycling 11,136 11,497 3,918 4,364 4,751 4,944 Fund Right Of Way (ROW) Cleanup Fund Closure Fund 10,100 10,832 11,617 12,498 13,444 14,487 Fund 40162/63 Debt Service Sinking 1,896 2,024 2,166 2,316 9,301 9,466 Fund Debt Service Reserve 3,069 3,069 3,069 3,069 23,830 23,830 Total Projected Available Fund Balances $92,762 $92,260 $80,759 $60,922 $170,177 $92,814 To phase in the need for the identified rate adjustments and maintain liquidity in subsequent years to the Forecast Period, the County should consider exploring alternative disposal options to delay the need for the construction of the additional MRF and WTE facilities. Although the County is projected to maintain approximately $93 million in average annual cash balances, the majority of such funds are assumed to be restricted to the specific purpose or use of the fund such as landfill closure, debt service payments or future capital funding as shown below: Projected Ending Fund Balance Minimum Reserve Target ($1,000s) Projected Fiscal Year Ending September 30, Description Total Projected Available Fund Balances $92,762 $92,260 $80,759 $60,922 $170,177 $92,814 Less Restricted Funds: Debt Service Related Fund Balances ($4,965) ($5,093) ($5,236) ($5,385) ($33,131) ($33,296) Restricted for Landfill Closure (10,100) (10,832) (11,617) (12,498) (13,444) (14,487) R&R Fund Requirement per Trust Indenture (1,500) (1,500) (1,500) (1,500) (1,500) (1,500) Restricted Purpose Recycling and ROW (11,687) (12,049) (4,469) (4,915) (5,302) (5,495) Restricted Purpose Capital and Bond Funds (33,553) (31,921) (28,740) (6,973) (85,836) (2,007) Customer Deposits (13) (13) (13) (13) (13) (13) Net Available for Operating Reserve Targets $30,944 $30,853 $29,185 $29,638 $30,951 $36,016 Targeted Operating Reserve Balances: 120 Days of Operating Expenses $22,444 $22,331 $22,887 $24,053 $25,026 $26,025 One (1) Year of Electric Revenue 16,997 16,542 11,385 9,609 9,607 9,606 Total $39,441 $38,873 $34,272 $33,661 $34,633 $35,631 Net Available Funds Above / (Below) Target ($8,497) ($8,020) ($5,087) ($4,024) ($3,682) $

68 As can be seen from the prior table after deductions for the identified restrictions net available cash balances for operating reserves average approximately $36 million during the forecast period. For purposes of this study, it is recommended that the County target minimum operating reserve balances to reduce financial risks equal to: a) 120 days of operating expenses; plus b) twelve (12) months of budgeted electric revenues in order to provide a partial contingency for interruption of service to the WTE facility. Although the forecast does not currently recognize compliance with the recommended targets, it is expected that improving net revenue margins and debt service coverage will aid in improving cash reserve targets by the final year of the forecast period. 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. 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 2016: (Remainder of page intentionally left blank) -45-

69 Summary of Historical, Existing, and Recommended Rates Historical Existing Recommended Description Assessments: Collection (Avg. Area 1-5) [1] $ $ $ Residential Credit (4.00) (5.72) 0.00 Disposal MSW (0.80 tons) Disposal Yard Waste (0.24 tons) Disposal Facility Assessment Charge (0.80 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 $30.00 $30.00 $31.75 MSW w/ Surcharges [3] Horticulture / Yard Waste C&D Class III Tires Surcharges per MSW Ton [3][4] $4.93 $4.33 $0.55 Disposal Facility Assessment per Ton [5] $6.00 $6.00 $12.40 [1] Derived from Table 17. Amounts shown reflect the average fee charged for the franchise collection areas 1-5. The recommended Fiscal Year 2016 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 County and franchised municipal 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 and Bonita Springs for which the County provides collection services and represented as Franchise Area 1. [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 Disposal Facility assessment Charge. The recommended disposal fees and collection fees are targeted to generate a net increase in revenues of approximately $4 million and $2 million, respectively. The following provides a brief discussion concerning the rate design assumptions in development of the recommended rates: -46-

70 Disposal Fees: o o o Tip Fees: The interlocal agreements with the municipalities for disposal services provide limitations to the annual increase to the tip fee. The recommended tip fees for MSW and yard waste were limited to approximately six percent (6%). As previously discussed, the operations for the Division are dynamic and integrated. Although it is the intent of the Division to maximize recycling and minimizing the disposal of waste to the landfill, waste flows may be diverted among facilities for disposal. Moreover the cost of disposal for each facility varies. Therefore to the extent possible the recommended tip fees were set equivalently. Exception was made to the proposed tire fee since it is a below market rate and may be contributing to an economic incentive for out-of-town tires to be disposed of at the County's WTE, which uses disposal capacity and results in ash disposed to the Lee / Hendry landfill. The increase in revenues from recommended changes to the tip fees, excluding the tire fee, is estimated at approximately $1.3 million annually. Surcharges: the recommended surcharges reflect the allocation of allocable costs including the allocation of the expenses related to the budgetary cost centers for Solid Waste Operations (note: excludes contracted collection expenses) and Right of Way operations to the respective surcharges. The estimated cost for Solid Waste Operations and Right of Way are estimated at approximately $1.9 million for the Fiscal Year Although the costs for solid waste operation and right of way are comparable to prior year levels the recommendation would be to lower the combined surcharges from $4.33 per ton to $0.55 per ton. The reduction in the fee is assumed by the application of franchise fee revenues to help offset the cost of operation. The priority of application of the franchise fee revenues are to the Solid Waste Operations surcharge first and then any remaining balance to the Right-of-Way Surcharge. The nexus of the application of the franchise fee to the surcharges relates to the link among the unincorporated customers associated with the generation of the franchise fee revenues and those same customers which would pay the surcharges. The proposed surcharges are expected to result in a roughly -$1.1 million decline in revenues (funded by the use of franchise fees) and produce approximately $0.2 million in annual revenue to fully fund the cost of solid waste operations and right of way operations. Disposal Facility Assessment: The balance of the disposal system funding requirements is recovered from the Disposal Facility Assessment. The recommended increase to the Disposal Facility Assessment is expected to generate approximately $3.8 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 represents a minor 1.2% increase over the existing billing fee and is equivalent to the proposed fee to be charged by the property appraiser and tax collector. -47-

71 Collection Fees: o o Residential Credit: affects the residential assessment and is used to offset the cost of collection. The proposed rates recommend the elimination of the credit. Collection Assessment: The recommended increase to the collection assessment reflects the actual cost of collection by franchise area. 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 2016 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 $18.51 to $21.64 a year or approximately $19 a year on average (i.e., $1.60 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 $7 a year (i.e., $0.60 a month) assuming application of the proposed tip fees to assumed deliveries of 0.80 tons of MSW and 0.24 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 $ $ (Net of Res. Credit) $40.07 $ $ $30.00 $28.00 $22.65 $55.00 Lee County FY16 [*] $ $ $45.75 $ $ $31.75 $31.75 $24.00 $80.00 Other Counties with Waste-to Energy Facilities: Broward County N/A N/A $ $ $50.00 $30.00 $50.00 $ Hillsborough County $ $91.32 $ $68.16 $61.81 $38.01 $71.50 Miami-Dade County N/A N/A $ $66.34 $66.34 $66.34 $ Palm Beach County $141 - $209 $ $ $ $42.00 $45.00 $25.00 $50.00 Pinellas County N/A N/A $ $37.50 $37.50 $37.50 $37.50 Other Counties without Waste-to Energy Facilities: Charlotte County N/A N/A $ $36.00 $36.00 $36.00 $ Collier County $ $ $49.66 $ $ $53.61 $65.80 $77.85 $ Hernando County $ $ $63.05 $ $ $53.00 $20.00 $20.00 $ Manatee County $ $48.36 $ $36.00 $61.00 $36.00 $86.00 Pasco County $ $62.00 $ $56.70 $56.70 $56.70 $ Polk County $ $44.00 $ $36.50 $36.50 $22.00 $2.00 / Tire Sarasota County $95.69 $63.79 $ $57.56 $48.96 $41.37 $ Other System Averages $ $74.65 $ $49.45 $47.13 $42.23 $99.53 [*] Amounts shown reflect the gross assessment before early prepayment discounts. As can be seen above, the recommended rates for adoption by the BOCC for the Fiscal Year 2016 are projected to remain very comparable to and / or below the average 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 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 2016; 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 expenditure needs of the System and for compliance with the rate covenants and flow of funds requirements delineated in the Trust Indenture and need for additional rate adjustments; -49-

73 Develop a formal financial policy to outline near-term and long-term financial goals to provide guidance in the operations of financial management intended to help minimize certain financial risks and promote the overall credit worthiness of the System. Specifically, the policy should identify minimum targeted debt coverage or cash flows, operating reserve and capital reserve targets; Evaluate possible alternatives to the near term construction of the new WTE and MRF facilities in order to delay use of reserves and the issuance of the corresponding proposed bond issuance identified in the Fiscal Year 2019, which might provide for a general improvement to the fiscal strength of the System (assuming delaying such improvements are operationally feasible and do not result in operating costs greater than forecasted) and reduce future rate adjustments identified in this report; and Continue efforts to promote recycling of waste within the County to achieve targeted recycling requirements as required by State regulation. (Remainder of the Page Intentionally Left Blank) -50-

74 LEE COUNTY, FLORIDA Solid Waste Division Revenue Sufficiency and Rate Study LIST OF TABLES Table No. ES-1 Title 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 and Projected Rate Covenant Compliance 17 Historical, Current and Proposed Assessment, Tipping and Gate Fees