NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'A+' rating on the following outstanding Miami-Dade County, FL's (the county) revenue bonds:
--$75.7 million solid waste revenue bonds, series 2005;
--$35.6 million solid waste revenue bonds, series 2001;
--$23.8 million solid waste revenue bonds, series 1998.
Fitch has also revised the Rating Outlook on the bonds to Negative from Stable.
Bonds are secured by net revenues of the county's solid waste system. The additional bonds test and rate covenant are both 1.20 times (x) and allow the use of a portion of the rate stabilization fund to be included in meeting these thresholds. A reserve fund is funded with surety bonds equal to maximum annual debt service.
KEY RATING DRIVERS
WEAKENED OPERATIONS DRIVE OUTLOOK CHANGE: The Outlook revision to Negative from Stable reflects Fitch's concern over projected net revenues through fiscal 2014. If realized, it will result in debt service coverage levels (excluding rate stabilization funds) inconsistent with the current rating.
HISTORICALLY FAVORABLE PLEDGED REVENUES: Pledged net revenues from the county's well established solid waste system have historically provided solid debt service coverage from operations.
HOUSEHOLD COLLECTION FEES COLLECTED ON TAX BILL: Residential solid waste fees collected from over 324,000 households are charged on the property tax bill. This provides strong incentive for payment. Revenues from tax bills represent a strong 53% of total revenues providing some stability. The county board of commissioners retains ability to raise these fees.
STRONG AND STABLE LIQUIDITY POSITION: The county has maintained very strong system cash balances helping support capital expenditures and offset the projected downward trend in debt service coverage levels.
CAPITAL NEEDS ARE MANAGEABLE: The system's capital plan for the next five years is manageable and relies on a modest amount of new debt. This should not affect operations due to the rapid amortization rate of current debt.
MODEST ECONOMIC RECOVERY OCCURRING: The local economy continues to experience improvement. Unemployment rates have improved and rising home values are indicative of a turnaround in housing.
BELOW AVERAGE DEBT SERVICE COVERAGE: Preliminary budget projections for fiscal 2014 show debt service coverage (excluding rate stabilization funds) declining to below-average levels. Failure to take action to ensure adequate coverage levels more consistent with the rating category would likely lead to downward rating pressure.
The fully integrated solid waste system operates as a self-supporting enterprise fund of Miami-Dade County (general obligation bonds rated 'AA' with a Stable Outlook by Fitch,). The county department provides solid waste collection, recycling and disposal services. Collection service is provided to all single family and small multi-family residences and a small number of commercial and multi-family accounts in the unincorporated portions of the county and certain municipalities.
The county also provides curbside recycling services for 20 municipalities including eight that receive full collection service. The system includes the county owned waste-to-energy Resources Recovery Facility (RRF), three landfills (one of which is for the disposal of ash byproducts), three transfer stations, 13 neighborhood trash and recycling centers, and contract disposal capacity at two alternative private facilities. The county provided waste collection to approximately 324,000 residential units in 2012.
FISCAL 2013 OPERATIONS PRESSURED
For fiscal 2013, management budgeted for higher tonnage levels (3% above 2012 actuals) based on trends in tonnage at the time of budget. However, tonnage levels for fiscal 2013 are tracking only slightly higher (+1%) over fiscal 2012 levels. This shortage in tonnage combined with higher budgeted disposal expenses due to contractual increases is projected to result in a drop in debt service coverage to a still adequate 1.58x (without rate stabilization funds).
FISCAL 2014 PROJECTIONS SHOW DECLINE IN COVERAGE
The preliminary budget for fiscal 2014 includes an additional drop in operating net revenues due primarily to a projected decline in energy sales revenues. The current energy sales contract with Florida Power and Light expires Nov. 30, 2013. At that time, the county will no longer be receiving its contracted $85 per megawatt hour. Instead, the county will sell energy at the 'as available' market rate which is $27-$28 per megawatt hour due to lower rates in the market.
The preliminary 2014 budget calls for a $21 million decline in energy sales to $10.8 million, equaling 8.3% of projected fiscal 2014 operating revenues. Partially offsetting this loss in revenues is a projected decline in RRF expenses of $12 million. The decline in expenses is primarily a function of the contractual agreement to share sales revenues evenly with Covanta, which are expensed by the county.
Contractual disposal expenses are also projected to decline by $3.6 million helping offset higher transfer fees (up $1.5 million). Based on these changes in revenues and expenses, the county is projecting a cumulative decline in net revenues of $7 million. Debt service coverage, based on these preliminary projections, would decline to a very modest 1.21x or 1.64x using a portion of rate stabilization funds whereby rate stabilization funds account for up to 20% of net operating revenues as permitted by the bond ordinance.
This preliminary budget notably does not include additional expected revenues from an approved 8% utility fee increase and uses a conservative figure for projected tonnage. Management has not raised the household collection fee.
Management is exploring multiple alternatives to increase energy revenue. Among them include powering county facilities, entering into an agreement with a cooperative electrical utility, a municipal electrical utility, or/and a standard offer contract with an investor owned utility.
Fitch notes that while system net revenues have resulted in historically sufficient debt coverage above required levels, there is a downward trend in coverage. Continued operations at coverage levels close to or below the required 1.2x rate covenant (excluding rate stabilization funds) expose the system to a greater risk of even lower coverage due to unexpected increases in expenses or reductions in revenues. Failure to develop a financial plan that addresses these risks and provides for adequate tipping and household collection fees that preserve higher debt service coverage commensurate with the current rating level could lead to downward rating pressure.
FISCAL 2011 AND 2012 RESULTS REMAIN SOLID
While tonnage levels had declined in recent years due to a downturn in the economy and reduction in new construction, management took actions to reduce fixed operating costs and budgeted tonnage levels conservatively through fiscals 2011 and 2012. Equivalent revenue ton levels were down 2.4% in fiscal 2010 compared to fiscal 2009 and down 2.8% in fiscal 2011. Tonnage remained relatively flat in fiscal 2012. Senior lien debt service coverage from net revenues remained strong at 2.55x in fiscal 2011 and 2.31x in fiscal 2012.
Operating revenues declined slightly from $266.9 million in fiscal 2011 to $266.1 in fiscal 2012, but expenses increased by approximately $3 million due to higher landfill and disposal costs.
STRONG AND STABLE LIQUIDITY LEVELS
Reserve levels remain strong as of Sept. 30, 2012, with unrestricted cash and investments of $179 million in the solid waste enterprise fund equal to 80% of fiscal 2012 operating expenses. Restricted assets comprised of the rate stabilization fund ($20.7 million) and operating expense reserve ($39.6 million) bring total cash available for operations to $239.3 million, a strong 391 days cash on hand. The system has maintained its rate stabilization fund at $20.7 million for the last six years.
BULK OF REVENUES DERIVED FROM TAX BILL
System revenues are primarily derived from a household collection fee charged to the residential property tax bill and constituted a high 53% of the system's $266 million operating revenues for fiscal 2012. This stable revenue source strongly supports the 'A+' rating on the bonds.
Residents are currently being charged $439 in fiscal 2013 and such fee is subject to annual adjustments approved by the county board of commissioners but such rate has not changed since Oct. 1, 2006.
Other revenues include tipping fees derived from municipal interlocal agreements and private haulers (22% of revenues), proceeds from waste to energy sales (12%), and a utility service fee charged to county water and sewer users (8%). Disposal fee changes were up 1.7% for fiscal 2013 and 1.9% for fiscal 2014, based on the increase in local consumer price index (CPI).
INTERLOCAL CITY AGREEMENTS AND ENERGY CONTRACTS SUPPORT REVENUES
The county has long-term interlocal agreements with 18 of the largest cities in the county for solid waste disposal. Fees charged to contracted municipalities were $63.65, $62.59 and $60.30 per ton during fiscal years 2013, 2012, and 2011, respectively, and are subject to annual changes based on CPI. Private haulers with long term contracts for disposal also received the $63.65 tipping fee per ton. The non-contractual rate was $83.92 per ton during fiscal 2013.
A majority of the interlocal agreements expire in 2015, but five of the 18 have been recently renewed through 2025 or longer. These five represent 58% of revenues and include Miami, the largest municipal revenue producer. Fitch views management's assumption as reasonable that the remaining agreements will be renewed due to its competitive pricing and conveniently located transfer stations.
There is currently no local flow control ordinance in place for these municipalities, although newly incorporated municipalities are required to remain in the county's collection system. That said, the county board of commissioners could decide to enact such an ordinance if necessary.
The proceeds from the sale of electricity from the county owned RRF is shared with Covanta, the private operator. The county has purchase contract agreements with Progress Energy Inc. and Florida Power and Light which expire Nov. 30, 2013.
MODERATE CAPITAL NEEDS; DELAYS IN REPLACEMENT FLEET
The county does not anticipate any additional debt until years fiscal 2015 through 2019 when it will consider the issuance of approximately $44 million for system maintenance and landfill costs. Debt amortization of outstanding bonds is rapid at 76% in 10 years. This mitigates the risk of operational pressure from the additional debt service.
Management has developed a ten-year replacement plan for its heavy equipment. According to the department's rate consultant, it has been evaluating and extending the expected operational life of vehicles and other heavy equipment in order to maximize the value of the assets. Adjusting the replacement schedule has allowed the system to conserve its capital budgets, and has not affected the system's operations or its ability to provide services.
Management has indicated that it has delayed the replacement of some assets until the finalization of the plan to move to natural gas operated vehicles is implemented county-wide. Such plan is expected to provide substantial fuel costs savings.
However, the county acknowledges that the system may incur higher maintenance costs and more overtime expenses (thereby accelerating expected fuel costs savings). However, the county does not anticipate any operational inefficiencies. Fitch believes management's expectations to be reasonable, but prolonged delay or postponement in implementing the new vehicle replacement plan could result in a much larger increase in expenses than expected which will affect negatively liquidity and debt coverage levels.
DIVERSE ECONOMY EXPERIENCING SIGNS OF TURNAROUND
The area economy is diverse with a large international component, and the presence of healthcare, higher education, and professional and business services balance the tourism component of the county's economy for which it is so well known. Wealth levels for the county are below average and the county's unemployment rate remains above state and U.S. averages. The 9% June unemployment rate of is less than the 10.1% a year prior and reflects of a 1.5% decline in labor and a 0.3% decline in employment. However, it remains above the state's 7.4% and nation's 7.8% rate. Based on Zillow.com housing values have improved 18.7% countywide through mid-August.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, and Malcolm Pirnie, Inc., system rate and operations consultants.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria