Fitch Rates Hillsborough County, FL's $116MM Solid Waste Revenue Bonds 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to the following Hillsborough County, FL solid waste revenue bonds:

--$90,060,000 solid waste & resource recovery revenue bonds, series 2016A;

--$25,990,000 solid waste & resource recovery revenue bonds, series 2016B.

The bonds are scheduled to sell via negotiation on Nov. 2. Proceeds are being used to refund the county's outstanding series 2006A&B solid waste revenue bonds for savings.

Fitch also affirms its 'A+' rating on the county's outstanding series 2006A&B solid waste & resource recovery revenue bonds to be refunded.

The Rating Outlook is Stable.

SECURITY

The bonds are backed by a first lien on the net revenues of the county's solid waste system. The debt service reserve fund equal to 50% of maximum annual debt service (MADS) is planned to be cash funded.

KEY RATING DRIVERS

ECONOMIC GROWTH SUPPORTS WASTE FLOW: The system continues to be managed well as waste levels from residential and commercial sources have experienced modest increases over the past five years as a result of population growth and general economic improvement.

RESIDENTIAL ASSESSMENTS PROVIDE STABILITY: The system benefits from a stable revenue base as close to 60% of operating revenues are derived from special assessments levied on residents' tax bills. Tax collection rates are very strong.

AMPLE DEBT SERVICE COVERAGE: Debt service coverage has historically been strong and pro forma projections show continued sound coverage from net revenues at over 1.30x.

VERY STRONG CASH POSITION: Unrestricted reserves are very strong at close to 600 days cash on hand (DCOH) and provide financial cushion in the event of waste-to-energy system interruption or to support capital needs.

MINIMAL CONTRACT RENEWAL RISK: Existing arrangements with most system vendors are expected to continue due to the long history of vendor relationships with the county, the county's competitive rates and a county flow control ordinance.

LIMITED FUTURE DEBT NEEDS: The system funded improvements to its resource recovery facility in 2008 increasing its generation capacities, and its landfill capacity is strong resulting in moderate future expenditure needs.

RATING SENSITIVITIES

CHANGE IN FINANCIAL OPERATING PROFILE: Management of the inherent volatility of non-assessment revenues through expenditure control and proper rate-setting measures is expected by Fitch to result in continued sound debt service coverage and strong liquidity. The rating is sensitive to results contrary to this expectation.

CREDIT PROFILE

The county's solid waste management system is an enterprise fund of Hillsborough County (IDR rated 'AAA' with a Stable Outlook). The service area consists of the unincorporated area of the county, the city of Temple Terrace, and only certain areas of the cities of Tampa and Plant City annexed after 1983 (the service area). The city of Tampa does have its own resource recovery facility (RRF) that serves the bulk of its residents. The system performs collection, transportation, and disposal of all solid waste generated or brought into the service area. The county enacted a flow control ordinance in 1983 giving it control over the collection and disposal of solid waste within its service area. The system also sells electricity generated from its waste-to-energy RRF.

PROCESSED WASTE LEVELS SEE STEADY RISE

Solid waste tonnage collected by the county has increased modestly the last five years after experiencing a decline related to the recession, a fall-off in construction, and increased recycling. Waste generated within the service area from residential and commercial sources has steadily increased at an average annual rate of 2.5% during the fiscal period 2011 through 2015 compared to estimated population growth of 1.2% over the same period.

Residential waste, which accounted for approximately 55% of the total county inbound waste has steadily increased at an average annual rate of 3% during this five year period. Commercial waste, representing approximately 41% of inbound waste, has increased at an average annual rate of 1.8% during the same period. The waste from incorporated cities of Temple Terrace, Plant City and Tampa make up the remainder of the inbound waste.

WEAK LEGAL COVENANTS

The county covenants in the amended series 2016 bond ordinance to fix rates and charges sufficient to cover operating expenses by 100% and bond debt service costs by 115%. Gross revenues for this purpose may include transfers from the rate stabilization fund up to 25% of the balance at the beginning of the bond year. The additional bonds test has the same requirement.

The amended series 2016 bond ordinance revises the rate covenant to 115% from the prior 110% level. It also removes the requirement to raise rates gradually by 3% if debt service coverage including the use of rate stabilization funds is below 1.65x. Fitch believes these changes provide more flexibility to the system.

RESIDENTIAL SPECIAL ASSESSMENTS PROVIDE STABILITY

In fiscal 2015, special assessments constituted 58% of gross operating revenues. Special assessments are levied and enforced in the same manner as property taxes ensuring a steady revenue stream regardless of the level of solid waste collected and processed in the system. Tax collections are strong historically averaging 99% annually. Residential customers for disposal services in fiscal 2016 were just over 300,000 and for collection services at 272,449.

Due to the new franchise collection contract beginning in fiscal 2014 cost savings were passed along to residential customers, reducing the fiscal year 2014 annual assessment fee from $231 to $223 per residential unit. Such rates remain unchanged through fiscal 2017. These rates are comparable to or lower than other Florida counties with RRFs. Rates for counties, without an RRF, tend to be lower although service levels may be less.

ELECTRIC GENERATION REVENUES SECURED THROUGH CONTRACT

Electric revenues are generated through the sale of power produced at the RRF which totaled approximately $17.2 million in fiscal 2015 or 17% of operating revenues. The county projects revenues to remain around 16%-17% of revenues for the next five fiscal years. The county has a power purchase agreement with Seminole Electric Cooperative (Seminole) that provides for delivery of up to 38 megawatts of contracted energy of which the county is able to use 2.5 megawatts for its own use. The contract with Seminole expires in 2025.

Any residual energy produced is sold to Tampa Electric Company, Inc., per an agreement. The county pays the RRF operator, Covanta Hillsborough, Inc., 10% of revenues pursuant to an operations contract as an incentive to produce and sell electricity.

TIPPING FEES DERIVED FROM NON-RESIDENTIAL WASTE

Commercial and municipal tipping fees from Temple Terrace, Tampa and Plant City accounted for 21% and 2% of total operating revenues in fiscal 2015, respectively. Commercial tipping fee revenues has averaged between 19%-22% of operating revenues since fiscal 2011 and are projected to remain at the high end of this average over the next five years.

OPERATING CONTRACTS HISTORICALLY STABLE

The county has a contract with Covanta Hillsborough, Inc. for operation of the RRF through 2029. Covanta has operated the facility since November 1984. The agreement provides for the payment of the cost of operations based on the tons disposed at the RRF, with a minimum throughput of 545,000 tons per year. The payment is subject to an annual escalation in accordance with an indexing provision as contained in the agreement. The RRF was placed into operation in 1987 and then expanded in 2009 for a cost of $120 million which included a new 16.9 megawatt turbine generator. Covanta is responsible for repairs and replacement of equipment on a timely basis and required to meet environmental and contractual performance guarantees, which it has done.

Three hauler contracts were awarded in 2013 for five residential collection districts for a seven year term. The contracts are subject to a one-time three year renewal with the same terms at the county's option.

FISCAL 2015 DEBT SERVICE COVERAGE REMAINS SOUND

Operating revenues have remained relatively stable over the past five fiscal years with the steady annual increases in waste flow helping offset the modest decrease in collection and disposal charges instituted in fiscal 2014. Recycling revenues and commercial revenues showed the most variability over this period, which is typical for most solid waste systems.

Fiscal 2015 operating revenues of $101 million experienced a modest 2.7% decline compared to fiscal 2014 primarily due to a 5.8% decline ($1.3 million) in commercial collection revenues and a $1.7 million decline in recycling revenues. Operating expenses were up a modest 1.6%. Net revenues of $25.7 million (which excludes rate stabilization funds) covered fiscal 2015 debt service by a solid 1.86x. Coverage has traditionally been strong contributing to the systems high liquidity levels.

In fiscal 2014, management had instituted an automated residential collection program providing larger bins to residents and negotiated new franchise hauler contracts which resulted in annual savings of over $12 million in fiscal 2014. Such action has contributed to the maintenance of the system's strong debt service coverage levels.

PROJECTED FISCAL 2016 RESULTS SHOW LOWER BUT ADEQUATE COVERAGE

Fiscal 2016 results are unaudited but projections show relatively flat operating revenues and a conservative 9% or $7 million increase in expenses. Net revenues, excluding rate stabilization funds, are conservatively projected at $18 million and cover debt service 1.3x. Pro forma debt service coverage levels following the bond refunding, as projected by the county's bond engineer and rate consultants, are projected to remain close to this level through fiscal 2019 and improve gradually thereafter with rate increases of 2.9% proposed for fiscal 2018 and 2019, and 3.7% in fiscal 2020. Pro forma debt service remains flat beginning in fiscal 2017 through 2023 and then declines by $2.8 million due to the maturity of a 2013 bank loan used to purchase the carts used with the automated collection service.

AMPLE LIQUID RESOURCES

Liquidity is strong with approximately $134.6 million of combined restricted and unrestricted cash according to unaudited results at the end of fiscal 2016. This represents a robust 590 DCOH. Management has prudently decided to fully fund its landfill closure liabilities although the funds are not legally restricted and $36 million of the above amount represents these funds.

MANAGEABLE CAPITAL NEEDS

With the expansion of the RRF plant completed in 2008 capital needs are anticipated to be manageable in the near term and payable on a pay-as-you go basis. Management is in the process of preparing a 20 year market study to determine the suitability of its existing facilities to meet future demands as well as the use of other technologies available to support processing of waste. The county is not forecasting any new debt issuances for the next five year capital improvement plan (CIP) period. The five year CIP totals $26.6 million. Fitch expects future capital costs to be manageable and rates for service to remain competitive.

BROAD-BASED ECONOMY EXPERIENCING A STRONG RECOVERY

Located midway down the western coast of Florida, Hillsborough County serves as the economic center for Florida's Gulf Coast with major sectors in business services, government, health care, education and tourism. MacDill Air Force Base and the Tampa Port are major economic engines.

Wealth levels hover around regional and national averages, with poverty rates slightly above those of the state and nation. The county unemployment rate of 4.7% for July 2016 is equal to the state's rate and below the national level (4.9%) for the same period.

Projects such as the planned expansion of insurer USAA, which is projected to add 1,200 new jobs, a large upgrade at Tampa International Airport, a new Amazon distribution facility in the county and a proposed $1 billion waterfront mixed use development project in Tampa are expected to further bolster job growth. Fitch believes that underlying economic characteristics of the county point to favorable prospects for continued expansion.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Solid Waste Revenue Bond Rating Criteria, this action was additionally informed by information from CDM Smith, Inc., the county's consulting engineer, and Public Resources Management Group, Inc., the county's bond feasibility consultant.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

Solid Waste Revenue Bond Rating Criteria (pub. 12 Aug 2016)

https://www.fitchratings.com/site/re/885295

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013549

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013549

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan, +1-212-908-0538
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Larry Levitz, +1-212-908-9174
Director
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan, +1-212-908-0538
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Larry Levitz, +1-212-908-9174
Director
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com