Fitch Rates Texoma Area Solid Waste Authority, TX Contract Revs 'A+'; Outlook Stable
Fitch Ratings has assigned an 'A+' rating to the following Texoma Area Solid Waste Authority, Texas' (TASWA) contract revenue bonds:
--$3.2 million regional solid waste disposal contract revenue bonds, series 2012.
The bonds are expected to price via negotiation on April 11, 2012. Proceeds from the sale of the bonds will be used for a cell expansion and to pay issuance costs.
In addition, Fitch affirms the following rating:
--$15.8 million regional solid waste disposal contract revenue refunding bonds, series 2010 at 'A+'.
The Rating Outlook is Stable.
The bonds are special obligations of TASWA secured by its gross revenues, which are derived from payments made by the solid waste systems of the cities of Sherman, Gainesville, and Denison pursuant to the landfill agreement (the contract).
Per the contract, each member city shall budget an amount sufficient to satisfy its annual requirement, which is comprised of bond debt service and operations and maintenance expense components. Also, each member city is unconditionally obligated to pay its proportionate share of the bond debt service component of the annual requirement, using solid waste funds together with any other funds from any source available for such purposes.
In addition, the landfill contract stipulates that, in the event of the failure of one member city to pay the annual requirement for more than 10 days, annual payments of the remaining member cities are to be adjusted to ensure TASWA receives the total annual requirement. Contracts with member cities continue until all bonds are paid in full and shall remain in force thereafter throughout the useful life of the facility.
The bonds are also secured by a cash-funded debt service reserve fund equal to average annual debt service on all parity bonds.
KEY RATING DRIVERS
SOUND ENTERPRISE AND GENERAL GOVERNMENT CREDITWORTHINESS: Each member city's solid waste enterprise operation and general credit profile is considered in the Fitch rating, given the full step-up provision of the contract, and the member cities' absolute and unconditional obligation to make up any shortfall in solid waste revenue from lawfully available funds.
STRONG CONTRACTUAL PROVISIONS: The landfill contract with three member cities is strong and includes the unconditional obligation of member cities to fully cover TASWA's debt service expense, including a step-up provision to cover defaulting entities, a requirement to budget for the full annual requirement, and mandatory use of the TASWA landfill.
RATE ADJUSTMENTS: TASWA's steady rate increases have enabled it to weather the reduced level of waste volume associated with the economic downturn.
ESSENTIAL SERVICE AND LIMITED COMPETITION: The authority provides an essential service and landfill competition within the service area is limited.
AUTHORITY CREATION AND GOVERNANCE
TASWA was created to establish a regional solid waste disposal system to receive, transport, treat and dispose of solid waste of the member cities (Sherman, Gainesville, and Denison). The authority is governed by a five-member board, composed of the mayors of each member city as well as the county judges of Grayson and Cooke Counties.
Each member city is required to collect and distribute all of its solid waste to the landfill. The authority operates the facility and has the right to discontinue service to any member city, and each member city will be responsible for delivery of solid waste to a specified point of delivery.
STRONG CONTRACT LANGUAGE
The strong language of the contract requires that, in the event of the failure of a member city to pay the annual requirement for more than 10 days, the annual payments of the remaining member cities must be adjusted to ensure that the authority receives the total annual requirement.
Payments by member cities must be made in monthly installments and regardless of whether or not any member city receives or uses the services or facilities of the authority. The payment to TASWA is an operating expense, paid before any enterprise debt. If solid waste revenues are insufficient to cover a municipality's annual requirement, it has an unconditional obligation to pay the debt service portion, utilizing any other available revenue to provide this amount. To date, there is no history of member default or payment delays.
The annual requirement will be based upon each member city's percentage of total tonnage of solid waste the prior year and will be recalculated annually. Cost allocations, which have not changed significantly since 2004, include debt service, operations and maintenance, and debt service reserve requirements. Sherman accounts for approximately 33%, Gainesville for 20%, and Denison for 18%.
Currently, about 28% of volume is coming from private haulers and individuals as the authority continues to pursue additional customers which provide a net economic gain. In the event private hauler volume drops off during the fiscal year, TASWA is able to increase the annual payments for all users, effective 60 days after board action, to offset any private hauler revenue losses.
WEAK DEBT SERVICE COVERAGE REQUIREMENT
Debt service coverage is essentially sum sufficient, consistent with the authority's rate covenant. Softened economic conditions in fiscal 2009 resulted in reduced trash and debt service coverage for fiscal 2009 to 0.9 times (x), with the remainder paid from unrestricted operating funds.
Management responded effectively by reducing expenditures and raising rates by $3 to $33 per ton. In addition, TASWA maintains significant rate flexibility in adjusting rates mid-year if needed, or the authority can true-up at the end of the year. An additional $2 rate increase has been adopted to become effective on Oct. 1, 2012. The garbage rates of all three cities are competitive despite recent rate increases.
For fiscal 2011, debt service coverage was higher than typical at 1.23x and was planned to prepare for the current bond sale (as there will be an overlap in interest payments for four months since the series 2008 bonds mature after this issuance).
LONG REMAINING ASSET LIFE; LIMITED CAPITAL NEEDS & COMPETITION
The estimated remaining life of the landfill is in excess of 50 years and the percentage of the total landfill capacity used to date is roughly 5%. The authority sold a small amount of parity debt via private placement in 2008 (not rated by Fitch) to build an additional 12-acre cell for waste disposal. Future debt plans include $3 million in parity debt for cell construction every four to five years, concurrent with the maturity of the prior cell construction debt thus maintaining level debt service.
Waste disposal options in the area are limited; the TASWA landfill is the only open facility of its kind, with all other public landfills within Cooke and Grayson counties closed since 1993. Competition outside the primary service area is limited, too. In addition, regulatory issues complicate the transport of solid waste across the state line into Oklahoma. Officials report that the authority is in compliance with all regulatory requirements.
STRONG SUPPORT THROUGH MEMBER CITIES' SOLID FINANCIAL PROFILES
Key to the rating is the continued solid financial operations of the member cities, which are unconditionally obligated to pay their proportionate share of the bond service component of the annual requirement.
The city of Sherman has no solid waste revenue bonds outstanding (only capital leases). Coverage on leases was a substantial 29x in fiscal 2011. Liquidity for fiscal 2011 was a robust 127 days of cash on hand with approximately $1.8 million in unrestricted net assets. The unrestricted general fund balance for fiscal 2011 was a solid $8.2 million representing 29% of expenditures and transfers out.
Gainesville's solid waste operations, which support capital leases as well as a portion of the city's general obligation debt, provided a strong 3.1x debt service coverage of all non-TASWA obligations in fiscal 2011, with the TASWA requirement paid as an operating expense. In addition, liquidity is substantial with 363 days cash on hand with unrestricted net assets at a total of $1.9 million. The city's unrestricted general fund balance represented a strong $5.9 million, or 47.9% of spending.
Denison (GO bonds rated 'AA-' by Fitch) does not maintain a separate fund for solid waste, but instead records refuse disposal operations in the general fund. Denison's fiscal 2011 unreserved general fund balance stood at $4 million or 20% of expenditures and transfers out.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue Rating Criteria, this action was additionally informed by information from CreditScope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, and the Municipal Advisory Council of Texas.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 20, 2011);
--'Rating Guidelines for Solid Waste Revenue Bonds' (Aug. 9, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Rating Guidelines for Solid Waste Revenue Bonds
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