Fitch Ratings has assigned an 'AA-' rating to the following Tacoma, Washington (the city) bonds:
--$58.1 million solid waste revenue bonds, 2015.
The bonds will price via negotiated sale during the week of Feb. 9. Proceeds will be used to partially refund outstanding revenue bonds and to fund capital improvements of the solid waste system (system).
In addition, Fitch affirms its 'AA-' rating on the following outstanding bonds:
--$63.8 million solid waste utility revenue and refunding bonds series 2006A, 2006B, 2008 at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by net revenues of the city's system and a cash-funded debt service reserve fund.
KEY RATING DRIVERS
STABLE FINANCES: The system's financial operations have held steady due a predominantly fixed rate structure and to consistent and moderate rate hikes, with the exception of two recent years. Financial operations are projected to decline to still satisfactory levels in fiscals 2015 and 2016 due to two years of peak debt service, but are projected to improve significantly thereafter net of an assumed refunding.
SATISFACTORY DEBT SERVICE COVERAGE: Debt levels and amortization are moderate and likely will remain so given no plans for additional issuances apart from refundings. The city projects debt service coverage (DSC) to fall to the 1.70x policy minimum and recover thereafter due to two years of peak debt service.
EXCLUSIVE SOLID WASTE PROVIDER The city is the exclusive provider of collection and disposal service for all residential and commercial refuse in the city, resulting in stability for its municipal solid waste operating revenues and minimal exposure to private haulers.
LIMITED SCOPE OF OPERATIONS: The city's operating risk profile is reduced due the system's recent and planned closure of its landfill. As a Tier One system, the utility collects solid waste and has an extendable contract in place through 2020 for the delivery of its municipal waste to a private landfill.
RATING SENSITIVITIES
STABLE OUTLOOK: The rating is sensitive to shifts in fundamental credit characteristics including continued adherence to the system's financial management practices, financial operations, and operating profile. The Stable Outlook reflects Fitch's expectations that material changes to these factors are unlikely.
CREDIT PROFILE
The city (ULTGO 'A+'/Outlook Stable) is located about 33 miles south of Seattle in Pierce County and is the second largest city in the Puget Sound region. The city's solid waste system is owned and operated by the city, providing collection services for all residential and commercial customers within city limits. The city owns the entire collection fleet that delivers waste to a private landfill site in the county.
STABLE FINANCIAL OPERATIONS
The system's financial performance has been sound despite modest reductions in waste collections in recent years. Revenues have benefitted from consistent and moderate rate hikes, with the exception of two recent years, and from fixed rates that are based on container size instead of actual volume. As a result, total operating revenues increased modestly in four of the past five audited years. Revenues are projected to rise moderately moving forward based on board-approved 3.8% rate hikes in fiscals 2015 and 2016, with projected rate hikes ranging from 3%-4% through fiscal 2020.
The Council did not raise rates in fiscals 2013 and 2014 during the system's transition to an every other week collection model. Although implementation of the new collection schedule resulted in elevated expenditures in fiscal 2013, the transition is expected to reduce operating costs by increasing recycling and collection efficiency and lowering fuel consumption. The new money portion of the current issuance will be used to purchase more fuel-efficient collection vehicles, which is also expected to lower operating costs.
Expenditures increased significantly in recent years due to the system's transition from using its relatively inexpensive municipal landfill to a private landfill. Moving forward projected revenue growth is roughly in line with projected expenditure growth, which reflects typical inflationary pressures.
The system has contracts in place for long-haul garbage (expiring in 2020 with a renewal option), recycling (2016) and yard waste (2015 with a five-year renewal option). Management is working to combine its long-haul garbage and yard waste contracts, which are now provided by the same company, into a single and more affordable contract. The recycling contract likely will go to bidding prior to its expiration.
SOUND DEBT SERVICE COVERAGE PROJECTED TO TEMPORARILY DIP
The system's DSC in fiscal 2013 was sound at 2.10x (2.33x before a $1.4 million transfer to the rate stabilization fund is considered). The issuer projects modestly improved coverage in fiscal 2014 to 2.46x before falling to a satisfactory 1.70x in fiscal years 2015 and 2016. The lowered coverage levels are due to substantial debt service spikes that drop off in fiscals 2017 and 2018, net of a projected refunding in fiscal 2016. As a result, coverage is projected to rise to a strong 3.49x by fiscal 2018.
An inability or unwillingness to refund the system's 2006 revenue bonds at or near currently projected interest rates could result in DSC levels below management's policy minimum beginning in fiscal 2017, absent offsetting actions to raise rates or lower expenditures. Fitch's 'AA-' rating assumes the system will maintain coverage of at least the 1.70x policy minimum and actual coverage beneath these levels could lead to a negative rating action.
DSC calculations do not take into account required revenue transfers to the city's general fund. The transfer is established by city charter at a maximum rate of 8% of solid waste revenues. The city transfers the maximum percentage allowed and a change to the charter would require voter approval. Payment of the transfer is subordinate to debt service payment. DSC of 2.10x in 2013 would fall to a low 1.32x adjusting for the transfer.
MODERATE DEBT AND LIMITED CAPITAL NEEDS; HEALTHY CASH POSITION
Debt levels are moderate. Capital needs over the next five years are $46 million and are chiefly for vehicle and equipment costs. Capital needs are split almost evenly between pay-go and bond proceeds from this issuance. Liquidity is sound with fiscal 2014 operating cash at $20.8 million (more than 180 days cash on hand) and $6 million in the rate stabilization fund. The city's financial projections show a modest $250,000 drawdown of the rate stabilization fund balance over the next five years. Management is targeting the rate stabilization fund to equal at least 10% of revenues or about $5.7 million, based on audited fiscal 2013 results.
SOLID WASTE FEES CHARGED ON COMBINED BILL
The system's solid waste fees are charged on a combined bill with water, sewer, and power. Revenues are balanced between residential customers (48% in 2013) and commercial customers (43%), with private trips to the city's transfer station for drop-off making up 10% of revenues. The system contains little revenue concentration, with the top 10 payers accounting for only 5.4% of operating revenues. Rates remain above average for certain customer classes yet roughly in line with other regional rates.
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.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (August 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (August 2012);
--'Solid Waste Revenue Bond Rating Criteria' (June 2014).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Solid Waste Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750529
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978985
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