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Rating Action:

Moody's revises outlook to negative on Hillsborough County Solid Waste Enterprise, FL's Series 2016A and Series 2016B Revenue Bonds; affirms A1

11 Nov 2020

New York, November 11, 2020 -- Moody's Investors Service has affirmed the A1 rating on Hillsborough County's (FL) Solid Waste and Resource Recovery Refunding Revenue Bonds, Series 2016A (AMT) and Solid Waste and Resource Recovery Refunding Revenue Bonds, 2016B (NON-AMT) bonds. Concurrent with the rating affirmation, Moody's changed the outlook for Hillsborough County Solid Waste Enterprise to negative from stable.

RATINGS RATIONALE

The A1 is based on the fundamental strengths of the system, including the relatively high percentage of predictable revenues derived from annual assessments, the strong waste flow control with monopoly position, growing service area benefiting from population in-migration and increased housing construction, and sound management that has contributed to historically stable financial operations including substantial liquidity levels that provide a financial and operational buffer. The negative outlook, however, reflects the downward pressure on the enterprise as it faces the challenge of significantly escalating operating expenses, particularly contractual expenses, which has led to a weakening in the debt service coverage ratio (DSCR). The enterprise has approximately $96 million of debt outstanding.

Although FY 2019 Moody's net revenue DSCR was at 1.9x, in line with historical performance, the enterprise anticipates to facing a period of weaker Moody's DSCRs during FYs 2020-2022 due to the escalating operating expenses outpacing revenue growth. Moody's DSCR weakened to 1.07x in FY 2020 (unaudited) and is projected to continue to be less than 1.00x in both FYs 2021 and 2022 . Moody's DSCR does not include rolling coverage (versus the bond ordinance definition of DSCR, which allows for inclusion of rolling coverage). The primary driver of the increases in operating expenses are the costs for residential collection by the franchise haulers, which have increased markedly due to a higher cost environment for truck capital and truck maintenance.

In response to the rising operating expenses, the enterprise increased the residential collection assessment by $55.00 or 42% for FY 2021. The enterprise is planning to implement more rate increases on an annual basis to keep up with the rising expenses, but the proposed rate increases will be subject to approval by the Board of County Commissioners.

The system's liquidity position after a period of cash accumulation from FYs 2014-2019 is substantial at $180 million or 726 days cash on hand (FY 2019 audited) and $703 million or 703 days cash on hand (FY 2020 unaudited). However, given the growing operating expenses, liquidity is expected to moderate, but should still remain at acceptable levels at around 385 to 415 days.

RATING OUTLOOK

The negative outlook reflects the ongoing pressure of escalating operating expenses, particularly contractual expenses, which has led to a weakening in the debt service coverage ratio. The negative outlook also reflects the exposure that the enterprise faces in terms of both potential increased costs from future hauler contract renewals and that future rate increases planned by the enterprise are subject to Board of County Commissioners approval.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Further and sustained improvement in financial margins with coverage above 2.0 times

- Maintenance of residential assessment share of total revenue above 70%

- Sustained growth of waste tonnage as a reflection of the local economy

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Sustained declines in financial margins with coverage below 1.5 times

- A reduction in liquidity and slowing of local economy and reduction in tonnage delivered to the system from current levels

LEGAL SECURITY

The revenue bonds are secured by net revenues of the solid waste system. The DSRF requirement is 50% of the standard 3-prong test, thus providing a weaker level of reserve funds.

The rate covenant applies gross revenues and any Rate Stabilization funds or General Purpose Fund deposited into the Revenue Fund, and includes two separate coverage tests, which are 1) 1.00x operating expenses, 1.15x senior lien debt service, 1.00x subordinate lien debt service, and all required reserve deposits, and 2) 1.00x operating expenses and 1.00x senior lien debt but only including Rate Stabilization Funds that are not in excess of 25% of the balance on deposit in the fund at the end of the previous fiscal year.

The additional bonds test requires that net revenues cover 1.15x maximum debt service for 12 of the past 24 months, however net revenues can be adjusted to incorporate recent rate increases, extension of service area, and net revenues from acquisition of existing systems upon certification by a qualified independent consultant. The coverage calculation may include Rate Stabilization Funds that are not in excess of 25% of the balance on deposit in the fund at the end of the previous fiscal year.

The enterprise has the ability to make payments in lieu of taxes (PILOT) at the bottom of the funds waterfall structure, before deposits to the general purpose fund. The amount of PILOT is limited to 10% of the revenues the county can control (i.e. from residential collection and disposal assessments, commercial and municipal tipping fees and rates, among others).

PROFILE

The solid waste system consists of county-owned facilities, including a 46 MW WTE facility operated by Covanta Holding Corporation (Corporate Family Ratings Ba3 stable), a landfill operated by Waste Management, Inc. (Baa1 stable), and two transfer stations.

METHODOLOGY

The principal methodology used in these ratings was Power Generation Projects Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1236893. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Sarah Lee
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Kurt Krummenacker
Additional Contact
Project Finance
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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