TEXT - Fitch rates Northeast Maryland Waste Disposal Auth
Feb 4 - Fitch Ratings has assigned an 'AA' rating to the Northeast Maryland Waste Disposal Authority, MD's (the authority) following revenue bonds: --Approximately $79 million solid waste refunding revenue bonds (Montgomery County Solid Waste Disposal System), series 2013. The bonds are scheduled for competitive sale on Feb. 14. Proceeds will be used to refund the authority's outstanding series 2003 bonds. In addition, Fitch affirms its 'AA' rating on the following outstanding obligations: --$2.7 million in outstanding solid waste disposal system refunding revenue bonds, series 2003A, issued by Montgomery County, MD; --$113.7 million in outstanding solid waste refunding revenue bonds (Montgomery County Solid Waste System), series 2003, issued by the authority. The Rating Outlook is Stable. SECURITY The bonds are a limited obligation of the authority secured by a pledge of project revenues, the primary source of which is a waste disposal fee paid to the authority by Montgomery County (the county) and secured by a pledge of essentially all revenues derived from the operation of the county's solid waste disposal system. The pledge securing the county's obligation to pay the waste disposal fee to the authority is on parity with the pledge securing the county's solid waste revenue bonds maturing June 1, 2013. The waste disposal fee paid by the county is net of the authority's share of any revenues from the operations of the project. Additional security is derived from a cash funded debt service reserve fund equal to 10% of par. SENSITIVITY/RATING DRIVERS USER FEE COLLECTED ON TAX BILL: A bulk of the system's revenues are derived from a benefit charge or user fee collected by the county on commercial and residential property tax bills and enforced through property foreclosure. SOUND FINANCIAL PERFORMANCE: Bonds are secured by substantially all revenues generated by the county's solid waste system, and both waste flow and net revenue performance have improved after a slight decline during the recessionary period. RESERVE LEVELS ARE FAVORABLE: The system has maintained a solid level of operating reserves which have remained relatively stable the last five years. STRONG ECONOMIC BASE: Montgomery County (general obligation bonds rated 'AAA' by Fitch) benefits from its above-average wealth levels, low unemployment, and a highly educated labor force. Anchoring the economy is the extensive presence of the U.S. government. LOW TO MODERATE DEBT BURDEN: Management reports the system is in good physical condition and compliant with all regulatory requirements, and there are no significant capital needs or plans for additional debt leveraging. ADEQUATE BONDHOLDER PROTECTIONS: Rate covenant and additional bond provisions are lenient. However, these risks are mitigated in part by the short remaining life of the county and authority bonds, which are fully repaid by 2013 and 2016, respectively. CREDIT PROFILE The authority is an independent state agency consisting of eight participating political subdivisions located in central Maryland. The authority was organized in 1980 to assist in the development of waste management facilities to serve the region. In 1993 the authority and Montgomery County concurrently issued bonds to finance construction of an 1,800 ton-per-day resource recovery facility (RRF), among other related improvements. The authority owns the RRF, which it operates as part of the county's solid waste disposal system (the county system) pursuant to the terms of a waste disposal agreement with the county. The county system provides for the collection, recycling, composting, transfer, mass burning, and landfilling of solid waste. The county has been providing solid waste collection and disposal services since 1943. STRONG AND HIGHLY RATED ECONOMIC BASE The solid waste disposal system service area is the entire Montgomery County. Montgomery County is a wealthy suburb of Washington DC, with a highly educated labor force and a broad and diverse economy with expansion potential. The region's heavy concentration of government jobs helped to stabilize it during the downturn, with declines in total payroll notably lower than the national average. Healthy job growth is anticipated in the intermediate term, with modest risk to government downsizing. Unemployment remains low at 4.7% in November. Population is 989,794 (2011 estimate) and is up 13% from 2000 census figures. PROPERTY TAX BILL CHARGES PROMOTE REVENUE STABILITY A bulk of the county system revenues are collected as a system benefit charge, which is essentially a pre-paid tip fee collected on the property tax bill and enforced through foreclosure in the same manner as if the owner had failed to pay property taxes. System benefit charges are established by the county without any legal limitation and are calculated to reflect as closely as possible the actual costs, or allocated portion of costs, to the county of providing solid waste management services. System benefit charges were $214 in 2012 for a single-family residence in the unincorporated area of the county. These charges represented 71% of total system revenues in fiscal 2012 and have averaged 70% the last five fiscal years. This fee has gradually increased each year, but is up only 7.7% since 2008. Approximately 359,000 residential units, including multi-family, located throughout the county are subject to a charge on their property tax bill for system services. System benefit charges are set annually but may be adjusted more frequently. Due to the nature of the property tax bill cycle, mid-year adjustments would be cumbersome. However, the tip fee may be adjusted within 90 days of the county's decision to do so. Tip fees, which account for an average of 16% of remaining county system revenues, are also established by county ordinance without limitation as to rate or amount. Tip fees are currently $56 per ton, having last been increased by nearly 8% effective fiscal 2008 and 27% in total since fiscal 2003. Tip fees are managed to control capacity at the transfer station and RRF. Current tip fees are competitive with regional systems. SOUND FINANCIAL PERFORMANCE The county system has historically produced coverage of operating expenses and combined debt service on the authority and county bonds at or close to 1.0x. Fitch calculated coverage in fiscal 2012 from net revenues of the county system was 1.07x, up from 0.97x in fiscal 2011, largely due to an increase in waste flow due to an improving economy. The rate covenant and additional bonds test (ABT) is based on a relatively low 1.10x coverage threshold. Further, both tests permit 25% of the revenue requirement to be satisfied from available fund balances. The fiscal 2012 debt service coverage ratio improves to 1.83x when factoring in available fund balances equal to 25% of revenues required to cover operations plus debt service. LIBERAL RATE COVENANT AND ABT MITIGATED BY LACK OF DEBT NEEDS Fitch views these liberal legal provisions negatively, as they allow less than sum-sufficient coverage of debt service from system operations and may allow issuance of more debt than the system operations can comfortably cover. However, the stable nature of the revenue environment combined with the county's exceptional financial management counters this risk, as do the lack of future issuance plans and the short remaining life of the outstanding bonds. Further, system liquidity is considered sound, with $58 million in available reserves at the close of fiscal 2012 (audited GAAP), or the equivalent of 219 days operating expenses. The county system is in full compliance with all regulatory permits. The facility is reportedly in good condition, and there are no major capital repairs or replacements scheduled. Debt service charges in fiscal 2012 totaled $31.8 million, or one-third of the county system's fiscal 2012 revenues, which Fitch considers high. Outstanding debt of the county ($2.7 million) is scheduled to mature June 1, 2013, leaving only the authority's series 2013 bonds outstanding. The series 2013 bonds mature April 1, 2016. FUTURE FLOW PROJECTIONS ARE CONSERVATIVE Five-year projections for waste flow are fairly conservative and assume 1% annual population growth and maintenance of a $56 tipping fee. If waste flow projections do not materialize due to an unexpected downturn in the economy or other factors, the county has the ability to raise tipping fees or the system benefit charge accordingly. The financial flexibility provided by the county's sound level of reserves also mitigates any such concern. THIRD-PARTY CONTRACTS PERFORMING WELL The county and the authority are party to various contracts related to the operation of the RRF, delivery of waste to the system, and land-filling of non-processable or bypassed waste. Third-party participants are performing as anticipated, according to management, and all but one of the operating contracts expire after final bond maturity. The contract for rail service with CSX for transport of waste to the RRF from the county transfer system expires Aug. 7, 2015. Management expects timely extension of the contract and no disruption in services, which Fitch believes is reasonable based on the historical performance of the system. The county also owns 650 acres of land near Dickerson, less than 2 miles from the RRF, of which 125 acres is permitted for the Site 2 landfill if out-of-county disposal becomes unavailable.