Fitch Affirms Hillsborough County, FL’s Solid Waste Revenue Bonds at ‘A+’; Outlook Stable

Fitch Ratings has affirmed the 'A+' rating on the following Hillsborough County, FL's (the county) solid waste revenue bonds:

--$145.6 million solid waste & resource recovery revenue bonds, series 2006A and 2006B.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net revenues of the county's solid waste system. The debt service reserve fund equal to maximum annual debt service (MADS) is funded with an AMBAC Assurance surety bond.

KEY RATING DRIVERS

SOUND OPERATING SYSTEM: The system continues to function well despite significant declines in tonnage due to economic pressure. The system benefits from a stable revenue base as over half of revenues are derived from special assessments levied on residents' tax bills and legal requirements to raise rates if debt service coverage fails to reach 1.65x.

TYPICALLY AMPLE DEBT SERVICE COVERAGE: Debt service coverage narrowed recently due to no increase in rates and higher costs but is expected to return to its historical 1.65x range in fiscal 2014.

LOWER COST STRUCTURE: Management has automated much of its collection operations leading to an expected significant decrease in operating costs, enhancing operating flexibility and debt service coverage.

MINIMAL CONTRACT RENEWAL RISK: The county recently locked in new contracts with its three major haulers. Existing arrangements with most of its 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.

SOLID LIQUIDITY: Available cash and investments are ample representing over a year of operations.

LIMITED FUTURE DEBT NEEDS: The system funded improvements to its waste-to-energy facility in 2006 increasing its generation capacities, and its landfill capacity is strong resulting in moderate future expenditure needs.

RATING SENSITIVITIES

VOLATILITY OF NON-ASSESSMENT REVENUES: The inherent volatility of the system's non-assessment revenues would preclude positive rating action.

BELOW TARGET DEBT SERVICE COVERAGE: Ongoing declines in debt service coverage below the 1.65x target could result in negative rating action.

CREDIT PROFILE

The county's solid waste management system is an enterprise fund of Hillsborough County (GO rated 'AAA' with a Stable Outlook). The system serves the unincorporated portion of the county including portions of the cities of Tampa and Temple Terrace annexed after 1983 (the service area). The system performs collection, transportation, and disposal of all solid waste generated or brought into the service area. The system also sells electricity generated from its waste-to-energy facility (RRF).

Residential customers for disposal services were projected for fiscal 2013 at 288,000 and for collection services at 260,000. Customer counts have been growing slowly since fiscal 2009 and are projected to continue on this gradual trend. The county enacted a flow control ordinance in 1983 giving it control over the collection and disposal of solid waste within its service area.

REVENUE STABILITY OFFSETS TONNAGE DECLINES

Solid waste tonnage collected by the county declined steadily since fiscal 2007, the result of the recession, the fall-off in construction, and increased recycling. Overall tonnage processed fell from 888 tons in fiscal 2009 to 829 tons in fiscal 2013; a reduction of 6.6 percent. However, fiscal 2013 tonnage represented a slight increase over the prior year reversing a five year downward trend. Despite the drop-off in waste, potential negative effects on finances are mitigated by bond indenture requirements that the county charge residential assessments sufficient to cover collection costs and raise residential disposal assessments and tipping fees at least 3 percent annually if net revenue debt service coverage is less than 1.65x.

The sizable presence of special assessments in the system's revenue base is a source of additional stability. 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 at 99 percent annually. In fiscal 2012, special assessments constituted 59 percent of operating revenues.

ELECTRIC GENERATION; A SIGNIFICANT REVENUE SOURCE

Electric revenues are generated through the sale of power produced at the RRF which totaled $16.6 million in fiscal 2012 or 16 percent of operating revenues. The county has a power purchase agreement with Seminole Electric Cooperative (SEC) 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 SEC expires in 2025. Rates are fixed until 2015 when they are adjusted annually based on SEC's cost of fuel. Any residual energy produced is sold to Tampa Electric Company, Inc., per an agreement. The county pays the RRF operator, Covanta Hillsborough, Inc. 10 percent of revenues pursuant to an operations contract as an incentive to produce and sell electricity.

TIPPING FEES DERIVED FROM NON-RESIDENTIAL WASTE

Non-residential waste revenues are derived from tipping fees, which totaled $16.9 million or 16.6 percent of operating revenues in fiscal 2012. Three franchise haulers collect residential and commercial waste and pay tipping fees. A commercial tipping fee was instituted in fiscal 2013 with slightly lower processable rates and much higher non-processable rates than previous fees paid by commercial haulers. Waste is also received from the City of Temple Terrace according to a contract to be processed at the RRF or landfill. A similar agreement between the county and the city of Tampa expired in 2010 and was not renewed by the city, resulting in an estimated loss of about $900,000 annually.

WIDE FISCAL 2012 DEBT SERVICE COVERAGE

No rate increase was enacted in fiscal 2012 as debt service coverage was strong at 2.5x. Despite the rate freeze, fiscal 2012 revenues experienced modest 3 percent year over year growth due to a combination of customer expansion, higher electricity generation and a positive revenue adjustment. Fiscal 2012 expenses fell by $1.8 million or 2.1 percent as a result of lower landfill costs and reduced variable expenses in tandem with the decrease in tonnage levels.

NARROWED PROJECTED FISCAL 2013 RESULTS

Fiscal 2013 results are unaudited but officials project the use of $5.2 million from the rate stabilization fund in order to achieve the target 1.65x coverage threshold. Officials decided to maintain assessment rates at prior year levels due to the still tenuous economy at the time. Higher contractual costs and slightly elevated debt service combined with reduced investment income to narrow coverage.

AUTOMATION EXPECTED TO GENERATE FISCAL 2014 SAVINGS

Recent investment by the county in overhauling its collection system is expected to generate substantial savings. The project automated much of the collection operations by funding the purchase of rolling bins and carts for residential waste which can be mechanically processed by the automated arms of the trucks of the franchise haulers. In 2013, the county issued $25 million of bonds to fund the purchase of nearly 600,000 garbage and recycling roll carts. The reduced labor requirements and greater efficiencies of the new process lowered hauler costs leading to more favorable contract terms. New franchise agreements were recently signed with three trash haulers designed to significantly cut collection costs. Officials project savings of approximately $10 million from these changes (11 percent to 12 percent of total operating costs) in fiscal 2014, enabling a reduction in fiscal 2014 solid waste assessments of about 3.6 percent.

RISING DEBT SERVICE REQUIREMENTS

While debt service coverage has been historically high with the exception of fiscal 2013, coverage of maximum annual debt service (MADS) is much lower due to a sharp rise in debt service beginning in fiscal 2015. Debt service requirements of the series 2006 bonds rise from $7 million in fiscal 2011 to $11.1 million in fiscal 2015 where it levels off. Fiscal 2012 coverage falls from 2.5x current debt service to 1.8x of MADS. Furthermore, the $25 million of bonds issued in 2013 are on parity with the outstanding series 2006 bonds and add about $2.8 million to debt service from fiscals 2015 through 2023.

LOWER COST STRUCTURE OFFSETS DEBT SERVICE RISE

Lower operating costs as a result of automating the collection process and reductions in staff through an early retirement program provide significant cost offsets to the elevated debt load. Fiscal 2014 debt service coverage is anticipated to be maintained at 1.65x despite a significant increase in debt service. Furthermore, beginning in fiscal 2014, management plans on using excess cash to defease a portion of its outstanding series 2006 bonds. The refunding is estimated to cut debt service costs ranging from $2 million to $4 million annually. The system's reduced cost structure combined with modest customer growth assumptions results in projected debt service coverage at the county's target of approximately 1.65x annually over the next five years.

AMPLE LIQUID RESOURCES

Liquidity is strong with approximately $94 million of unrestricted/uncommitted cash according to unaudited results at the end of fiscal 2013. This represents a robust 418 days cash on hand. Approximately $4.6 million is designated for sinkhole remediation and $10 million will be used for the refunding program, however, remaining cash will continue to be ample. Management has prudently decided to fully fund its landfill closure liabilities although the funds are not legally restricted, further adding to the system's flexibility.

The county has also earmarked cash equal to $11.8 million; the series 2006 debt service reserve fund requirement (DSRF) due to credit deterioration of the surety provider. The designated funds are not in lieu of the surety and, similar to the landfill reserve, are not legally restricted.

MANAGEABLE CAPITAL NEEDS

With the expansion of the RRF plant completed, capital needs are modest. Lower volume has enabled the delay of the expansion of the county's landfill for 10 years upon expected Department of Environmental Protection permit renewal. Remediation of a large sinkhole which developed in the county's landfill in 2010 is scheduled for completion in August of 2014. The project is fully funded. No additional debt is planned.

BROAD-BASED ECONOMY EXPERIENCING A STRONG RECOVERY

Located midway down the western coast of Florida, Hillsborough County serves as the economic center for Florida'sGulf 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.

Following a severe recession, the county is experiencing a sustained and vigorous recovery. Employment growth has been robust and levels now exceed pre-recession highs. The housing market is also on the upswing with home prices as of September 2013 up 21 percent year over year, according to Zillow.com. Rising sales and tourist taxes are also indicative of the county's emerging recovery.

Wealth levels hover around regional and national averages. Projects such as the location of an Amazon distribution center within the county and an expansion of USAA are expected to generate additional jobs and economic activity. Fitch believes that underlying economic characteristic of the county point to favorable prospects for long-term economic growth and strength.

Additional information is available at '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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Solid Waste Revenue Bond Rating Criteria' (June 19,);

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Solid Waste Revenue Bond Rating Criteria

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=710712

Tax-Supported Rating Criteria

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=808771

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