WASTE CONNECTIONS, INC.
Fitch Ratings has affirmed its 'AA-' rating on
Fitch has also assessed the county solid waste department's standalone credit profile (SCP) at 'aa-'. The SCP represents the credit profile of the department's solid waste system (the system) irrespective of its relationship with and the credit quality of, the county (Issuer Default Rating, AA/Stable).
The Rating Outlook is Stable.
RATING ACTIONS
Entity / Debt
Rating
Prior
LT
AA-
Affirmed
AA-
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VIEW ADDITIONAL RATING DETAILS
SECURITY
Bonds are secured by net revenues of the county's solid waste system. A debt service reserve fund is funded with cash and a surety bond.
ANALYTICAL CONCLUSION
The 'AA-' bond rating and 'aa-' SCP reflect the system's strong revenue defensibility including a diversified revenue base from which close to 60% is derived from a residential collection fee charged on the property tax bill, midrange operating risk and very low leverage. Debt service coverage on outstanding obligations has been solid, and surplus revenues have built up cash reserves to robust levels, which have supported capital and maintenance efforts.
The system's service area, which includes the unincorporated area of the county and a number of municipalities, has experienced rapid economic and population growth. Growth is expected to continue but at a more moderate pace in the medium term. Since 2018, the county has entered into short-term subordinate equipment leases to replace fleet for the system in lieu of debt issuance and such leases are ultimately secured by legally available funds of the county including those of the general fund. The amount of lease payments escalated in fiscal 2020 to
Current revenue bond debt amortizes fairly rapidly (100% of principal by end of 2030), allowing for the phase in of new debt without significant budget implications depending on the timing and level of new debt to be issued.
RESOURCE RECOVERY FACILITY DAMAGED BY FIRE
In
The solid waste department has continued to operate and service its residents without interruption. The county is currently diverting all solid waste to county owned landfills and to private landfills within the county's solid waste system and Fitch does not expect this to have significant effects on near-term operating costs. The RRF processed approximately 900,000 tons of waste last fiscal year which is 43% of the 2.1 million tons of overall solid waste projected to be processed within the system in fiscal 2023.
Projected net-operating results for fiscal 2023 (ending
In an
The report noted that construction of the facility could be financed through several possible sources, including federal funding under the Inflation Reduction Act, state funding, county revenue bonds and
WASTE DISPOSAL CAPACITY OPTIONS BEING EXPLORED
The county's Comprehensive Development Master Plan requires the annual certification of a Level of Service with at least five years' disposal capacity as a prerequisite to issue development permits, and unlike other forms of concurrency such as transportation, concurrency requirements for solid waste are state mandated and cannot be waived due to their importance to public health. The concurrency requirement is based on a continuing five-year cycle and must be assured annually for continuing five-year cycles at the start of each fiscal year.
The county currently has capacity at the
FINANCIAL PROFILE REMAINS SOLID
The county continues to receive revenues from the collection and disposal of waste and has a very high level of unrestricted cash positioning it well to manage through the near-term while options are explored for the continued disposal of waste.
For FYE 2022, operating revenues increased 9% yoy and were largely driven by increased tipping fee revenue, electric revenue sales, and disposal facility fees. Tipping fee revenue and disposal facility revenue was driven both by strong yoy growth in total tonnage, as well as contractual fee increases per ton for customers. Debt service coverage from adjusted net revenues of
Inflation continues to increase system costs such as labor, vehicles and other operating items, but contractual caps limit fiscal implications and the county has demonstrated a willingness to raise fees accordingly. For fiscal 2023, hauling contract annual CPI inflators are capped at 4% for 13 of 15 contracts with the other two capped at 5%, but these two permit the rollover of any increase over 5%. Disposal contract tipping fees increased by CPI.
To cover increased costs, the county increased the annual fee for residential curbside collection by 5.2%, increasing
KEY RATING DRIVERS
Revenue Defensibility: 'Stronger'
The bulk of revenue is derived from monopolistic service lines and the county board retains independent rate setting authority. Strong customer and development growth support the favorable service area characteristics. Management has historically managed user rates in line with changes in expenditures.
Operating Risk: 'Midrange'
The system has a diversified revenue base with approximately 61% of fiscal 2022 revenues generated from fees charged on the property tax bill of close to 350,000 households in the service area. Other revenues include tipping fees derived from long-term interlocal agreements with 21 municipalities to provide solid waste disposal services. These contracts were renewed around 2013 and have expiration dates between 2025 and 2035 depending on the municipality. Rates are subject to annual adjustment based on changes in CPI, which due to the higher inflationary environment, have increased yoy. The county has waste-delivery commitments from a number of private haulers.
Financial Profile: 'Stronger'
The system's strong financial profile is characterized by leverage that has generally declined since 2015. However, additional investment in fleet, a waste facility and landfill expansions and associated debt is expected to increase leverage. The system's liquidity profile, while neutral to the assessment, is robust.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A stabilization or reduction of the system's annual operating costs on a sustained basis could lead to upward movement in the operating risks assessment.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A sustained and dramatic increase in the operating cost burden due to higher than anticipated waste disposal costs or maintenance needs or increases in external pricing factors outside of the county's control without corresponding and timely rate action;
A delayed response to installing adequate waste disposal measures to ensure sufficient capacity and meet Level of Service requirements, particularly in response to the loss of the resource recovery facility;
A sustained increase in leverage above 8x Fitch's calculation of net debt to cash flow available for debt service and/or a notable decline in liquidity or cash flow.
CREDIT PROFILE
The fully integrated solid waste system operates as a self-supporting enterprise fund of
The system includes the county-owned waste-to-energy RRF, three landfills (one of which is for the disposal of ash byproducts), three transfer stations, 13 neighborhood trash and recycling centers and contract disposal capacity with two alternative private providers at four facilities.
Revenue Defensibility
Demand Characteristics
The area economy is diverse with a large international component. The presence of health care, higher education, and professional and business services balance the tourism component of the county's economy. The county has experienced strong growth in property values, new development and population. However, overall tonnage levels had remained relatively stable prior to the pandemic other than increases due to storm activity.
Residential household customers have grown by approximately 4% over the past five years and roughly 6% since 2010. Actual population growth based on census reports has been 7% since 2010.
The bulk of system revenues are derived from a residential assessment fee charged on the property tax bill (roughly 60% of annual revenues), tipping fees (approximately 20%), electric revenues and a utility disposal fee.
Pricing Characteristics
The county board of commissioners retains an independent ability to raise rates as necessary to cover operating costs and maintain its bond covenant of 1.2x coverage. As noted, the board has demonstrated its willingness to implement rate increases to address higher costs and ensure operational sustainability.
Operating contracts are subject to periodic renewal, which exposes the system to future cost risks. The county has been able to renew its contracts with generally similar terms, preventing cost spikes, but a reliance on contracted services results in some limitations on operating cost flexibility.
Financial Profile
The system's relatively low debt and strong unrestricted cash and system reserves results in a strong assessment due to the system's net debt to CFADS of -4x for fiscal 2022.
The additional bonds test and rate covenant are both adequate at 1.20x and allow the use of a portion of the rate stabilization fund to be included in meeting these thresholds.
Fitch expects annual waste generation to increase on a measured basis as the economy experiences continued growth. Future equipment and capital needs related to landfill expansions and a new or updated RRF and annual expenditure growth from operations and maintenance requirements will drive spending. However, the decline in annual bond debt service costs which occurred in fiscal 2022 (from
Fitch believes management's strong revenue defensibility and manageable contracts provide the tools necessary to ensure adequate coverage of financial obligations and sufficient cash levels.
Asymmetric Risk Additive Considerations
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
Additional information is available on www.fitchratings.com
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