OREANDA-NEWS. Fitch Ratings affirms the following ratings of the Texoma Area Solid Waste Authority, Texas (TASWA):

--$12,975,000 outstanding regional solid waste disposal contract revenue refunding bonds, series 2010 at 'A+';
--$785,000 outstanding regional solid waste disposal contract revenue bonds, series 2012 at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are special obligations of TASWA payable from its gross revenues, which are derived from payments made by the solid waste systems of the cities of Sherman, Gainesville, and Denison pursuant to a landfill agreement (contract).

Pursuant to the contract, each member city shall budget an amount sufficient to satisfy its annual requirement, which is comprised of bond debt service and operations and maintenance expense components. Each member city is unconditionally obligated to pay its proportionate share of the bond debt service component of the annual requirement, using solid waste funds together with other funds from any source available for such purposes.

In addition, the contract stipulates that, in the event of the failure of one member city to pay the annual requirement for more than 10 days, annual payments of the remaining member cities are to be adjusted to ensure the authority receives the total annual requirement. Contracts with member cities continue until all bonds are paid in full and shall remain in force thereafter throughout the useful life of the facility.

The bonds are also backed by a cash-funded debt service reserve fund equal to average annual debt service on all parity bonds.

KEY RATING DRIVERS

SOUND ENTERPRISE AND GENERAL GOVERNMENT CREDITWORTHINESS: Each member city's solid waste enterprise operations and general credit profile is considered in the Fitch rating, given the full step-up provision of the contract.

STRONG CONTRACTUAL PROVISIONS: The landfill contract with the member cities is strong. The cities have an unconditional obligation not just to fully pay TASWA's debt service expense but also to cover any payments of defaulting entities. Use of the TASWA landfill is mandatory and O&M payments are on a take-or-pay basis.

WEAK COVERAGE REQUIREMENT: The authority's rate covenant is essentially sum-sufficient. Budgeting for non-cash expenses, such as depreciation and post closure liability reserves, typically yields slightly better results.

RATE ADJUSTMENTS: TASWA's timely rate adjustments enables it to weather volatility of waste volume associated with economic cycles, as well as reduced waste resulting from recycling.

ESSENTIAL SERVICE AND LIMITED COMPETITION: The authority provides an essential service, and landfill competition within the service area is limited.

RATING SENSITIVITIES

MAINTENANCE OF ADEQUATE RATES AND CHARGES: Given the declining waste volume and weak coverage, maintenance of rates and charges sufficient to recover costs is critical to the rating.

MEMBER CREDIT FUNDAMENTALS MAINTAINED: The rating is sensitive to fundamental shifts in credit quality of Texoma Area Solid Waste Authority's participating members.

CREDIT PROFILE

AUTHORITY CREATION AND GOVERNANCE

TASWA was created to establish a regional solid waste disposal system to receive, transport, treat and dispose of solid waste of the member cities (Sherman, Gainesville, and Denison). The authority is governed by a five-member board, composed of the mayors of each member city as well as the county judges of Grayson and Cooke Counties.

Each member city is required to collect and deliver all of its solid waste to the landfill. The authority operates the facility and has the right to discontinue service to any member city.

STRONG CONTRACT LANGUAGE

The contract requires that, in the event of the failure of a member city to pay the annual requirement for more than 10 days, the annual payments of the remaining member cities must be adjusted to ensure that the authority receives the total annual requirement.

Payments by member cities must be made in monthly installments, regardless of whether or not any member city receives or uses the services or facilities of the authority. The payment to TASWA is an operating expense, paid before any members' enterprise debt. If a city's solid waste revenues are insufficient to cover its full annual requirement, it has an unconditional obligation to pay the debt service portion from any available revenue. To date, there is no history of member default or payment delays.

The annual requirement is based upon each member city's percentage of total solid waste tonnage the prior year and is recalculated annually. Cost allocations include debt service, operations and maintenance, and debt service reserve requirements. Sherman accounts for approximately 35% of the annual requirement, Gainesville for 21%, and Denison for 18%.

Currently, about 26% of volume is coming from private haulers and individuals as the authority continues to pursue additional customers that provide a net economic gain. In the event private hauler volume drops off during the fiscal year, member cities' payments for both debt service and O&M components would require an offsetting increase. TASWA is able to increase the annual payments for all member cities to offset any private hauler revenue losses effective 60 days after board action.

WEAK DEBT SERVICE COVERAGE REQUIREMENT

Debt service coverage is essentially sum sufficient, consistent with the authority's rate covenant. TASWA maintains significant rate flexibility in adjusting rates mid-year if needed, or the authority can true-up at the end of the year. The garbage rates of all three cities are competitive despite recent rate increases.

For fiscal 2015, debt service coverage was at 1.1 times (x), in compliance with its rate covenant. Excluding post-closure liability accrual, which is annually expensed and reserved for those costs, debt service coverage is slightly higher at 1.2x.

LONG LIVED ASSET WITH LIMITED CAPITAL NEEDS & COMPETITION

The estimated remaining life of the landfill is in excess of 50 years, and the percentage of the total landfill capacity used to date is less than 10%. The last issued bonds in 2012 were for the purpose of building an additional 12-acre disposal cell. Future debt plans include $2 million-$3 million in parity debt for cell construction every four to five years, concurrent with the maturity of the prior cell construction debt, thus maintaining level debt service.

Waste disposal options in the area are limited; the TASWA landfill is the only open facility of its kind, with all other public landfills within Cooke and Grayson counties closed since 1993. Competition outside the primary service area is also limited. Regulatory issues complicate the transport of solid waste across the state line into Oklahoma. Officials report that the authority is in compliance with all regulatory requirements.

MEMBER CITIES SOLID FINANCIAL PROFILES

An important rating consideration is the continued solid financial operations of member cities, which are unconditionally obligated to pay their proportionate share of the bond service component of the annual requirement.

The city of Sherman has no solid waste revenue bonds or capital leases outstanding as of the close of fiscal 2014. The total payment to TASWA that year was $1.4 million, or 32% of enterprise operating expenditures. Liquidity for the enterprise was adequate at $1.2 million, or 102 days of cash on hand (DCOH), and unrestricted net assets totaled $1.4 million. The unrestricted general fund reserves stood at a solid $11.5 million, representing 38% of spending.

Gainesville's solid waste operations, which support capital leases as well as a portion of the city's general obligation debt, provided a strong 3x debt service coverage of all non-TASWA obligations in fiscal 2014, with the roughly $920,000 TASWA requirement (42% of spending) paid as an operating expense. In addition, liquidity was strong at $1.5 million or 234 DCOH and unrestricted net assets of $1.4 million. The unrestricted general fund reserves stood at a strong $7.4 million, or 42% of spending.

Denison (GO bonds rated 'AA-', Stable Outlook by Fitch) does not maintain a separate fund for solid waste but instead records refuse disposal operations in the general fund. Denison's fiscal 2014 unrestricted general fund reserves were healthy at $7 million or 30% of spending. Denison's total payment to TASWA in fiscal 2014 was roughly $770,000, or about 30% of refuse operation spending levels.

FAIRLY STABLE SERVICE AREA

The authority operates in the Sherman-Denison metropolitan statistical area, which has a small, but diverse economic base. Area employers include healthcare, food processing, technology, light manufacturing and claims processing. Tourism is another economic driver given the proximity to Lake Texoma, a large recreational lake.

The 3.6% unemployment rate for Cooke County in December 2015 was below the state 4.2% and national 4.8% averages. Member cities' wealth indicators are below average, with 2014 median household income ranging from 70% to 81% of the state average.