finance: S&P Gives Credit Where Credit is Due

Edward McGlade,

Competition drives virtually every public and private solid waste operation, so it should come as no surprise that it directly affects a project's financing.

In a recent report, Standard & Poor's (S&P), New York City, developed business profiles for 15 solid waste and resource recovery systems. The profiles measure the systems' ability to effectively compete and are particularly useful where the credit rating is primarily driven by non-business rating factors, such as legal provisions or finances.

The five factors considered in a S&P solid waste business profile are:

* management;

* operations;

* competitive position/project economics;

* markets; and

* regulation.

A 10-point scale is used, with '1' representing the strongest overall business profile. This subset of the factors considered in credit ratings (see chart on page 22), provides for a strong correlation between business profiles and credit quality.

The 15 solid waste and recovery systems profiled are geographically dispersed, representing 10 states, with service districts ranging from densely-populated urban and suburban areas, such as Camden County, N.J., to more rural areas, including the coastal region of central North Carolina. Also included is Delaware's integrated statewide system.

The systems also differ in operations. Seven currently rely on waste-to-energy (WTE) facilities, and the rest are primarily landfill-based systems. Finally, the credit quality of the initial group ranges from 'A' with a stable outlook, to 'BB' on CreditWatch with negative implications.

Since S&P does not rate any unenhanced solid waste systems higher than 'A+,' with the majority of ratings ranging from 'BBB' to 'A', business profiles fell in a relatively narrow band. Also, the majority were expected to score below 3.5 with WTE-based systems generally scoring lower (due to their comparatively higher fixed costs) than landfill-based systems.

A more favorable score would indicate very limited business risk, which would require a combination of the following characteristics:

* low tipping fees;

* proactive management;

* increasing trends in waste flow;

* high degree of control over collection of waste;

* sound facility operations with adequate disposal capacity;

* limited regulatory-driven capital needs;

* good relationships with customers and haulers; and

* limited pressure due to the local political environment.

The three systems that scored the highest (3.8 - 4.4) have several common characteristics. All three use landfills as the primary disposal method and, to date, none have experienced problems with waste diversion. Shasta Joint Powers Financing Authority, Calif., for example, has low tipping fees ($30 per ton for county users). And, Delaware Solid Waste Authority has kept its relatively competitive tipping fee ($56.50 per ton) stable over the past several years.

On the other hand, Coastal Regional Solid Waste Management Authority's, N.C., tipping fee, at $48 per ton, is somewhat higher than the regional average. But, alternative disposal sites are limited and the trends in waste flow have been increasing despite a somewhat limited economic base.

Shasta also has seen waste flow increases, while Delaware has experienced very stable waste flow levels. All three have favorable operating profiles. Interestingly, Coastal is rated 'BBB', while Shasta and Delaware are rated 'A'. A recent start-up, Coastal's comparatively favorable business profile indicates that the outlook could be revised to positive, or the rating could be upgraded as the authority builds a greater track record.

Two landfill-based systems that did not fare as well as the top group, yet still scored above the mid-point are Prince Georges County, Md. (4.9) and Metro Waste Disposal System, Ore. (4.9). Both are rated 'A.'

For Metro, the score was not higher due to tipping fees ($70 per ton) that are above the regional average. These higher fees are driven in part by aggressive recycling and hazardous materials programs. However, Metro, with few nearby competitors, has lowered tipping fees somewhat and has significant financial flexibility to make further reductions.

Prince Georges County, which also has a somewhat uncompetitive cost profile, has successfully implemented a user charge system for residents that has enabled a more competitive tip fee for the commercial wastes, which is more vulnerable to diversion.

The Southeastern Public Service Authority, Va., (4.8) which operates a refuse-derived-fuel facility has the best score for a WTE-based system.

Despite some losses in commercial waste, the authority's business profile, and its 'A-' rating, is supported by favorable plant operations, and a strong management team that has adapted well to competitive pressures.

Lancaster, currently rated 'BBB' has the most notable score in this group due to its management's proactive approach to the competitive pressures facing the system. Lancaster's competitive strategy, including negotiating contracts with haulers and marketing plant capacity for specialty waste, is expected to lead for significant improvement in competitive position, which would stabilize its credit quality.

Some of the system's that scored less favorably share certain characteristics, including uncompetitive tipping fees and waste streams vulnerable to diversion. Among this group are Commerce Refuse to Energy Authority, Calif. (6.15), Sarasota County Solid Waste Dept., Fla. (5.9) and Oneida-Herkimer Solid Waste Authority, N.Y. (6.3).

The lowest scores were assigned to Union County Utilities Authority, N.J., and Camden County Pollution Control Financing Authority, N.J. Both are rated 'BB' and are on CreditWatch. Both authorities have uncompetitive tipping fees driven by the high WTE-related fixed costs.

Until recently, management in both Union and Camden counties made little progress as New Jersey's system of flow control was temporarily preserved.

However, since the Supreme Court declined to hear all appeals regarding flow control in New Jersey last November, these systems are operating in a competitive open market environment. S&P will continue to monitor the situation in New Jersey and comment upon the effects to these issuers credit qualities.

Although many solid waste ratings have remained stable, the overall trend in credit quality has been negative. The systems most exposed to the competitive environment have witnessed rating downgrades.

However, as other systems have adapted to competition, there is evidence that solid waste and recovery systems with the strongest business characteristics can prosper.

Permit Total Tire Recycling, Sacramento, Calif., a facility handling waste tires from the Bay Area and throughout Northern California, has been granted a five-year operating permit by the California Integrated Waste Management Board, allowing it to store up to 10,500 waste tires at its nearly five-acre site in southeast Sacramento.

Production Streamline In an effort to streamline Aljon's customer-focused manufacturing, the company has announced they will no longer produce their line of scrap tire processing equipment and wheel loader attachments. Aljon will, however, continue to service existing equipment.

Stock Pall Corp., East Hills, N.Y., has signed an agreement to purchase all the outstanding capital stock of the swiss holding company Argentaurum AG, including its Rochem subsidiaries. Pall will pay a minimum of $48 million to a maximum of $64 million and the transactions will be accounted for as an asset purchase.