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Lancaster Purchase of Harrisburg Incinerator Could Hurt Credit Rating Says Moody's

Date: February 22, 2013

Source: News Room

Moody's investor service may be throwing a monkey wrench into Lancaster County Solid Waste Management Authority's (LCSWMA) plans to buy the troubled Harrisburg, PA incinerator. While affirming its A3 rating of the LCSWMA's $30.6 million of debt, Moody's said the acquisition could result in a "multiple-notch rating change." LCSWMA, beginning in Mar. 2011, has offered to buy the Harrisburg plant which has been at the heart of the City of Harrisburg's financial woes that include $340 million in debt. The Moody's report goes on to caution that "Given the history of this particular asset, the undertaking by the authority may be credit negative in our view." James Warner, CEO of the LCSWMA, expressed dismay, saying that Moody's had overstepped. "When they say multiple-notch rating change, we can only assume a negative one," he said. "This was really an ordinary surveillance update, so we were surprised by this. They wanted to know about this deal. We discussed it but really we didn't think it should factor into their upgrade." A multiple notch downgrade could put LCSWMA's debt on the edge of "non-investment grade," resulting in more difficulty obtaining funding and higher interest rates. Nevertheless, Warner said that they are moving forward with the deal and he hopes to be in there by the end of the second quarter.

Standard & Poor's rates the Lancaster bonds AA-minus, also stable, having last affirmed that rating in November 2009. "Moody's has us three notches below S&P. That's a big gap," Warner said. "There is no doubt the bond industry has this bias against anything regarding the Harrisburg plant. But that facility is running quite well, thanks to the expertise of Covanta Energy." Covanta finished the project after taking over its operations in 2007.

LCSWMA's offer proposes to solve two problems, avoid having to expand its own incinerator for $175 million, and provide the City of Harrisburg cash needed to reduce its massive debt which has it teetering on bankruptcy. LCSWMA initially offered $45 million along with a promise to upgrade the plant but later increased it to $124 million if the city and Dauphin County would guarantee the waste. William Lynch, the city's state-appointed receiver, is selling the incinerator, water and wastewater systems and parking garages. Last June, Lynch's office selected LCSWMA to negotiate exclusively for the incinerator.

See also: "Harrisburg Selects Lancaster for Negotiations on Troubled Incinerator," (www.wastebusinessjournal.com/news/wbj20120627A.htm), June 27, 2012.

See also: "More Trouble and Controversy Surround Harrisburg Incinerator," (www.wastebusinessjournal.com/news/wbj20120410B.htm), April 6, 2012.

See also: "At Least Four Suitors Vying for Harrisburg's Troubled Incinerator," (www.wastebusinessjournal.com/news/wbj20120322A.htm), March 22, 2012.


FROM MOODY'S
February 22, 2013
Global Credit Research


Rating Action: Moody's affirms the rating on Lancaster County Solid Waste Management Authority's (PA) Resource Recovery System Revenue Bonds

  • $30.6 million outstanding revenue bonds affected

Moody's Investors Service (Moody's) has affirmed the A3 rating to the Lancaster County Solid Waste Management Authority's, PA (the Authority or LCSWMA) Series 2006 Resource Recovery System Revenue Bonds. The Authority has $30.620 million of revenue bonds outstanding. The outlook is stable.

RATINGS RATIONALE

The rating affirmation is based on the track record of successful operations in a competitive environment that the Authority has established in recent years. Additional factors supporting the rating include the Authority's stable finances, high liquidity levels, and well-managed operations. The stable outlook is based on the well-designed contracts with haulers which extend beyond the maturity of outstanding debt, efficient facility operations with recognized operators, and supportive waste streams from municipalities that keep the plants running smoothly.

In June 2012, the Authority was selected the winner of a competitive bidding process to negotiate for the purchase of the Harrisburg Materials Energy Recycling Recovery Facility (HMERRF) by the Office of the Receiver for the City of Harrisburg, PA. Our rating incorporates knowledge of this transaction. At this time however specific details are extremely limited. Given the history of this particular asset, the undertaking by the authority may be credit negative in our view. Depending on the structure of the transaction and the associated debt financing, it may have significant credit implications and could result in a multiple-notch rating change.

STRENGTHS

  • Tonnage protected by both legal flow controls and contracts with haulers

  • Current round of hauler contracts expire after the final maturity of outstanding debt

  • Strong maintained liquidity position with over 400 days cash on hand

CHALLENGES

  • Very limited rate-raising ability to increase rates under current hauler contracts

  • Declines in tonnage could result in use of liquidity given limited rate-raising ability

  • Potential heightened risk associated with integrating a new waste-to-energy facility with poor operating history

WHAT COULD CHANGE THE RATING-UP: Sustained growth in operations and widening of financial margins may result in upward pressure on the rating.

WHAT COULD CHANGE THE RATING--DOWN: Increased competitive pressures on the Authority's waste flow and/or reduction of cash reserves could result in a downward revision of the rating.

The principal methodology used in this rating was Waste-to-Energy Projects published in April 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Myra Shankin
Associate Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
Journalists: 212-553-0376
Subscribers: 212-553-1653

Chee Mee Hu
MD - Project Finance
Public Finance Group
Journalists: 212-553-0376
Subscribers: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
Journalists: 212-553-0376
Subscribers: 212-553-1653

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