Fitch Affirms North Sumter County Utility Dependent District, FL's Utility & Sub Revs

NEW YORK--()--Fitch Ratings affirms the following ratings for North Sumter County Utility Dependent District, FL's revenue bonds:

--Approximately $155 million outstanding utility revenue bonds at 'A'.

--Approximately $19 million subordinate utility revenue bonds at 'A-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of (and lien upon) the net revenues of the system and connection fees. The subordinate bonds have a second lien on these revenues.

KEY RATING DRIVERS

Stable Residential Customer Base: The North Sumter County Utility Dependent District (NSCUDD, or the district) serves a portion of the large master-planned retirement community known as 'The Villages' in Central Florida. The customer base is mostly residential and stable, and the district is nearing full build-out.

Slim Financial Margins Expected: Debt service coverage was strong in fiscal 2011; however, annual debt service will increase significantly beginning in fiscal 2012, which will lower coverage to previously forecasted and adequate levels of roughly 1.2x on the senior bonds, and 1.1x for all bonds. The one-notch rating distinction reflects the slim overall coverage and a lien and pledge of the revenues that is superior for the senior lien bonds.

Affordable Rates, Strong Liquidity: Rates remain affordable, providing management with solid rate-raising and financial flexibility, and helping to offset the low expected debt service coverage margins. Strong cash flows generated in fiscal 2011 have allowed the district to accumulate over 570 days of cash on hand by fiscal year-end 2011.

High Debt Burden: The district's debt profile remains high, mainly as a result of the system acquisition by NSCUDD in early 2011. With limited capital needs expected, debt ratios should moderate some over time.

CREDIT PROFILE

STABLE CUSTOMER BASE

NSCUDD is an independent municipal entity created in 2010 to purchase two privately-owned existing utility systems, the North Sumter Utility Company, LLC (NSU) and The Villages Water Conservation Authority, LLC (VWCA; together known as the system).

The system consists of a potable water and sewer utility and a separate irrigation system that essentially serve the same stable residential customer base. The system's 7,700-acre service area contains roughly 22,000 accounts and serves a portion of the master-planned retirement community known as 'The Villages'. The Villages is a large, wealthy retirement community covering 21,500 acres and roughly 43,000 residential units in central Florida. With several thousand new homes completed over the past two years, the NSCUDD service area is approaching build-out.

SOLID GOVERNANCE STRUCTURE

A five-member board of directors, initially appointed by Sumter County, provides oversight and policy planning for the system. Once the initial terms expire, the board will consist of members elected from within the system's service territory. Through a written agreement with NSCUDD, system management is provided by a separate and independent special district with experience providing management, accounting, customer service, and billing services to other utilities and community development districts within 'The Villages', known as Village Center Community Development District (VCCDD).

Fitch deems system management to be stable and competent, and oversight with board members eventually elected from within the service area to be a solid structure. Utility operations and maintenance are separately administered via contractual arrangement with an experienced operator.

Fitch believes NSCUDD's independent governance structure insulates it from a recent tentative IRS finding that VCCDD is not a 'political subdivision' of the state, and therefore bonds issued by VCCDD are not tax exempt, because a controlling portion of the VCCDD governing board was elected by a single property owner. NSCUDD is an independent municipal entity with board members that were initially appointed by Sumter County when created in 2010, but will be elected from the electorate after initial terms expire.

SYSTEM INFRASTRUCTURE IS RELATIVELY NEW

The system consists of the potable water and wastewater system, and the irrigation system. The potable water system includes water production, treatment, and distribution facilities, and Fitch views the overall system capacity to be solid. Raw water is supplied locally through groundwater supply wells from the Floridan Aquifer. The district's three interconnected water treatment facilities have a combined capacity to treat up to 11.5 million gallons per day (mgd), which compares very favorably to the average demand in 2011 of 2.7 mgd.

The wastewater system consists of over 160 miles of gravity sewer, 33 miles of force mains, and one treatment facility. The treatment plant has 3.5 mgd maximum day capacity compared to the 1.7 mgd of average daily demand. The irrigation system is a combined irrigation and fire protection system with water supplied from stormwater runoff, as well as from the lower Floridan Aquifer through wells and pump stations, 250 miles of irrigation mains, and several lined retention basins to capture stormwater.

Water use permits for both the potable system and the irrigation system are regulated by the Southwest Florida Water Management District and are valid through 2017. Current potable supplies are expected to be sufficient for the long-term. Overall, the system is relatively new with limited rehab challenges expected in the near to intermediate term.

HIGH DEBT BURDEN REMAINS A CREDIT RISK

The system's debt burden remains high but is on the decline. Debt per customer was over $3,900 in fiscal 2011, which is more than 50% greater than the median for the rating category (roughly $2,200). Debt relative to net plant is also high at 150%, which is about 2x the rating category median, and annual debt service is a high 58% of projected fiscal 2013 gross system revenues.

While the debt burden should decline as the area matures, debt amortization is somewhat slow, leaving longer-term debt ratios higher than similarly rated entities for the foreseeable future. On the positive side, system capital needs are limited and are expected to be funded from cash and other internal sources.

AFFORDABLE RATES, SOLID LIQUIDITY

Financial results were solid in fiscal 2011 with debt service coverage approaching 2.0x, and excess free cash flow (measured as net revenues remaining after payment of O&M and debt service) of roughly $6 million. However, financial performance is expected to be modest on a going forward basis as the district begins to fully amortize the debt. Annual debt service increased from about $6 million in 2011 to over $10.6 million in fiscal 2012, resulting in a rather significant decline in debt service coverage, which was expected.

Total debt service peaks in fiscal 2018 at $11.9 million, but is level thereafter. Coverage of maximum annual debt service is 1.2x from 2012 operations, and projected to be about 1.0x from 2013 results. The district's affordable rates and independent rate-making authority temper concerns of slightly rising debt service costs over the next several years.

Financial margins are projected to provide coverage of annual debt service for the senior bonds close to the rate covenant required 1.20x level. Similarly, coverage of the senior and subordinate debt service combined is expected to be about 1.1x. Fitch views these levels to be modest but sufficient given the moderate rate structure and strong liquidity.

Strong liquidity results mainly from significant excess cash flow from fiscal 2011 results. Fitch expects liquidity to remain close to fiscal 2011 levels as capital needs are limited and expected to be funded from the roughly $1 million in expected excess annual cash flow from operations.

Rates are affordable, comparing favorably to those of neighboring utilities. Rates for all three services are structured with a base fee and consumption charges. The combined average monthly residential bill for all three services is roughly $62 for 3,000 gallons of potable water use and 9,000 gallons of irrigation in 2012, which is a moderate 1.7% of median household income. The district has independent rate-setting authority and, if necessary, can implement additional rate increases beyond the already approved 2.5% annual rate indexing for the next 8 years.

Additional information is available at 'www.fitchratings.com'. Final draft attached. Please submit for business approval. Thanks

In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 12, 2012);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);

--'2012 Water and Sewer Medians' (Dec. 8, 2011);

--'2012 Sector Outlook: Water and Sewer' (Dec. 8, 2011).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901

2012 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111

2012 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657110

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Contacts

Fitch Ratings
Primary Analyst
Andrew DeStefano
Director
Andrew.destefano@fitchratings.com
+1-312-606-2337
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Teri Wenck, CPA
Associate Director
Teri.wenck@fitchratings.com
+1-512-215-3742
or
Committee Chairperson
Amy Laskey
Managing Director
Amy.laskey@fitchratings.com
+1-312-606-2337
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Andrew DeStefano
Director
Andrew.destefano@fitchratings.com
+1-312-606-2337
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Teri Wenck, CPA
Associate Director
Teri.wenck@fitchratings.com
+1-512-215-3742
or
Committee Chairperson
Amy Laskey
Managing Director
Amy.laskey@fitchratings.com
+1-312-606-2337
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York
elizabeth.fogerty@fitchratings.com