Fitch Affirms North Sumter County UDD, FL's Sr & Sub Revs 'A'/'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the following ratings on North Sumter County Utility Dependent District, FL (NSCUDD, or the district) revenue bonds:

--$153 million utility revenue bonds, series 2010, at 'A';

--$19 million subordinate utility revenue bonds, series 2010 at 'A-'.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

STABLE RESIDENTIAL CUSTOMER BASE: 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 almost fully developed.

LIMITED DEBT SERVICE COVERAGE: Financial margins are strong, although high debt carrying costs limit debt service coverage (DSC) and free cash flow. Modest approved annual rate increases are viewed positively, although revenue increases will be mostly offset by a scheduled rise in debt service. The one-notch rating distinction on the subordinate bonds reflects the low all-in DSC and a lien on revenues that is junior to the senior bonds.

AFFORDABLE RATES, STRONG LIQUIDITY: Rates are affordable and cash ample, providing management with financial flexibility and some offset to the relatively low actual and expected DSC.

HIGH DEBT, LIMITED CAPITAL NEEDS: The district's debt profile is high, mainly as a result of the system acquisition by NSCUDD in early 2011. Debt ratios should continue to moderate with modest capital needs over the next five years.

RATING SENSITIVITIES

RATING STABILITY EXPECTED: The rating is sensitive to shifts in the district's debt burden and financial performance. The Stable Outlook reflects Fitch's expectation that significant changes in either are unlikely over the next several years.

CREDIT PROFILE

The district 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).

DEVELOPED SERVICE AREA, STABLE CUSTOMER BASE

The system consists of a potable water and sewer utility and a separate irrigation system. The system's 7,700-acre service area contains roughly 25,000 water and sewer accounts and serves a portion of the master-planned retirement community known as 'The Villages'. The Villages is a large, wealthy retirement community covering 22,600 acres and roughly 52,000 residential units in central Florida. NSCUDD's service area is nearly 100% developed.

HIGH DEBT BURDEN ON THE DECLINE

The system's debt burden remains high but is on the decline. Debt per customer was over $3,900 in fiscal 2011 after acquisition of the system but has since declined to under $3,400 as of fiscal 2013. Debt relative to net plant is also high at 155%, which is about 2x the rating category median, and annual debt service is a significant 57% of budgeted fiscal 2015 gross system revenues.

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 internal sources, allowing debt metrics to continue their current trend of a gradual decline.

STRONG LIQUIDITY & AFFORDABLE RATES PROVIDE FLEXIBILITY

Financial results were solid in fiscal 2011 with DSC 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, as expected, financial performance has been more modest over the past two fiscal years as the district began to fully amortize the bonds. Annual debt service increased from about $6 million in fiscal 2011 to $10.8 million in fiscal 2013, resulting in a decline in DSC to 1.5x on the senior bonds and 1.3x on total debt service (including subordinate debt service).

Annual debt service peaks in fiscal 2018 at $11.9 million, but is level thereafter. Coverage of maximum annual debt service is 1.2x from fiscal 2013 operations. The fiscal 2015 budget indicates financial results will be similar to results achieved in fiscal 2013. The district's affordable rates and independent rate-making authority temper concerns of slightly rising debt service costs over the next several years. In addition, the district's cash balances have improved significantly (resulting mainly from excess annual cash flows and limited capital needs) and provide financial flexibility. Fitch expects liquidity to remain close to current levels (769 days cash on hand for fiscal 2013), as capital needs are limited over the next five years.

While pro forma financials were not available, Fitch expects financial performance to remain relatively narrow, albeit stable, as the service is substantially developed, capital needs are well defined and limited, and approved rate increases allow for baseline revenue growth. Fitch views modest pro forma results to be sufficient given the affordable rate structure and strong liquidity.

LIMITED CAPITAL NEEDS AND SUFFICIENT CAPACITY

The system is relatively new with limited rehab challenges expected in the near- to intermediate-term. Also, given the built-out nature of the service area, future capital needs will be limited to routine system upkeep and renewal.

Raw water is supplied locally through groundwater supply wells from the Floridan Aquifer. 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 supply levels are expected to be sufficient for the long term. Also, water and sewer treatment capacity compare very favorably to average daily water demand and wastewater flows in fiscal 2014.

Additional information is available at 'www.fitchratings.com'.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2014);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Outlook: Water and Sewer Sector' (December 2013).

Applicable Criteria and Related Research:

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=914175

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Contacts

Fitch Ratings
Primary Analyst
Andrew DeStefano
Director
+1 212-908-0284
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eva D. Rippeteau
Associate Director
+1 212-908-9105
or
Committee Chairperson
Douglas Scott
Managing Director
+1 512-215-3725
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Andrew DeStefano
Director
+1 212-908-0284
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eva D. Rippeteau
Associate Director
+1 212-908-9105
or
Committee Chairperson
Douglas Scott
Managing Director
+1 512-215-3725
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com