Fitch Affirms North Sumter County Utility Dependent District, FL's Solid Waste Revs at 'A'

NEW YORK--()--Fitch Ratings has affirmed the 'A' rating on the following outstanding North Sumter County Utility Dependent District (NSCUDD) revenue bonds:

--$48,615,000 solid waste revenue bonds, series 2012;
--$3,845,000 subordinate solid waste revenue bonds, series 2012.

The Rating Outlook is Stable.

SECURITY
The bonds are payable from a pledge of and lien on all rates, fees, charges and other income from ownership and operation of the solid waste system net of operating expenses. The bonds are also secured by a cash-funded debt service reserve account funded at maximum annual debt service (MADS) ($3.7 million).

KEY RATING DRIVERS

STABLE SOURCE OF REVENUES: System revenue is largely derived from residential accounts served on an exclusive basis and collected as a fixed monthly assessment charge irrespective of volume. Fitch views enforcement provisions to be weaker, however, historical collection rates are adequate. System expenses are largely driven by contracts with providers of basic collection and disposal services.

ADEQUATE FINANCIAL METRICS: System operations are expected to yield MADS coverage between 1.1x and 1.2x on an all-in basis. System liquidity improved to better than six months of days cash on hand (DCOH) in fiscal 2015, exceeding management's internal target of three to four months. The senior and subordinate bonds are rated on par, reflecting the small amount of subordinate bonds outstanding and nominal distinction in coverage between the two liens. The ratings may diverge in the future if these factors change.

FAVORABLE SERVICE AREA CHARACTERISTICS: The solid waste system service area is essentially comprised of The Villages, a large and very successful self-contained retirement community in central Florida with numerous amenities and entertainment venues. The service area continues to experience growth in new residences.

RATE SETTING AUTONOMY: System rates are established by the district without regulatory oversight or approval. Current residential service charges remain in line with other area solid waste systems.

AVERAGE LEGAL COVENANTS: The trust indenture establishes rate covenants and additional bonds tests of 1.2x on the senior lien bonds and 1.05x on the subordinate bonds. Management has no current plans for additional debt considering the minimal operational characteristics of the system.

RATING SENSITIVITIES
The 'A' rating is sensitive to declines in revenue performance or increased delinquencies given the expectation for narrow levels of debt service coverage.

CREDIT PROFILE

The district is a local unit of special purpose government created pursuant to Chapter 189 Florida Statutes and by ordinance enacted by Sumter County in July 2010. The district acquired and operates a solid waste utility system serving a substantial portion of The Villages within unincorporated Sumter and Marion Counties and the City of Wildwood in north central Florida. The solid waste system is governed by a seven-member board of directors originally appointed by registered voters of the service area.

LIMITED OPERATING RISK

The district is responsible for providing basic waste collection and disposal services. The district has no paid employees but contracts out all services to experienced operators. A contract for trash collection extends through 2023. The district's five-year contract for disposal of trash, yard waste, and recyclables extends through November 2019. Fitch anticipates that renewal of contracts will not be problematic, consistent with historical experience.

An independent special district, Village Center Community Development District (VCCDD), provides billing, collection, accounting and other management services; VCCDD provides similar services to other utilities and community development districts within The Villages. All revenues collected by VCCDD are deposited with the district on a daily basis.

The series 2012 bonds were issued to finance the acquisition of the system from a private operator of the system. The bonds mature in 2042 and are paid off in a very slow fashion with 25% of principal amortized in 10 years. Fitch views the system's debt level as a manageable pressure, as capital assets are essentially comprised of waste containers, limiting the need for additional borrowing.

ADEQUATE FINANCIAL PERFORMANCE ANTICIPATED

Financial operations yield a moderate level of debt service coverage considering the low level of operational risk and capital needs. Senior and all-in DSC was 1.4x and 1.2x, respectively, in fiscal 2015 and is a slight improvement from fiscal 2013 and 2014 coverage. Fitch expects coverage levels to continue to gradually improve as new residences are completed and the service area expands. Unrestricted cash and investments in fiscal 2015 totaled $3.5 million or around 185 days of operations. The district does not have a formal reserve or liquidity policy for the system but targets three to four months of operating expenses.

The district's independent rate setting authority and competitively priced rate structure are positive credit factors. Residential rates were increased 5.8% in March 2012 for the first time in almost four years to $17.90 per month and have remained unchanged since. A sample of neighboring system's solid waste fees range from $16.90 to $21.70 per month. Revenue growth has exceeded original expectations as new homes have come online more quickly than anticipated, foregoing a need to raise rates.

WEAKER ENFORCEMENT PROVISIONS OFFSET BY STRONG COLLECTION HISTORY

Revenues from residential accounts are collected as part of a consolidated monthly bill for water, wastewater, solid waste, and amenities (golf, swimming, fishing lakes, fitness trails, and other organized activities). Partial payments made on the consolidated bill are not applied pro rata or on an all-or-none basis but follow an order of priority with the solid waste component last among the charges noted above. The only enforcement mechanism available to ensure collection of the solid waste charge is the assessment of a 5% penalty upon delinquency, which occurs after 20 days from the date of delivery.

Delinquencies grew in fiscal 2015, with collections averaging 94.4%. Fitch rates NSCUDD's water and sewer revenue bonds and subordinate utility revenue bonds 'A' and 'A-', respectively.

EXCLUSIVE SERVICE PROVIDER TO STABLE RESIDENTIAL SERVICE AREA

The district has been granted the right to provide solid waste service on an exclusive basis through the final scheduled maturity date of the bonds to all residential accounts located in the Sumter and Marion County portion of the service area. Residential customers accounted for roughly 92% of total system projected fiscal 2016 revenue, with the bulk of remaining resources coming from 233 container sites for the collection of commercial waste which the district serves on a non-exclusive basis.

Residential customer growth has been strong within the solid waste area but is expected to taper as the system nears full development. Residential customers grew to 50,771 (as of Aug. 31, 2016) from 48,888 in fiscal 2014 an increase of 8.1%.

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

Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
Solid Waste Revenue Bond Rating Criteria (pub. 12 Aug 2016)
https://www.fitchratings.com/site/re/885295

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015277
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015277
Endorsement Policy
https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan
Director
+1-212-908-0538
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Audra Dickinson
Associate Director
+1-512-813-5701
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan
Director
+1-212-908-0538
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Audra Dickinson
Associate Director
+1-512-813-5701
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com