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

Fitch Ratings affirms the 'A' rating on the following North Sumter County Utility Dependent

District, FL (NSCUDD) revenue bonds:

--$50,045,000 solid waste revenue bonds, series 2012;

--$4,000,000 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) ($3.6 million).

KEY RATING DRIVERS

ADEQUATE FINANCIAL METRICS: System operations are expected to yield MADS coverage between 1.1x-1.2x on an all-in basis. System liquidity improved to better than five months of cash on hand (DCOH) in fiscal 2014, slightly 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.

STABLE OPERATING RESULTS ANTICIPATED: System revenue is largely derived from residential accounts served on an exclusive basis and collected as a fixed monthly assessment charge. Revenue risk related to variability in waste generation is not a material rating factor. Enforcement provisions are viewed as weaker; however, historical collection rates are very strong. System expenses are largely driven by the performance of basic collection and disposal services.

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 has experienced very strong growth but is approaching full build-out. Resident income levels are high.

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.

HIGH DEBT: System acquisition costs contribute to high levels of leverage. Over time Fitch expects the debt burden will moderate given the system's minimal capital demands and absence of additional borrowing needs.

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.

RATING SENSITITY

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

NSCUDD 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 the Sumter County Board of Commissioners for terms of two or four years. Following expiration of the initial terms the board will be appointed by registered voters of the service area; the last county-appointed seat is up for election in November 2016.

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 with OMI for trash collection was recently extended through 2023. The district is in the process of finalizing a five-year extension of its contract with Waste Management, Inc. for disposal of trash, yard waste, and recyclables - minor changes are expected that will not have an impact on the system's creditworthiness.

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.

HIGH DEBT LOAD TEMPERED BY ABSENCE OF CAPITAL DEMANDS

System debt is moderately high measured against funds available for debt service (12.2x) and on a per capita basis ($605) following the sale of the series 2012 bonds to finance system acquisition. Further, the series 2012 bonds are being paid off in a very slow fashion with 48% of principal amortized in 20 years and final maturity not until 2042. Fitch views the system's high debt as a manageable pressure, as physical assets are essentially comprised of waste containers, limiting the need for additional borrowing.

ADEQUATE FINANCIAL PERFORMANCE ANTICIPATED

Financial operations yield a moderate level of DSC. Senior and all-in DSC was 1.46x and 1.37x, respectively, in fiscal 2013. Fiscal 2013 results reflect only 9 months of operation after NSCUDD assumed ownership and operation of the system on Dec. 27, 2012. Unaudited results for fiscal 2014 depict net revenues available for debt service of roughly $4.16 million equal to 1.61x DSC on senior bonds and 1.49x DSC all-in. Actual DSC in fiscal 2013 and 2014 exceeded original projections resulting in improved system liquidity. Unrestricted cash and investments in fiscal 2014 totaled $3 million or close to 170 DCOH; the district does not have a formal reserve or liquidity policy for the system but targets three to four months of operating expenses.

Annual debt service charges will increase roughly 12% through 2018, reaching MADS of $3.4 million before leveling off. All-in MADS coverage from fiscal 2014 net revenue was estimated at 1.14x. MADS coverage is somewhat narrow but adequate given the stability of the revenue stream and our view of system operating risk.

The district's independent rate setting authority and competitively priced rate structure are also favorably considered. 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; as a result, the district was able to forego minor rate increases of 1.8% for 2013 and 2% for 2014 contemplated at the time of our last rating.

WEAKER ENFORCEMENT PROVISIONS OFFSET BY STRONG COLLECTION

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.

Importantly, delinquencies remain minimal, with collections averaging 99.7% in fiscal 2014. Fitch rates NSCUDD's utility 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. These customers account for nearly 92% of total system 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 but is expected to taper as the system nears full development. Residential customers grew to 46,712 in 2014 compared to 40,766 in 2012 and 29,653 in 2007. Build-out is expected at 50,737 residential customers in 2017. Customer growth is driven by the impressive rate of new home sales within The Villages. In the first nine months of calendar year 2014 there were 2,128 new home sales at an average price of $299,000, compared to calendar year 2013 new home sales totaling 3,419 at an average price of $271,000. The average income of home buyers on financed purchases was reported at a healthy $99,803 in 2012 (income information from the U.S.

Census Bureau is not available for the service area).

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

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;

--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012;

--'Rating Guidelines for Solid Waste Revenue Bonds', dated June 22, 2012.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Solid Waste Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750529

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=933095

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