TEXT-Fitch affirms N. Sumter Cty Utility Dependent District, Fla.

Wed Nov 7, 2012 3:27pm EST

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Nov 7 - 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
U.S. Water and Sewer Revenue Bond Rating Criteria
2012 Water and Sewer Medians
2012 Outlook: Water and Sewer Sector

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