Dec 7 - Fitch Ratings assigns the an 'A' rating to the following North
Sumter County Utility Dependent District (NSCUDD) revenue bonds:
--$50,980,000 solid waste revenue bonds, series 2012;
--$1,960,000 subordinate solid waste revenue bonds, series 2012.
The bonds are scheduled for negotiated sale on Dec. 19. Proceeds will pay the
cost of acquiring an existing solid waste collection and disposal system. The
bonds have a final maturity date of Oct. 1, 2042.
Proceeds will also fund a deposit to the reserve account for the senior and
subordinate bonds, fund a deposit to the operating account (equal to one month
of system operating expenses), and pay cost of issuance.
The Rating Outlook is Stable.
The bonds are secured by a pledge of and lien upon all rates, fees, charges and
other income from ownership and operation of the solid waste system net of
operating expenses. The bonds are additionally secured by a reserve equal to the
lesser of maximum annual debt service (MADS), 10% of proceeds, or 125% of
average annual debt service.
KEY RATING DRIVERS
MODEST FINANCIAL METRICS: Financial margins are projected to provide senior
coverage of 1.2 times (x) and all-in coverage of 1.15x, and cash on hand at
closing is projected at approximately three to four months operating expense.
The senior and subordinate bonds are rated on par, reflecting the small amount
of subordinate bonds to be issued and nominal distinction in coverage between
the two liens. The ratings may diverge in the future if these factors change.
HIGH DEBT: Debt levels will be high following system acquisition but moderate in
time given the minimally capital intensive nature of the system and lack of
additional borrowing plans.
FAVORABLE SERVICE AREA CHARACTERISTICS: A substantial portion of the solid waste
system service area includes 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
and is approaching full build-out. Resident income levels are high.
ESSENTIALITY AND EXCLUSIVITY: The district is designated the exclusive provider
of essential solid waste services within the vast majority of the service area
through the life of the bonds. STABLE PLEDGED REVENUE STREAM: System revenue is
largely derived from residential accounts and collected as a fixed monthly
assessment charge eliminating risk to variability in waste generation.
Historical collection rates are solid although enforcement mechanisms are weak.
COMPETITIVE RATES: 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. The district's financial
projections reflect very modest increases following system acquisition.
AVERAGE LEGAL COVENANTS: The trust indenture establishes a rate covenant and
additional bonds test of 1.2x on the senior lien bonds and 1.05x on the
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 was formed for the purpose of acquiring and operating certain utility
systems within unincorporated Sumter County, including the solid waste system to
be acquired with proceeds of the current issuance.
The solid waste system service area is comprised of 20,079 acres encompassing a
substantial portion of The Villages, an affluent active adult retirement
community in north central Florida approximately 60 miles northwest of Orlando.
INDEPENDENT GOVERNANCE STRUCTURE
System oversight and policy planning are carried out by a seven-member board of
directors, each elected from the system's service area. An independent special
district, Village Center Community Development District (VCCDD), will continue
to provide billing, collection, accounting and other management services
following system acquisition (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.
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
The district is the exclusive provider of solid waste service to all residential
accounts within Sumter County, representing approximately 87% of the system's
total residential customer base, pursuant to a development order expiring Dec.
31, 2043. Essentially all other residential accounts are subject to a
development order issued by Marion County expiring Dec. 31, 2023 which is being
considered for extension through 2042 on Dec. 18.
Basic waste collection and disposal services are separately administered via
contractual arrangement with an experienced operator. Service contracts contain
provisions for termination, renewal, and pricing that are fairly standard for
similarly operated solid waste systems.
HIGHLY SUCCESSFUL RAPIDLY GROWING RETIREMENT DEVELOPMENT
The service area presently includes 40,766 residential customer accounts, up
from 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. A total of 2,309 new homes have been sold through the first 10
months of 2012. From 2000-2011 an average of 2,738 homes were sold annually
within The Villages. Despite persisting weak economic conditions in recent
years, the lowest number of new home sales occurred in 2009 with 2,115.
The average home sales price in 2012 is $241,000 (just 9.6% from the peak
average sales price of $257,000 in 2006) and the average income of home buyers
on financed purchases is reported at $99,803 (income information from the U.S.
Census Bureau is not available for the service area).
The system also includes 208 container sites for the collection of commercial
waste. Commercial revenues are not a significant rating factor, projected to
equal less than 6% of gross system revenue in 2013.
STRONG REVENUE COLLECTION HISTORY
More than 90% of gross operating revenue will be collected from residential
property owners as part of a consolidated monthly bill for water, wastewater,
solid waste, and amenities (golf, swimming, fishing lakes, fitness trails, and
other organized activities). From 2007-2011 solid waste collections averaged a
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.
NARROW FINANCIAL PERFORMANCE ANTICIPATED
The district's financial forecast depicts annual debt service coverage
approximating 1.15x on an all-in basis. Fitch views this level to be modest
although sufficient given the somewhat limited risk associated with operating
the system, its stable revenue performance, and the district's independent rate
setting authority and competitively priced rate structure.
At closing system liquidity will consist of a working capital account equal to 1
month of operating expenditures (approximately $516 thousand) and a utility
guaranty fund equal to $1.8 million to be funded by the seller and held by the
trustee. This account is designed to provide short-term rate relief if the
seller's projections of additional home sales do not materialize and rates need
to be increased to comply with the rate covenant.
Residential rates were increased 5.8% in March 2012 for the first time in almost
four years to $17.90 per month which remains comparable to the cost of service
provided similar utilities in the area. The district's financial forecast
includes minor rate increases of 1.8% for 2013 and 2% for 2014; otherwise, no
rate increases are contemplated.
Fitch notes that the district's annual budget is subject to the approval of
Sumter County (implied GO bonds rated 'AA-' by Fitch). If a budget is not
approved the district shall operate in accordance with the provisions of its
last approved budget. The county has covenanted that it will take no action that
impairs the district's ability to pay its outstanding bonds.
HIGH DEBT LOAD
System debt is high measured against net plant assets, system equity, and on a
per capita basis. Debt carrying charges are expected to consume close to
one-third of gross revenue. Debt amortization is also very slow with about 50%
of principal repaid within the first 20 years.
NSCUDD's capital assets are essentially comprised of waste containers - as such
future capital pressures and borrowing needs are expected to be minimal
offsetting any debt related concerns along with the system's reasonable rates.