OREANDA-NEWS. Fitch Ratings has affirmed the 'AA' rating for the following Pinellas County, FL's (the county) revenue bonds:

--Approximately $80 million sewer system revenue and revenue refunding bonds series 2003, 2006 and 2012.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are secured by a senior lien pledge of the net revenues of the county's sewer system.

KEY RATING DRIVERS

IMPROVED FINANCIAL PERFORMANCE DRIVES POSITIVE OUTLOOK: Significant rate increases imposed since 2011 have resulted in much-improved debt service coverage (DSC) levels and helped support a fully cash-funded capital program. Financial metrics are forecast to stay elevated while allowing the system to fully fund capital needs.

STABILIZED AND MANAGEABLE RATES: Despite higher rates and average customer bills that now approximate Fitch's affordability threshold, total charges remain manageable at 1.2% of household income. Fitch expects rates to remain reasonable and financial performance to stabilize as only modest increases are planned through 2019.

MANAGEABLE CAPITAL NEEDS: With improved financial margins, the county is expected to be able to fund system capital expenses without issuing additional debt. Capital needs through fiscal 2020 will focus on renewal and replacement (R&R) projects.

DEBT BURDEN MODERATING: The debt burden continues to improve. The rapid amortization of existing bonds coupled with a modest, cash-funded capital program should continue to moderate debt ratios over time.

STABLE CUSTOMER BASE AND ECONOMY: The county is part of the Tampa-St. Petersburg MSA, which is the 2nd largest metropolitan area in the state. The customer base is primarily residential and top customers are relatively stable and diverse.

RATING SENSITIVITIES

WELL-MANAGED FINANCIAL AND DEBT PROFILES: The Pinellas County Sewer System's ability to sustain its recent trend of strong debt service coverage and liquidity levels, and a declining debt profile, while sufficiently addressing capital needs could warrant upward rating movement.

CREDIT PROFILE

DIVERSE SERVICE AREA

Pinellas County (estimated 2014 population of 933,300) is located on Florida's central Gulf Coast approximately 25 miles west of the city of Tampa. It is home to the cities of Clearwater (the county seat) and St. Petersburg. The county's sewer utility system served roughly 83,000 retail connections and three wholesale customer -- the cities of North Redington Beach, Redington Shores, and Pinellas Park -- in 2015 and covers a service area totaling 106 square miles. The City of Indian Rocks Beach was a fourth wholesale customer until the sale of their sewer collection system to the county, effective October 2014.

The system covers much of the unincorporated areas of the county, or around 300,000 residents including the wholesale end-users, and to a lesser extent provides service to areas within the city limits of certain municipalities. The system also provides reclaimed water (non-potable) service to approximately 23,000 retail customers and to several wholesale customers.

SUSTAINED FINANCIAL IMPROVEMENT DRIVES OUTLOOK

The system's financial performance has experienced marked improvement over the past five years. Operating revenues increased by roughly 27% since fiscal 2010 due to substantial annual rate increases recommended by the county commission to improve historically weak financial results. This has led to significantly improved DSC levels, escalating from 1.4x in 2010 to over 2.0x in 2014. Free cash flow relative to annual depreciation costs likewise peaked above 100% for the first time in recent years and the operating margin continues to steadily rise. System liquidity has also remained solid during this time, exceeding 500 days' cash on hand since fiscal 2010. As of fiscal 2014 nearly $68 million in unrestricted cash and investments (including $5.5 million in available funds set aside with a fiscal agent) equated to a very robust 640 days cash on hand.

Financial projections provided by the county through fiscal 2021 appear conservative and show a continuation of strong financial performance. These results are supported by only minimal 1% annual rate increases that have been adopted for fiscals 2017 - 2019 (0% in fiscal 2016). These steady increases, coupled with level annual debt service and a controlled expenditure forecast are expected to maintain solid DSC levels above 2.0x and ample liquidity while allowing for 100% cash funding of the capital improvement plan (CIP) from excess annual cash flows. No additional debt issuances are currently contemplated.

STABILIZING RATE STRUCTURE

While the system's recent rate increase program proved positive for financial results, the average fiscal 2014 residential sewer customer charge of approximately $44 per month (assuming a national average of 7,000 gallons) now equates to a somewhat elevated 1.2% of county-wide median household income (MHI), just above Fitch's 1% affordability threshold for one utility charge. Fitch notes that when rates are applied to actual residential flows, or closer to 5,000 per customer, the sewer bill equates to closer to .9% of MHI.

The customer charge's proximity to Fitch's affordability threshold could signal potential concern for future rate-raising flexibility; however, the adopted rate increase plan of 1% annually through 2019 (excluding fiscal 2016) should maintain fairly level charges going forward. Furthermore, when incorporating the average customer's water charge, county water and sewer utility charges comprise less than 2% of MHI or below Fitch's affordability overall threshold.

IMPROVING DEBT POSITION SUPPORTS OUTLOOK

Debt metrics show continued improvement. Overall, the total debt burden equates to a low 29% of net plant and annual debt service comprises a low 19% of gross revenues. Historically high debt per customer levels continue to decline and are forecast, absent additional debt issuances over the next five years, to rank below Fitch's 'AA' medians as of fiscal 2015. Debt per capita for the service area's 300,000 residents (inclusive of wholesale end-users) equates to a somewhat elevated $595.

MANAGEABLE CAPITAL PROGRAM

The five-year, fiscal 2016 - 2020 CIP totals $84.2 million and focuses primarily on asset maintenance and R&R projects. Recent treatment plant upgrades related to regulatory concerns of high pollutants found in effluent discharged into surface water have been mostly completed. The county expects to cash-fund the entire CIP which will allow debt ratios to continue to decline.

STRONG SERVICE AREA ECONOMY

The county is part of the Tampa-St. Petersburg metropolitan area economy with employment led by the professional, business and healthcare service sectors. Transportation, tourism, high-technology and trade also play an important role. The county's improving unemployment rate is led by solid employment growth since 2011. The region has long been a popular spot for retirees because of its coastal location and affordable housing. The service area is substantially developed -- the county is the most densely populated in the state -- thereby limiting residential growth to infill development.

The mostly residential customer base remains stable with relatively modest growth expected. Wholesale municipal customers have historically comprised a modest 12% of total revenues. All of the wholesale customers are signed to long-term, flow-based contracts.