News Column

Fitch Affirms Pinellas County, FL's Sewer Revs at 'AA'; Outlook Stable

May 21, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms the 'AA' ratings on the following Pinellas County, FL's revenue bonds:

--Approximately $170 million in outstanding sewer system (the system) revenue bonds.

The Rating Outlook is 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, STABLE FINANCIAL PERFORMANCE: Debt service coverage (DSC) has steadily improved from fairly weak levels in 2008-2010 to close to 2.0x in fiscal 2013. Liquidity is very strong and offsets the system's slightly below average free cash flow. Fitch believes the stronger expected margins will allow the system to fund capital needs and maintain liquidity levels.

MANAGEABLE CAPITAL NEEDS: With improved financial margins, the county is expected to be able to fund system capital expenses (CapEx) without issuing additional debt. Capital needs through fiscal 2018 will focus on renewal and replacement (R&R) projects.

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

RATES ON THE RISE: County-approved rate increases beginning in 2012 will increase user charges by 24% through 2015. The increases have already improved many key financial metrics, as previously expected, which Fitch views positively even though rates are above affordability markers.

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 comprised of mainly retail residential customers, which are relatively stable and diverse. The service area is substantially developed, limiting customer growth to infill development. The county's improving unemployment rate is led by solid employment growth since 2011.

RATING SENSITIVITIES

WELL-MANAGED FINANCIAL AND DEBT PROFILES: The rating is sensitive to shifts in various credit fundamentals including a continued trend of strong financial results, maintenance of solid DSC, and strong liquidity. If these results continue, and if capital needs remain modest, positive rating action could be warranted.

CREDIT PROFILE

DIVERSE SERVICE AREA, COASTAL LOCATION ATTRACTS TOURISTS AND RETIREES

Pinellas County (estimated 2013 population of 926,610) is located on Florida's central Gulf Coast approximately 25 miles west of the city of Tampa, and is home to the cities of Clearwater (the county seat) and St. Petersburg. The county is part of the Tampa-St. Petersburg metropolitan area economy with employment led by the service sector including professional, business, and healthcare services. Transportation, tourism, high-technology, and trade also play an important role in the economy. The region has long been a popular spot for retirees because of its coastal location and affordable housing.

The county's sewer utility system served roughly 81,000 retail connections and four wholesale customers in 2013 and covers a service area totaling 106 square miles. The system covers much of the unincorporated areas of the county, and to a lesser extent provides service to areas within the city limits of certain municipalities.

The mostly residential customer base remains stable, and wholesale municipal customers comprise just 12% of total revenues. All of the wholesale customers are signed to long-term, flow-based contracts. The system also provides reclaimed water (non-potable) service to approximately 23,000 retail water customers and to several wholesale customers. The county is almost completely developed; the customer base has been stable with relatively modest growth expected.

SYSTEM LIQUIDITY REMAINS STRONG

The system ended fiscal 2013 with nearly $62 million in unrestricted cash and investments, which is equal to a very robust 582 days cash on hand. Fitch views the county's decision to approve a multi-year rate plan in 2012 positively, as it has resulted in improved financial margins and DSC. Operating revenues have increased by roughly 18% over the past two fiscal years and DSC for fiscal 2013 reached 1.9x. In addition, the strong cash position demonstrated in fiscal 2013 extends a trend of improving liquidity since fiscal 2008.

Somewhat concerning is the historically low annual free cash flow (excess revenues remaining after operating and debt service expenses have been paid), which indicates the system is unable to fund routine repair and upkeep from existing rate revenues. However, Fitch projects the system will be able to maintain its healthy liquidity levels despite the expectation to cash-fund the capital program as financial margins are expected to continue to improve and identified capital needs are relatively modest.

Financial projections provided by the county appear reasonable and show continued improvement in financial performance. Rate increases already adopted for fiscal 2014 and 2015 coupled with a decline in annual debt service are expected to improve DSC to more than 2.0x and allow for 100% cash funding of the capital improvement plan (CIP) from excess annual cash flows. The forecast assumes additional modest rate increases beyond fiscal 2015, escalating operations and maintenance costs, and no additional debt.

SOMEWHAT HIGH RATES CONTINUE TO RISE

In total, the county's four-year rate package will increase rates by 24% through fiscal 2015. Rates had only been increased modestly over the years preceding the current rate plan, which was somewhat of a concern given the weak financial results recorded during that time. While positive for financial results, the average residential customer bill for sewer service of approximately $42 per month (assumes 7,000 gallons) in fiscal 2013 is already 1.2% of county-wide median household income. However, Fitch notes that residential flows are closer to 5,000 per customer in this area, and the total combined water and sewer bill for the average residential customer is less than 2% of MHI.

MANAGEABLE DEBT BURDEN TO SLOWLY IMPROVE

The system's debt metrics are mixed. High debt per customer (roughly $2,300 in fiscal 2013) is balanced against modest debt to net plant of 29% and reasonable debt carrying costs. In addition, the debt per customer ratio does not take into account the potentially thousands of end users covered by a single connection, as is the case for large condominium complexes and retail customers of the four municipal systems that purchase service from the county on a wholesale basis. Overall, debt has been on a slow and steady decline, and Fitch expects this trend to continue.

The five-year CIP totals $66 million through fiscal 2018 and will focus primarily on various asset maintenance and improvement projects. The treatment plant upgrades related to regulatory concerns of high pollutants found in effluent discharged into surface water sources have been mostly completed. The county expects to cash-fund the entire CIP, which will allow debt ratios to continue to decline. Fitch projects debt per customer will decline to approximately $1,700 by fiscal 2018 if no additional debt is issued, which would be roughly average for the rating.

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

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2014 Water and Sewer Medians' (Dec. 2013);

--'2014 Outlook: Water and Sewer Sector' (Dec. 2013).

Applicable Criteria and Related Research:

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=831196

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Andrew DeStefano

Director

+1-212-908-0284

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Eva Rippeteau

Associate Director

+1-212-908-9105

or

Committee Chairperson

Amy Laskey

Managing Director

+1-212-908-0568

or

Media Relations:

Elizabeth Fogerty, +1-212-908-0526 (New York)

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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