OREANDA-NEWS. Fitch Ratings has affirmed the following Polk County, FL (the county) revenue bonds:

--Approximately $188 million utility system (the system) revenue bonds series 2004, 2010, 2012, 2013, 2014A, 2014B, and 2014C at 'AA-'.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are payable from a senior lien pledge of the net revenues of the county's water and sewer system, including available system connection charges.

KEY RATING DRIVERS

STRONG FINANCES DRIVE POSITIVE OUTLOOK: Financial performance has been consistently strong, evidenced by solid margins, robust debt service coverage (DSC) and strong free cash flow (FCF). Ample liquidity provides flexibility.

MANAGEABLE CAPITAL PLAN: The updated five-year capital improvement plan (CIP) totals $110 million through 2020 and primarily funds water system upgrade and expansion projects as well as a comprehensive renewal and replacement program.

AVERAGE DEBT BURDEN: System leverage is manageable and expected to remain near rating category medians with limited new debt in the CIP, but slow amortization of existing bonds.

STABLE SYSTEM OPERATIONS: The utility is comprised of six separate and self-contained service areas resulting in a dispersed asset base and high delivery costs. However, the operating profile is stable and system redundancy is provided by interconnections with other local utilities.

STABLE BUT LIMITED ECONOMY: Historically known for its citrus and phosphate mining industries, the county's economy has diversified into healthcare, light manufacturing and distribution. The unemployment rate has been on a steady decline, but income levels remain below average.

RATING SENSITIVITIES
STRONG FINANCES, MANAGEABLE DEBT and CIP: The rating could be upgraded if financial metrics continue to be strong and the debt burden and capital program remain manageable.

CREDIT PROFILE

CENTRAL LOCATION WITH ACCESS TO INTERSTATE

Polk County (implied GO rating of 'AA' by Fitch) is located in central Florida along the Interstate-4 corridor, 25 miles east of Tampa and 35 miles southwest of Orlando. The county covers a large geographic area and has a total estimated population of 607,000.

The economy is somewhat limited but diversifying, and proximity to the interstate provides some residents with access to the larger Orlando and Tampa employment centers. A decline in the county's unemployment rate to 6.7% in July 2015 from 8.9% in July 2013 results from a slight rise in employment coupled with a slight decline in the labor force. Nevertheless, the trend is positive.

SOLID FINANCIAL PERFORMANCE TO CONTINUE

Financial results are strong due to a combination of steady rate increases and customer growth over the past five years. DSC in fiscals 2013 and 2014 topped 3.0x, and 2.7x excluding connection charges. The system makes scheduled annual payments in lieu of taxes (PILOTs) to the county's general fund (GF), which totaled approximately $1.5 million in fiscal 2014, or just 3% of the system's operating budget. PILOTs are paid as an operating expense and are based on a formula that uses the value of system assets applied to the ad valorem tax rate, and are therefore relatively predictable.

Pro forma financial results have not been updated since the county issued bonds for the system in 2014. Nevertheless, Fitch anticipates financial results will remain strong as very limited additional debt is currently anticipated over the next several years.

A sizable improvement in system liquidity over the past several years provides solid financial flexibility. The system ended fiscal 2014 with approximately $56 million in unrestricted cash and investments (excluding unspent bond proceeds) and $1 million in renewal and replacement fund balances, or 652 days cash on hand. Cash is projected to remain strong despite the expectation for sizable CIP spending from internal sources (about two-thirds of the CIP).

Annual FCF from existing rates (nearly $25 million in fiscal 2014, which was over 200% of annual depreciation) should remain strong as operations are expected to remain stable and only a limited amount of additional debt is expected to be issued over the next five years. The significant FCF provides substantial resources to fund proposed capital spending.

User charges are high; the average monthly residential customer bill for combined service is roughly $107 for 7,000 gallons of water use in fiscal 2015, which equates to 3% of median household income and is elevated compared to peer systems. Rates were held constant in fiscal 2016 after the county completed a four-year rate plan that increased rates by 16% through fiscal 2015. However, the county anticipates implementing a water supply surcharge in fiscal 2017 to fund long-term supply initiatives. Identification of longer-term capital needs (and funding sources) is expected to be better known once the county completes a facilities master plan sometime in 2016. Fitch views as a credit positive the county's past and current demonstrated support of rate increases.

MANAGEABLE DEBT BURDEN, LIMITED ADDITIONAL BORROWING EXPECTED

The system's debt burden is manageable and most debt ratios approximate the medians for 'AA' rated systems. As of fiscal 2014, outstanding debt totaled 42% of net capital assets and equated to $1,898 per customer. Pro forma annual debt service is level and carrying costs comprise a fairly low 18% of gross revenues, although debt is back-loaded with just 18% of outstanding principal retired over the next 10 years and just 49% retired over 20 years. The county projects to issue just $25 million in additional bonds over to fund a portion of the $110 million CIP, leaving pro forma debt metrics similar to current levels.

LARGE SERVICE AREA PRESENTS CAPITAL CHALLENGES

The system provides services to a predominantly residential customer base of roughly 60,000 water and 43,000 sewer customers (not including about 4,500 reclaimed water customers) throughout the county's roughly 2,000 square mile service area. The utility is divided into separate regional service areas, some very rural, given its large geographic area. Each of the regional service areas is self-contained with its own supply resources and treatment facilities.

The system's five year CIP totals $110 million and funds various system expansion and renewal and replacement projects. Customer growth has been relatively strong historically. However, a more tempered growth rate is expected going forward and will not be a major capital program driver.

STABLE OPERATIONS, SOLID INFRASTRUCTURE AND WATER SUPPLY

The water system consists of groundwater supply from the Floridan Aquifer, numerous small water treatment facilities and distribution assets. Water supply is generally good, requiring minimal treatment. Groundwater wells are permitted through the South West Florida Water Management District (SWFWMD) with permitted supply (and treatment capacity) of approximately 33 million gallons per day (mgd; average annual), which is comfortably in excess of average demand (14 mgd). Water demand trends have been stable and even with expected customer growth water supply should continue to meet the system's needs for the intermediate term.

For the longer term, the county is leading efforts to develop additional sources including possible shared supply and treatment facilities with other municipal utilities in central Florida. The county received a long-term water use permit for 37 mgd of additional raw water from the more brackish Lower Floridan Aquifer. Regional water supply initiatives are in the early planning stages and do not comprise a significant portion of the current five-year CIP.

The sewer system also serves customers through the six regional service areas. There are a total of seven sewer treatment plants, each of which has sufficient uncommitted capacity as measured by the average flow for each plant versus the designed treatment capacity. Three of the plants provide highly treated reclaimed water, which is provided for public access reuse or sold to reclaimed water customers. Any remaining or excess reclaimed water is discharged into rapid infiltration basins. All sewer treatment plants are operating under current discharge permits issued by the state department of environmental protection.