NEW YORK--()--Fitch Ratings affirms the 'AA-' rating on the following bonds of Jacksonville Beach, FL (the city):
--$35.6 million utility revenue refunding bonds, series 2010.
The Rating Outlook is Stable.
Outstanding series 2010 bonds are secured by net revenues of the combined electric and water and wastewater system.
KEY RATING DRIVERS
SOLID COMBINED UTILITY: Jacksonville Beach owns and operates a combined utility system providing retail electric, water and wastewater services to the city of Jacksonville Beach, FL, and surrounding areas. The systems are stable, do not exhibit customer concentration, and do not have any significant environmental or supply challenges over the medium term.
SUFFICIENT POWER SUPPLY: The electric system's participation in Florida Municipal Power Agency's (FMPA) All-Requirements Power Supply Project (rated 'A+' with a Stable Outlook by Fitch) and St. Lucie Project (rated 'A' with a Stable Outlook) ensures the city a reliable power supply sufficient to meet future needs.
CONSISTENTLY STRONG FINANCIAL METRICS: Operating results on a combined basis continue to yield strong annual debt service coverage in excess of 3.0x and sizeable unrestricted cash balances. Coverage of full obligations, including transfers to the city's general fund and purchased power obligations, is tighter at 1.3x, but satisfactory for the rating.
FAVORABLE DEBT PROFILE: Leverage ratios compare well to medians for the rating category and should improve going forward as the system continues to fund its capital needs from excess cash flow from operations. Debt/customer of nearly $1,050 is equal to just one-third the median figure, and debt/funds available for debt service (FADS) was 2.1x in fiscal 2011.
MANAGEABLE CAPITAL PROGRAM: Capital needs are manageable as a consequence of having resource sufficiency for each of the systems. Planned capex will be aimed at routine maintenance and repair of system assets.
RATE FLEXIBILITY: Affordable electric, water and wastewater rates in comparison to surrounding utilities, and relative to residents' income levels, provide the city with ample flexibility.
HEAVY GENERAL FUND RELIANCE: Transfers from the electric fund to the city's general fund are sizeable, accounting for nearly 25% of total general fund income in fiscal 2011. However, this risk is mitigated by a ceiling on the transfer payment equal to no more than 4.5 mills per kWh, as well as the fact that the transfer makes up less than 5% of the system's annual revenues.
AMPLE POWER SUPPLY DERIVED FROM FMPA
The city of Jacksonville Beach is a distribution-only electric system and purchases all its power from FMPA under the agency's All-Requirements Project (ARP) and St. Lucie Project. The ARP load is served with a fuel supply mix that is approximately two-thirds natural gas derived mostly from ARP's owned resources and, to a lesser extent, through purchased power contracts with various other power suppliers.
The balance of ARP's supply requirements are met with a mix of coal, nuclear and renewable resources. ARP members are bound to the project by all-requirements power sales contracts that terminate in 2036, and are then automatically renewable on a yearly basis.
SMALL RETAIL WATER AND WASTEWATER SYSTEMS
The system maintains an ample water supply and sufficient treatment capacity to meet long-term demand of the essentially built-out service area. Water supply is provided by six artesian wells that penetrate the Floridan Aquifer and have a combined capacity of 17.5 million gallons daily (mgd). The city is currently permitted to withdraw 7.0 mgd from the wells. Water drawn from the wells is treated at two city-owned water treatment plants operating with a combined treatment capacity of 8.5 mgd, sufficient to meet the current average water production of 2.5 mgd and a historical peak of 3.8 mgd.
The city's wastewater treatment system consists of a pollution control plant and an effluent transmission and disposal system. The pollution control plant's primary and secondary treatment capacity of 4.5 mgd has remained in sufficient excess of the average daily flow of about 2.2 mgd over the prior three fiscal years (including fiscal 2012).
The city's pollution control plant was recently upgraded to meet stricter treatment standards related to nitrogen emissions regulation. As a result, all regulatory and operating permits for both the water and wastewater systems are reportedly current and no regulatory actions are pending at this time.
MANAGEABLE CAPITAL PROGRAM
Combined capital needs through fiscal 2017 are estimated at $39.7 million. Projected spending is split between the electric system ($23.5 million) and the water and wastewater systems ($16.2 million), and will focus primarily on routine upgrades and maintenance of system assets. The capital plan will be funded from excess operating cash flow and will not require additional debt issuance. Fitch believes that excess cash flow will be sufficient to meet projected capital spending through fiscal 2017 based on the city's financial projections.
Debt levels appear favorable relative to median ratios for similarly rated systems. Debt per customer of about $1,050 was equal to just one-third the median ratio in fiscal 2011, and equity/capitalization exceeded 80% compared to the median of 55%. In addition, debt/FADS adjusted for purchased power in fiscal 2011 was 5.3x compared with the median ratio of 4.8%, which excludes the adjustment. Fitch expects the combined system's leverage ratios to continue to improve given the lack of additional borrowing plans.
The system has historically set rates in order to pay for capital expenditures on a pay-as-you-go basis and maintain reserves in each fund equal to at least 90 days cash. Water and wastewater rates require city council approval but are not subject to regulatory approval or oversight. Following an updated review by the city's rate consultant in 2011, the city adopted a 7% rate hike effective March 1, 2012 (fiscal 2012) and 7% increases for fiscals 2013 and 2014. Despite the continued rise in user charges, the average monthly water and sewer bill for residential users remains affordable at about $50, or 1.2% of median household income.
Purchased power costs typically account for about 75%-80% of total operating expenses of the combined fund. FMPA has the ability to pass through fuel costs to the ARP's members monthly, as does the city. As a result of reduced natural gas prices, the city's monthly residential cost per 1,000 kWh dropped from approximately $138 in July 2010 to $124 in July 2012. The city's rates remain well below the average of utilities statewide as a result.
CONSISTENTLY FAVORABLE FINANCIAL PERFORMANCE
The financial profile of the combined system is sound, evidenced by financial metrics consistently in line with rating category medians. Fitch calculated debt service coverage (DSC) was 3.5x in fiscal 2011 and has averaged a robust 3.4x over the prior five years. Coverage of full obligations, which includes annual transfers to the city's general fund and purchased power costs, has remained at a satisfactory 1.3x over the same period.
The system ended fiscal 2011 with a sizeable unrestricted cash balance of $47.3 million, equal to 224 days cash on hand. Fitch notes that the year-end balance includes approximately $10.3 million derived from the over-recovery of fuel costs incurred during the fiscal year. Excluding this amount, cash totaled a more typical 180 days, still comfortably above Fitch's median of 128 days. Preliminary results through 11 months of fiscal 2012 indicate a continuation of historical financial performance. DSC is projected to remain above 3.0x and a net increase in unrestricted cash of at least $5 million is expected.
Transfers from the combined fund to the general fund are high, accounting for about one-fourth of total general fund income in fiscal 2011. Concern regarding the above-average reliance is partially mitigated by the general fund's high general fund balance (equal to 47% of spending in fiscal 2011) and the city's policy that caps transfers to 4.5 mills per kWh (equal to 5% of combined revenues).
STABLE SERVICE TERRITORY
The service area of the electric system consists of a 17-mile-long strip of land situated between the Atlantic Ocean and the Intercoastal Waterway and includes a portion of the city of Jacksonville (implied general obligation [GO] bonds rated 'AA+', wita a Stable Outlook) and of St. Johns County.
The city is located on the northeastern coast of Florida in the southeastern corner of Duval County, approximately 18 miles east of downtown Jacksonville. The city serves as a bedroom community for Jacksonville, as well as a vacation spot. Income and unemployment levels are in line with state and national averages. The Jacksonville economy has generally been spared the worst of the housing downturn and recession when compared to other large metro areas in Florida. Wealth and income levels are average.
Notwithstanding the reduction in electricity sales in four out of the prior five years, the system expects average annual growth of 1% for next five years. Fitch finds this level of sales growth conservative, given the city's ability to further build out in unincorporated portions of St. Johns County.
The system also benefits from a diversified customer base consisting of mainly residential and small commercial customers, with the largest customer accounting for no more than 3% of total 2011 revenue. Collection of annual billings continues to approximate nearly 100%, and bad debts have remained below 1% over the prior two years.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
This action was informed by information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria', Jan. 11, 2012;
--'Revenue-Supported Rating Criteria', June 12, 2012.
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria