NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an initial rating of 'AA' to the following JEA District Energy System (DES) bonds:
--$39,000,000 refunding revenue bonds, 2013 series A.
The bonds are expected to price via negotiation the week of June 3. Proceeds will be used to refund JEA's outstanding variable rate DES Revenue Bonds, 2004 Series A and pay the costs of issuance.
The Rating Outlook is Stable.
The bonds are secured by net revenues of the district energy system, as well as net revenues of JEA's water and sewer system after payment of the water and sewer system's senior and subordinate lien bonds. The 2013 Series A bonds will not carry a debt service reserve.
KEY RATING DRIVERS
ESSENTIAL SERVICE PROVIDER: JEA's district energy system (DES, or the system) provides chilled water for air conditioning to a small and concentrated pool of customers in Jacksonville, FL. The system has four distinct facilities, and customers currently have no alternative service provision to the service being provided.
SUPPORTIVE DEBT SERVICE GUARANTEE: The 'AA' rating assigned the 2013 Series A bonds is inherently linked to the credit quality of JEA's water and sewer system whose revenue bonds are rated 'AA' with a Stable Outlook by Fitch. JEA's covenant to make a timely transfer from the water and sewer fund to a DES subaccount in an amount sufficient to meet any existing debt service shortfall provides a sound guarantee.
STRENGTH OF LARGEST CUSTOMERS: University of Florida Health (UF)) and the city of Jacksonville, who together account for nearly 90% of total system revenues, are exceptionally stable customers and exhibit strong credit fundamentals. Fitch currently has an implied general obligation rating of 'AA+' with a Stable Outlook assigned to the city of Jacksonville, but does not maintain a public rating on UF.
SOUND CONTRACT PROVISIONS: Currently four of the six DES contracted customers, including the largest two, pay a fixed demand charge subject to a take-or-pay obligation. In addition, a payment default by any one customer would result in a rate adjustment to the remaining customers, effectively providing an unlimited step-up provision.
CONTRACTS EXPIRE BEFORE BOND MATURITY: The scheduled expiration of each contract well before the 2013 series A bonds mature poses some risk to bondholders. However, the essentiality of the service, the debt service guarantee of JEA's water and sewer fund and the system's ability to adjust rates to account for the loss of a customer ultimately mitigates any risk associated with the duration of the contracts.
RATE FLEXIBILITY: JEA's ability to adjust rates within 30 days ensures a timely recovery of costs. Additional operating cushion is provided the system's strong liquidity.
CHANGE IN WATER AND SEWER SYSTEM CREDIT QUALITY: Any change in the credit quality of JEA's water and sewer system would trigger a review of the DES rating.
The District Energy System (DES, the district) is owned and operated by JEA as a distinct utility system, separate and apart from JEA's electric system and the water and sewer systems. The district owns and operates four chilled water plants and underground piping that generate and distribute chilled water to 15 locations primarily in downtown Jacksonville.
Chilled water is provided to six customers pursuant to 20 year contracts with varying expiration dates, all of which are well before the final maturity of the bonds currently being issued. The two largest customers, the City of Jacksonville and Shands Healthcare, comprise a substantial 89% of the district's revenues.
CREDIT QUALITY OF THE WATER AND SEWER SYSTEM UNDERPINS THE RATING
JEA's covenant to transfer from the water and sewer fund an amount sufficient to meet any existing debt service shortfall related to the 2013 series A bonds underpins bondholder security. Fitch rates the water and sewer system's revenue bonds 'AA', largely due to the system's strong financial profile. Operating results of the water and sewer system have trended positively over the last several years, leading to improved debt service coverage and solid growth in liquidity. Net revenues in fiscal 2012 covered senior and subordinate lien annual debt service by 2.3 times (x) and liquidity remained at a sound level, equal to about 115 days cash on hand.
Fitch believes the added burden to the water and sewer system of having to fund scheduled debt service on the DES's 2013 Series A bonds, if called upon, would be manageable given the relative size and financial strength of the fund. With nearly $43 million in unrestricted cash and annual debt service obligations projected at $128 million, the credit quality of the water and sewer system would not be diminished by having to assume DES's projected debt service obligations of nearly $3 million annually.
SOUND CONTRACT PROVISIONS
JEA has sole discretion to set or adjust rate levels and revenue requirements for DES at any time. Customers are billed monthly, and any delinquency beyond 42 days results in a discontinuation of service. The system consistently collects 100% of its billings.
DES levy's both a demand charge based on the contract amount of cooling tons or the monthly measured tons, whichever is greater, and a consumption charge determined by the actual customer usage. Customers with contract demand in excess of 200 tons are assessed the demand charge on a take-or-pay basis under their respective contract.
The 2013 series A bonds mature well beyond when each of the existing contracts expire, and customers are not obligated beyond their respective contract term to continue paying debt service costs. However, Fitch believes the prohibitive cost of retrofitting existing buildings to house on-site chillers makes it highly unlikely that existing customers will not renew their contracts upon expiration. Contract termination by a customer is allowable, although an upfront payment to JEA equal to the present value of the contract demand payments due over the term of the agreement would generally have to be made.
DES FINANCIAL POSITION
DES's financial metrics are strong, although Fitch expects the system's financial performance will moderate going forward. Operating revenues have risen nearly 50% over the prior five fiscal years, keeping debt service coverage well above 2.0x and liquidity at a considerably strong level over that span. Modest rate adjustments were made only in certain years to offset increased electric costs, making much of the revenue growth attributable to escalating demand.
Liquidity diminished some in fiscal 2012 following the pay down of a revolving line of credit, but with $3.2 million in unrestricted cash, the system retained more than 250 days of cash on hand. The system's strong cash position provides a solid cushion in the event of a counterparty payment delay or default.
Financial projections through fiscal 2017 conservatively assume flat sales revenue, despite sizeable gains in recent years. The forecast also incorporates increased debt service obligations driven by the current offering and no change in rates. Resulting debt service coverage will decline to a still acceptable 1.4x, which should yield sufficient excess cash flow needed to fund planned capex while leaving current reserve levels in tact over the current planning period.
STRONG SERVICE TERRITORY
The city of Jacksonville is located in the northeastern part Florida and with an estimated population of nearly 828,000, is the state's largest city. The local economy remains well diversified and employment figures have exhibited steady, albeit modest, growth dating back to mid-2010. The city's March 2013 unemployment rate of 7.3% was the lowest it's been since November 2008. Wealth and income levels are average.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Fitch Rates JEA's Senior and Subordinate Rev Bonds 'AA'; Affirms Outstanding; Outlook Stable (Jan. 23 2012);
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria