Fitch Affirms JEA, FL's Water and Sewer System Rev Bonds at 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following JEA, FL revenue bonds at 'AA':

--$1,368,695,000 in outstanding water and sewer system revenue bonds (senior lien);

--$274,820,000 in water and sewer system subordinated revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured net revenues derived by the operation of the combined system.

KEY RATING DRIVERS

SOUND FISCAL FOUNDATION: JEA's water and sewer system (the system) continues to generate strong all-in debt service coverage (DSC) in excess of 2.0 times (x) and maintains satisfactory cash reserves. Fitch expects this trend to continue based on the system's most recent financial forecast ending in fiscal 2020.

MODERATING DEBT PROFILE: Leverage metrics have moderated in recent years but remain elevated for the rating category. Continued improvement is expected given plans to fund capital needs solely from excess operating cash flow and existing reserves through at least fiscal 2020.

AFFORDABLE RATES: Generally affordable water and sewer rates on a combined basis relative to service area wealth levels provide flexibility. In addition, rate adjustments require only the approval of JEA's board and are not subject to city council review.

MANAGEABLE CAPITAL PROGRAM: Planned capital spending has risen in recent years but should remain manageable through the current planning period. Water supply and treatment capacity for the combined system are well in excess of customer demand, and no costly regulatory requirements are currently expected.

LARGE UTILITY PROVIDER: JEA's water and wastewater systems provide an essential service to a large and economically diverse service area. The majority of revenues are derived from residential end users, no meaningful customer concentration exists, and employment and wealth indicators for the service area are in line with those of the state and nation.

SUBORDINATE LIEN RATING: Fitch does not make a rating distinction between JEA's senior and subordinate lien obligations given the modest (approximately 17%) amount of subordinated debt outstanding relative to the system's overall debt profile.

RATING SENSITIVITIES

IMPROVED DEBT AND LIQUIDITY METRICS: A measureable reduction in JEA's debt levels stemming from scheduled debt amortization and plans to fund capex over the next several years solely from cash flow, coupled with improved liquidity over time could ultimately lead to a positive rating consideration.

CREDIT PROFILE

LARGE RETAIL SERVICE PROVIDER

JEA provides water treatment and distribution service as well as wastewater collection, treatment and disposal service on a retail basis to a large and stable service territory that includes most of the city of Jacksonville and portions of neighboring St. Johns, Nassau and Clay Counties. JEA's water supply and overall treatment capacity are expected to be sufficient for the long term.

POSITIVE TREND IN FINANCIAL PERFORMANCE

Financial metrics have trended positively in recent years, due principally to greater stability in sales, a series of prior rate adjustments, and greater cost recovery related to rate structure changes. Fitch calculated all-in debt service coverage peaked at 2.38x in fiscal 2015 and has averaged a robust 2.25x over the prior three fiscal years.

Annual transfers made to the city of Jacksonville are sizable but represent a manageable portion of the overall operating budget, typically equal to about 6% of gross revenues. Net revenues covered annual debt service obligations plus the annual transfer amount by a satisfactory average of 2.02x over the prior five years.

Liquidity is considered low for the rating category but adequate relative to the system's operating profile and projected capital needs. The system ended fiscal 2015 with 149 days of cash on hand compared with the rating category median of about 485 days.

STABLE SERVICE TERRITORY

Jacksonville's economic indicators have remained generally sound as the city's unemployment rate (4.5% as of April 2016) continues to track the state and nation. Income levels are also on par with the state, although an above average poverty rate persists. Utility revenue collection nevertheless remains strong with annual write-offs continuing below 0.5% of annual billings.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1006254

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1006254

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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.

Contacts

Fitch Ratings, Inc.
Primary Analyst
Christopher Hessenthaler
Senior Director
+1-212-908-0773
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano
Director
+1-212-908-0284
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Christopher Hessenthaler
Senior Director
+1-212-908-0773
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano
Director
+1-212-908-0284
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com