NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA' rating assigned to JEA, Florida's $39,750,000 District Energy System (DES) bonds, 2013 series A.
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 do not carry a debt service reserve.
KEY RATING DRIVERS
ESSENTIAL SERVICE PROVIDER: JEA's district energy 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 to the service being provided by DES.
DEBT SERVICE SUPPORT: The 'AA' rating assigned to 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'/Stable Outlook. 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 strong debt service support.
STRENGTH OF LARGEST CUSTOMERS: The University of Florida Health-Jacksonville (UFH-J) and the city of Jacksonville, which together account for nearly 85% of total system revenues, are very stable customers and exhibit sound credit fundamentals. Fitch maintains an Issuer Default Rating of 'AA'/Stable Outlook on the city of Jacksonville as well as a rating of 'BBB'/Stable Outlook on debt issued on behalf of UF Health-Jacksonville (UFH-J).
SOUND CONTRACT PROVISIONS: Four of the six DES contracted customers, including the two largest, currently 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 support of JEA's water and sewer fund, and the system's ability to adjust rates to account for the loss of a customer sufficiently mitigates the risk associated with the duration of the contracts.
RATE FLEXIBILITY: JEA's ability to adjust DES rates within 30 days ensures a timely recovery of costs. Additional operating cushion is provided by 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 District Energy System rating given 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.
The District Energy System 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 17 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 UFH-J, comprise a substantial 85% of the district's revenues.
CREDIT QUALITY OF THE WATER AND SEWER UTILITY 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.
JEA's 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. The system ended fiscal 2015 with 149 days of cash on hand compared with the rating category median of about 485 days.
Fitch believes the added burden to the water and sewer system, if called upon, of funding scheduled debt service on the DES's 2013 series A bonds would be minimal given the relative size and financial strength of the utility. With roughly $56.2 million in unrestricted cash and net revenues of nearly $275 million, the water and sewer system's obligation to satisfy additional DES debt service obligations, estimated at $3 million, would not diminish the credit quality of the water and sewer utility.
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 imposes 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 the expiration date of the existing contracts, 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 financial metrics of have remained adequate, with Fitch-calculated debt service coverage of 1.28x in fiscal 2015 and available liquidity staying at or slightly higher than 250 DCOH. Fitch expects similar financial results through 2020 based on JEA's latest financial projections.
STRONG SERVICE TERRITORY
Jacksonville is the state's largest city, anchoring a sizeable economic base that ranks fourth in the state. The local economy remains well diversified, with employment figures that have exhibited steady, albeit modest, growth dating back to mid-2010. Economic indicators have remained generally sound as a result, as the city's unemployment rate (4.5% as of April 2016) continues to mirror the state and nation. Income indicators are also on par with the state, but a slightly above-average poverty rate persists.
Additional information is available at www.fitchratings.com
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
Dodd-Frank Rating Information Disclosure Form