NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following bonds of JEA, Florida revenue bonds:
--Approximately $266.4 million water and sewer system revenue bonds, 2014 series A.
In addition, Fitch affirms the 'AA' rating on the following outstanding JEA revenue bonds (par amounts outstanding as of Sept. 30, 2013):
--$1.6 billion in outstanding water and sewer system revenue bonds (senior lien);
--$289.9 million in water and sewer system subordinated revenue bonds.
The Rating Outlook is Stable.
Senior lien bonds (including the 2014 series A bonds) are secured by a first lien on net revenues of JEA's water and sewer system (the system) as well as a cash funded debt service reserve. Subordinated bonds are secured by a junior lien on net system revenues after the payment of senior lien obligations. A default on the subordinated revenue bonds does not trigger a default of the senior revenue bonds.
KEY RATING DRIVERS
SOUND FINANCIAL PROFILE: JEA's system continues to generate strong all-in debt service coverage (DSC) in excess of 2.0x and maintains satisfactory cash reserves. Fitch expects this trend will continue based on the system's current financial forecast and historical trends.
HIGH BUT STABILIZING DEBT BURDEN: Leverage metrics have moderated in recent years but remain high for the given rating category. Continued improvement is expected based on JEA's plan to fund system capital needs through at least fiscal 2018 solely from excess operating cash flow and existing reserves. No costly regulatory requirements are currently expected.
STRONG FINANCIAL MANAGEMENT: Financial operations and capital planning are guided by an effective management team and highly engaged board.
REDUCED RATE AFFORDABILITY: Rate affordability has eroded in recent years due to ongoing declines in median household income (MHI) levels and a series of annual rate increases. Residential rates are somewhat high as a result, although no additional increases are expected through at least the forecast period.
LARGE PROVIDER OF AN ESSENTIAL SERVICE: JEA's water and wastewater systems provide an essential service to a large and economically diverse service area. Residential customers make up the vast majority of revenues, no meaningful customer concentration exists, and employment and wealth indicators 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 15%) amount of subordinated debt outstanding relative to the system's overall debt profile.
DEVIATION FROM CURRENT FORECAST: Weaker operating results relative to JEA's current financial projections through fiscal 2018 would be viewed negatively.
IMPROVED DEBT AND LIQUIDITY METRICS: A measureable reduction in debt levels coupled with improved liquidity over time could ultimately lead to positive rating consideration.
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 (implied general obligation bond rating of 'AA' with a Negative Outlook by Fitch) and portions of neighboring St. Johns, Nassau and Clay Counties.
JEA's customer base is highly diverse with residential users accounting for nearly half of annual sales and operating income and composing approximately 80% of the combined customer base. The 10 largest customers accounted for just 4.7% of total revenue in fiscal 2013 and represent a stable mix of large employers.
POSITIVE TREND IN FINANCIAL PERFORMANCE
Financial metrics have trended positively in recent years, due principally to annual rate increases that have offset ongoing declines in sales. All-in DSC peaked at 2.3x in fiscal 2013 and has averaged a robust 2.2x over the prior three fiscal years. Management targets a satisfactory all-in DSC ratio of no less than 1.8x.
Liquidity is considered weak for the rating category but adequate relative to the system's operating profile and projected capital needs. The system ended fiscal 2013 with 110 days cash on hand compared to the rating category median of about 400 days. Financial projections through fiscal 2018 demonstrate all-in DSC in excess of JEA's minimum target of 1.8x, despite holding rates steady through the planning period. The forecast is based on what Fitch considers reasonable assumptions.
HIGHER TRANSFERS COULD WEAKEN FINANCIAL METRICS
A prescribed formula that determines the system's annual transfer amount to the city remains in effect through fiscal 2016 and provides near-term comfort by maintaining the obligation at a manageable level (equal to 6% of gross revenue in fiscal 2013). However, a revised formula that was recently proposed by the city's administration would compel JEA to make an additional $40 million annual contribution to the city's general fund for an unspecified number of years. Fitch believes any escalation in the annual transfer amount resulting from the city's need to bolster its pension fund and overall financial position could diminish the system's financial metrics absent a corresponding rate increase and/or expenditure reductions. Fitch notes that the annual transfer is made after the payment of operating and maintenance (O&M) expenses and annual debt service obligations.
Water and sewer rate hikes averaged 8.3% between fiscals 2007-2012, leaving the current average monthly residential water and sewer bill somewhat high at 1.9% of MHI but still on par with other large Florida utility systems. Rates were held constant in fiscals 2013 and 2014, and no additional increases are currently programmed into the system's financial forecast.
MANAGEABLE CAPITAL PROGRAM
The current capital improvement program (CIP) is relatively unchanged in size and scope compared to prior years. Planned spending through fiscal 2018 is manageable and is estimated at roughly $595 million. Projects included in the CIP will target a continued reduction in sanitary sewer overflows, ongoing compliance with all regulatory requirements, and the overall maintenance of system assets.
Funding for the capital program is forecast to come entirely from excess operating revenues and existing reserves, including the system's renewal and replacement fund currently sized at $131 million. Projected cash flows through fiscal 2018 demonstrate excess revenues sufficient to meet annual capital spending outlined in the CIP, while also maintaining cash reserves at existing levels.
IMPROVING DEBT PROFILE
Both debt as a percentage of system assets and debt-to-funds available for debt service (FADS) have trended downward since peaking in fiscal 2010, but at 69% and 6.9x, respectively, both indicators remain weak relative to Fitch's median ratios for the 'AA' rating category. Management's long-term goal remains a more favorable debt-to-asset ratio of 50%. Debt per customer is equally high at about $3,400, although a scheduled 12% reduction in total debt outstanding by fiscal 2018 should reduce this ratio to below $3,000, bringing it more in line with the rating category median.
SUFFICIENT SUPPLY AND TREATMENT CAPACITY
The rated maximum daily treatment capacity of the water system totals 298 million gallons per day (mgd) is almost three times the customer demand in fiscal 2013 (100 mgd). JEA's current water supply is forecast to be sufficient through at least 2031 based on its most recent water resource management plan. The system's water supply is drawn from the Floridan Aquifer pursuant to a 20-year consumptive use permit issued in May 2011 by the St. John's River Water Management District.
The sewer system has 11 operating treatment plants currently ranging in treatment capacity from approximately 0.2 mgd to 52.5 mgd. Average daily flows totaled 71 mgd in fiscal 2013, significantly lower than the system's total treatment capacity of 118 mgd. All discharge permits are current and system assets are purported to be in good operating condition.
STABLE SERVICE AREA
The city of Jacksonville is located in the northeastern part of Florida, and with an estimated population of nearly 836,500 is the state's largest city. The city's economy continues to exhibit solid improvement following the recent recession. Employment grew by an annual average of 2.5% in 2012 and 2013, reducing the city's April 2014 unemployment rate to a relatively low 5.9% from 7.1% one year earlier and from a peak of 11.3% in 2010. Wealth indicators are about even with state indices and only modestly lower than national averages.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 2013;
--'U.S. Water and Sewer Revenue Bond Rating Criteria', July 2013.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria