NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating on the following bonds for Jacksonville Beach, FL (the city):
--$28.4 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, 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 service area is small, but stable with no growth pressures, capacity or supply constraints, or concentration in customers and sales.
SUFFICIENT POWER SUPPLY: The electric system, which accounts for nearly 90% of combined revenues, participates 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). The projects collectively provide the city with a reliable, competitively priced power supply sufficient to meet future needs.
CONSISTENTLY STRONG FINANCIAL METRICS: Timely cost recovery continues to yield strong annual debt service coverage in excess of 3.0x and sizeable unrestricted cash reserves. Coverage of full obligations, including purchased power obligations and transfers to the city's general fund made after satisfying debt service obligations, mirrors Fitch's rating category median of 1.4x. Fitch expects the continuation of strong financial metrics based on the city's forecast through fiscal 2019.
FAVORABLE DEBT PROFILE: Leverage ratios compare well to medians for the rating category and should continue to improve as the system remains committed to funding its capital needs entirely from excess operating cash flow. Debt per customer of nearly $900 is less than one-third the median figure, and the ratio of debt to funds available for debt service (FADS) of 1.7x is considerably lower than Fitch's median of 5.1x.
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 account for a significant proportion of the city's total general fund income, demonstrating the city's reliance on utility revenues to fund general government operations. While the amount transferred each year has thus far remained manageable to the electric fund, escalation beyond current levels would be viewed negatively, particularly if financial metrics of the combined utility diminished as a result.
Jacksonville Beach owns and operates a distribution-only electric system, purchasing all its power from FMPA's All-Requirements and St. Lucie Projects. The city is bound to the ARP project by a rolling 30-year power supply contract. Participation in the St. Lucie project is pursuant to a take-or-pay power sales contract that extends through the life of the project's related debt and includes a 25% step-up of each participant's original entitlement share in the event another participant member defaults on its obligation.
The ARP load is served by a fuel supply mix that is approximately 80% natural gas derived mostly from ARP's owned resources. The balance of ARP's load is served through owned and purchased capacity consisting of coal, nuclear and renewable resources. FMPA officials expect the project's existing capacity will be sufficient to meet future load growth as well as an 18% reserve for peak days through at least 2023.
SMALL RETAIL WATER AND WASTEWATER SYSTEM
The system maintains an ample water supply and sufficient treatment capacity to meet long-term demand of the essentially built-out service area. The city's water supply is derived from the Floridan Aquifer, from which the city is currently permitted to withdraw 7.0 mgd. Two city-owned water treatment plants provide capacity on a combined basis to treat up to 8.5 mgd, sufficient to meet the current average water production of 2.0 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. Treatment capacity remains well in excess of average daily flows. 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
The size and scope of the combined system's five-year capital program is relatively unchanged from prior years, and remains very manageable. Projected spending through fiscal 2019 totals $40.2 million, split between the electric system ($29.2 million) and the water and wastewater systems ($11.1 million). Planned projects will focus primarily on routine upgrades and maintenance of system assets. The capital plan will be funded entirely from excess operating cash flow, which should lead to a continued reduction in debt levels.
The city's utility rates have remained relatively affordable compared to income levels for the service area, and relative to peer utilities. Historically the city has set rates sufficient 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. Fitch believes this strategy has served the city well, keeping debt levels low, cash balances high, and utility rates affordable.
Electric rates consist of a base rate and a bulk power cost adjustment (BPCA) used to recover purchased power costs. The monthly residential cost per 1,000 kWh now stands at about $124, about equal to the statewide average for municipal and investor owned utilities. Officials do not anticipate any additional changes in the base rate over the next several years.
Beginning in fiscal 2015 with an already adopted 4.8% rate hike, water and sewer charges, pursuant to a resolution adopted by city council, will be adjusted on an annual basis according to changes in the consumer price index (CPI). The changes will be automatic and will not require the review and approval of city council. Fitch views the city's new methodology for rate adjustments positively as it eliminates regulatory oversight and will likely avoid large spikes in user charges.
Despite the escalation in rates over the last several years, combined water and sewer bills remain very affordable for the rate base. The average residential monthly water and sewer bill totals approximately $57, equal to a modest 1.3% of median household income.
CONSISTENTLY FAVORABLE FINANCIAL PERFORMANCE
Debt service coverage has remained strong, averaging 3.6 over the prior five years, while liquidity has more than doubled over the same period. Unrestricted cash and investments totalled $60.2 million at the close of fiscal 2013, providing a significant 275 days of cash on hand. Financial projections through 2019 include the continuation of strong coverage levels, although targeted spending for capital projects is forecast to reduce available cash reserves to a more modest level estimated to be in the range of 160 days cash. The city's forecast incorporates reasonable assumptions, including zero growth in sales or customers, no additional debt and no change in utility rates.
STABLE SERVICE TERRITORY
The city is located on the northeastern coast of Florida in the southeastern corner of Duval County, approximately 18 miles east of downtown Jacksonville. With a relatively small population of just under 22,000, the city serves as more of a bedroom community for Jacksonville, as well as a popular vacation spot given its location along the Atlantic Ocean.
The combined utility system's service territory includes a water and sewer system that serves approximately 10,000 customers within Jacksonville Beach, and an electric distribution system that serves approximately 34,000 customers located in the City of Jacksonville Beach, the City of Neptune Beach, and the northeastern portion of St. Johns County. The customer base is well diversified, no customer concentration exists and income and economic indicators have remained relatively stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);
--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);
--'U.S. Public Power Rating Criteria' (March 18, 2014).
Applicable Criteria and Related Research:
U.S. Public Power Peer Study -- June 2014
U.S. Public Power Peer Study Addendum - June 2014
U.S. Public Power Rating Criteria