NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following JEA, Florida revenue bonds:
--Approximately $65,955,000 St. Johns River Power Park System (SJRPP) revenue bonds, issue two, series twenty-six.
--Approximately $7,140,000 SJRPP System revenue bonds, issue two, series twenty-seven.
The bonds are scheduled to price via negotiation on April 28. The bonds will refund outstanding issue two bonds for interest cost savings and fund issuance costs.
The Rating Outlook is Stable.
The SJRPP revenue bonds as well as outstanding bulk power supply system revenue bonds are contract debts of JEA, payable as an operation and maintenance expense of the electric system on a take-or-pay basis.
The repayment of issue two bonds, under the first bond resolution, includes payments made pursuant to a joint ownership agreement with Florida Power & Light (FP&L; Fitch long-term Issuer Default Rating [IDR] 'A' and senior unsecured 'A+' with a Stable Outlook).The repayment of outstanding issue three bonds, under the second bond resolution, is solely the obligation of JEA.
KEY RATING DRIVERS
LARGE RETAIL ELECTRIC PROVIDER: JEA serves an economically sound and stable service area with a highly diverse customer base. Residential users account for a considerable 47% and 41% of system revenues and sales, respectively, and no meaningful customer concentration exists.
STRONG FINANCIAL MANAGEMENT: Financial operations and capital planning are guided by an effective management team and highly engaged board.
SOUND FINANCIAL PROFILE: Fitch-calculated debt service coverage (DSC) has remained strong, averaging 2.36x over the prior five fiscal years while liquidity has steadily grown over the same period to a healthy 180 days of cash on hand. Both metrics approximate Fitch's median ratios for the rating category. Fitch expects similar financial results through fiscal 2019 based on the authority's financial forecast.
DIVERSIFYING RESOURCE PORTFOLIO: JEA owns and operates a varied mix of generating assets providing a sufficiently diverse capacity portfolio split between natural gas-fired (52%) and coal and other solid fuels (42%). The planned addition of nuclear capacity in the 2018-2020 timeframe will further diversify JEA's resource base.
CONTINUED DEBT REDUCTION: Leverage metrics have moderated in recent years but remain high for the rating category. Continued improvement is expected given plans to fund capital needs through at least fiscal 2019 entirely from excess operating cash flow and existing reserves.
RISING NUCLEAR CONSTRUCTION COSTS: Continued revisions to the Vogtle nuclear expansion project of completion schedule and budget are a concern, but appear manageable for JEA as the project will account for an estimated 6% of the electric utility's total resource capacity and about 10% of forecasted energy supply in 2020.
ADDITIONAL LEVERAGE: While not anticipated, escalation in JEA's already high debt levels could ultimately pressure the rating.
NUCLEAR PROJECT DEVELOPMENTS: Higher Vogtle project costs related to construction or related financing that reduce JEA's financial and operating flexibility would be viewed negatively.
ST. JOHN'S RIVER POWER PARK AGREEMENT
JEA's contract debts stem from its partial ownership interests in SJRPP and Plant Scherer Unit 4. SJRPP consists of two coal-fired generating units each with a capacity of 638 MW. The facility is operated by JEA and owned jointly with Florida Power & Light (FP&L; IDR of 'A' with a Stable Outlook), to which it sells 37.5% of its 80% interest under a take-or-pay contract (effectively creating a 50-50 share).
JEA's and FP&L's financial obligations to repay issue two bonds under the first bond resolution are several, not joint. In addition, there is no formal step-up provision between the parties. As such, the repayment of outstanding power park bonds under the first bond resolution is dependent on FP&L's ability to make payments to JEA.
Fitch believes JEA's high proportion of ownership in the large facility and its remedies under a possible default by FP&L, together with FP&L's take-or-pay obligation for a share of JEA's capacity and the economic value to JEA of the facility, provide adequate bondholder protection at the rating level. The first bond resolution allows JEA to take FP&L's allotted capacity for its own use or resale if FP&L were to default on its financial obligations to the power park.
SOLID TREND IN FINANCIAL AND DEBT METRICS
JEA is among the largest municipally owned electric utilities in the United States. The service area for the electric system includes the entire city as well as a small number of customers in neighboring St. Johns, Nassau and Clay Counties. The system's customer base has remained stable and is solidly diverse as the 10 largest customers represent a cross-section of relatively stable employers that consistently account for less than 15% of JEA's total annual revenue.
The authority's financial position remained sound in fiscal 2014, supported in large part by a rebound in energy sales. Fitch-calculated DSC improved to 2.38x as a result, and balance sheet resources, including available reserves in the system's renewal and replacement fund, remained at a healthy level, equal to about 180 days of cash on hand. Coverage of full obligations, including a sizeable transfer made annually to the city's general fund, also continued at a sound level, equal to 1.58x in fiscal 2014. Fitch expects future financial performance to continue at a similar level based on JEA's most recent financial forecast.
Financial performance through the first quarter of the current fiscal year was strong, supported primarily by a 3.6% increase in aggregate energy sales compared to the same point in the prior fiscal year. Lower than originally budgeted operating expenses have also had a positive impact, contributing to a solid increase in year-over-year funds available for debt service.
The utility has no additional debt plans through at least fiscal 2019, which should result in a favorable reduction in JEA's historically high leverage ratios. Capital spending for the electric system totals approximately $737 million through fiscal 2019, and is expected to be funded entirely on a current basis from excess cash flow. Continued fuel diversification and existing retrofits position JEA well to meet existing environmental regulations.
CONCERNS OVER VOGTLE COST INCREASES AND CONSTRUCTION DELAYS
JEA is participating in the development of the 2,204 MW Vogtle expansion project, via a 20-year purchase power agreement signed in 2008 with the Municipal Electric Authority of Georgia (MEAG; power revenue bonds rated 'A+' with a Stable Outlook). The power purchase agreement (PPA) obligates JEA to take the entire output and to pay all of the costs related to the construction and operation of MEAG's Project J, including debt service, for a 20-year period beginning at commercial operation.
By 2020, the designated capacity will account for an estimated 6% of JEA's total resource capacity and slightly more than 10% of forecasted energy requirements. More recent developments indicate the commercial operation dates will likely be delayed again, to the second quarter of 2019 and 2020, respectively, increasing the total cost attributable to Project J to $1.8 billion. Fitch will continue to monitor the progress of construction and assess the impact of any further increase in the projected cost of completion on the authority's cost of power supply and related financial metrics. In the interim, the authority's full rate-setting authority and ample existing capacity should allow the authority to adequately manage the most recent revision to the construction schedule.
BROAD SERVICE TERRITORY Jacksonville is as the state's largest city (implied unlimited general obligations rated 'AA'; Stable Outlook), anchoring a sizeable economic base that remains well diversified with employment figures that have exhibited steady, albeit modest, growth dating back to mid-2010. The city's unemployment rate (5.9% as of February 2015) continues to approximate the state and nation's, as do income indicators. Electric revenue collection remains strong with annual write-offs continuing below 0.5%.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria'(June 16, 2014);
--'U.S. Public Power Rating Criteria'(March 18, 2014);
--'U.S. Public Power Peer Study' (June 13, 2014).
Applicable Criteria and Related Research:
U.S. Public Power Peer Study -- June 2014
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria