Fitch Affirms Jacksonville, FL's Capital Project Revs at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'AA-' ratings on the following obligations of the city of Jacksonville, Florida:

--$115.75 million capital project revenue bonds series 2008A and 2008B.

The Rating Outlook is Stable.

SECURITY

The capital project revenue bonds are backed by an annual contribution paid to the city from the Jacksonville Electric Authority (JEA) from revenue remaining after satisfying all payment obligations of the electric system and water and sewer system bond resolutions.

KEY RATING DRIVERS

RATING REFLECTS JEA CREDIT: The rating on the capital project revenue bonds is linked to the creditworthiness of the JEA electric system revenue bonds, as approximately 80% of the surplus revenue from JEA's utilities is derived from its electric system. Fitch rates the electric system revenue bonds 'AA' with a Stable Outlook (for more information, see 'Fitch Rates JEA's (FL) Electric System Rev Bonds 'AA'; Outlook Stable', dated June 15, 2015).

SUBORDINATE OBLIGATION: The rating on the capital project revenue bonds recognizes the subordinate nature of the payment obligation to the city and is one notch below JEA's electric system revenue bond rating.

GO RATING CEILING: Fitch's rating on the capital project revenue bonds will be no higher than the implied unlimited tax general obligation (ULTGO) rating on the city, as the pledged revenue is received by the city as a transfer into the general fund on an annual basis. Fitch rates the city's implied ULTGO 'AA' with a Stable Outlook (for more information, see 'Fitch Rates Jacksonville, FL Special Revs 'AA-' & Downgrades Various Bonds; Outlook Stable', dated Oct. 27, 3014).

AMPLE COVERAGE: The pledged JEA contribution has been extremely stable and provides coverage nearing 12 times (x) maximum annual debt service (MADS) on the capital project revenue bonds.

CONTRIBUTION SUBJECT TO MODIFICATION: The formula governing the amount of the annual JEA contribution is subject to reconsideration by the city council every five years at a minimum, with the current calculation effective through September 30, 2016. Fitch considers risk to diminishment low as the JEA transfer represents a significant funding source for the general fund of the city.

RATING SENSITIVITIES

CHANGES IN JEA/CITY CREDIT QUALITY: The rating is sensitive to changes in the ratings assigned to JEA's electric system revenue bonds and the implied ULTGO on the city.

CHANGES IN PLEDGED CONTRIBUTIONS: The rating is also sensitive to changes in debt service coverage stemming from revisions to the JEA contribution formula, utility net revenues available after JEA bond debt service, or the issuance of additional parity indebtedness.

CREDIT PROFILE

JEA is organized as a component unit of the city responsible for the management and operation of an electric utility system and a water and sewer utility system serving the city as well as a small number of customers in neighboring St. Johns, Nassau and Clay Counties. The JEA governing body is appointed by the mayor of the city and confirmed by the city council. JEA is subject to annual budget submission to the city and approval by the city council.

RATING LINKED TO JEA ELECTRIC SYSTEM CREDIT QUALITY

In fiscal 2015 the budgeted JEA contribution was $111.7 million, equal to a very high 11.8x MADS on the capital project revenue bonds. A total of $90.1 million or 80.7% of the JEA contribution budgeted in fiscal 2015 is derived from the surplus cash flow of the electric utility. Key rating drivers for the 'AA' rating on the electric system revenue bonds include JEA's strong management and sound financial profile with Fitch-calculated debt service coverage averaging 2.36x over the prior five fiscal years (2.38x in fiscal 2014 or 1.58x coverage of full obligations, including the annual transfer to the city general fund), a healthy 180 days of cash on hand, a sufficiently diverse resource portfolio, an economically sound and stable service area, and high but moderating leverage metrics. The rating on the capital project revenue bonds recognizes the subordinated nature of the JEA transfer to the city relative to the utility system's operating and debt expenses.

CITY MAY ADJUST JEA CONTRIBUTION FORMULA

The JEA contribution is based on formula outlined in the city charter that applies fixed millage rates against the gross kilowatt-hours sales and the number of cubic feet of potable water and sewer service delivered. The charter further stipulates that JEA is required to pay an additional amount if necessary to ensure a minimum annual increase of $2.5 million. Under the charter the city council may reconsider the assessment calculations every fifth year, at a minimum. The current formula is effective through September 30, 2016. The city's dependence on the JEA contribution provides assurance that future revisions to the payment formula will not materially negatively affect debt service coverage. The annual transfer from JEA funds 11% of the city's fiscal 2015 general fund budget, and in Fitch's view would be a challenge to replace.

SOUND LEGAL PROVISIONS

The city has covenanted in the bond ordinance not to reduce the mill rates utilized to determine the JEA contribution unless the pro forma amount of revenue received in 12 consecutive months of the preceding 24 months is equal to 300% MADS on outstanding parity debt. JEA will pay the annual contribution to city on a monthly basis, and the city will make monthly deposits to the sinking fund equal to the accrued monthly aggregate debt service on the bonds. Bondholders do not have the right to compel JEA to exercise its rate making power, and JEA has not covenanted to establish rates or charges to assure sufficient available revenue to make the JEA contribution - Fitch views this as a moderate risk given the general fund's reliance on the transfer for operations. The additional bonds test for the capital project revenue bonds requires MADS coverage of 2.0x, but there are no plans to issue additional parity indebtedness. General government capital needs are largely expected to be financed through the issuance of special obligation bonds backed by the city's covenant to budget and appropriate non-ad valorem revenue.

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

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, and IHS Global Insight.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987364

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987364

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Larry Levitz
Director
+1-212-908-9174
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Larry Levitz
Director
+1-212-908-9174
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com