NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following JEA, Florida revenue bonds:
--Approximately $8.4 million electric system revenue bonds, series three 2013B;
--Approximately $90.2 million electric system subordinated revenue bonds, 2013 series C.
The series three 2013B bonds will refund outstanding electric revenue bonds, series three 2009A, while the 2013 series C bonds will refund outstanding 2008 series C and 2009 series B bonds. Both refundings will achieve cost savings with no extension of maturity dates.
In addition, Fitch affirms the 'AA' on the following outstanding JEA revenue bonds (par amounts outstanding as of Sept. 30, 2012):
--$1.4 billion electric system revenue bonds;
--$1.3 billion electric system subordinated revenue bonds;
--$126 million bulk power supply system revenue bonds;
--$962 million St. John's River Power Park revenue bonds.
The Rating Outlook is Stable.
SECURITY
The series three 2013B bonds are secured by a first lien on net revenues of the electric system, including offsetting transfers from JEA's rate stabilization fund. The pledge of net revenues for the subordinated 2013 series C bonds is junior to the senior bonds. A default of the senior revenue bonds triggers a cross default of the subordinate revenue bonds. The reverse does not hold.
Outstanding St. John's River Power Park (SJRPP) bonds and bulk power supply system bonds are contract debts of JEA, payable as operations and maintenance expenses of the electric system on a take-or-pay basis.
KEY RATING DRIVERS
LARGE RETAIL PROVIDER: JEA is a large, vertically integrated retail electric provider serving nearly 423,000 customers. The service territory is economically diverse, there is no concentration among the largest customers, and residential customers comprise a healthy 45% of system revenues.
IMPROVED FINANCIAL FLEXIBILITY: Improvement in JEA's overall credit profile in recent years has been driven by schedule rate increases leading to a measured increase in operating margins and financial metrics, maintenance of competitive rates, greater diversification of resources and steady gains in reducing leverage.
POSITIVE TREND IN FINANCIAL PERFORMANCE: Debt service coverage and liquidity strengthened to 3.2x and 170 days cash on hand in fiscal 2012 versus Fitch's rating category medians of 2.1x and 167 days, respectively. Fitch expects future financial performance to continue at a comparably strong level.
STRONG MANAGEMENT: A proactive and tenured management team has demonstrated its ability to identify and effectively mitigate system risks.
ANTICIPATED DEBT REDUCTION: No plans to issue additional debt through fiscal 2017 is expected to result in a nearly $450 million reduction in outstanding debt and lead to modest improvement in JEA's below-average equity-to-capitalization ratio of 19.9%. The rating category median, including less capital intensive retail distribution systems, is 51%.
DIVERSIFYING FUEL SUPPLY: The electric system's diverse resource mix includes capacity that is approximately two-thirds natural gas-fired, but coal and other solid fuels are used to generate over half of required energy supply.
RISING NUCLEAR CONSTRUCTION COSTS: Recent revisions to the Vogtle nuclear expansion project completion schedule and budget are a concern, but appear manageable for JEA as the project will account for an estimated 5% of the electric utility's total resource capacity and 12% of forecasted energy supply in 2018. Future challenges to completing construction and resolving contractor litigation remain, and will be evaluated going forward.
RATING SENSITIVITY
NUCLEAR PROJECT DEVELOPMENTS: Higher Vogtle project costs related to construction or related financing that reduce JEA's financial and operating flexibility would viewed negatively.
CREDIT PROFILE
IMPROVED FINANCIAL POSITION
JEA's financial position continued to improve in fiscal 2012 as a second consecutive year of declining MWh sales was positively offset by a sizeable reduction in annual debt service costs. Consequently, DSC improved to a more robust 3.2x compared to JEA's prior five-year average of 2.8x and Fitch's 'AA' rating category median of 2.5x. Operating results through the first six months of the current fiscal year indicate little deviation from prior year performance. Balance sheet resources, including available reserves in the system's renewal and replacement fund, were equal to a sizable 170 days cash at the close of fiscal 2012, also comfortably above the median for comparably rated utilities.
The utility has no additional debt plans through at least fiscal 2017, which should result in a favorable reduction in leverage ratios. Capital spending for the electric system totals approximately $749 million through fiscal 2017. Continued fuel diversification and existing retrofits position JEA well to meet new and proposed environmental regulations.
CONCERNS OVER VOGTLE COST INCREASES AND CONSTRUCTION DELAYS
JEA, via a 20-year purchase power agreement signed in 2008 with the Municipal Electric Authority of Georgia (MEAG; Fitch rates MEAG's power revenue bonds 'A+' with a Stable Outlook), is participating in the development of the 2,204 MW Vogtle expansion project. Construction has been on-going since 2009 and accelerated following the Nuclear Regulatory Commission's approval of the final AP 1000 reactor design and issuance of the construction and operating licenses (COL) in February 2012. However, the co-owners of the project recently revised the expected commercial operation dates for the units from April 2016 and 2017, to the fourth quarter of 2017 and 2018, respectively.
JEA's total estimated cost of the project has increased to an estimated total of $1.7 billion as a result of delays in the COL approval process and challenges related to the initial construction activity. Litigation between the co-owners and the contractor over the responsibility of certain costs related to the timing of the design approval and COL issuance is also continuing and could result in further revisions to the forecast.
RATES REMAIN COMPETITIVE
JEA's residential electric rates remain average relative to other regional providers, despite the imposition of annual base rate increases over the prior four years that totaled 20%. The fuel and purchased power rate is adjusted annually based on purchased power costs, although the rate can be modified as needed with board approval if costs vary by more than 10% from JEA's budget. JEA's average monthly bill (based on usage of 1,000 kWh) totaled about $116 as of October 2012, slightly below the $119 statewide average for municipally owned and operated systems. No additional rate increases are currently planned, which should improve JEA's relative ranking among regional systems.
BROAD SERVICE TERRITORY
JEA is one of 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 is relatively diverse with residential customers composing a healthy 40% and 45% of total system sales and revenues, respectively. JEA's 10 largest customers represent a cross-section of relatively stable employers that comprised a modest 13.6% of revenues in fiscal 2012.
The local economy remains well diversified and employment figures have exhibited steady, albeit modest, growth dating back to mid-2010. The city's February 2013 unemployment rate of 7.3% was the lowest it's been since November 2008. Wealth and income levels are average.
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:
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Public Power Peer Study' (June 20, 2012).
Applicable Criteria and Related Research
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696027
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
2011 U.S. Public Power Peer Study — Excel Addendum
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=638690
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789228
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