NEW YORK--()--Fitch Ratings assigns an 'AA' rating to the following JEA, Florida revenue bonds:
--Approximately $121.7 million electric system revenue bonds, series three 2013A;
--Approximately $54.4 million electric system subordinated revenue bonds, 2013 series A;
--Approximately $70.1 million electric system subordinated revenue bonds, 2013 series B.
The 2013 series A bonds are expected to price on Jan. 16, 2013 while the two remaining offerings will price on Jan. 23. Proceeds of the 2013 series A bonds will refund outstanding electric revenue bonds (series 2001 series C) for approximately 18% savings of refunded par. Series three 2013A and subordinate revenue bonds 2013 series B will refund outstanding variable-rate electric system bonds and pay a portion of the cost to terminate existing swaps.
In addition, Fitch upgrades to 'AA' from 'AA-' the rating 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.
Fitch also affirms the 'F1+' rating on JEA's $82.8 million tax-exempt electric system commercial paper (CP) notes, series C.
The Rating Outlook on all long-term bonds has been revised to Stable from Positive.
The series three 2013A 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 A and B 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
IMPROVED FINANCIAL FLEXIBILITY: The rating upgrade to 'AA' reflects the continued improvement in JEA's overall credit profile over several years, including a measured increase in operating margins and financial metrics, maintenance of competitive rates, greater diversification of resources and steady gains in reducing leverage.
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.
POSITIVE TREND IN FINANCIAL PERFORMANCE: Debt service coverage (DSC) and liquidity strengthened to 3.2x and 170 days cash on hand in fiscal 2012 versus Fitch's 'AA' rating category medians of, respectively, 2.1x and 167 days.
COMPETITIVE RATES: JEA's electric rates are in line with the median for Florida municipalities, despite recent increases to bolster the system's financial metrics and manage higher costs. The authority's cost structure, which consists of a base rate and a fuel and purchased power rate, are not subject to regulation.
ANTICIPATED DEBT REDUCTIONS: No plans to issue additional debt through fiscal 2017 will result in a nearly $450 million reduction in outstanding debt, thereby improving JEA's still below-average equity-to-capitalization ratio (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 approximately two-thirds natural gas-fired capacity, but coal and other solid fuels constitute over half of generation. Management continues to lessen the system's reliance on coal with new combustion turbines and the addition of various renewable resources, as well as with planned nuclear capacity from MEAG Power's Plant Vogtle units 3 and 4.
STRONG MANAGEMENT: A proactive and tenured management team has demonstrated its ability to identify and effectively mitigate system risks.
AMPLE LIQUIDITY: The 'F1+' rating on the CP program is supported by JEA's ample internal liquidity sources, including a recently extended $82.8 million credit agreement with J.P. Morgan, equal to several times potential liquidity demands.
IMPROVED FINANCIAL POSITION
JEA's financial performance has steadily improved over the past few years from what was already a generally sound position. Rating pressures in the mid-2000s were related to the system's limited financial flexibility at the time. JEA's rates were among the lowest in the state, and compression in its operating position ultimately ensued. Since then, management embarked on a plan beginning in fiscal 2008 to systematically raise rates, which has led to a measured improvement in the authority's financial metrics and overall flexibility.
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. 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 solid 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.
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 unemployment rate remains slightly above average, however, at 8.1% as of October 2012. Wealth and income levels are average.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
This action was informed by information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria', Jan. 11, 2012;
--'Revenue-Supported Rating Criteria', June 20, 2011.