New York, January 13, 2017 -- Issue: Electric System Revenue Bonds, Series Three 2017A; Rating: Aa2; Rating Type: Underlying LT; Sale Amount: $20,000,000; Expected Sale Date: 01/31/2017; Rating Description: Revenue: Government Enterprise;
Issue: Electric System Subordinated Revenue Bonds, 2017 Series A; Rating: Aa3; Rating Type: Underlying LT; Sale Amount: $75,000,000; Expected Sale Date: 01/31/2017; Rating Description: Revenue: Government Enterprise;
Summary Rating Rationale
Moody's Investors Service today assigned a Aa2 rating to JEA, FL's planned issuance of approximately $20.0 million of senior lien electric system Revenue Bonds, Series Three 2017A and a Aa3 rating to the planned issuance of approximately $75.0 million of electric system subordinated revenue bonds, 2017 Series A. Concurrently, Moody's also affirmed the Aa2 rating on approximately $1.208 billion of JEA's existing senior lien electric system revenue bonds and the Aa3 rating on approximately $1.151 billion of JEA's existing subordinate lien electric system revenue bonds. At the same time, Moody's has affirmed the Aa2 ratings on approximately $494 million of JEA's St. Johns River Power Park System (SJRPP) Revenue Bonds and approximately $112 million of JEA's Bulk Power Supply System Revenue Bonds (Plant Scherer Revenue Bonds). JEA's rating outlook remains stable. The ratings take into consideration JEA's diverse energy resource mix and transmission ownership, both of which position it well to serve its service area. The ratings also incorporate our view that JEA's recently implemented new general funds transfer agreement with the City of Jacksonville and other pension reform underway to resolve the City's underfunded pension plan obligations, will not create excessive demands on JEA's strong cash resources. The ratings recognize the ongoing risks associated with JEA's participation in the Vogtle 3 and 4 nuclear expansion project through a 20-year take-or-pay contract with MEAG Power. While JEA's involvement in Vogtle is intended to advance the utility's generation supply diversification strategy and its involvement continues to be incorporated into the current rating, credit risks persist such as those relating to construction delays, cost overruns and material weakening of the credit quality of Toshiba Corporation (Caa1; ratings under review for downgrade), parent of the contractor, Westinghouse Electric Co. LLC (unrated). Even with a series of general rate increases over multiple years (most recently effective December 1, 2016), JEA is maintaining reasonably competitive retail rates for all customer classes, playing an important role in Jacksonville's economic expansion. JEA's rate setting process is unregulated and the JEA management team and board regularly raises rates when necessary to support a sound financial condition, including a long record of robust debt service coverage margins and strong liquidity. The Aa2 rating for the SJRPP bonds and the Plant Scherer Revenue Bonds incorporate the fact that the debt service for these series of bonds are paid as an operating expense of JEA prior to the debt service on the Electric System Revenue Bonds and the Electric System Subordinated Bonds. The subordinate lien rating is Aa3, reflecting the weaker security provisions related to the subordinate lien bonds.
Moody's rating outlook for JEA's electric system, SJRPP and Bulk Power System revenue bonds is stable as we expect management to focus its considerable strengths on running this competitive enterprise. The outlook also incorporates the anticipated benefits of the latest rate increase and the near term plans for debt refunding, along with the latest risks associated with JEA's participation in the take-or-pay obligation with MEAG Power for output from the Vogtle nuclear expansion project.
Factors that Could Lead to an Upgrade
In light of JEA's indirect involvement in Vogtle 3 and 4 and JEA's high, albeit improving, leverage relative to other "Aa-rated" municipal utilities, limited prospects exist for the rating to be upgraded in the near to intermediate term.
Over the long run, the rating could be upgraded if JEA sufficiently copes with its indirect nuclear construction risks and continues to effectively manage growth and sustain strong liquidity, while maintaining sound debt service coverage levels, competitive rates and further reducing its debt ratio.
Factors that Could Lead to a Downgrade
Sustained erosion of internal liquidity and/or reduction in debt service coverage margins below historic 2.0x for the electric system for a sustained period could result in a lower rating.
Moreover, rating pressure could stem from construction risk related to the Plant Vogtle nuclear expansion project, materially beyond the levels already publicized.
JEA's senior lien bonds have a rate covenant that requires net revenues to cover debt service by 120% and an additional bonds test that requires net revenues to cover maximum annual debt service by 120%. A renewal and replacement account is required to be funded at least equal to 5% of gross revenues of the preceding year or 10% of net revenues of the preceding year. Senior lien bonds are also secured by a debt service reserve sized at maximum annual interest, which we consider to be a weak protection measure for bondholders.JEA's subordinate lien bonds are payable from a subordinate lien on the net revenues of JEA's electric system. Subordinate lien bonds have a sum-sufficient rate requirement and adjusted net revenues must also be at least equal to 115% of debt service on the senior and subordinate lien bonds. There is a sum-sufficient additional bonds test. Subordinate lien bonds do not require a debt service reserve, which we consider to be a weak protection measure for bondholders.As of September 30, 2016, JEA had approximately $210.1 million aggregate principal amount of SJRPP Revenue Bonds outstanding under its First Power Park Resolution (the First Resolution), which are referred to as "Issue Two Bonds" and approximately $283.9 million aggregate principal amount of SJRPP Revenue Bonds outstanding under its Second Power Park Resolution (the Second Resolution), which are referred to as "Issue Three Bonds". Issue Two Bonds under the First Resolution are payable solely from and secured by a pledge of and lien on revenues of JEA's 80% ownership interest in the SJRPP, along with other available pledged funds, including contract debts that are payable as an O&M cost of the JEA Electric System and FP&L under a joint ownership agreement between JEA and FP&L. The respective payments of JEA and FP&L with respect to the SJRPP are several and not joint. Debt service requirements for Issue Three Bonds governed by the Second Resolution are the sole responsibility of JEA. The Second Resolution permits the use of a surety bond to satisfy the debt service reserve requirement and allows for issuance of variable rate debt with payment terms other than April 1 and October 1. Under the Second Resolution, the debt service reserve is a weak level of protection for bondholders in our view since it is established at maximum annual interest. The debt service reserve under the First Resolution governing Issue Two Bonds is more protective of bondholder interests since it is based upon average annual debt service. JEA's Bulk Power Supply System Scherer 4 Project issue is secured by a pledge of and a lien on the proceeds of the bonds; the revenues as defined in the Bulk Power Supply System resolution are all revenues derived from ownership and operation of the project. JEA is required to make payments from the electric system as an O&M expense into the Plant Scherer Project Revenue Fund for any output, capacity, use and service of the project at least equal to 115 percent of the aggregate debt service. The debt service reserve account is required to be at maximum annual interest, which we view as a weak protection measure for bondholders.
Use of Proceeds
The proceeds from the planned offering of Electric System Revenue Bonds, Series Three 2017A and Electric System Subordinated Revenue Bonds, 2017 Series A will be used to refund certain of JEA's outstanding Electric System Revenue Bonds and Subordinated Revenue Bonds, respectively, and in both instances to also pay for any related costs of issuance.
JEA is a municipal utility whose service territory covers Jacksonville, Florida (Duval County), and parts of three adjacent counties. It is split into three enterprise funds, including the Electric Enterprise; the Water and Sewer Enterprise Fund; and the District Energy System. The Electric Enterprise is comprised of the JEA Electric System, the Bulk Power Supply System, and St. Johns River Power Park System. Jacksonville is a major ground transportation center and is also considered a significant rail hub and has one of the largest ports on the South Atlantic Seaboard. The local economy is diversified among defense, transportation and distribution, financial services, consumer goods, information services, manufacturing and insurance sectors. Statistics from Moody's economy.com indicate that Jacksonville fares well versus the U.S., as it has been doing since the recession's end and slow gradual recovery.
The principal methodology used in this rating was US Public Power Electric Utilities With Generation Ownership Exposure published in March 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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