Approximately $1.61 billion of debt securities affected
New York, March 28, 2022 -- Moody's Investors Service has upgraded JEA, FL - Electric Enterprise (JEA) ratings as follows: the senior lien electric system revenue bonds to A1 from A2; subordinate lien electric system revenue bonds to A2 from A3, St. Johns River Power Park System (SJRPP) revenue bonds to A1 from A2, Bulk Power Supply System revenue bonds (Plant Scherer revenue bonds) to A1 from A2. Additionally, Moody's upgraded the utility's underlying long-term rating for Variable Rate Electric System Revenue Bonds (Senior Lien) to A1 from A2 while affirming the associated short-term VMIG-1 rating for those bonds. Moody's also upgraded the utility's underlying long-term rating for Variable Rate Electric System Revenue Bonds (Subordinate Lien) to A2 from A3 and upgraded the associated short-term rating for those bonds to VMIG-1 from VMIG-2. Concurrently, Moody's revised JEA's rating outlook to stable from positive.
RATINGS RATIONALE
Today's rating actions primarily reflect JEA's sound financial performance for fiscal years 2019-21, evidenced by three-year average financial metrics including strong liquidity and fixed obligation charge coverage (FOCC) ratio of 372 days and 2.86x, respectively, and an adequate adjusted debt ratio averaging 78.9%. These strong financial metrics are the result of a multi-year effort by JEA to materially deleverage as the utility has reduced its on-balance debt by nearly 55% or by $2.2 billion since 2012. The rating action also considers the governance changes implemented by JEA during 2020-21 as a key rating driver that addresses many of its governance related challenges through material personnel changes at the Board of Directors and across senior leadership positions. Improvements in governance and transparency are contributing to the good progress JEA is making towards reestablishing the trust of key constituents following settlement of litigation with Municipal Electric Authority of Georgia (MEAG Power) that eliminated the significant credit negative overhang which previously called into question JEA's willingness to abide by the take-or-pay "hell or high water" terms governing the Project J power purchase agreement (PPA) with MEAG Power. Further, the rating action recognizes the continuing improvement in JEA's carbon transition risk profile through the early retirements of its owned coal-fired generation plants.
These credit positive factors provide balance for JEA's most pressing credit challenge, which is tied to its indirect exposure to nuclear construction risk at the Plant Vogtle project through its 20-year Project J PPA with MEAG Power and the impact to the construction budget and the schedule owing to the multiple delays in construction completion which could now extend into Q-1 2023 and Q-4 2023 for Vogtle Units 3 and 4, respectively. While JEA has reasonably competitive rates versus its peers in Florida, it has plans to raise its rates by about 1.5% annually beginning in 2022 through 2026 to manage the increasing obligations under the Project J PPA as the FOCC ratio is anticipated to decline from historical levels over the next several years. Even with the planned rate increases, JEA's FOCC ratio is likely to steadily decline to about 1.6x by 2026 (from the robust 3.3x for fiscal year ended September 30, 2021), a level that remains within the "A" category range under our rating methodology. Like all utilities, JEA has also faced some challenges from the ongoing effects of the coronavirus pandemic, although sizable operating expense and debt service reductions have more than offset the impact of any lost revenue as the utility continues to maintain a strong liquidity profile.
The A1 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 electric system subordinate lien rating is A2, reflecting the weaker security provisions related to the electric system subordinate lien bonds. The VMIG-1 short-term ratings for both the variable rate senior lien electric system revenue bonds and variable rate subordinate lien electric system revenue bonds, respectively, reflect the short-term rating transition schedules for variable rate demand obligations supported by conditional liquidity facilities under the Moody's Rating Methodology for Variable Rate Instruments Supported by Conditional Liquidity Facilities.
RATING OUTLOOK
The stable outlook reflects JEA's existing cost competitiveness and very strong financial metrics which provide a cushion for the utility to absorb impending rate increases and higher debt equivalent take or pay costs under the Project J PPA. The outlook also considers JEA's improved relationship with MEAG Power following the settlement of litigation and good prospects for continued improvement in governance under a revamped board and management team that has been established during the past two years. The outlook further incorporates key rating constraints that remain, including lingering exposure to indirect nuclear construction risk at the Plant Vogtle project through JEA's 20-year Project J PPA which comes with a downward trajectory for JEA's FOCC ratio to settle at 1.6x owing to the increased obligations under the Project J PPA.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
- If Vogtle Units 3 & 4 are completed under the latest revised schedule and budget and JEA proves successful in its strategies for coping with the increase in payments to MEAG Power under the Project J PPA and resulting pressure on its FOCC ratio
- If JEA's revamped board and management team can achieve even further progress toward rebuilding the trust of key constituents - In terms of metrics, producing FOCC of at least 1.80x on a sustained basis after both new Vogtle units go into commercial operating status, while maintaining strong liquidity, balance sheet flexibility and cost competitiveness
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
- If there are further construction delays and cost overruns at the Plant Vogtle project materially beyond the latest revised schedule and cost to complete
- If JEA is unable to continue the good progress achieved to this point in reestablishing stability around governance - If JEA's financial flexibility declines as the Plant Vogtle project moves forward and payments to MEAG Power increase under the Project J PPA to cause a decline in the FOCC ratio to less than 1.5x for a sustained period
LEGAL SECURITY
As of September 30, 2021, JEA's Electric System had approximately $904.8 million of electric system senior revenue bonds outstanding. The Electric System 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 also have a debt service reserve requirement sized at maximum annual interest, which we consider to be a weak protection measure for bondholders.
As of September 30, 2021, JEA had approximately $523.6 million of Electric System subordinate lien revenue bonds outstanding. The Electric System 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, 2021, JEA had approximately $251.8 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". Debt service requirements for Issue Three Bonds governed by the Second Resolution are the sole responsibility of JEA. JEA is required to make payments from the electric system as an O&M expense into the SJRPP Revenue Fund for any output, capacity, use and service of the project at least equal to 115% of the aggregate debt service. 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.
As of September 30, 2021, JEA had approximately $81.9 million aggregate principal amount of Bulk Power Supply System revenue bonds related to its Scherer 4 Project. JEA's Bulk Power Supply System Scherer 4 Project issue benefits from 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% 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.
PROFILE
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.
METHODOLOGY
The principal methodology used in the long-term ratings was US Public Power Electric Utilities with Generation Ownership Exposure Methodology published in August 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1170209. The principal methodology used in the short-term ratings was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1057134. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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