OREANDA-NEWS. Fitch Ratings has upgraded the rating on the following bonds of Jacksonville Beach, FL (the city) to 'AA' from 'AA-':

--$18.1 million utility revenue refunding bonds, series 2010.

The Rating Outlook is Stable.

SECURITY

Outstanding series 2010 bonds are secured by net revenues of the combined electric, water and wastewater system.

KEY RATING DRIVERS

SOLID COMBINED UTILITY: Jacksonville Beach owns and operates a combined utility system providing retail electric, water and wastewater services to the city of Jacksonville Beach, FL, and surrounding areas. The service area is small but stable, with no growth pressures, capacity or supply constraints or concentration in customers and sales.

STEADILY IMPROVED FINANCIAL METRICS: The upgrade to 'AA' reflects the steady improvement in the financial and debt metrics of the combined utility system. Fitch-calculated debt service coverage has averaged a strong 3.9x over the last five years, while liquidity has increased from 288 days of cash on hand in fiscal 2012 to 382 days in 2015. Median ratios for the former rating notch are 2.46x and 216 days, respectively.

FAVORABLE DEBT PROFILE: The utility's trend of deleveraging has continued, as the system remains committed to funding its capital needs entirely from accumulated reserves. Debt per customer and the ratio of adjusted debt to funds available for debt service (4.4x) are consistent with rating category medians.

SUFFICENT POWER SUPPLY: The electric system participates in Florida Municipal Power Agency's (FMPA) All-Requirements Power Supply Project ('A+'/Stable Outlook) and St. Lucie Project ('A'/Stable Outlook). The projects collectively provide the city with a reliable, competitively priced power supply sufficient to meet future needs.

FAVORABLE RATE FLEXIBILITY AND STRUCTURE: Affordable electric, water and wastewater rates compared to surrounding utilities and relative to residents' income levels provide the city with ample flexibility. Additionally, rate structures of the combined utility - enabling automatic and periodic rate adjustments - facilitate timely cost recovery.

RATING SENSITIVITIES

ABILIITY TO SUSTAIN PERFORMANCE: The rating on Jacksonville Beach, FL's utility revenue bonds reflects Fitch's expectation that the utility will sustain financial metrics, including cash on hand, consistent with current levels and projected performance. Weaker debt service coverage or the depletion of cash would result in downward rating pressure.

HEAVY GENERAL FUND RELIANCE: Transfers from the electric fund account for a significant proportion of the city's total general fund income. While the amount transferred each year has thus far remained manageable, escalation beyond current levels would be viewed negatively, particularly if the combined utility's financial metrics diminished as a result.

CREDIT PROFILE

Jacksonville Beach owns and operates a combined utility system serving nearly 34,500 customer accounts on a retail basis. The city's electric utility generates 90% of the combined system's total annual revenue. Water treatment and distribution as well as wastewater collection, treatment and conveyance provide the balance of system revenue.

The electric system purchases all of its power from FMPA's All-Requirements and St. Lucie Projects (ARP). The city is bound to the ARP project by a rolling 30-year power supply contract. Participation in the St. Lucie project is pursuant to a take-or-pay power sales contract that extends through the life of the project's related debt and includes a 25% step-up of each participant's original entitlement share in the event another participant member defaults on its obligation.

The ARP load is served by a fuel supply mix that is approximately 80% natural gas derived mostly from ARP's owned resources. The balance of ARP's load is served through owned and purchased capacity consisting of coal, nuclear and renewable resources. FMPA officials expect the project's existing capacity will be sufficient to meet future load growth as well as an 18% reserve for peak days through at least 2023.

CONSISTENTLY FAVORABLE FINANCIAL PERFORMANCE

The upgrade to 'AA' reflects the steadily improved financial and debt metrics of the combined utility system. Fitch-calculated debt service coverage has averaged a strong 3.9x over the prior five years, while liquidity has increased from 288 days of cash on hand in fiscal 2012 to 382 days at fiscal year-end 2015. Median ratios for the former rating notch are 2.46x and 216 days, respectively.

Fitch expects similar financial results will continue based on Jacksonville Beach's current financial forecast and capital program ending in 2021.

Unrestricted cash and investments totaled $78.3 million at the close of fiscal 2015, providing a robust 382 days of cash on hand. Coverage of full obligations, which includes general fund transfers and purchased power costs, has remained satisfactory at 1.5x, just below the median ratio for the 'AA' category.

MANAGEABLE CAPITAL PROGRAM AND FAVORABLE DEBT PROFILE

The size and scope of the combined system's five-year capital program is relatively unchanged from prior years, and remains very manageable. Projected spending through fiscal 2021 totals $42.8 million, split between the electric system ($31.1 million) and the water and wastewater systems ($11.7 million). Planned projects focus primarily on transmission upgrades and maintenance of system assets.

The capital plan will be funded from excess operating cash flow and should not require additional debt issuance. Outstanding debt consists only of the series 2010 bonds, which mature on Oct. 1, 2020.