Chairman Alan Howard speaks at a March 20 meeting of the JEA board of directors.
Top officials at the Jacksonville, Fla., municipal utility said March 20 that privatizing their power company would help it survive a changing market. But they also acknowledged the deal value could be dragged down by JEA's exposure to an over-budget, behind-schedule nuclear project in neighboring Georgia.
Members of the JEA board held a workshop to kick off their official consideration of whether to take the utility private, be it through recapitalization, a sale to a financial sponsor, or a purchase by one or more strategic acquirers, either within or outside of Florida.
While Managing Director and CEO Paul McElroy walked the board through challenges facing utilities across the country — stalling sales due to energy efficiency, along with potential disruption by renewable generation and technological developments — he focused on a recent trend specific to municipal utilities.
According to McElroy, the past year has shown him that the combination of low rates and high equity values has given investor-owned utilities a capital cost advantage over city-run companies. Municipal utilities were historically cheaper to run than their publicly-traded competitors, he said, but that was not the case for JEA in 2017.
"That is a momentous change," Board Chairman Alan Howard said. "I can't believe that's ever happened before in history."
CFO Melissa Dykes agreed with that characterization, saying that "never in my career" has she seen this play out. The shift applies not just to comparing companies' costs of capital, she said, but also their costs of capital to debt.
McElroy clarified, however, that this trend is not prompting JEA to move faster toward a sale. "I think this is just a data point, but it's a data point that covers a significant portion of our business," he said. "The market has shifted significantly here."
This shift is calling into question JEA's ability to continue contributing $117 million annually to Jacksonville's city coffers. "I can't help but see that there's tremendous pressure," Howard said. "Am I missing something there, absent tremendous rate increases?"
JEA's current integrated business model is being challenged, McElroy said: "Is there ultimately a different model that is just distribution and the wires business that can achieve some level of sustained growth?"
"I personally question those people who look at JEA and said it was a golden goose before it's a golden goose," Howard said. "I'm not sure it'll always be a golden goose. There are some real headwinds."
CEO Paul McElroy speaks at JEA's March 20 board meeting.
Tampa, Vogtle influences
JEA is looking to two past developments — one inspiring, one fraught — to inform its thinking.
Tampa Electric Co. was acquired in 2016 by Canadian firm Emera Inc. in an all-cash deal worth $10.4 billion, including debt.
Although neither of those companies are municipal utilities, the purchase "was really an eye-opener, which suggested there was a tremendous amount of locked-in value at JEA that had not been vetted to the community," Howard said.
"It could be the right move at the right time with potentially transformative consequences for our city," he added. According to a consultancy hired by the JEA board, the utility could be valued anywhere from $7.5 billion to $11 billion. This has prompted some of the biggest names on Wall Street to jockey for handling a sale.
But a big concern among board members is JEA's connection to the Vogtle nuclear plant expansion, which is years behind schedule and billions of dollars over budget.
JEA has a power purchase agreement, or PPA, with the Municipal Electric Authority of Georgia, one of Vogtle's four owners. The authority has said that despite the March 2017 bankruptcy of then-project manager Westinghouse Electric Co. LLC, its contract with JEA remains intact.
When a departing board member suggested in November 2017 that JEA should go private, the utility came under scrutiny from equity analysts and rating agencies. The next month, Moody's Investors Service downgraded its outlook for JEA to "negative" for its Vogtle agreement.
The consultancy hired by JEA said the Vogtle connection could lower the value of a transaction by $1.2 billion, which Dykes said is the amount of tax-exempt debt issued that is associated with the PPA. She added, however, that "it's more complicated than just subtracting that amount" from a JEA valuation.
McElroy said in retrospect, the PPA was "a terrible idea," but Dykes argued it could be more valuable to JEA if a future presidential administration purses carbon regulation.
JEA is exploring options to exit the PPA while still honoring the contract, according to McElroy and Howard. If the PPA is kept, they said, it could be ring-fenced in a potential purchase.
Jacksonville's city council ultimately has final say over whether a deal can proceed, with a status update scheduled for June 26.