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JEA advisers lay out utility sector changes driving ownership solicitation

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JEA advisers lay out utility sector changes driving ownership solicitation

The financial firms running the potential privatization or restructuring process of JEA advised the Florida municipal utility's board Oct. 22 that now is the right time to consider all options, given the changes sweeping the industry.

The presentation updating the board on the solicitation process by J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC, hired in July, included a recommendation that JEA executives maintain "a very clear view of how the market values the opportunity," said Todd Giardinelli, a managing director and global head of mergers and acquisitions at Morgan Stanley's power and utilities group.

Given the relatively few opportunities for M&A activity in the electric utility sector of late, many of the sector's big names have pursued a growth strategy that hinges on regulated infrastructure investments, J.P. Morgan managing director Jennifer Dooly said. With utilities' infrastructure investments nearly doubling in the past decade, many companies now find themselves challenged by having to balance the investment strategy with minimizing customer rate increases that had been offset by factors such as tax reform, inexpensive debt and low fuel costs.

"Utilities have to look to other opportunities to take advantage of economies of scale to continue investing in this critical infrastructure without customer rate pressure," Dooly said. "Scale and scope are going to be increasingly important to capture capital and operational efficiencies."

Lower cost of capital, greater operational and maintenance efficiency, technology innovation and more renewable generation are shaping to be the main disruptions in the industry, Dooly added.

Edward Manheimer, managing director of Morgan Stanley's power and utility M&A group, said renewable energy's cost and efficiency improvements, the growth of distributed generation, corporate sustainability targets and an increasing appetite for clean energy across customer classes are also driving changes at utilities.

With large utilities eyeing JEA as an opportunity to pursue economies of scale, and the Florida utility in need of capital to invest in modernizing its grid and generation portfolio, "it is timely and appropriate for JEA to undergo this process," Manheimer said.

Those shifts in the utility sector prompted JEA's board of directors to vote July 23 to allow Managing Director and CEO Aaron Zahn and his team to explore alternative ownership structures. That vote followed a presentation in May in which JEA management projected the utility could face a $2.3 billion cash shortfall in 2030 if it failed to take adequate steps to adapt to the sector's "technology disruption." Members of the utility's board and management team have pointed to JEA's status as a government entity as a major hurdle to pursuing strategies that nonmunicipal utilities can, such as creating joint ventures.

The utility opened its solicitation in August, requiring that all bids keep the utility's value to at least $3 billion, distribute at least $400 million to customers and protect certain employee retirement benefits. JEA has said capitalizing on the utility industry's evolution was essential to "future-proof" the utility.

The utility has narrowed its list to nine parties, including three investor-owned utilities that do business in Florida: Duke Energy Corp., Emera Inc. and NextEra Energy Inc. Emera is also involved in a separate bid with private equity firm Bernhard Capital Partners Management LP and Suez SA, a global operator of water and wastewater systems.

Other qualifying respondents include financial infrastructure company American Public Infrastructure LLC; water utility American Water Works Co. Inc., which recently expressed an interest in JEA's water and sewer business; Australia-based investment manager IFM Investors Pty. Ltd.; asset manager Macquarie Infrastructure & Real Assets Inc., a Macquarie Group Ltd. subsidiary; and a respondent that did not consent to releasing its name.

Giardinelli said JEA expects to receive revised replies from the nine parties by the end of November. JEA and its advisers will take a "deeper dive" into the bids, with the utility expected to have a recommendation between January 2020 and March 2020.