JEA and the companies interested in restructuring the Jacksonville, Fla., municipal utility will likely be able to move forward with ongoing negotiations after JEA fired its CEO, but Wall Street analysts say the utility has its work cut out for it to persuade local leaders and ratepayers that a new ownership structure, including privatization, will benefit all parties.

While recent opposition to a potential sale may not be shocking, Guggenheim Securities LLC analyst Shahriar Pourreza said "it's going to be challenging" for JEA and the winning party to bring ratepayers, who will have to vote in a referendum to approve any full or partial sale of JEA, on board. He added that "there are a lot of emotional attachments" for municipal utilities up for potential new management like JEA or Santee Cooper, legally known as South Carolina Public Service Authority.

"I think the probabilities of getting JEA done are more than 50%. It's not 100%, it's not 95%, it's not 75%," Pourreza said in a Dec. 20 interview.

In Pourreza's view, the key players for JEA's solicitation are NextEra Energy Inc., with flagship utility Florida Power & Light Co. operating adjacent to JEA, and American Water Works Co. Inc., which expressed an interest in JEA's water and sewer business. Pourreza said this is partially because "the competition for JEA is likely to be a little less fierce than Santee Cooper."

"Given JEA's financial condition, someone like NextEra can give enough of an attractive concession, which they are not shy to do, then I think there is a possibility for a deal to be had," Pourreza added.

After JEA's board of directors voted on Dec. 17 to terminate Managing Director and CEO Aaron Zahn for several ethics violations, the board declined to pause or cancel its solicitation for alternative business strategies to transform the government-affiliated entity, despite calls from JEA board members and city leaders including Mayor Lenny Curry to reconsider the inquiry.

As of October, JEA has nine remaining offers on the table: investor-owned utilities Duke Energy Corp. and Emera Inc. have submitted individual proposals. Emera is also part of another bid with private equity firm Bernhard Capital Partners Management LP and Suez SA, a global operator of water and wastewater systems.

Other respondents that remain in the solicitation include financial infrastructure firm American Public Infrastructure, LLC; Australian investment manager IFM Investors Pty Ltd.; asset manager Macquarie Infrastructure & Real Assets Inc., part of Macquarie Group Ltd.; and a respondent that did not consent to releasing its name.

Glenrock Associates LLC analyst Paul Patterson said the change in management and Jacksonville city leaders' growing opposition underscores the utility's "challenged history." JEA previously considered privatization in late 2017, sparking major interest from Wall Street, but later terminated the process amid criticisms from Curry, city officials and the public.

"To a certain degree, I don't think any of the large utilities have been distracted" by JEA's political issues, Patterson said in a Dec. 18 interview. It is not unusual for utilities operated or regulated by local governments to see pushback from politicians on possible ownership changes, according to Patterson, so the companies still in negotiations with JEA may not be too concerned.

"I don't think they've been sitting on the edge of their seats trying to figure out what to do because of this," he added. "You're getting involved in things that aren't cut-and-dry corporate M&A."

JEA will still need to be mindful about how it proceeds with the rest of the solicitation, Patterson said. The board of directors will meet on Jan. 28, 2020, when board members will evaluate all possible scenarios that JEA could pursue instead of the solicitation team's recommendation. The board will also assess all nine negotiating offers from the remaining participants.

"That doesn't mean they can do whatever they want to do and people will always be there to buy," Patterson said. "If they come up with something wacky, then it might have an impact."

NextEra Energy, American Water Works, Suez SA, IFM Investors and Macquarie declined to comment on how the recent developments affect their negotiations with JEA, citing the solicitation's legal terms. Bernhard Capital and Emera did not respond to a request for comment. American Public Infrastructure could not be reached for comment.

"Duke Energy has a keen interest in the economic vitality of Florida, given our long-standing history in the state," spokesperson Catherine Butler said in a Dec. 18 email.