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Privatization talks are 'dead,' Vogtle dispute resolvable, new JEA chief says

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Privatization talks are 'dead,' Vogtle dispute resolvable, new JEA chief says

➤ 'Absolutely' possible to resolve Vogtle contract dispute

➤ New value emphasis meant to facilitate debt payback

➤ JEA striving to lead 'paradigm shift' for public power

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CEO Aaron Zahn.
Source: JEA

Aaron Zahn, a former sanitation technology developer and private equity executive, was appointed the permanent CEO of JEA, Florida's largest municipal utility, in November 2018. The Jacksonville, Fla., power provider faces major challenges, including trying to exit a key agreement with an owner of the troubled Vogtle nuclear plant expansion, as well as the aftermath of scuttled privatization talks that Zahn has described as "toxic." JEA is also working to pay off $4 billion in debt and move into a new headquarters.

S&P Global Market Intelligence spoke with Zahn several weeks after starting his new position. The following is a condensed and edited version of that interview.

S&P Global Market Intelligence: Do you see a way for JEA and MEAG Power to resolve the dispute over the Vogtle power purchase agreement?

Aaron Zahn: Absolutely. What a lot of people don't know is that I was actively working throughout the summer [of 2018] to try and find an amicable, mutual resolution on a commercial basis. And ultimately when we were served, we were forced into the legal posture. We didn't initiate that, but it certainly forced our hand relative to needing to establish whether or not we have the appropriate authority not just to be in the contract, but to continue. It's not whether we agree or disagree on the project; that much I think is already clear for everyone.

What's next for JEA in its new strategic framework? Is a privatization possible?

As far as I'm concerned, the discussion's dead. What we need to do is define what the business looks like if we stay status quo, and what we can do within the construct of being a public, government entity. It has some benefits relative to freedom on rate structures and regulatory oversight. There are also some significant hindrances in terms of restrictions on joint ventures and restrictions on public data, and they inhibit some things we might otherwise do if we were private.

Then the next question is what the appropriate capitalization structure is to allow you to maximize value for the community, the customer, the environment and economic development.

At the end of the day, what I can tell people is if it ever comes up again, it'll come up as a more strategic conversation that is less politically charged; one that has a significant amount of data around it. But at this point in time as a management team, we're not evaluating it at all.

Your emphasis on value and profitability could be seen as setting up JEA as an M&A target.

The moment you take on debt from a third-party provider, if you aren't focused on profitability, you're not fulfilling your fiduciary responsibility that you owe to those bondholders. Up until 2008, JEA's revenues were growing 3% to 4% year-over-year for the last 120-plus years. And for the last 10 years, we've seen sales decline on the energy side.

So when we have debt that's outstanding for 30 years or 40 years, yeah, it should be a significant concern to the board and the management team. We are focused on profitability to ensure we're doing what's in the best interest of the people we borrow money from. If we were completely debt-free, it'd be a different story.

Do stakeholders and others in Jacksonville understand that notion?

No, not all of them. It's one of the reasons why I've been extremely busy talking to my employees, our city council, our mayor, our different customer bases — helping them understand this repositioning of value.

What people can understand is when I say to them, "Look, do you want customer value to go up or down?" OK, pretty straightforward. Then, "Do you want financial value to go up or down?" That is definitely the piece with the most charge around it. You explain to them that value doesn't necessarily mean you're trying to tie it to a stock price, as our contribution to the city comprises over 10% of its annual budget.

I would say we are in a paradigm shift for public power. We're the only one really out there radically, transparently saying it this way. But it's for a specific reason, and I think we're afforded that luxury due to the privatization conversation. So I understand why people tie the two together, but I look at it as the profitability-and-value focus being a result, not the driver, of the privatization conversation.

What is your outlook of the power sector?

We've really pivoted the business to start thinking about the energy pie. We are certainly the dominant last-mile provider of energy at this point in time, but our consumers are starting to generate and utilize energy in a different way, whether that's natural gas consumption or solar production or microturbines or even hydrocarbons. Jacksonville's an epicenter of LNG given our port.

One of the things we're starting to say is how we can take our dominant position and pivot it to continue to provide that last-mile energy service in a way customers are going to expect over the next 10 to 20 years. I think that's something the market's been struggling with, and I'm not sure there's a ton of utilities out there leading it.