Debt, complexity of deal could push down city-owned utility's value, audit says
A draft of the financial audit being prepared for JEA by its financial adviser provides insight into how the city would move forward if it decides to sell the public utility to a private company.
One conclusion sums up the process.
“A privatization of the JEA enterprise would likely represent the largest and most complex municipal privatization in the United States,” the report reads.
JEA’s financial adviser, Public Financial Management, prepared the Feb. 2 draft, along with the ongoing audit, at the request of JEA board Chair Alan Howard.
Howard made the request at the board’s Nov. 28 meeting.
According to Public Financial Management, the need to evaluate JEA’s value is supported by “the rapidly changing nature of the utility industry.”
Although sales of municipal utility systems like JEA “have historically been quite rare,” JEA’s position could make it a desirable purchase for utility companies trying to expand their territories or an investment firm looking to make money on the deal.
While Public Financial Management acknowledges a wide gap between the potentially low- and high-end value of the utility, it does not provide the actual figures other than in the billions.
It does caution that because of obstacles that come with selling JEA’s assets, “complexity and uncertainty may reduce buyer interest and push potential valuations away from the high end of the ranges.”
One issue for JEA is the annual contribution it makes to the city and its estimated $4 billion in outstanding debt. A sale would require JEA to settle that.
It also has a 20-year power purchase agreement with Municipal Energy Authority of Georgia to pay for costs associated with its share of the capacity and energy output of Plant Vogtle, a nuclear power plant under construction that has experienced delays and cost overruns.
The report notes that “a change in control may require a complex restructuring of the contract,” since there are no provisions in the deal for a sale of JEA.
The report highlights the two likely categories of potential buyers.
The first would be a strategic buyer, which includes regulated utilities, independent energy companies and investors with utility assets in their portfolio.
The second is a financial buyer, such as a large investment or pension fund or a private equity firm whose primary goal is to use the purchase as a financial investment. In this scenario, the buyer could sell JEA’s assets after holding it for some negotiated period of time.
A purchase does come with significant risks, however. A new owner would not continue to have access to FEMA disaster grants, nor would it be exempt from paying property taxes on the land or other assets.
As an independent authority, JEA remits an annual contribution to the city in lieu of taxes, a figure expected around $116 million this fiscal year.
While the draft report details several variations of a potential sale, an “enterprise sale” is identified as the “primary focus for an analysis of JEA.”
This type of sale would include all of JEA’s assets being sold to a third party – either the strategic or financial buyer.
“This can result in an operation that is ultimately folded into an acquirer’s operation, or some independence in operation may result, including retaining a corporate headquarters in Jacksonville,” according to the draft.
One of the key takeaways from this early version of the audit is the process and timeline of a sale, which is likely to take years to complete.
The draft lays out six phases.
The first would be a commitment from the utility and the city to undertake the option of a sale. “This commitment is essential to generating the greatest level of interest among buyers,” the draft said.
A second phase includes preparing the documentation pertaining to JEA’s operation, legal issues and financial disclosures, similar to how it would prepare for a bond sale.
The third phase involves engaging advisers and resolving legal or regulatory issues. As the report explains, during this phase JEA will need to figure out if it wants to sell all its assets at once or in pieces.
JEA operates in three areas — electric, water and sewer and district energy systems. A sale could involve the transfer of all three, or a combination of those assets.
The fourth phase comprises indications of interest. JEA would need to determine which potential buyers would be willing to move ahead with a serious bid. JEA would make a comprehensive presentation to potential buyers.
The fifth phase is where the potential buyers formally proceed with their own due diligence and submit bids. It also includes narrowing down the buyer and negotiating terms.
The five steps could take at least five to nine months.
The final phase, which could take more than a year to complete, would be receiving the required regulatory approvals from City Council, the Federal Energy Regulatory Commission, the North American Electric Reliability Corp. and other regulatory bodies.
From there, the buyer would need to work through a transition so customer service isn’t interrupted.
The draft report says the sale of JEA would provide “substantial up-front net proceeds to the city” and that “current market conditions can be expected to provide for a greater net value of JEA to the city than in anytime past.”
However, the report says the sale of JEA “would be an enormously complex undertaking” that would “have quantifiable impacts on future taxes and payments received by the city and other governmental jurisdictions.”
Finally, the report underscores that operating a utility company is complicated in 2018.
“It may be more prudent to leave this business to larger, more nimble companies that have the ability to absorb risk and uncertainty” and that Jacksonville leaders will need to weigh the pros and cons of a potential sale.
Gerri Boyce, JEA manager of media relations, said in a statement the final audit is expected to take 60 to 90 days from the Nov. 28 board meeting.
“Work on the study and draft is incomplete and remains ongoing,” she said.
“Information contained in this draft is subject to change, could be added to or subtracted from, and may contain errors, and should in no way be construed to represent a final work product.”
Boyce said the final version of the audit is not on the JEA board’s Feb. 20 meeting agenda.