Draft study on JEA sale: Utility has more “net value” than ever before

Jacksonville, FL — The sale of JEA could bring a greater net value to the City than any time in the past- but the upfront proceeds are just one factor in what would be an incredibly complex deal.

WOKV has obtained a draft of a JEA Valuation Report, which is being assembled by Public Financial Management. The report was taken on at the request of Board Chair Alan Howard, after the prior Chair posed the question late last year of whether the people of Jacksonville would better be served by a private entity. The Report is still in the works, and it's not yet clear when it will be completed and presented to the JEA Board, but the prospect of a sale is something that's drawn a lot of questions and concerns from the City Council and JEA employees in recent days. Much of that was triggered when our partner Action News Jax reported that JEA offered some employees incentives if they agreed to stay on in the event of a sale, even though that offer has since been rescinded.

The draft makes it clear that PFM is not making a recommendation on whether it’s in the City’s best interest to sell, retain, or come up with a modified arrangement. Instead, they discuss various things that must be considered in making that decision- and those questions go beyond just a dollar amount.

PFM says the privatization of JEA “would likely represent the largest and most complex municipal privatization in the United States”, and it would take over a year and a half to complete. JEA would have to ensure operations continue in a safe and reliable manner through any transition, there would be multiple levels of regulatory approval, the utility could face trouble filling positions during a sale process, there are a large number of contracts JEA is involved in which would need to be reworked, and the fees for professional assistance through the complex process would likely be steep. Amid these concerns, though, is the belief that there would be significant initial net proceeds.

“Current market conditions can be expected to provide for a greater net value of JEA to the City than at any time in the past,” the draft report says.

PFM further says many of the concerns would likely be able to be mitigated through the terms of the sale, such as requiring the buyer to retain employees for a certain period of time, or locking in utility rates for a term. The draft report adds, however, that more terms stipulations would complicate the deal, and could work against JEA’s value.

Local presence is another key factor. The draft report says J.D. Power has rated JEA’s customer service as excellent, and the American Public Power Association has designated them as a Reliable Public Power Provider, for safe and reliable electric service. They’ve also continually invested in capital improvements including hardening their system and replacing pipes. They’re also partners with the City on many projects, including the septic tank phase out, LED street light conversion, and more. Despite all that, the report questions if it’s “prudent” for the City to continue as it is.

“It is a business that is changing rapidly due to technology and market forces. It may be more prudent to leave this business to larger, more nimble companies that have the ability to absorb risk and uncertainty,” the draft report says.

The report notes that the City has examined this before, but the utility market is different now than when the utility was formed, and even from when this was last studied just a few years ago. Changes in JEA’s business outlook and financial structure, have also made them more appealing to a potential purchaser, according to PFM, while their debt reduction and improved operations have increased their value.

Because this is a draft, the range of possible value is not yet available. While value is important, PFM warns that the highest possible up-front price could mean less than optimal outcomes for customers in the long run. Any value will also likely be offset by liabilities, including $4 billion in debt. JEA would also not be eligible for federal and state assistance it can currently receive, in the event of a natural disaster like a hurricane.

JEA’s contribution to the City budget is still another factor. PFM estimates JEA will contribute $116.6 million in a direct contribution to the City in lieu of taxes in FY 18. It further estimates JEA will pay $39.5 million through the franchise fee and $88.5 million in public service taxes, also in FY18. PFM says the anticipated property tax revenue that a buyer would pay in lieu of the direct contribution would likely be short of what JEA would provide.

There are also many different ways the deal could go down, which starts with a range of options for who would be looking to buy JEA in the first place, and whether the electric, water and sewer, and district energy interests would be sold together or separately. There are also options to retain ownership and contract out services, or even recapitalize through an IPO. Privatization would come with guarantees for investors and shareholders- and it would likely be up to ratepayers to make up any shortfalls.

There’s no exact timeline, but PFM expects the process would be lengthy, and must start with a clear commitment. The draft report says prospective buyers need some level of comfort in order to put in the due diligence, so there would need to be a consensus that a sale is an option. It’s projected it would take five to nine months to make it all the way through final bids, and more than a year to get all the needed regulatory approvals.

JEA says this will not be on the February Board meeting agenda. There’s no timeline yet for when the report will be finalized and presented to the Board.