Jacksonville, Florida, and the city’s utility, JEA, escaped a third downgrade over a lawsuit contesting the legality of JEA’s contract to buy nuclear power from Georgia.
Fitch Ratings said Thursday that it will not lower Jacksonville's AA issuer default rating or its AA ratings on JEA’s debt because of legal opinions and court orders supporting JEA’s power purchase agreement with the Municipal Electric Authority of Georgia.
While Fitch’s decision is good news for the city and utility, spreads have widened in secondary trading on their bonds – a sign that may reflect uncertainty about the lawsuit filed Sept. 11 and a “hard” multi-notch downgrade by Moody's Investors Service last week, said Alan Schankel, managing director and municipal strategist for Janney Montgomery Scott LLC.
Both Moody's Investors Service and S&P Global Ratings downgraded JEA’s bonds in the last three weeks saying the lawsuit calls into question JEA’s willingness pay its debt.
Under the power purchase agreement, JEA is the sole obligor on the first 20 years of debt service for $1.4 billion of Project J bonds and $1.2 billion in Department of Energy-backed loans issued by MEAG to finance a portion of its ownership in two nuclear reactors under construction at Georgia’s Plant Vogtle.
Jacksonville and JEA filed a lawsuit Sept. 11 asking a Florida judge to void the PPA. MEAG filed a complaint in Georgia federal court Sept. 11 asking that the PPA be enforced.
“Fitch does not believe that the filing of litigation specific to this PPA represents a repudiation by the city and/or JEA of the PPA, or an unwillingness on the part of the city or JEA to pay its debts generally,” said Fitch analysts Andrew DeStefano and Michael Rinaldi.
“JEA's management has indicated publicly that it will continue to honor its obligations under the PPA unless and until such time as a court determines that the PPA is not valid,” they said, adding that the legal dispute appears to be isolated to one contract.
The Fitch analysts said any change in JEA’s intention to continue paying its obligations under the PPA “absent a court ruling striking down its validity would cause Fitch to reevaluate all relevant ratings.”
S&P lowered most of JEA’s ratings by one notch. Moody's went further, downgrading nearly all of JEA and Jacksonville’s ratings by three notches.
While Fitch said it did not believe the litigation represented a repudiation of the PPA or unwillingness to pay debts, market data says otherwise, according to Schankel.
Spreads for 10-year JEA bonds were 45 basis points over the AAA benchmark on Wednesday compared to 20 bps a month ago, he said.
Jacksonville’s special revenue bonds maturing in 2033 saw large block trades on Bloomberg Tuesday at rates that indicated a 37 basis point shift higher over a month ago, he said.
“I think the change in spread is meaningful, beyond market anomalies, likely reflecting both uncertainty related to litigation and the hard fact of a three-notch downgrade,” Schankel said.
In addition to the lawsuit, analysts have also said their rating decisions also factored in JEA’s Sept. 18 petition asking the Federal Energy Regulatory Commission to review the reasonableness of its PPA with MEAG, despite the fact that public power entities are exempt by law from FERC oversight.
Nearly 60 public power agencies and cooperatives, and industry associations, have filed protests and requests to intervene in the case because it could result in new regulatory oversight.
Some intervenors have asked FERC to accelerate its decision-making process because they said the pending case will have to be disclosed for upcoming bond issues.
On Oct. 2, JEA filed a motion in MEAG’s federal suit asking the court to take notice of the petition JEA filed seeking FERC’s “exclusive jurisdiction” over the power purchase agreement with MEAG.
If federal regulators agree to take jurisdiction over the power purchase agreement work on all litigation could be suspended.
