JEA downgraded because of governance instability
Florida's largest public utility in Jacksonville has lost its stellar rating because of govenance issues following a recent failed and controversial attempt at privatization.
S&P Global Ratings cut JEA's senior water and sewer bond rating to AA-plus from AAA and its subordinate debt to AA from AA-plus. The outlook is developing.
The downgrades affect $1.15 billion of senior water and sewer debt and $224 million of subordinate obligations.
"The downgrade and developing outlook on the water and sewer system bonds reflect recent events suggesting governance instability and evidence of weak controls," said S&P analyst Edward R. McGlade.
Those events include the JEA board of directors firing managing director and chief executive officer Aaron Zahn on Dec. 17 because of irregularities that occurred during the failed sale process, the termination of chief financial officer Ryan Wannemacher on Dec. 27, and the resignation of five utility board members on Jan. 28.
JEA is operating with an interim CEO and CFO. Mayor Lenny Curry has nominated a new board, but the members must still be approved by the city council.
"In our view, these events are not in keeping with the former rating," McGlade said. "The absence of key executives and a board and uncertainty as to who their successors will be could frustrate strategic initiatives and the ability of the utility to move forward with its core functions."
A Jacksonville City Council committee is investigating what went wrong during the privatization effort, which has cost the utility an estimated $13 million. A federal investigation is also underway.
"We believe both management and the board will need to rebuild public trust, which has eroded as a result of the failed privatization attempt and the disclosure of the initiative's high costs for consultants and severance payments," McGlade said. "Unless addressed, this erosion of trust can translate into a loss of customer confidence and support, which could impair JEA's credit quality if it encounters resistance to rate adjustments or its implementation of strategic initiatives."
With regard to JEA's electric system, S&P affirmed its A-plus rating on the senior-lien, fixed-rate debt, the A rating on subordinate-lien obligations, the A-plus rating on senior variable-rate demand bonds, the A rating on subordinate variable-rate bonds, and the A-1 rating on commercial paper.
"JEA's robust financial metrics provide support for the utility's long-term credit quality and current ratings," S&P said.
The outlook on all of the electric system debt remains negative, and reflects JEA's exposure to its power purchase agreement related to the construction of two nuclear reactors in Georgia, S&P said. The negative outlook also takes into consideration the ongoing federal lawsuit in Georgia in which JEA and Jacksonville are attempting to abrogate the PPA.