JEA utility sues its fired CEO and suspends senior executives

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The principal architect of the attempt to sell Florida's largest municipal utility to private interests lied about fiscal outlook to make his case for a sale.

JEA's former chief executive officer, Aaron Zahn, exaggerated fiscal problems at the city of Jacksonville-owned utility and the need for huge rate increases and layoffs caused, in part, by a heavy debt burden associated with a contract to buy nuclear power generated at Georgia's Plant Vogtle, according to a new lawsuit.

JEA filed a lawsuit against former Chief Executive Officer Aaron Zahn alleging that he lied about the utility's fiscal problems.

JEA filed a six-count complaint against Zahn, contending that he misrepresented the utility as being in “death spiral” because of declining sales, increasing competition, and debt, all positions that Zahn posited allegedly toward "driving JEA toward a flawed sale process."

The suit said Zahn proposed and obtained the utility board's approval for a stock-like Performance Unit Plan to benefit JEA employees, as well as lucrative executive employment agreements for himself and other members of his senior leadership team.

Zahn, in a breach of his fiduciary duties, knew or should have known those proposals violated Florida law, according to the suit filed in the Fourth Judicial Circuit Court in Duval County Friday.

"Zahn’s fraudulent scheme has left in its wake criminal and legislative investigations; credit downgrades by bond rating agencies; massive bills from law firms, lobbying groups, and investment bankers; and a damaged reputation from a breach of the public’s trust," according to the 21-page complaint filed by JEA's outside law firm, Nelson Mullins Riley & Scarborough LLP, and Jacksonville's Office of General Counsel.

JEA has a 20-year power purchase agreement with Georgia’s MEAG to buy nuclear-generated electricity from Plant Vogtle.

The lawsuit contends that Zahn stated that the liability from the Plant Vogtle PPA was a reason for JEA to pursue a sale, but he “mischaracterized the impact of the power purchase agreement to JEA.”

“Zahn failed to disclose to the board that upon a sale, the obligations under that agreement could remain with JEA and, if so, would be passed on to JEA’s ratepayers,” the suit said.

JEA was considering retaining the Vogtle contract liability for another reason, according to a draft transmission agreement posted by the utility on a repository for documents related to the now-failed privatization effort.

“JEA intends to continue the Vogtle PPA until its conclusion or termination so as not to cause any adverse tax effects on bondholders,” said the document prepared by the Pillsbury Winthrop Shaw Pittman LLP law firm.

In addition to breach of fiduciary duty, the lawsuit alleges that Zahn committed fraud and breached the public trust. It asks the court to void Zahn's employment agreement.

JEA is also requesting a jury trial and unspecified damages.

John Mullen, Zahn's attorney, said JEA's lawsuit is "nothing more than a disguised press release in response to Mr. Zahn’s demand for arbitration."

On May 8, Zahn requested arbitration with the American Arbitration Association seeking to enforce terms of his employment agreement, according to the suit. JEA has asked the court to stay, or disallow, arbitration while it litigates the legality of the agreement.

"The claims of the lawsuit have no factual basis and are a rehash of largely disproven conspiracy theories," said Mullen, a partner at Phelps Dunbar LLP who specializes in labor and employment law as well as complex commercial litigation and arbitration.

Mullen contended that Zahn is being "politically scapegoated and at the level of political interference now being perpetrated at JEA."

The failed privatization effort is under investigation by a special Jacksonville City Council committee and federal agencies. In early February, JEA said the sale process cost the utility an estimated $13 million, but that a number of invoices were still under review.

JEA's former board of directors canceled the utility's proposed privatization, which was known as an "invitation to negotiate" to potential buyers, on Dec. 24.

On Jan. 28, Zahn was fired with cause because of irregularities the city's Office of General Counsel said occurred during the failed sale process. After the utility board fired him, all but one member resigned. That member's term subsequently expired.

On Tuesday, interim Chief Executive Officer Paul McElroy placed eight senior employees on administrative leave with pay because he said they had been "complicit or implicitly" involved with the failed utility sale process or development of the Performance Unit Plan.

McElroy said he reviewed testimony and spoke to people about the sale and proposed performance plan, and he told the suspended employees that "nothing I’ve read or heard clarifies your role, real or perceived in a positive light."

Those placed on leave, McElroy concluded, had "lost the confidence of management, employees, City Council, the media and the community.”

They are Energy Systems General Manager Caren Anders; Water and Wastewater Systems General Manager Deryle Calhoun; Chief Information Officer Shawn Eads; Human Resource Officer Jon Kendrick; Chief Supply Chain Officer John McCarthy; Chief Energy and Water/Wastewater Planning Officer Steve McInall; Chief Environmental Officer Paul Steinbrecher; and Chief Customer Officer Kerri Stewart.

McElroy appointed interim employees to replace those who were placed on leave.

A JEA spokeswoman said McElroy talked to analysts at two bond rating agencies about the suspensions on Tuesday, and had a call into a third.

Energy Systems General Manager Caren Anders is among the senior JEA executives suspended this week.

A new seven-member utility board was appointed on April 14, and is reviewing the proposed budget for fiscal 2021, which will include a record $198 million transfer of revenue to Jacksonville's general fund.

As planned now, there will be no customer rate increases for the utility's electric system or its water and wastewater systems. The budget must be approved by the City Council.

"We're not in a death spiral, for sure," Chairman John Baker said at the utility board's May 26 meeting, after reviewing the proposed spending plan. "I think the budget is thorough. It's not wildly optimistic nor wildly pessimistic."

McElroy said JEA officials met virtually with Moody's Investors Service on May 22 and also planned to meet with S&P Global Ratings and Fitch Ratings. The meetings were to introduce the utility’s new leadership.

Baker said he was encouraged to hear the response from Moody's about plans for stabilizing the utility. He said there was also discussion about the lawsuit JEA and the city of Jacksonville filed in September 2018 in an attempt to strike down an agreement with Georgia's MEAG to purchase nuclear-generated power produced at Plant Vogtle.

"I can tell you at least Moody's...wants us to resolve Plant Vogtle and we need to figure out a way sooner rather than later to have a shade committee meeting so that we can all be brought up and have a strategy and be of one mind of where we go," Baker said. A shade meeting allows board members to meet in private to discuss litigation.

"Moody's took the filing of that lawsuit [against MEAG] as an indication that we weren't good for our word and that's why they knocked us down a notch," Baker continued. "I think that's something we ought to work on."

The litigation led Moody's to downgrade nearly all Jacksonville ratings in October 2018. Jacksonville’s issuer credit rating was lowered to A2 from Aa2. JEA’s senior lien electric system revenue bond rating was lowered to A2 from Aa2.

Moody's said in a credit opinion June 1 that the JEA electric enterprise system's A2 rating and negative outlook continues to reflect governance and social risks relating to the ongoing lawsuit and "significant" ongoing organizational changes.

Moody's said JEA has risk exposure to the twin nuclear reactor project under construction at Georgia's Plant Vogtle through the 20-year PPA with MEAG Power.

"Despite significant construction delays at the Vogtle project, JEA is making payments to MEAG, while seeking to mitigate the expensive PPA through litigation," said Moody's analyst Kevin Rose. "While JEA commits to continue paying as billed by MEAG under the PPA unless a court invalidates the PPA, the ongoing litigation calls into question JEA's willingness to abide by the take-or-pay 'hell or high water' terms governing the PPA."

Rose said there also are social risks tied to the novel coronavirus, the respiratory illness that causes COVID-19.

"JEA, like most of its peers, will be challenged to cope with the effects of the coronavirus pandemic, including likely reductions in load demand and increase in bad debt expense," he said. "These credit negative characteristics are partially balanced by JEA’s use of rate autonomy to help achieve financial objectives while maintaining competitive retail rates."

JEA also maintains strong liquidity and has significantly decreased its debt, diversified its power supply and reduced its carbon footprint, Rose said.

In March, S&P cut JEA's senior water and sewer bond rating to AA-plus from AAA and its subordinate debt to AA from AA-plus, saying the moves reflected governance instability and evidence of weak controls following the firing of Zahn, termination of Chief Financial Officer Ryan Wannemacher, and the resignation of the utility board members.

S&P affirmed its A-plus rating on the senior-lien electric system debt, which was downgraded from AA-minus in 2018 over the lawsuit against MEAG and rising costs associated with the Vogtle Plant project. The ratings continue to have negative outlooks.

Fitch assigns AA ratings to JEA's electric and water systems debt. The outlook is stable.

As of Sept. 30, JEA's electric system had $1.6 billion in outstanding fixed rate debt; $406.4 million of synthetically fixed rate obligations; and $184.5 million of variable rate debt.

The water and wastewater systems had $1.16 billion of outstanding fixed rate bonds; $162.2 million of variable rate debt; and $110.2 million of synthetically fixed rate debt.

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Energy industry Lawsuits Municipal utility districts Revenue bonds Ratings JEA City of Jacksonville, FL Florida