JEA will bring deal to convert variable-rate debt to fixed

Jacksonville, Florida, public utility JEA plans to bring $476.6 million in electric system revenue bonds next week in a deal designed to sharply reduce the system’s exposure to variable-rate debt and derivatives.

“This transaction will result in a significant simplification of JEA’s Electric System balance sheet,” the utility said in an online investor presentation. “Upon closing of the 2024A Bonds, JEA’s Electric System debt portfolio will consist of primarily fixed rate debt.”

JP Morgan will be the lead underwriter on the deal, which is scheduled to price Tuesday. Ramirez & Co, RBC Capital Markets, US Bancorp, Wells Fargo Securities will also underwrite the deal.

The bonds will refund several senior and subordinate bonds and fund swap termination payments.

As of June 30, JEA’s electric system exposure to swap termination payments was $21.2 million, according to the preliminary official statement.

There will be two series of variable rate bonds outstanding after the bond sale.

The deal comes as the enterprise puts old controversies and troubles in the rear view.

“The two drags on the credit have been stabilized,” Muni Credit News Joseph Krist said.

“The management issues which accompanied the effort to privatize the utility have been put to bed. The other is the effort to reconfigure the relationship with MEAG. With the resolution of that litigation, the authority’s perceived willingness to pay is no longer an issue,” he said.

“This has allowed the focus to be on operations which generate solid numbers,” Krist said. “Yes, costs will go up but the rate base can afford it.”

JEA signed a deal with Municipal Electric Authority of Georgia in 2008 to purchase electricity from two nuclear units MEAG and other utilities planned to build. With the Vogtle units’ 3 and 4 construction costs overrunning projections, and JEA obligated to accordingly pay more for the expected electricity, in fall 2018 JEA and the Jacksonville city government filed suit to escape JEA’s contract with MEAG.

A judge ruled against one of JEA’s arguments and JEA reached a settlement with MEAG maintaining its 20-year electricity purchase commitment. The settlement gave JEA the option to continue to buy the electricity beyond 20 years but required it to pay MEAG $1 million a year for 20 years.

In the meantime, in 2019 JEA’s management sought to sell JEA to outside private entities. A new CEO decided to end the solicitation process in December 2019. Concerns were raised about the prior CEO’s qualifications to run JEA and about contractual provisions that would have paid him and other senior management substantial sums if JEA’s sale had gone through.

Vogtle Unit 4 entered commercial operation in April, following Unit 3, which has been online since 2023.

“Many of the prior downgrades and negative outlooks for JEA derived from its association with the Municipal Authority of Georgia, the construction of the Vogtle nuclear units 3 and 4 and JEA’s contractual commitment to pay the first 20 years of debt service on MEAG’s Project J debt,” said Howard Cure, Director of Municipal Bond Research at Evercore Wealth Management.

“Completion of the units now enhances JEA’s transition to lessen carbon pollution risk along with the early retirement of JEA owned coal-fired generation plants and the transition into solar generating facilities,” he said.

“Governance issues, including termination of the CEO and CFO and full replacement of the board members, also stemming from the nuclear projects, has come to an end and should instill more confidence not only with bond holders but with other important constituencies such as rate payors, regulators and the political establishment,” Cure said.

JEA provided about 12.4 billion kilowatt-hours to customers primarily in Jacksonville in fiscal 2023. Of this, 60% comes from natural gas, 5% from coal, petroleum coke, or biomass, 20% from purchased power, 10% from nuclear power, and 4% from solar or methane gas. JEA also has a water and wastewater division that is financially independent.

Next week’s deal is comprised of $354 million of senior revenue bonds and $122.6 million of subordinated revenue bonds. The senior bonds, also being priced next week, are rated A1 by Moody’s Ratings, A-plus by S&P Global Ratings, and AA by Fitch Ratings. The ratings carry stable outlooks. Moody’s and S&P rate the subordinated bonds a notch lower. Fitch makes no distinction.

Fitch said its AA rating reflects the system’s strong historical performance and very low leverage profile. The system’s very strong revenue defensibility, including JEA’s monopolistic revenue source and independent ability to adjust rates, and strong operating risk profile, also contributed to the rating.

The system’s ratio of net adjusted debt to adjusted funds available for debt service has been at low levels in recent years. Fitch expects this to be at a strong level of around six times even if the utility were to experience stress and even considering its plan to spend $1.5 billion on capital improvements through 2027. Some of this will be financed through additional debt.

Fitch expects operating costs to remain elevated in coming years at above 11 cents/kWh going forward.

JEA has strong customer growth trends and customers with solid demographic characteristics. Electric costs are at an affordable 2.8% of median household income.

JEA serves 1.7 million people and has 520,000 retail electric customers. Its annual budget is roughly $1.5 billion.

The U.S. Environmental Protection Agency has ordered all coal plants be either closed or drastically modified by 2032 to end their carbon dioxide emissions. JEA is considering how to respond to the regulations, a JEA spokesperson said.

Moody’s cited sound financial performance and a multi-year effort by JEA to materially deleverage for its A1 senior rating.

“Governance changes implemented over the past several years are a key credit quality driver as the utility makes progress towards reestablishing the trust of key constituents,” said the Moody’s rating report, which cited as a credit benefit the reduction of variable rate debt.

The commencement of Vogtle 3 and 4’s operations in last 13 months is positive, Moody’s said, because it ended questions about when they would start and, going forward, reduces carbon transition risk.

Debt service payments connected to Vogtle 3 and 4 are increasing effective fiscal 2024. “The stable outlook reflects JEA’s existing cost competitiveness and robust financial metrics which provide a cushion for the utility to absorb impending rate increases and higher debt equivalent take or pay costs,” for the Vogtle project, Moody’s said.

S&P pointed to similar factors as did Fitch and Moody’s to support its A-plus senior rating. It said it was still concerned by “recent years’ repeated management and board member departures.”

Cure said, “The key to see if [JEA’s] ratings can return to pre-Vogtle levels is based on whether or not JEA’s financial flexibility declines or remains strong now that the Vogtle units have commenced commercial operations and payments to MEAG increase owing to higher operating costs.”

PFM Financial Advisors is the outside municipal advisor and Greenberg Traurig is the bond counsel on the deal.

A JEA spokesperson said JEA was unsure whether any part of the bonds would be insured.

The senior bonds will have serial maturities 2025 to October 2040. The subordinate bonds will have maturities in 2027, 2029, and 2034 to 2039. The bonds will be callable in April 2035.