Litigation filed by Jacksonville, Florida and JEA in an attempt to invalidate the utility’s contract to buy nuclear power led Moody's Investors Service to downgrade nearly all credit ratings of the two entities late Thursday.
Jacksonville’s issuer-credit rating was lowered to A2 from Aa2. Six of the city’s credit ratings were also downgraded by up to three notches each, affecting about $2.1 billion of outstanding debt. The outlook was revised to negative from stable.
Most of JEA’s electric and water bond ratings were also downgraded by three notches, including its senior lien electric system revenue bond rating, which was lowered to A2 from Aa2. The outlook remains negative.
Moody’s said the broad array of downgrades stem from a lawsuit Jacksonville and JEA filed Sept. 11 in a Florida state court asking a judge to void a take-or-pay power purchase agreement JEA has with the Municipal Electric Authority of Georgia.
“The city's action calls into question its willingness to support an absolute and unconditional obligation of its largest municipal enterprise, which weakens the city's creditworthiness on all of its debt and is not consistent with the prior Aa rating category,” said analyst Edward Damutz.
JEA signed a contract with MEAG in 2008, agreeing to pay for 20 years on $1.4 billion of outstanding Power Project J bonds, which were issued to finance a portion of MEAG’s ownership in two reactors under construction at Plant Vogtle in Georgia.
Moody’s said it also downgraded MEAG’s Project J bond rating to Baa3 from A2 due to the uncertainty of the debt’s security because of the lawsuit and concerns about the willingness of JEA to honor the obligation.
“For now, JEA continues to honor the payment terms and conditions of the existing take-or-pay contract that secures the outstanding MEAG Power PPA Project J debt, and intends to continue doing so unless and until a court invalidates the PPA,” said Dan Aschenbach, lead analyst for project finance at Moody’s.
Sam Mousa, chief administrative officer for Jacksonville, issued a sharp rebuke of the rating agency in response to the downgrades.
“The city of Jacksonville strongly rejects Moody’s downgrade of the city for its participation in an effort to protect the ratepayers and taxpayers of Jacksonville from a constitutionally unsound agreement previously entered into by JEA concerning the construction of nuclear power Plant Vogtle,” Mousa said in a statement.
Mousa said JEA customers are “currently paying for this skyrocketing, out-of-control nuclear power plant project with no certainty in cost or completion timeline.”
“This downgrade action is based upon wild speculation, completely without rationale or merit, and not at all indicative of the city’s commitment to pay its debt, both past and present, or of its financial strength and integrity,” he said. “Moody’s refused to acknowledge the city’s clearly stated and historically demonstrated commitment to make debt payments.”
Mousa’s statement didn’t make a specific reference to the lawsuit, or the city’s intention in filing it. “The city cannot sit idly by while others make decisions that have significant consequences for our citizens without exploring all of our options,” he said.
He went on to discuss Jacksonville’s fiscal strengths, its efforts to reduce its debt, and to reform its underfunded pension plans.
JEA also issued a statement that touted the utility’s strong financial condition and history of paying its debt, and although it mentions the lawsuit the statement doesn’t explain why it was filed.
“Moody’s took rating action affecting all of JEA’s bonds, in part, attributed to a lawsuit JEA recently filed with respect to its power purchase agreement with MEAG Power for energy from Plant Vogtle,” the statement said. “Moody’s has taken this action in spite of the commitment to conservative financial management and financial excellence that JEA's board and leadership have repeatedly demonstrated in the past and continue to demonstrate today.”
JEA will “honor and fulfill its obligations under the bonds which Moody’s has now downgraded,” the utility said. “Any implication to the contrary is not consistent with actions and statements of JEA’s Board and management.”
MEAG President Jim Fuller also weighed in on the flurry of rating actions by Moody’s.
“Moody's decision to downgrade the city of Jacksonville's and JEA's credit as well as MEAG Power's Project J Bonds is a direct result of JEA's actions,” Fuller said. “JEA’s leaders are so intent on reneging on JEA’s contractual agreements with MEAG Power, they are ignoring the ramifications of their actions on the citizens of Jacksonville and ratepayers of JEA in doing so."
Earlier this year, Jacksonville explored the possibility of selling JEA and commissioned a study from Public Financial Management that found the utility’s value could range between $7.5 billion and $11 billion.
The PFM report cites JEA’s 20-year power purchase agreement with MEAG, and the associated debt, as a liability that probably would need to be remediated if the city sold JEA to a private entity such as an investor-owned utility.
A special city committee appointed to review the potential sale concluded in a final report July 25 that JEA is valuable as a municipal asset but JEA’s obligations to the Plant Vogtle project “have the potential to adversely affect the utility’s financial position for several decades to come.”
While the city didn’t proceed with actions to sell the utility, a non-binding referendum will be on the Nov. 6 ballot asking voters if the City Council should be required to get voter approval to sell any more than 10% of JEA.
In addition to the lawsuit filed by Jacksonville and JEA, MEAG filed suit in a Georgia federal court asking a judge to enforce JEA’s power purchase agreement.
MEAG has also filed a notice transferring JEA’s suit to the U.S. District Court for the Northern District of Georgia.
On Sept. 28, S&P Global Ratings lowered JEA’s senior-lien bond rating to A-plus from AA-minus. S&P also assigned a negative outlook to all the utility’s debt, in part, because of the litigation.
