Muni Credit News August 3, 2017

Joseph Krist

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

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For what it’s worth, this is the 200th edition of the Muni Credit News since we started publishing in the fall of 2014. Over that time our regular readership has steadily expanded and we continue to achieve new levels of readership on a monthly basis. We hope to continue to deliver the kind of timely and actionable information and insights that support your investment in municipal bonds.

For the rest of August, 2015, we will be taking what we hope is a well deserved break from publishing. We will return the first week in September when we will return to our original weekly schedule. We will continue to generate the same volume of and hopefully, quality of product that we have been providing twice weekly. Our hope is that the Muni Credit News continues to be one of your primary tools as you navigate the ever more complicated municipal bond landscape.

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PURPLE LINE GETS A WIN

It was an active and potentially pivotal week for Maryland’s Purple Line. The Federal Transit Administration  joined the Maryland Transit Administration in its appeals case in efforts to get the Purple Line project moving. FTA experts have already offered a view in favor of the Purple Line and concluded that a delay is not necessary. The take the position that additional environmental studies are not necessary. Plaintiffs against the Purple Line say the latest environmental impact study doesn’t fully address issues of cost and ridership and is missing important information on about “how Metro’s decline in ridership and safety and reliability would affect the Purple Line, which would depend on it.”

The appeal turned out to be somewhat successful for the project. A federal appeals court ruling will allow Maryland to begin building the Purple Line while a lawsuit opposing it continues, clearing the way for the state to pursue federal funding for the light-rail project.  The U.S. Court of Appeals for the D.C. Circuit reinstated the Purple Line’s environmental approval, which a lower-court judge had revoked last year, while the legal case continues.

The ruling allows the state to continue its efforts to obtain $900 million in federal grants for the line’s $2 billion construction costs while Maryland’s attorney general appeals an earlier ruling in the 2014 lawsuit seeking to block it. Congress has appropriated $325 million to the Purple Line, but the state can’t access that money until a full funding agreement is signed.

CYBERSECURITY

The ongoing investigations by the Department of Justice, Office of the Special Counsel, and the intelligence community have shed light on a number of facets of Russian hacking and cybersecurity issues. We were intrigued by an MSNBC report focusing on the activities of a large and successful Russian based cybersecurity firm, Kaspersky Lab. Kaspersky Lab’s products include anti-virus software which is sold throughout the world. It is even available to individuals and others through chains like Best Buy. Concerns have been raised about the use of such software by American consumers given the alleged events of 2016 and suspected links between the company’s founder and CEO and the Russian intelligence services.

The federal government has used some Kaspersky products but the company has been removed from its list of approved vendors. Nonetheless, the Washington Post has found that several local governments across the U.S. are using Kaspersky security software. More troubling is that many of the cities and government entities using it were unaware of the federal action.

Among the entities are Portland, OR, Picayune, MS, San Marcos, TX, the State of Connecticut Public Defender Office, and Fayetteville, GA. The concern is that those systems, even if they are not protecting critical infrastructure, can be targeted by hackers because they provide access to much sensitive information. Even if an entity’s main systems do not use the software, employees connecting remotely through computers using the software provide a gateway for mischief.

The concern comes from the background of the firm’s founder. Kaspersky Lab was founded in 1997 by Eugene Kaspersky, only ten years after he had graduated from a KGB-supported cryptography school and had subsequently worked in Russian military intelligence agencies. He denies any connection to the Kremlin and insists that his company, despite its US presence and global footprint, has never been solicited for help by the Russian government. In the US, Kaspersky Government Security Solutions, or KGSS, had been hosting an annual cybersecurity summit in Washington. The acting FBI director, CIA Director, Director of National Intelligence and National Security Agency Director all testified before Congress this year they would not use Kaspersky.

It is just another front in the battle that municipalities face in their growing need to devote resources and stay ahead of the curve in terms of cybersecurity. It is clear that the level of risk associated with the use of technology by municipalities grows every day.

NUCLEAR PLANTS IN THE MIDST OF A BANKRUPTCY

Earlier this year, the primary contractor overseeing the construction at two nuclear plant expansions in Georgia and South Carolina –  Westinghouse – declared bankruptcy. The two plants are partially owned by the Municipal Electric Authority of Georgia and the South Carolina Public Service Authority respectively. The bankruptcy threw into doubt the ability of the plants to be completed. Already over budget, the projects risked further increases in cost related to potential delays in construction due to the uncertainty over Westinghouse’s ability to perform.

Late last week, Georgia Power finalized a new service agreement with Westinghouse for the Vogtle nuclear expansion – the first new nuclear units to be built in the United States in more than 30 years. Under the new service agreement, approved by the U.S. Department of Energy on July 27, Southern Nuclear (the Southern Company subsidiary which operates the existing units at Plant Vogtle) will oversee construction activities at the site.

The service agreement includes engineering, procurement and licensing support from Westinghouse, as well as access to Westinghouse intellectual property needed for the project. Georgia Power also continues work with the project’s Co-owners (Oglethorpe Power, MEAG Power and Dalton Utilities) to complete a full-scale schedule and cost-to-complete analysis of the project.

After that work is completed, it will rest with the Georgia Public Service Commission to determine the best path forward for customers.

At the Sumner plant expansion where South Carolina Public Service Authority co-owns the project a South Carolina Public Service Authority along with IOU South Carolina E&G, Toshiba Corp. also said Friday it has agreed to pay $2.168 billion to walk away from the two other unfinished nuclear reactors. Toshiba is the parent of Westinghouse. SCANA Corp and its partner, Santee Cooper, are more cautious about finishing the VC Summer nuclear units in South Carolina.

The project is years behind schedule. Santee Cooper and South Carolina Electric & Gas will halt work immediately on two nuclear reactors, ending months of deliberation over the future of the troubled project that already has cost consumers billions of dollars. Santee Cooper, a state-owned electricity provider, said early Monday afternoon it would stop construction on the partially completed power units in Fairfield County, which have cost South Carolina utility customers nearly $9 billion so far. The proposal was approved unanimously by the utility’s board at a meeting in Columbia.

Santee Cooper said it would seek to preserve the work that has been completed so far and look for buyers to take over the project. The utility now expects the project would cost 75 percent more than initially anticipated.  Santee Cooper says it is suspending construction. SCE&G refers to abandoning the project. The Santee Cooper board is interested in shutting down the construction in such a way that could make it possible to resurrect the project if future conditions make completion more attractive. SCANA however, needs to make sure that it is able to recover as much of the costs of the project as possible from customers to protect its shareholders.

While the payments from Toshiba are clearly mitigating to some of the risk to the co-owners of both projects, bondholders of the municipal agencies’ debt must be aware that these credits are still not out of the woods yet. Ratepayers will be saddled with higher than anticipated rate requirements for some time as the result of the Westinghouse difficulties. Santee Cooper has raised power rates five times to cover the cost of the project. Overall, the utilities’ competitive positions will have sustained long term damage no matter how the projects ultimately work out.

NO ROOM AT THE INN FOR DEBT SERVICE

It’s taken 12 years of underperformance and restructurings but he Lombard convention center hotel project has finally succumbed and entered Chapter 11 bankruptcy. The petition was filed this week by The Lombard, Ill. Public Facilities Corp. which issued the bonds. The 2005 project was initiated to host corporate meetings and other functions in the Chicago suburb. Like many of these projects, the 2008 financial crisis put a seemingly permanent dent in the demand for the kind of services these hotel facilities provide.

This was a project financing which was originally secured by project revenues as well as an agreement with the Village of Lombard to make up shortfalls in debt service. When the project failed to meet its initial projections for occupancy and revenues, the Village was called upon to meet its obligations. It declined to and the most junior tranches of debt service defaulted.

The project went through a restructuring in 2011  and the hotel operations limped along thereafter. Corporations have cut back nationwide in terms of their willingness to pay for offsite meetings and that change in demand has been deadly for more than one of these projects. It has become clear that without a significant additional restructuring, the project cannot cover debt service,

Among the project’s creditors are the bond insurance company ACA which insured some $53.9 million of the original issue of bonds. The Chapter 11 filing was undertaken pursuant to an agreement with the majority of bondholders.

PUERTO RICO DEBT INVESTIGATION

The fiscal control board confirmed that it will launch its own process to  investigate the causes of Puerto Rico’s fiscal crisis, including the commonwealth’s debt issuance, disclosure and selling practices. The findings of this investigation will be made public. The board will create a special committee that will appoint an independent investigator. The investigation will be carried out according to the investigative protocol recently approved by the board.

A committee representing unsecured creditors in Puerto Rico’s Title III bankruptcy cases filed a lawsuit July 21 for federal Bankruptcy Court Judge Swain to authorize a discovery process to investigate the role played by Banco Popular, Banco Santander and the Government Development Bank (GDB) in the issuances and transactions related to the commonwealth’s debt.

According to the panel, federal law empowers it to “conduct an investigation into Puerto Rico’s debt and its connection to the current fiscal crisis.”  The judge last week delegated the creditor committee’s request for investigation to Judge Judith Dein. The matter will be dealt with Aug. 9 as part of an omnibus hearing in San Juan for bankruptcy cases under Title III of Promesa. As for the mechanism used by the board to carry out the investigation, it recently approved a protocol to carry out “informal” and “formal” investigations into any matter it deems worthy, as Promesa allows.

The protocol was approved by the board during a May 26 executive meeting.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

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