Muni Credit News July 13, 2017

Joseph Krist

Senior Municipal Credit Consultant

joseph.krist@municreditnews.com

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PUERTO RICO

The bankruptcy judge hearing the proceedings in the Puerto Rico bankruptcy cases ordered that all papers opposing the motion to allow PREPA to assume the fuel supply contract with Freepoint Commodities, filed by the electric utility through the Financial Oversight & Management Board for Puerto Rico be filed by July 14 and reply papers to be filed by July 21. On April 10, the utility and Freepoint agreed to amend the contract, extending its termination from October 2017 to October 2018. As part of the agreement, PREPA had to immediately ask the court to authorize the contract if the utility commenced a bankruptcy process under Title III of the Promesa federal law.

According to PREPA, if Judge Swain failed to grant the authorization within 40 days of PREPA’s Title III case commencement, Freepoint could seek to terminate the contract or impose worse payment terms.

CYBERSECURITY BACK IN THE NEWS

We’ve raised the issue of cybersecurity as a potential source of credit weakness especially for services which rely on automation to run their operating and distribution systems. Examples in the municipal space are primarily essential service utilities like electric, water, and wastewater systems. So it is with interest that we note the latest efforts to hack into operating systems at facilities across the country.

Last week the New York Times reported that the FBI and the Department of Homeland Security have been scrambling to help multiple US energy firms and manufacturing plants fight off intrusions from hackers. The most serious incident involves the Wolf Creek nuclear power plant near Burlington, Kansas. The incident raises the profile of concerns of an attack that could not only cause widespread electric outages but potentially disable nuclear safety systems.

The “good” news is that it’s not clear how many of the hackers’ targets have been breached at all or is there any evidence that the attackers managed to access the targets’ actual control system networks. The hackers have targeted facilities from the Wolf Creek nuclear plant to an unnamed supplier of energy industry control systems. In 2014, the Department of Homeland Security warned that hackers had infected the networks of multiple US electric utilities with a piece of general purpose malware known as Black Energy.

Troubling is the initial reaction at the US Department of Energy to queries about hacking efforts against US electric generation and transmission assets. Last month, Secretary Perry would not discuss such efforts in any detail. Now he has reversed that position. Perry recently confirmed that hackers are targeting U.S. nuclear power plants, but he said federal labs can safeguard the nation’s sprawling grid. ” Obviously it’s real, it’s ongoing and we shouldn’t be surprised when you think of the world we live in today.” Perry pointed to “different groups, they may be state-sponsored, they may just be people who are criminal elements involved with trying to penetrate into certain areas.”

The secretary also touted “substantial resources” at the Department of Energy being used to thwart hackers, including the Idaho National Laboratory’s “full-out grid” effort to help detect and protect against attacks. The online assailants hijacked websites likely to be visited by electric utility employees in “watering hole” attacks. They also sent “phishing” emails aimed at luring workers into clicking on booby-trapped documents.

The grid has always been held up as the most likely target of a hack. Nuclear plant controls are designed especially to separate general corporate networks connected to the internet from those which actually control operating elements at those facilities. There is so far no evidence the intruders tried to move beyond corporate computers or cross into any of the isolated operational networks that keep the lights on and regulate the safety of radioactive material. Nonetheless, the issue of cybersecurity continues to grow as a potential source of credit risk and issuers need to do a better job of discussing the issue when they report results or seek to borrow.

MUNICIPAL UTILITY IN COLORADO

Boulder, CO has always been one of the states more progressive cities. So it is no surprise that in an age of increasing privatization, the City is trying to move toward municipal ownership of the City’s electric utility system. Since 2011, the City of Boulder has explored creating its own municipal electric utility (municipalization) as a path to achieving its goals of 100 percent clean energy and an 80 percent reduction in carbon emissions by 2050. During the last week of July and the first week of August, hearings will be held by the Colorado Public Utilities Commission on the City’s application to purchase the system.

The City is asking the Commission to approve the transfer of the assets Boulder wishes to acquire from PSCo so the City may move forward to condemnation; and Boulder’s plan for separating the electric distribution system that serves Boulder into two systems, one eventually owned and operated by Boulder’s new electric utility and one owned and operated by PSCo (the “Separation Plan”). Boulder’s request in Phase 1 also includes several orders that will ensure the Commission’s continued jurisdiction over the assets until PSCo no longer provides retail electric service within the City’s jurisdictional boundaries.

The plan calls for the City to begin operation of the municipal utility in 2022. Boulder’s request includes only the electric distribution facilities and real property interests necessary for the new electric utility to serve its customers located within the City Limits. there are two City-owned properties within the City Limits that the City is proposing that PSCo continue to serve: the facilities at Boulder Reservoir on the northern edge of the City Limits and the Open Space and Mountain Parks Department facilities located at Cherryvale Road and South Boulder Road on the southeastern edge of the City Limits. While Boulder would like to be able to provide electric service to all City-owned properties, the significant cost for the City to provide electric service to those two facilities is not cost effective at this time.

The application at this stage does not provide a price to be paid by the City for any assets transferred from PSCo should the plan move forward. Once that price is determined, the City will have the right to move forward with the plan or to maintain the status quo.

BAY AREA TOLLS MAY RISE

The tolls on the Golden Gate Bridge just rose by 25 cents. Now there is talk in the San Francisco Bay Area of a plan to raise tolls on all the Bay Area bridges by up to $3 as a way of dealing with increasing gridlock on roads and bridges. The Metropolitan Transportation Commission is looking to hike bridge tolls up to $3, a nearly 60-percent increase from current rates. The San Mateo County Transit District and Board of Supervisors are also studying locally-tailored options, such as another half-cent sales tax increase.

Nine counties are being asked to consider the proposed toll hike known as Regional Measure 3, or RM3. The Legislature is currently considering a bill that would enable the nine counties and MTC to float a future ballot initiative to increase tolls up to $3. A Bay Area Council study of 9,000 Bay Area voters found 85 percent said traffic was worse than a year ago and 56 percent would support gradually increasing bridge tolls by $3 over the next four years to help fund improvements.

Roughly three quarters, of 74 percent, said they’d be willing to pay more to cross the Bay Area’s seven state-owned bridges if that money is invested in “big regional projects” that ease traffic and improve mass transit. The Silicon Valley Leadership Group has also floated the prospect of a tri-county one-eighth-cent sales tax that would directly fund Caltrain.

Money from the increased tolls could be used on a wide range of projects, such as expanded ferry service, buying 300 more BART cars to allow the agency to run longer trains, increasing the number of freeway carpool and express lanes, increasing express bus services, extending BART to San Jose and other improvements.

Regional Measure 2, which voters approved in 2004, helped fund the fourth bore of the Caldecott Tunnel; BART’s extension to Warm Springs, Antioch and the Oakland airport connector; light rail in San Francisco; high-occupancy vehicle lanes on Interstate 580 and Interstate 80; improvements to Clipper cards and much more. That was the first time tolls had been raised since 1988, when voters approved Regional Measure 1.

The proposed measure is slated to go before voters in June or November next year. It needs a simple majority across the nine-county Bay Area to be approved.

ENERGY STATE TROUBLES CONTINUE

We have documented the troubles of the energy producing states to deal with the impact of lower oil and natural gas prices on their state revenue streams. That problem was manifest once again with the news that Fitch has lowered Oklahoma’s general obligation bond rating to ‘AA’ from ‘AA+’ . Fitch says that the action “incorporates a decline in financial resilience over the past several years as the state has struggled with the economic and revenue effects of the downturn in energy markets. The state has been unable to address its fiscal challenges with structural and recurring measures and revenue collections continue to reflect subdued energy prices. Although economic and energy production indicators improved in 2017 following an increase in rig counts, revenue growth prospects remain constrained by the extended low price environment and the state has reduced its rainy day fund (RDF; the constitutional reserve fund) to a level that provides limited cushion.

Oklahoma is fortunate that as a low debt issuer among the states its comparative debt metrics help to support a good rating. Nonetheless, the state has had difficulty budget  processes over recent years with balance achieved only through aggressive expense reduction. This has impacted primary services especially education throughout the State.

HARTFORD FINANCIAL TROUBLES DRAG RATING BELOW INVESTMENT GRADE

The ongoing financial deterioration of the City of Hartford have led S&P Global Ratings has lowered its rating on Hartford, Conn.’s general obligation (GO) bonds two notches to ‘BB’ from ‘BBB-‘ and its rating on the Hartford Stadium Authority’s lease revenue bonds to ‘BB-‘ from ‘BB+’. The ratings remain on CreditWatch with negative implications, where they were placed on May 15, 2017. “The downgrade to ‘BB’ reflects our opinion of very weak diminished liquidity, including uncertain access to external liquidity and very weak management conditions as multiple city officials have publicly indicated they are actively considering bankruptcy,” said S&P Global Ratings.S&P also noted that Hartford has engaged an outside law firm with expertise in financial restructuring. Officials also mentioned that the city would initiate discussions with bondholders for concessions to implement a debt restructuring if it didn’t receive the necessary support in the state’s 2019 biennial budget.

We note that the State’s budget remains unresolved. S&P pegged the odds of a downgrade at one-in-two with a “likelihood of a negative rating action, potentially by multiple notches. Factors that could lead to a downgrade would be if the state passage of a budget is significantly delayed, or if the city were not to receive sufficient support in a timely manner that would enable it to manage liquidity and allow it to meet obligations in a timely manner. Alternatively, if timely budget adoption translates into stabilized liquidity, and provides long-term structural support, we could remove the ratings from CreditWatch.

DON’T BOGART THOSE TAXES

Nevada saw the legal sale of recreational marijuana begin on July 1. Now as we go to press, Nevada’s governor has endorsed a statement of emergency declared for recreational marijuana regulations, after the state’s tax authority declared that many stores are running out of  product for sale. The Nevada Tax Commission is considering emergency regulations which would allow for liquor wholesalers to distribute marijuana. According to the Commission,  “Based on reports of adult-use marijuana sales already far exceeding the industry’s expectations at the state’s 47 licensed retail marijuana stores, and the reality that many stores are running out of inventory, the Department must address the lack of distributors immediately. Some establishments report the need for delivery within the next several days.”

Liquor wholesalers have undertaken litigation against the Commission which would allow them to participate in the business. Within the first weekend of legal recreational marijuana, sales totaled around $3 million, according to the Nevada Dispensary Association. The tax authority claimed most liquor wholesalers who have applied to distribute marijuana have yet to meet requirements to be licensed. The state is looking for a legal resolution soon in the Nevada Supreme Court. “The business owners in this industry have invested hundreds of millions of dollars to build facilities across the state. They have hired and trained thousands of additional employees to meet the demands of the market. Unless the issue with distributor licensing is resolved quickly, the inability to deliver product to retail stores will result in many of these people losing their jobs and will bring this nascent market to a grinding halt. A halt in this market will lead to a hole in the state’s school budget,” the department said in its statement.

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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