Joseph Krist

Publisher

The reversal of the pandemic has reinstated pressure on many credits. Many areas are reinstating limits on activities. School districts are having to quarantine students who test positive. Indoor activities are increasingly seeing mask requirements and testing requirements. Reopening of cultural and entertainment facilities are being delayed. The specter of a second Christmas season is a real risk to local finances.

It is not realistic to assume another massive federal bailout. So, the risks of the pandemic, especially in those states most resistant to regulation, are arguably as big a threat to credit as they have been at any time since the onset of the pandemic. So, we look at local credits, hospital credits, and higher education credits as likely being at the front of the line in terms of exposure to pandemic risk.

GIG WORK BACK IN COURT

After we went to press last week, a California judge found that determined that Prop. 22 infringes on the power the state Constitution explicitly granted to the California Legislature to regulate compensation for workers’ injuries. This is the law which sought to treat workers like those for Uber and others as independent contractors. The initiative had several different goals. The judge in the case cited that factor in declaring the law unconstitutional. The ballot measure also violates a constitutional provision that requires laws and initiatives to be limited to a single subject.

The ruling is based on the idea that a ballot initiative cannot be amended after it is passed by voters, any unconstitutional provision renders it unenforceable. The decision effectively kicks off a period of what is likely to be a year while appeals work their way through to the California Supreme Court. If the TNCs are successful in getting an initiative on the Massachusetts ballot in 2022, the election and the court decision could occur at the same time.

PUERTO RICO WATER FLOATS

Once again, the long-term financial strength and credit strength reflected in water and sewer utilities has been validated. One successful part of Puerto Rico’s financial stabilization was completed when the Puerto Rico Aqueduct and Sewer Authority restructured its outstanding debt. The refinancing, which was priced on Tuesday, will generate approximately $570 million in debt service savings over the life of the refunding bonds. The Authority was able to execute transactions that included an exchange, a tender for cash, a current taxable refunding, and a forward delivery refunding.  

The all-in interest cost, including expenses associated with pricing and selling the new issue, was 3.24%. If that doesn’t validate the notion that it is a great time to be an issuer, I’m not sure what will. The pricing reflects an assumption that a net rather than a gross revenue pledge will secure debt service. All in all, it marks an important milestone in the process of Puerto Rico’s financial recovery. A successful refinancing in December 2020 and this current transaction have lowered Prasa’s annual debt service requirement by an average of $35 million per year and approximately $920 million during the life of the bonds. 

INTERSTATE REGULATION

The Commonwealth of Virginia State Corporation Commission approved a request for a rate increase for Appalachian Power. So far so good. What did not get approved was the full request made by the company. That request was designed to generate revenues sufficient to fund environmental improvements to two coal-fired power plants that generate the bulk of the utility’s electricity. The SCC’s ruling, while not final, could force the closure of the Amos and Mountaineer plants — both in West Virginia — by 2028, Appalachian has said.

This puts the West Virginia plants in jeopardy even though the Mountaineer State’s regulators take a more sympathetic view. Once completed, the improvements will keep the plants in operation until 2028. The denied portion of the rate request would have funded additional surface water protections, which would have extended the plants’ lifespan by another 12 years. It’s not like there is a strong forward market for coal generated electricity past then.

The Virginia Clean Economy Act passed in 2020 requires Appalachian to use all carbon-free electricity by 2050 for its approximately 524,000 customers in Virginia. So, despite the location of the plants in another state, the regulatory requirements of the service area apply.  It is an example of a number of similar situations where operations of generating facilities in one state can be impacted by regulatory actions in another.

The municipal angle is that there are several municipal agencies who either own or participate in fossil fueled generation with investor owned partners from other states. Their state regulatory schemes will apply and could force changes in ownership of out of state generating assets. The Pacific Northwest is the likeliest region to see these phenomena as strong regulation in Washington State is threatening the ability of the state’s utilities to hold fossil fueled assets.

NYC REBOUND

With so much attention focused on the course of the pandemic as the Delta variant expands, it is easy to overlook some positive signs for NYC. There remains significant concern about the outlook in an environment where limits on rental payments and evictions expire.  Yet there are signs that the residential market is returning to form. July is typically the highest turnover month for apartments in the city.

While many tenants are in place as the result of rent and eviction imposed for the pandemic, the demand for new apartments has skyrocketed. Along with that boost to demand has come a major escalation in rents. In light of the recent experience, it is not surprising that landlords are seeking every dime they can. Not only are sticker prices up but the days of discounting appear to be over.

Nonetheless, the recent positive turn in the residential market does not necessarily bode well for the commercial market. It is still unclear what the ultimate breakdown will be between in office vs. remote work. The full approval of vaccines may finally alter that dynamic. While we believe that some greater proportion of workers will be permanently remote than was the case before the pandemic, we think that ultimately the realities of corporate management and culture will lead to most office workers returning to that setting.

That will be the long-term key for those businesses reliant on essentially daytime traffic associated with work versus the kinds of establishment which rely on tourism and/or entertainment.

EVICTION MORATORIUM

“If a federally imposed eviction moratorium is to continue, Congress must specifically authorize it.” And with that the federal moratorium on evictions currently authorized through executive order comes to an end. Now we move into the next phase of recovery from the pandemic, a return to more “normal” conditions. The decision from the Supreme Court holding that the C.D.C. had exceeded its authority will now either force Congress to enact legislation or end the moratorium.

The decision comes as there is much focus on the poor distribution of funds authorized to provide aid to renters directly. In turn, the pressure on landlords continues as owners have not been allowed to avoid the costs of operating buildings. Localities still need to collect property taxes. Only about $5.1 billion of $46.5 billion in aid authorized had been disbursed by the end of July, according to the Treasury Department.

Now that the moratorium has been declared illegal, the focus turns to those states where tenant protections are weaker and eviction proceedings more rapidly concluded. Four states – South Carolina, Tennessee, Georgia and Ohio – have the highest levels of rent backlog and will be at the leading edge of the issue. The long-term answer is legislation but we see that as unlikely.

METROPOLITAN OPERA

This leading cultural institution and contributor to the NYC economy has been on a pronounced downward trajectory for the last ten years. Changes in management led to changes in the Opera’s programming with an emphasis on “newer” (younger) customers. As the transition unfolded over that time period, attendance and demand continued to be pressured as the new offerings did not generate enough new interest to offset the negative impact of the programming changes.

Since then, the Opera and its unions have engaged in pitched battles over the effort to contain costs in the face of disappointing attendance. That continued as the Opera faced the realities of the pandemic including giving up a bit over a season and a half of cancelled performances. This culminated in the decline of the Opera’s credit ratings to Ba2.

Looming over the Opera regardless of the course of the pandemic was its problematic relationship between it and the employees, especially musicians. The ongoing labor standoff threatened the reopening of the Opera even as the pandemic waned. Now, an agreement with the most prominent union, that representing musicians has been reached. This should enable the Opera to conclude remaining more minor disputes and allow performances to occur.

That is good for the City and its tourism and entertainment industries. They lie at the heart of any city recovery. At the same time, the Met’s settlement with its workers reflects its long-term operating realities. The pay deal reached reduces the number of permanent musicians and it requires the remaining musicians to take a 3.75% pay cut. There are provisions linking pay levels to attendance levels and resurgent revenues. Nonetheless, the immediate impact is negative.

NPPD STUCK IN THE CLIMATE MIDDLE

Nebraska Public Power District has long been a reliable electric utility credit. Its construction programs were generally successful and it managed to be a stable credit even through construction of nuclear generation. It is not a criticism to view it as a sleepy credit. Now, the District finds itself in a controversial position despite its history.

As the owner of a nuclear facility and a large coal fired generating facility, NPPD now finds itself in the political crosshairs. The climate debate has now extended its reach into the Cornhusker State. On one side are environmental and climate activists who oppose fossil fueled and nuclear fueled generation. They would like to move the District away from both of those sources and develop new renewable generation. They also wish to prevent large scale transmission projects.

On the other side is Governor Pete Ricketts. He advocates the use and expansion of nuclear power and investment in carbon capture in order to save coal plants in general and the District’s huge Gentleman goal fired generator. A recent opinion piece from the Governor sums up his position. He buys into the notion that wind and solar are unreliable and that only fossil and nuclear fueled generation is the answer. To that end, the District has been encouraged to partner with a private carbon capture developer to employ carbon capture at the Gentleman plant.

The real game is revealed farther on. “Nebraska is the second largest ethanol-producing state in the nation. The future of ethanol is tied to the future of oil production and combustion engines. “This is the kind of ideological approach that puts tried and true credits in the middle of an argument over which it has no control nut for which it may ultimately incur a financial obligation. So far, efforts to involve NPPD in this sort of project has not put it at significant financial risk.

The concern is that the devotion of effort and resources in an effort to preserve 20^th century legacy assets could put NPPD at a disadvantage if the plants can’t be operated. Carbon capture just has not been able to work at scale and certainly not at the scale required to make it an economically viable technology.  The effort to enlist NPPD in the carbon capture effort has been going now for eight years.  It would be disappointing to see a conservative run financially sound credit harmed by ideological considerations.

THE WATER WARS GET LOCAL

So far, we haven’t seen a municipal system lose its water supply directly due to competition for groundwater sources from agriculture interests. Yet we are seeing on a smaller scale what might happen as drought conditions drag on in the American West. As the drought continues to impact surface water supplies, agricultural interests are often the first target of water use restrictions and supply cutbacks. In those cases, the use of groundwater supplies is the preferred alternative even if it is costly.

Now the impact of the long-term drought becomes clear. In addition to the obvious impact of lower snowpack, runoff, and river and lake/reservoir levels, the lack of water from the atmosphere prevents underground aquifers from having their supplies recharged. Ultimately, those sources will become far less reliable. In the short run, we will see residential and agricultural issues clash as they are currently on a smaller scale.

We came across a story about residents near Klamath Falls, OR. They are finding that local aquifers which supplied water to their area have been being depleted at rates well above historical levels. This is occurring because of significantly higher use of underground water by agricultural interests in the face of reduced rain and surface supplies. The greater use of the water has put residential wells at a disadvantage. This results in individual residential wells drying up leading to reliance on outside supplies.

This takes on more relevance as population trends show people moving to areas without sustainable long-term water supplies.

WIND PRODUCER HEADWINDS

One of the major obstacles to the development of offshore wind turbines has been concerns expressed by fishermen about the potential disruption of fishing grounds. It has led to changes in Maine’s offshore permitting process to placate lobstermen. Now, concerns about aquatic wildlife are being used in an attempt to delay the Vineyard Wind project which will be located off the shores of Connecticut, Rhode Island, and Massachusetts. The question is do the plaintiffs in the latest case really care about the whales or is the issue people’s view of the ocean.

Opposition to wind turbine locations have long characterized the islands off the New England coast. Opponents of early projects were pretty straightforward in framing their opposition as one of aesthetics. The concern about ocean views drove much opposition to proposed plants off Martha’s Vineyard. As the demand for and acceptance of renewables accelerated, there was less support for the aesthetic concerns.  Now, project opponents are trying a different tack – saving the whales.

ACK Residents Against Turbines is a group of Nantucket residents who oppose the siting of wind turbines some 14 miles off the coast. The basis for the suit: a belief that the proposed turbines will negatively impact whale breeding grounds. A closer look at the plans makes a good case that the environmental issues are just a smokescreen for the latest form of NIMBYism – not in my view. This project has been through its environmental review process and received federal approval to begin development.

The group of plaintiffs had participated in litigation against earlier projects. That experience has emboldened opponents of the turbines.  So far neither side has been able to amass enough objective information to persuade the other. In the absence of such data, it makes it look like the aesthetic concerns are what is driving the litigation.

Those concerns are cited by opponents of wind and solar power. The panels might cause too much glare, they might take away my view (usually of someone else’s farm), they might do any number of things. The irony is that much of that opposition comes from people who claim to be environmentalists and/or supporters of renewables. In the end, the arguments come down to NIMBY.

ZONING UP FOR A VOTE

Zoning rules, specifically those rules governing the development of housing, are at the center of the debates over economic justice. Numerous attempts have been made to legislate answers the issue of housing supply and affordability. One issue which can be addressed legislatively is zoning policy. Zoning is under scrutiny as a tool of economic injustice, Regulating lot sizes and individual development limits has long been understood as way to influence development. In particular, single- family zoning has been under the most focus.

Affordable housing advocates have long sought to permit lot owners to be able to create multiple residential housing units on traditionally single-family land. Now, legislation is moving forward in the California Legislature which could permit two-unit buildings on currently single-family lots. That could potentially create a net 3 new units on parcels which only had one. The move comes after previous efforts to encourage development of multifamily housing near transit facilities (high rises around BART stations, e.g.) failed over concerns about potential gentrification and displacement of current residents.

Rhetoric on both sides has been predictably hyperbolic. There is not a lot of objective research to assuage all possible concerns.

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.

Joseph Krist

Publisher

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CENSUS

The long awaited 2020 Census has begun to yield information on state and local basis. It yielded some surprises at the same time it confirmed some trends which were pretty clearly emerging.

Phoenix’s population grew from 1.4 million people in 2010 to 1.6 million in 2020, a rate of 11.2 percent, according to the Census Bureau. That made it the fifth largest city in the country leapfrogging Philadelphia. Overall, the largest county in the United States in 2020 remains Los Angeles County with over 10 million people. The largest city (incorporated place) in the United States in 2020 remains New York with 8.8 million people. 312 of the 384 U.S. metro areas gained population between 2010 and 2020. The fastest-growing U.S. metro area between the 2010 Census and 2020 Census was The Villages, FL, which grew 39% from about 93,000 people to about 130,000 people.

72 U.S. metro areas lost population from the 2010 Census to the 2020 Census. The U.S. metro areas with the largest percentage declines were Pine Bluff, AR, and Danville, IL, at -12.5 percent and -9.1 percent, respectively. Five counties (metro areas in parentheses) gained at least 300,000 people during that period: Harris County, Texas (Houston-The Woodlands-Sugar Land); Maricopa County, Arizona (Phoenix-Mesa-Chandler); King County, Washington (Seattle-Tacoma-Bellevue); Clark County, Nevada (Las Vegas-Henderson-Paradise); and Tarrant County, Texas (Dallas-Fort Worth-Arlington).

The 10 largest metro areas all grew between 2010 and 2020, led by two in Texas: Dallas-Fort Worth-Arlington and Houston-The Woodlands-Sugar Land each grew by approximately 20%. Dallas-Fort Worth and Houston were also two of the nation’s three metro areas to gain at least 1.2 million people over the decade. New York-Newark-Jersey City, NY-NJ-PA was the third.

Five metro areas crossed the 1million person threshold between 2010 and 2020: Grand Rapids-Kentwood, MI; Tucson, AZ; Urban Honolulu, HI; Tulsa, OK; and Fresno, CA. Among all U.S. metro areas, The Villages in Florida grew the fastest, followed by Austin-Round Rock-Georgetown, TX; St. George, UT; Greeley, CO; and Myrtle Beach-Conway-North Myrtle Beach, SC-NC.

At the state level, Texas experienced the largest numeric increase between 2010 and 2020, followed by Florida, California, Georgia and Washington. Utah was the fastest-growing state, increasing by 18.4% between 2010 and 2020, followed by Idaho, Texas, North Dakota and Nevada, which each grew by 15.0% or more.  California was the most populous state in 2020 (39.5 million), followed by Texas (29.1 million), Florida (21.5 million), New York (20.2 million) and Pennsylvania (13.0 million). The populations of three states — West Virginia, Mississippi and Illinois — and Puerto Rico declined over the decade.

One city which likely surprised people was the weakest big city credit, Chicago. Overall, the city’s population grew nearly 2% from 2010 to 2020 — from 2.6 million residents to 2.7 million, according to data released from the 2020 census. That’s a change from the population decline the city had experienced from 2000 to 2010, when the city lost nearly 7% of its population. It seems that the demise of the City of Chicago was not such a sure thing.

MANAGING THE TRANSITION TO CLEAN ENERGY

A bill has been introduced in the Wisconsin legislature which is intended to assist municipalities that have experienced a power plant closure by lengthening the period over which the payments they receive from the state for hosting those facilities incrementally decrease. Utility aid payments are paid by power companies to the state in lieu of property taxes. In Wisconsin, power plant sites are not subject to local property taxes. The state then passes funding from those payments along to municipalities that have power plants. After a plant is decommissioned, the state phases out the payments by 20% per year over five years.

The bill would lengthen the period over which payments phase out to 10 years. The payments decrease by 10% annually. The new timelines only would apply to power plants that are decommissioned after Dec. 31, 2020.  The idea is to facilitate the transition to other uses for the sites of decommissioned generation plants. This is also designed to offset the usually seen reductions in revenues from property taxes versus the revenues received through utility aid payments.

MANAGING THE RESURGENCE

Cultural facilities which saw their operations heavily impacted were among the first to try to reopen under significant limitations on attendance. In cities like New York, cultural facilities are at the center of tourism development activities. In New York, tourism has become the fulcrum underpinning the City economy with over 60 million visitors pre-pandemic. The resurgence of the pandemic especially with the spread of the Delta variant has put that recovery at risk.

To deal with the situation, the 33 museums and arts groups operating in city-owned buildings or on city-owned land — known as members of the Cultural Institutions Group have announced plans to require visitors to its museums and other cultural institutions to be vaccinated. The plans will require that visitors and employees at the city’s museums, concert halls, aquariums and zoos be vaccinated. Children younger than age 12, who are not eligible to be vaccinated, will have to be accompanied by a vaccinated person and will be encouraged to wear masks.

Broadway is beginning to open and/or reopen at least some its stages with a full reopening scheduled for September. It follows an earlier plan announced by the City that vaccinations would be required for indoor concerts — as well as for gyms and restaurants. New York was the first U.S. city to issue such a mandate.

ANCHORAGE AIRPORT

The airport serving the City of Anchorage has benefitted from its unique location in terms of both geography and world affairs. After it opened in 1951, it served as a refueling stop for airlines serving the Asia- North America market. For many airlines – cargo and commercial – flying by way of Anchorage allowed them to offset the limits of Soviet and Chinese air space restrictions. By the time, those obstacles were removed the role of the airport as a freight transfer facility had been clearly established.

That is where the politics comes in. Ted Stevens name is on the airport for a reason. Senator Stevens secured unique trade exemptions for Anchorage, Fairbanks and the Port of Anchorage in 2004 that allows cargo landed in the state on its way to and from the Lower 48 to be between not only planes but to different carriers at that time without being subject to federal regulations. That enabled the airport to become a significant transshipment hub. The revenue from those operations allowed the airport to transition from a fuel-based stopover to a freight hub.

With ocean ports in the lower 48 straining to handle the demand from a recovering economy and costs for container shipments skyrocketing, air cargo becomes a more cost competitive method. The pandemic also put the Anchorage Airport in good position. Data from the Airports Council International showed that total tonnage among the world’s top 10 busiest cargo airports increased 3 percent in 2020.

Landings at Anchorage were some 15 percent higher on year-over-year basis to over 3.1 million tons of cargo. This allowed Anchorage to surpass UPS hub Louisville, Ky., which saw a 4.6 percent growth in cargo business last year, for the fourth spot behind the Shanghai, Hong Kong and Memphis, Tenn. (Fed Ex), airports.

DROUGHT LIMITS ANNOUNCED

The Colorado River originates in the upper portions of the Colorado River Basin in the Rocky Mountains. The Upper Basin experienced an exceptionally dry spring in 2021, with April to July runoff into Lake Powell totaling just 26% of average despite near-average snowfall last winter. The projected water year 2021 unregulated inflow into Lake Powell—the amount that would have flowed to Lake Mead without the benefit of storage behind Glen Canyon Dam—is approximately 32% of average. Total Colorado River system storage today is 40% of capacity, down from 49% at this time last year.

This led the U.S. Bureau of Reclamation to announce that downstream releases from Glen Canyon Dam and Hoover Dam will be reduced in 2022 due to declining reservoir levels. In the Lower Basin the reductions represent the first “shortage” declaration in the history of the Colorado River system—demonstrating the severity of the drought and low reservoir conditions. The required shortage reductions and water savings contributions under the 2007 Colorado River Interim Guidelines for Lower Basin Shortages and Coordinated Operations of Lake Powell and Lake Mead, 2019 Lower Basin Drought Contingency Plan and Minute 323 to the 1944 Water Treaty with Mexico are: Arizona:  512,000 acre-feet, which is approximately 18% of the state’s annual apportionment; Nevada:  21,000 acre-feet, which is 7% of the state’s annual apportionment and Mexico:  80,000 acre-feet, which is approximately 5% of the country’s annual allotment.

The likely initial loser in this scenario is the agricultural sector of Arizona.

MORE UNCERTAINTY FOR MEAG

An agreement negotiated by the state Public Service Commission staff and Georgia Power proposes that regulators will continue reviewing semi-annual progress reports on the Votgle nuclear project moving forward. However, the commission will now wait until the final two reactors are up and running before deciding if Georgia Power’s expenses are reasonable. The stipulation order replaces a cost review mechanism established in 2017. The change reflects the continuing trend of cost increases which have continually plagued the project.

The decision was also accompanied the approval of $670 million in expenses at Plant Vogtle incurred during the final half of 2020. The moves by the Georgia state regulators clearly reinforce the continuing uncertainty regarding final costs of the expansion. So long as this is the case, we view the uncertainty as a continuing drag on the credit of MEAG and the Oglethorpe Electric Cooperative.

MAINE PUBLIC POWER

This year’s legislative session in Maine saw the legislative approval of and subsequent veto by the Governor of bills which would have enabled voters to decide if the wanted a pubic power agency to one the operating assets of Central Maine Power. Now in the aftermath of those actions, supporters of public power in the Pine Tree State have submitted applications for two initiatives to be placed on the 2022 ballot. The strategy of two proposals is undertaken with the goal of getting at least one question to voters by next fall on whether they would like to buy out the infrastructure of the two investor-owned entities.

Power to create the consumer-owned Pine Tree Power Co. has become a more serious issue especially as it pertains to CMP. The service issues which have plagued CMP’s customer base since it became owned by a subsidiary (Avangrid) ultimately owned by a Spanish company. Those service issues are currently the subject of robust debate in New Mexico where the proposed purchase of Public Service of New Mexico by Avengrid is under regulatory review. (Full disclosure – I am an Avangrid customer through another subsidiary as well) and none of the complaints are surprising. Proponents of the Maine initiative must collect over 63,000 signatures by January to get an item on the ballot.

CARBON CAPTURE STILL IN THE STATION

One hope of fossil fuel generation operators is that carbon capture technology can be developed which could allow older coal fired generation to operate. It has been proposed in connection with coal plants in North Dakota. It is at the center of the debate over what to do with one of the largest coal fired facilities, the San Juan plant in New Mexico. The owners of that plant were not able to attract interest from private investors and failed to fund even their share of a private study for the billion dollar proposal. 

Enchant Energy is a New Mexico-registered company that is acquiring the San Juan Generating Station near Farmington, New Mexico.  Enchant plans to retrofit SJGS with state-of-the-art carbon capture equipment that, when completed in 2023-2024, will transform the facility into the lowest emissions fossil fuel plant in the Western United States. The Department of Energy revised a cost sharing agreement with Enchant in January 2021 to increase the share paid by taxpayers for the study. The agreement was made during the final week of the Trump administration.

Enchant Energy is now also seeking a $906 million loan guarantee from the Department of Energy for the carbon capture proposal, lobbying Congress for expanded 45Q tax credits and other subsidies, and urging the state of New Mexico to accept long-term liability for sequestered carbon dioxide.  quarterly reports submitted by Enchant Energy to the Department of Energy shows that Enchant Energy has not lived up to funding commitments under previous agreements with the DOE.

Here’s the concern. The head of the Department of Energy’s Office of Fossil Energy and Carbon Management has stated “The office has invested a great deal of time and resources in CCS on coal. And it’s clear that carbon capture may not make economic sense on the remaining existing fleet of coal fired power plants in the United States, plants that are mostly based on subcritical efficiency boilers and nearing retirement over the next decade.”

The potential for liability issues to derail the project are real. As Enchant itself says, “No private entity could bear the burden. There’s a concern that the long-term liability is just not supportable by the private insurance industry.” All of the lobbying efforts with the state and federal governments seems to center on the currently uneconomical nature of the technology. Notwithstanding these outstanding concerns, the  Carbon Capture Improvement Act has passed the Senate as part of the Infrastructure Investment & Jobs Act. The Act makes it easier for power plants and industrial facilities to finance the purchase and installation of carbon capture, utilization, and storage equipment, as well as direct air capture (DAC) projects through the use of private activity bonds (PABs).

OKLAHOMA POWER LEGISLATION

The Oklahoma Development Finance Authority approved a series of steps to begin the process of issuing debt to help to ameliorate the financial impact of the February, 2021 winter storm that caused massive spikes in energy prices. This follows the enactment of a couple of pieces of legislation in the Spring and early Summer.  In April, the Oklahoma Legislature passed SB 1049 to create a program to securitize debt owed to unregulated utilities such as, potentially, the Grand River Dam Authority, municipal power authorities and electric co-operatives. Similar legislation was enacted for the customers of the state’s investor-owned utilities.

The plan centers around the issuance of up to $4 billion of securitized debt. It would be paid for from separate standalone charges on customer utility bills. Such securitization techniques have been undertaken for municipal issuers like the Long Island Power Authority. The plan is straightforward. The Oklahoma Development Finance Authority will issue bonds. The ODFA will pay proceeds to the utility companies and other impacted entities. Those impacted entities will pay off their bridge loans they took out to cover their debts to wholesale gas producers and sellers. The impacted entities will pay back ODFA over time with money obtained from higher charges to ratepayers, but the charges will be spread out over a longer period of time and at a lower rate.

One of the entities which could potentially benefit is the Grand River Dam Authority. GRDA is a well-established issuer of municipal bonds. Some opposed giving the financing option to GRDA because of its perceived credit strength. It would not make sense to extend this support to investor-owned utilities without making it available to municipal systems.

AMERICAN DREAM

For some, the recent announcement of a debt service reserve fund draw to cover debt service requirements on bonds issued to finance the American Dream Mall in East Rutherford, N.J. was inevitable. Given the long and winding road the project took to open, the last thing it needed was a restriction inducing pandemic. But that has indeed been the case and operations at the mall have begun behind schedule and without the expected customer market as the pandemic unfolded. In this case, the bonds in question are taxable bonds backed by a portion of sales tax revenues. The shortfalls resulting in reduced economic activity have reduced the funds available for debt service.

The result was an unscheduled draw on the debt service reserve in the amount of $9,285,625.00 was made in order to pay the debt service due on the Bonds for the period of February 1, 2021 to July 31st, 2021 which was payable on August 2nd, 2021. After the draw, $9,286,082.87 remains in the Debt Service Reserve Fund established under the Indenture.  The Bonds mature in 2024. It is not clear what the prospects for the mall are given the increasing likelihood of restrictions on indoor gatherings and masking and vaccination requirements.

ENERGY DEBATE COMES INTO FOCUS

We came across news about a rural electric cooperative in Virginia that is seeking to increase charges for “fixed costs”. As is implied, this portion of the bill contains charges for certain costs which are not dependent upon usage. The effort and the regulatory process are helping to shine a light on the kinds of tactics being employed by legacy energy providers. Recently, rural electric cooperatives have found themselves taking leading positions in the obstruction of the implementation of clean energy.

Shenandoah Valley Electric Cooperative serves 96,000 customers along the I-81 corridor in northwestern Va. It is seeking a 5% increase in the fixed charge of its customers bills. The Cooperative says it needs to fund system upgrades with the increase. Customers however, take a different view. They note that when a utility can shift more of its cost base for ratemaking and regulation purposes, that the value of alternative energy sources in terms of customer bills is reduced. This is especially true for potential solar installers.

Customer advocates estimate that one third of a customer bill would not be related to consumption. Ratemaking like this is seen as regressive in that the fixed portion represents a bigger claim on low in come customer resources. Research shows that poorer folks use less electricity. A customer advocacy group estimates that 17% of the co-op’s households — about 14,800 — would qualify as low-income with an average income of $16,206 per year. 

It will take different forms but the efforts by cooperatives to stymie the growth of alternative energy sources are an emerging factor in the space. As we’ve been following, inflated “exit fees” for cooperative participants are being used to fight efforts to reduce coal generation. These are the sort of “on the ground” tactics which movement advocates overlook. These conflicts over rates will have real consequences while the Green New Deal debate will likely drone on.

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.

Joseph Krist

Publisher

PANDEMIC THREATS RETURN

It was always an uncertain process with the potential for “many a slip, twixt cup and lip” as the economy tried to rebound from the limits of the pandemic. Nonetheless, the recent surge of the “Delta variant” has put a lot of the best laid plans of FY 2021 budget makers at all levels of government in jeopardy. Now we may see ourselves in a politically charged environment which will influence limits on economic activities. A push to keep as many businesses open as possible is likely.

The pressures on school districts will be enormous as we believe that they are the foundation of any permanent recovery. There are still some 7 million fewer people employed than prior then prior to the pandemic. Many were in jobs requiring physical presence. It’s why the hospitality industry is having such a hard time hiring. Childcare needs are likely as much a factor as extended jobless benefits when deciding whether to return to work. A safe open school environment will be a key need to be addressed going forward.

The corporate world will also have a role in dealing with the pandemic. While much emphasis has been placed on businesses requiring some or full in office presence, the resurgence of the virus and the “Delta variant” is already leading some significant employers to extend or make permanent remote work structures. The resurgence also imperils operations at higher education institutions and health facilities. The return to campus will be important for revenues at the schools. The healthcare system is again overwhelmed by new cases and that will likely exacerbate the negative impact on both healthcare revenues and patient health that have stemmed from the pandemic.

Unfortunately, the ultimate responsibility for responding to the pandemic is now primarily in the hands of the private sector and local government. That does create risks especially in states like Florida and Texas as their governors threaten pay and school funding if masks are mandated by local elected school districts. In many cases, local governments are requiring vaccinations or testing. The need to lead by example so that schools can reopen and economies fully reopen. It’s a bizarre way to deal with the multiple issues the pandemic raises.

GIG WORK ON THE BALLOT AGAIN?

The transportation network companies (TNC) are trying to build in their victory in California and have moved to place an item on the Massachusetts ballot affirming the right to classify their drivers as independent contractors rather than employees. So far, the industry has been successful in the U.S. (at least in CA) but has lost its argument in Britain. Last year, Massachusetts sued Uber and Lyft, claiming they misclassified drivers as independent contractors and that litigation is continues.

The Massachusetts Coalition for Independent Work, proposes exempting gig workers from being classified as employees but offering them some limited benefits, including minimum pay of $18 per hour spent transporting a rider or delivering food. If the TNC are successful, the ballot item could appear on the November, 2022 ballot.

EV REALITIES

Only 9.7% of people in the 50 largest U.S. cities have a public charger within a five-minute walk of home. Remove the two top performers — New York City and LA — and the figure drops to 6.2%. There is $7.5 billion in funding for them in the bipartisan infrastructure bill. In Los Angeles, more than 24% of the population has close-by access to more than 3,100 charging stations, which is twice as many as any other city. In New York City, 18% of the population has such access — although most chargers are on the crowded island of Manhattan, and many come with an access fee in commercial parking garages.

So far, the deployment of charging infrastructure has been reflected in local demographic data. The better off an area is, the more likely there will be demand for charging infrastructure. So, the private sector has reacted just as one would expect. They follow the money. Given the price of electric vehicles, the fact that the EV phenomenon is pretty much a rich, upper middle-class thing is not a shock.

What it does do is to make a case for government to provide such infrastructure. In water, much the same way as mass transit expansion fostered development in the 20^th century, electric charging infrastructure expansion could support more demand for electric vehicles.  This is especially true in rural and less populated areas.

COLORADO AND CLIMATE

Two opposite but related natural phenomena are occurring at the same time in Colorado which highlight the complexities of management of climate change. Last week, a mudslide closed I-70 the maim interstate highway link through Colorado. The State is facing significant costs in clearing the road, estimating damage, and funding and conducting repairs. I-70 is known for its unique design which minimized its footprint through Glenwood Dam and it is that area that the damage occurred. The State has petitioned the federal government for some $116 million to fund the repairs.

At the same time, the impact of the log-term drought plaguing the West is creating an opposite set of issues. Some 32 entities in Colorado are facing limits on the availability of electric power generated by hydroelectric generators at the Reidu Reservoir some 20 miles from Aspen. Water levels at Reidu Reservoir could fall so low this winter that the city of Aspen could have difficulty making hydroelectric power and those who own water in the reservoir could see shortages. The U.S. Bureau of Reclamation operates the reservoir as a storage and flood control mechanism. It also generates electricity for purchase by among others, municipal electric systems.

Those systems buy the power to achieve green power goals. Now the U.S. BOR is warning that officials estimated the reservoir will fall to around 55,000 acre-feet this winter. A year ago, the reservoir stood at 96,000-acre feet. So, within some 30 miles of each other we have too much moisture to hold the hillside over an interstate but steadily declining water and power availability. And in that relatively small area, the entire climate issue can be neatly summarized.

NEW YORK AND CALIFORNIA SITTING IN LIMBO

A year ago, no one would have predicted that New York and California could both be headed by new governors by this Fall. It is a certainty in New York where Governor Cuomo has resigned. It is a possibility in California where Governor Newsome retains a slim majority in recent polls in his effort to defeat a potential recall vote next month. While the circumstances leading to this predicament could not be more different, the results of changes in management which would result present similar challenges to each of the potential replacements.

Assuming that the recall in California is successful, both New York and California would be being run by short-term replacements. Both would be facing scheduled elections for their new offices in November, 2022. That will lead to even more highly charged political atmospheres in Sacramento and Albany at times when both states will be remerging from the limits and impacts of the pandemic and its resurgence. A political vacuum would exist which would limit the ability of either governor to respond in real time as effectively as might be the case.

In New York, the fraught relationship between the Mayor of NYC and the state government will be complicated by the first term status of the new mayor and the temporary status of the Governor. With the City and the State’s recovery at stake and massive decisions about housing and transit funding to be taken, it is a bad time for the jockeying and posing which can be expected as the result of this unanticipated opening.

California already went through this once when Gray Davis was recalled in 2003 and replaced by Arnold Schwarzenegger. Schwarzenegger was able to be elected to a full term and governed less ideologically than was expected. Schwarzenegger signed the Global Warming Solutions Act of 2006, creating the nation’s first cap on greenhouse gas emissions. In the end, he wasn’t able to substantially address the state’s fiscal issues especially its pension underfunding situation.

We do not believe that either of these potential changes present major credit issues for the states. The New York budget process will remain “three people in a room” but as was the case this year, one of those people will be politically weaker than the others. Long term, the issue is who will be Governor as of January 1, 2023. This will make the 2022 legislative election, the real place to watch. If veto proof majorities are maintained in the Legislature, the next Governor will have a hard time getting their priorities through if they do not match the goals of the legislative leaders.

In terms of municipal bond credits backed by revenues, the governorship of New York carries with it a raft of appointments to major issuers. Primary among them are the Metropolitan Transportation Authority and the Port Authority of New York and New Jersey. Many forget that the MTA is a state not local entity. The Governor’s role in appointing board members puts the Governor at the center of NYC and metropolitan NY transit policy decisions. The governors of NY and NJ are unusually positioned to address the region’s transit needs.

In terms of specific projects, both Newsome and Cuomo were driving forces behind major transit projects which may or may not succeed. The California High Speed Rail project has been a huge disappointment and is viewed by many as an endless financial drain. It is used as a cudgel against Governor Newsome. The New York legacy is a bit different. As he leaves office, a major rail link to LaGuardia Airport remains in limbo and is less likely to happen without Governor Cuomo. At the same time, several successful bridge and airport public/private partnership projects must be credited to Governor Cuomo.

MISSOURI SPITTING INTO THE WIND

A Missouri county court justice issued an order that said that officials must implement the voter-approved Medicaid expansion immediately in Missouri. A decision by that same judge was overturned recently by the Missouri Supreme Court. The new decision was in response to that decision which ordered him to “issue a judgment for the plaintiffs.” 

An estimated 275,000 people in Missouri are now eligible to gain Medicaid coverage. The state argued it needed time to develop a plan to accept newly qualified people in the Medicaid program and asked for a two-month delay in implementation of the expansion. It was noted that the Governor had initially submitted a plan for expansion to the federal government before withdrawing the paperwork in May.     

The constitutional amendment makes adults between the ages of 19 and 65 eligible for Medicaid if they make 133 percent of the federal poverty level — or about $35,200 for a family of four. It also prohibits the state from enacting work requirements for Medicaid recipients. And the federal government will cover 90% of the additional costs of expansion in its first year.

RAISE A GLASS OF WATER FOR NEWARK

As Congress considers the infrastructure bill, one example of what it seeks to fund is the replacement of lead water pipes. Lead water pipes are one of the leading sources of lead poisoning and elevated levels of lead in children. The negative impacts of lead exposure in childhood have been well known. In the 1960’s, the primary source of exposure was lead paint in residences. Now, testing for lead exposure especially through lead paint is an important part of the home purchase process. This reflects the enactment of legislation throughout the country limiting the use of lead paint.

As these efforts slowly paid off, it became clear that there was still risk from lead exposure especially in older homes. This stemmed from the use of lead pipes to connect individual homes and businesses. Many of those pipes are located in areas of older homes which tend to be owned by lower income residents. While the need for replacement was clear, the funding for replacement was not. Simply stated, most residents who were at risk from potential lead exposure from pipes could not afford the cost of replacement.

In 2016, elevated lead levels were found in the water supplied to several public schools in Newark. At the end of 2017, Newark, N.J. was informed by the federal government that Newark was in violation of the federal action level for lead in drinking water for a second consecutive water monitoring period. The City was required to undertake the replacement of thousands of pipes connected to water mains. According to the EPA, the average cost of replacing just one line is $4,700.

The problem was coming up with the funding for the cash strapped city and its water customers. Here is where municipal bonds played their role. To pay for the project, an agreement was made with the state that Essex County, of which Newark is the county seat, would issue $120 million in bonds were issued through the county’s improvement authority. That plan also came with legislation that allowed the lead lines to be replaced without the consent of the property owners. That was an important factor in a city where 74 percent of the population are renters. 

Now two years after the plan was created and implementation began, the replacement of nearly all its 23,000 lead service lines, which had tainted the drinking water, and replaced with copper pipes.  The City may have been dragged kicking and screaming to undertake this project but once a viable funding and financing source was identified, it moved aggressively.

PENSION RETURNS MIRROR STOCK MARKET

The strong performance of equities over the last year especially in 2021 clearly benefitted state and local pension funds. After single digit returns in FY 2020, the turnaround in performance was remarkable. States like New York and Minnesota had returns in excess of 30%. Double digit returns were the rule rather than the exception.

The positive returns will show up in improved unfunded liability ratios. This should take have some positive impacts on annually required contribution levels. The majority of funds have return assumptions of between 6% and 8% so these results are well above those thresholds. Now the issue becomes one of will on the part of legislators. Maintaining current funding levels in the face of these extraordinary returns will be an important credit issue going forward.

HIGH SPEED RAIL

The Brightline high speed rail service will resume running trains in November after suspending service in March 2020 because of the coronavirus pandemic. Schedules and fares would be similar to those before the suspension. Riders will have to wear masks onboard and the company will also require Covid vaccines for its employees. 

In Illinois, Gov. J.B. Pritzker recently signed a bill authorizing the formation of the Illinois High-Speed Railway Commission. The commission is tasked with conducting a ridership study and issuing its findings and recommendations concerning a governance structure, the frequency of service and implementation of the high-speed rail plan. The goal is the development of a system which would start at O’Hare International Airport in Chicago and offer a 127-minute ride to reach downtown St. Louis. Trains would stop in Champaign-Urbana in less than an hour and in Springfield in 78 minutes. The line would be integrated with existing Amtrak, Metra and intercity bus services, and connect the Illinois cities of Decatur, Moline, Peoria and Rockford. 

In California, the infrastructure bill will not include any new funding specifically for the California High Speed line. There is some $12 billion of funds available for unspecified intercity rail development but the federal government is not bailing out the line. The hope is that some funding could be generated to allow the state to finish the existing portion under construction in the Central Valley.

MORE INTERSTATE REGULATION ISSUES AND CLIMATE

Montana has enacted legislation which effectively requires owners’ unanimous consent to close a coal-fired power plant. In this case, the Oregon and Washington based co-owners of the Colstrip coal fired power plant are asking a federal judge for a preliminary injunction to stop the Montana attorney general’s office from enforcing a law they say changes the terms of their private ownership contract.

Utilities in those two states are under pressure to divest from fossil-fuel fired generating plants. At the same time, efforts to move from fossil fuels in Washington are facing a potential vote in November in eastern Washington. If approved by city voters in November, the Spokane Cleaner Energy Protection Act, or Proposition One, would preemptively prohibit the Spokane City Council from enacting a ban on natural gas service or hydroelectric power for homes and businesses in Spokane.

A volunteer group formed under the City Council’s direction, included a proposal to ban “gas hookups from all new commercial and multifamily residential buildings by 2023, and from all new construction by 2028” in a draft “action plan” released earlier this year. This led to the development of the proposed initiative.

The legal action seeks an injunction to prevent the measure from appearing on the ballot, and alleges that the initiative is illegal in three ways. The initiative would stand in the way of the city’s quest to meet greenhouse gas reduction goals outlined by the state legislature, the lawsuit argues, and local initiatives cannot threaten “to interfere with city or county efforts to implement state policies.”

The plaintiffs also contend that by preventing the city from amending its own building codes, the initiative would deprive the Spokane City Council of the authority granted to it by the state legislature. The third contention is a matter of process, as the groups argue that the issue is an “administrative matter.”

This all comes at a time when climate change is at the forefront of concerns. Over the past three decades, more than 600 local governments across the United States adopted their own climate action plans setting greenhouse gas reduction targets. These pledges were in addition to America’s commitment to the 2015 Paris Agreement.

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.

Joseph Krist

Publisher

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COLORADO CLIMATE CHANGE LITIGATION

Boulder County, CO is suing ExxonMobil, and Suncor, a Canadian company with its US headquarters in Colorado, to require that they “use their vast profits to pay their fair share of what it will cost a community to deal with the problem the companies created”. The companies are pressing to move the trials out of state courts and into a federal system where laws on deceptive marketing and consumer fraud do not apply.

The County is looking to the plaintiffs to pay for an estimated $3 million in annual costs assumed by the County to adapt transport and drainage systems to the climate crisis, and reduce the risk from wildfires. The litigation accuses the companies of deceptive trade practices and consumer fraud because their own scientists warned them of the dangers of burning of fossil fuels but the firms suppressed evidence of a growing climate crisis. The lawsuits also claim that as the climate emergency escalated, companies funded front groups to question the science in order to keep selling oil.

We’ve seen this song before. In this case, support for the lawsuit is less than universal. Boulder County has undergone significant growth. Some have questioned the County’s role in facilitating development in areas where that growth heightens fire risk. Editorial opinions have reflected a view summed up as “The companies didn’t create the demand for fossil fuels. We did through our lifestyles and consumption, including every single member of the communities who now wish to target corporations for a legal shakedown.” 

NUCLEAR DELAYED AGAIN

The expansion of Plant Vogtle’s nuclear generating facilities in Georgia is delayed again. Southern Co., announced yet another delay in its completion of the nuclear expansion of Plant Vogtle and said its share of the costs have increased by nearly half a billion dollars. Now, it projects the second quarter of 2022 for the first, and the first three months of 2023 for the last reactor. In each case that is three or four months later than what it had said in May and reasserted again last month.

That puts the plants some six years behind schedule. Southern says it will cover the increase from its own resources. It took a charge in the second quarter which will cost it $346 million. Southern also laid the groundwork for additional delays. The company said in a regulatory filing that “various design and other licensing-based compliance matters” have arisen or may arise that, if not resolved, could lead to additional delays and costs. In June, the GA State PSC staff noted that the Vogtle expansion “is in a worse condition than past U.S. new construction nuclear plants were at this same stage of construction/testing.”

CHICAGO BOARD OF EDUCATION

Legislation was signed as we went to press last week which calls for a newly constituted Board of Education for the Chicago Public Schools. At present, the mayor appoints a seven-member board, including the president, without an approval process. The seeds of this legislation reflect issues which arose during the Emmanuel administration when many expressed frustration with school consolidations and closures. The plan is for a new board to be comprised of ten elected members and 11 members appointed by the Mayor.

Unsurprisingly, the Mayor was not in favor of the legislation. She directly referenced the poor financial position of CPS and its reliance on funding from the City of Chicago. “I remain extremely concerned about various proposal components, many of which revolve around CPS finances, and the district’s future ability to function without appropriate safeguards, recognizing the district has remained solvent due to annual City of Chicago subsidies.” 

Diminished mayoral control has been a long-term goal of the City’s powerful and confrontational teachers’ union. The newly signed law mandates that the first elected members would run in the November 2024 general election for a four-year term. Though the mayor would continue picking the board president, the City Council would need to confirm that pick. After two years, the seats of the board president and the 10 appointees would become elected ones in January 2027 through a November 2026 election. Those members would also serve four-year terms.

The city would initially be divided into 10 districts for the 2024 school board elections, then expand to 20 districts for the 2026 ballot. That map would need to be drawn by February 2022.

Increased politization of school administration and management is not credit positive. The shift to mayoral control in the late 1990s was a direct reflection of the poor fiscal position of CPS and the hurdles which politics had created towards reform and improvement. For years prior, the Chicago Board of Education was a chronically failed system financially as reflected in a long time below investment grade rating. The new structure for the Board does not give real comfort given the history of politicized decision making.

DETROIT DUCKS CREDIT BULLET

The City of Detroit dodged a credit bullet when a voter initiative to revise the City Charter and mandate hundreds of millions of dollars of new (unfunded) spending even as its recovery from bankruptcy continues. Proposal P  sought to revise Detroit’s charter in ways that supporters believed would push toward a more just and equitable Detroit, including better access to broadband internet, greater water affordability, a task force on reparations and justice for African Americans. 

The item was defeated soundly with 67% voting against and 33% supporting it. The issue will come up again as the 2012 charter had indicated that a revision question should be put before voters in 2018, and at every fourth gubernatorial primary thereafter. We would expect charter revision efforts to continue over time.

PUERTO RICO

The disclosure statement offered in support of the expected refunding and restructuring of Puerto Rico’s tax backed debt is out. At over 2500 pages, it is full of detail and qualifications and caveats. One key section of the document however, clearly lays out the dilemma facing potential investors in new general obligation debt from the Commonwealth.

The dilemma results from the statement’s clear language regarding the apparent unwillingness of the Commonwealth legislature to enact statutory authorization for the bonds. The lack of such legislation is acknowledged and the Oversight Board offers several strong arguments that the proposed debt is already contemplated in existing statutory authority. It is under that authority that the current outstanding and defaulted debt was issued.

Relying on that authority, the Board is proceeding with the proposed bonds as a refunding of the debt to be refinanced and restructured. For some that will be enough to address concerns over the validity of the debt. It’s an issue because the Commonwealth sought to invalidate some previously issued debt in an effort to lower its debt service obligations.

So, do investors insist on legislative action or a high enough coupon to be paid for the willingness to pay risk? The government is already resisting proposed pension cuts which require legislation. Even under the dire circumstances of the bankruptcy, populism has served as an obstacle to reform and we expect that it will continue to do so. That’s enough to demand a lot of compensation in terms of coupon. The lack of statutory support demands that much more.

HOSPITALS, PROPERTY INSURANCE, AND COVID 19

The latest large not for profit hospital chain to sue their insurer over claims for lost revenues due to the COVID 19 pandemic is the Allegheny Health System. It joins nearly 180 other hospital providers who have sued a U.S. subsidiary of Zurich Insurance after Zurich would not cover claims for lost revenues due to the pandemic. In 2020, Allegheny reported an operating loss of $ 136 million, a decrease of $ 180 million year-over-year due to a decrease in elective surgeries, government shutdowns and other expenses related to the pandemic. The company said inpatient visits decreased 9%, outpatient registrations decreased 2%, and physician visits 7% compared to 2019. 

Allegheny and other systems are suing claiming that they should be paid under insurance which covers losses from business interruption due to communicable diseases, property protection and preservation, patient protection and additional expenses at the more than 350 healthcare system locations, according to demand. The coverage was valid from October 2019 to October 2020 and did not exclude virus claims in the final contract provided to the hospital system, according to the lawsuit.

Will they win? The odds are against them. One major system in NY, Northwell Health – saw a similar claim dismissed recently in the federal courts. Based on decisions to date, that was not a surprise. So far, it is estimated that some 92% of these cases have been dismissed early on in the litigation process. The dismissals have been emphatic as they have been dismissed fully and with prejudice in the vast majority of cases.

WHEN GREEN IS RED

So much of the debate over climate change seems to emphasize a blue state/red state dynamic. While it is fair to say that regulatory activity might reinforce a view along those lines it is also fair to say that the market view is different. We see this reflected in data released from the American Clean Power Association. 

Texas leads all states with 37,443 MW of cumulative clean power capacity installed, followed by California (20,354 MW), Iowa (11,394 MW), Oklahoma (9,395 MW), and Kansas (7,058 MW). Texas added the most clean power capacity last year with 6,320 MW, followed by California with 2,193 MW, Florida with 1,267 MW, Iowa with 1,218 MW, and Oklahoma with 1,182 MW.

In 2020, Texas led all states in land-based wind capacity additions with 4,137 MW and utility scale solar capacity additions with 2,044 MW. California led in battery storage additions, with 573 MW. When it comes to electricity generation, Texas led all states by generating over 100 million MWh of renewable electricity in 2020.

However, when it comes to the share of total electricity generated in a state, Iowa led with 57.6% of electricity generated from clean power in 2020. Other top states for clean power generation share include Kansas (43.4%), Oklahoma (35.5%), South Dakota (32.9%), and North Dakota (30.8%). The numbers show the power of a market-based move to a cleaner electric grid.

VACCINATION AS A CREDIT FACTOR

The resurgence of the pandemic though the explosion of the Delta variant has given us cause to see if there are real differences in economic and fiscal performance in states with low vaccination rates. There is already a regional pattern to the resurgence and it reflects vaccination rates. Going forward, we will have to see how limited economic activity becomes and then determine how much of an appetite there is for any additional fiscal bailouts to those jurisdictions seen as hindering vaccinations.

As is the case with so many things, the corporate response will likely be key. Industry and higher education seem to be coalescing around mandates for employees and students to be vaccinated. The real test will come in several weeks when extended unemployment benefits run out and workers are forced to choose between work and vaccination. While not widespread, the first sets of new regulations are being imposed to deal with the resurgence.

CALIFORNIA DROUGHT REALITIES

The ongoing drought in the West continues to wreak havoc especially in California. Much attention is rightly directed towards the huge wildfire problem. Underlying it all is a lack of water and the magnitude of the drought is leading some communities to look again at alternative sources of water. The latest example is in northern California’s Marin County.

Chartered on April 25, 1912, the Marin Municipal Water District was the first municipal water district in California. It serves more than 191,000 people in central and southern Marin from 100 % locally sourced drinking water. About 75 % of the water supply comes from our reservoirs on Mt. Tamalpais and in west Marin, with the remaining supply coming from neighboring Sonoma County’s Russian River water system. Both of these sources have been seriously compromised by the drought. Now, the district is looking at the potential revival of one alternative rejected years ago for its cost – a desalination project. A proposed desalinization plant was scrapped in 2010 after water use declined.

Others have tried. The city of Antioch is building a plant to clean brackish water from the San Joaquin River. It’s supposed to be completed in 2023. When the $100 million project is finished it will allow water to be used from the river year-round instead of purchasing costly water from other agencies. Purchases of water from other agencies is being considered in Marin.

Such a plan would require construction of a pipeline over the bridge from Richmond to San Rafael to pump water from the East Bay. It would cost between $66 million and $88 million. A small desalinization plant would provide less water but would cost $37 million.  

The situation in Marin County provides a window into the set of challenges facing municipal water systems throughout the West. Historically among the most secure of credits reflecting the necessity of water and its relative availability, water credits are beginning to see increasing pressure related to environmental and climate issues. Now, limits on water use and availability become more critical decision items facing potential residents and businesses looking to locate.

The limits are not just local. The State Water Resources Control Board voted unanimously to pass the “emergency curtailment” order for the Sacramento-San Joaquin Delta watershed from the Oregon border in northeastern California down into the Central Valley. About 5,700 Northern California and Central Valley water rights holders — who collectively hold about 12,500 water rights — will be subject to the forthcoming curtailments. The order will largely affect rights holders using water for agricultural irrigation purposes, though some municipal, industrial and commercial entities also will be affected. 

THE TRI STATE SAGA CONTINUES

Tri State Electric Cooperative continues to play financial hardball with participants looking to reduce their fossil fuel exposure. (7/26/21;6/28/21). One of the individual Colorado cooperatives at the center of the dispute is seeking to achieve a “partial” withdrawal from all requirements purchase terms.

La Plata Electric Association has proposed a partial contract buyout which would allow LPEA to seek outside power suppliers to provide 50% of the electricity it delivers to its members. LPEA believes this will allow the cooperative to deliver more electricity generated from renewable and local sources. LPEA also believes it can find electricity cheaper than prices it currently gets from Tri-State, which currently provides about 95% of LPEA’s electricity. That is based on the receipt of nine responses from non-Tri-State power-suppliers submitted to LPEA on its request for proposal to supply it with 50% of the electricity.

It’s not unreasonable that there be some compensation to Tri State from exiting members but the initial proposal was hard to take seriously. A long-term view would indicate that a generation utility like Tri State should be preparing for a sooner than later date for an end to the use of coal.

FLORIDA SENDS CRUISE LINES A LIFE PRESERVER

The State of Florida will provide some $250 million to fifteen ports in the state used by cruise ships. The funds are designed to replace much of the revenues not generated from port activities due to the limitations of the pandemic. The Florida aid package will provide ports with reimbursement grants equivalent to nine to 12 months of net revenue, or six to nine months of operating expenses, based on pre-COVID levels.

Unlike the many ports which depend primarily on cargo rather than passenger operations, Florida ports have continued to struggle because cruises account for a larger proportion of their revenue than they do for most other US ports. These ports have generated virtually no cruise revenue since April 2020. In addition, cruise lines and cruise ports did not receive any federal aid, despite the pandemic affecting them as severely as airlines and airports, which did receive federal aid. That forced the cruise industry to cut employment more rapidly in the face of an effective ban on activity.

Which ports are positioned to benefit most from the plan in that they took the biggest hits? Cruises accounted for 80% of 2019 revenue at Port Canaveral and 55% at Port Miami.  The revenue reductions were 35% each at Port Everglades and the Port of Palm Beach. The aid package is credit positive from both a liquidity viewpoint but also positions the ports to be able to be more flexible as the pandemic continues its course.

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.