Muni Credit News Week of May 7, 2018

Joseph Krist

Publisher

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ISSUE OF THE WEEK

$634,965,000*

ENERGY NORTHWEST

Columbia Generating Station Electric Revenue Refunding Bonds

Moody’s: “Aa1” (stable) S&P: “AA-” (stable) Fitch: “AA” (negative)

These bonds are supported by net billing agreements with Bonneville Power Administration (BPA, Aa1/stable) and thus are rated the same as BPA’s other supported obligations. Proceeds will refinance a like amount of outstanding debt.  Explicit US Government support features include borrowing authority with the US Treasury ($2.69 billion available as of September 30, 2017) and the legal ability to defer its annual US Treasury debt repayment if necessary.

The Columbia Generating Station nuclear facility is the third largest electricity generator in Washington, behind Grand Coulee and Chief Joseph dams. Its 1,190 gross megawatts can power the city of Seattle, and is equivalent to about 10 percent of the electricity generated in Washington and 4 percent of all electricity used in the Pacific Northwest. Columbia is the only commercial nuclear energy facility in the region. All of its output is provided to the Bonneville Power Administration at the cost of production under a formal net billing agreement in which BPA pays the costs of maintaining and operating the facility.

Four U.S. nuclear facilities have closed during the past three years, and two more are slated to close within the next four years. Two of those closed, representing a total capacity of 3,114 megawatts, were in response to return-to-service technical issues associated with plant-unique maintenance and repair challenges. The remaining four closures, representing a total 2,699 megawatts, result from unfavorable economics affecting relatively low-capacity (556 to 838 megawatts), for-profit facilities challenged by a deregulated market.

The bonds are likely closer to a low double A credit as BPA has experienced steadily declining liquidity as prices in the northwestern US wholesale power market have become relatively less favorable. BPA’s accelerated repayment of federal appropriations debt and declining availability under the US Treasury line are factors that could suggest a weakening of the US government’s explicit support features over time. In the initial discussion of a federal infrastructure package early in the Trump administration, there was floatation of the idea of the sale of the BPA’s generating assets to private interests. The idea reflects a general attitude towards entities like BPA as a source of revenue for the federal government over its mission of providing low cost power to the region to support economic development.

BPA published a new strategic plan that provides some credit positive objectives like reducing the debt ratio to a 75% to 85% range and maintaining $1.5 billion of US treasury line availability. The US federal government’s strong explicit and implicit support features are primary credit strengths that support current ratings even though BPA demonstrates financial metrics that are weak for the rating in the face of reduced prices for wholesale power.

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SANTEE COOPER FACES A DOWNGRADE

It has taken longer than one might hope but, better late than never for the announcement by Moody’s that it was putting its ratings of South Carolina Public Service Authority (Santee Cooper) under review for downgrade including the A1 rating on the outstanding $7.4 billion Revenue Bonds, the A2 bank bond rating, and the P-1 rating on the utility’s outstanding commercial paper note program. The action comes in the wake of the political fallout from the cancellation of the Summer 2&3 nuclear expansion project.

Now Santee Cooper’s  audited FY 2017 financial statements includes a $4 billion intangible regulatory asset which results in a significant and permanent increase in the utility’s debt ratio to over 130%, well above the average for an A rated public power electric utility. It remains highly uncertain as to how much if any of this investment will be allowed to be recovered through rate increases.  The ongoing litigation between Santee Cooper and its largest customer add additional uncertainty to the utility’s credit quality.

Moody’s final decision about a downgrade will “assess the legislative actions taken prior to the June 2018 end of the 2018 state legislative session; will examine Santee Cooper’s management plan to mitigate its exposure to the stranded nuclear asset; and will evaluate Central Electric Power Cooperative’s legal intentions and rights regarding its contract with Santee Cooper whose term extends to 2058.”

The S.C. House passed a bill replace its board of directors and create a panel to study a possible sale of the state-run utility. The state’s representatives voted 104-7 to give Governor McMaster, the ability to hand-pick up to 12 new board members for Santee Cooper. the legislation does nothing to prevent Santee Cooper from increasing customers’ bills to pay off its $4 billion debt for the troubled V.C. Summer nuclear project. The bill does, however, set up a new committee to vet possible purchase offers for Santee Cooper. It also calls for a study on ways to reduce costs for the utility’s 170,000 direct customers and the nearly two million customers at 20 electric cooperatives who get power from Santee Cooper.

The results of this process will go a long way to determining the rating position of the Agency.

TRANSIT HITS THE BRAKES IN NASHVILLE

With their beloved Predators in the midst of their quest for hockey’s Stanley Cup, rabid fans refer to their city as Smashville. Supporters of a plan to significantly invest in mass transit in Nashville would find the moniker appropriate in the wake of last week decisive vote against the Transit for Nashville plan. The proposed fifteen year $5.4 billion (current) dollar plan would have would have launched five light-rail lines, one downtown tunnel, four bus rapid transit lines, four new cross town buses, and more than a dozen transit centers around the city. . It would have been financed through a combination of higher sales and tourism related taxes.

The proposal faced a number of hurdles including a scandal impacting the mayor who proposed the plan, strong push back from housing advocates who saw the investment as misplaced, and those who objected to a resulting double digit sales tax. There were also concerns that too much of the investment was in center city although residents across the entire Metro area would be impacted by the sales tax. The vote fell broadly along urbanite versus suburbanite lines. Only five of 35 Metro Council districts, covering parts of East Nashville, Inglewood, downtown, 12South and Belmont, voting for the referendum. Ultimately, the proposition lost by a 2 to 1 margin.

DETROIT EMERGES FROM STATE CONTROL

Last week, Detroit’s Financial Review Commission (FRC) voted to waive oversight of the city, ending more than three years of supervision of the city’s finances following its emergence from bankruptcy in December 2014. The waiver follows passage last month of the city’s four-year financial plan. Michigan Public Act 181 of 2104 requires 13 years of oversight, but allows for scaled back oversight when the city meets certain benchmarks. The board was responsible for monitoring the city’s compliance with the bankruptcy plan of adjustment (POA) and provided general oversight of financial operations. The FRC  has faltered.

As is often the case, financial oversight is a powerful motivator for recovering cities to maintain prudent financial reporting and practices. The specter of loss of control tends to serve as a powerful check on the most irresponsible spending practices going forward. This should create a more favorable atmosphere for the kind of investment the City will need to support business growth and housing development both of which are crucial to the City’s long term success prospects.

Pension funding was a huge factor in the resolution of Detroit’s bankruptcy. City management has set aside funds in preparation for a fiscal 2024 pension contribution spike of $140 million (equal to 14% of fiscal 2017 operating revenue) in an irrevocable trust dedicated to its pension system. Detroit’s bankruptcy Plan Of Adjustment requires it to contribute just $20 million per year from its general fund to the pension system through fiscal 2019, but the city has made additional contributions of $105 million to date with the goal of amassing at least $335 million in assets in the irrevocable trust by 2023. With the monies accumulated in the irrevocable trust, Detroit will only need to increase its recurring general fund contribution by $5-$10 million per year during fiscal 2024-34 if actuarial assumptions are met.

The city also increased its reserves to available fund balance of nearly $600 million, or approximately 40% of revenue, at the close of fiscal 2017. The growth and maintenance of sufficient reserves will be necessary to counter concerns about the City’s long term budget outlook. The current positive momentum for the City is a reflection of the current administration. There is no way to assure that future mayors or City Councils will feel the same obligation to follow prudent fiscal policies. The fact is this the first time in more than 40 years that Detroit’s elected leadership has complete control of government functions.

NEW JERSEY TAX WORKAROUND IS SIGNED

Governor Phil Murphy has signed legislation to address the limitation of the SALT deduction from income under the federal tax reform bill. The legislation is designed to circumvent the law’s $10,000 cap on the deduction for state and local taxes (SALT), which has been a top concern in high-tax states like New Jersey and New York. Under the act, New Jersey taxpayers would be able to make contributions to funds set up by state localities. In return, taxpayers would be able to receive a credit against their property taxes worth up to 90 percent of the contribution.

Taxpayers would also be able to deduct the donations on their federal tax returns by using the charitable contribution deduction. New Jersey joins New York to enact legislation to create a workaround to the SALT cap that involves charitable contributions. One caveat is that it is unclear if the IRS will recognize these types of arrangements. Legislators have cited previous IRS actions which gave approval to states that give tax credits to taxpayers who make donations to private education.

THE FLIP SIDE OF CLOSING PRISONS

The movement to reverse the trend of mass incarceration in the US has resulted in closings of a number of facilities across the country. Faced with a declining population and high costs of updating older facilities some of the nation’s best known facilities have gone out of use. While much of the focus is on the cost saving associated with the closure of these facilities, there is another side of the issue which receives less attention. That is the role of these facilities as economic anchors and job creators in primarily rural areas. The correction jobs associated with these facilities are a source of replacement jobs for long time residents without college education, often previously employed in manufacturing.

The latest example of that side of the prison closing issue is currently playing out in upstate New York. Closed since 2014 because of declining incarceration rates, the Chateaugay Correctional Facility, is being sold by the state at auction.  The closing was a positive factor for the state’s budget but the local host town supervisor notes that “we lost 101 good jobs when it closed.” Some 200 miles north of Albany, the prison is located in the State’s relatively desolate North Country. This region relied primarily on agriculture – dairy farms – and industry which has seen significant consolidation in recent years.

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Chateaugay  has some 2,000 residents of whom 28% are below the federal poverty line and the median family income is $48,000. The physical plant up for auction includes 99 acres located 90 minutes from Montreal with 98,000 square feet of space spread over 30 buildings. It includes kitchens with walk-in freezers, a dining hall and a backup diesel generator. The hope is that its location near the Canadian border will make it attractive as a warehousing facility but with NAFTA under attack, the demand for that sort of facility is uncertain. The law of unintended consequences would seem to be in effect.

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