Joseph Krist
Publisher
BOLINGBROOK, ILLINOIS
Moody’s has released its current rating on the Village of Bolingbrook, IL. There has been a debate over what the impact on a default on non-guaranteed debt should be on a municipality’s when this happens. In this case Moody’s makes the argument that “governance is a driver of the current rating action given the village’s weak transparency and disclosure practices as reflected in the failure to report the Series 2005 Sales Tax Revenue Bonds, debt secured solely by sales tax revenue within a limited geographic area in annual financial reports. Public disclosure on this particular debt has not been timely.
The pledged revenue for Series 2005 Sales Tax Revenue Bonds fell short of the required sinking fund amounts because of weak home rule sales tax collections within a limited project area, which is extremely small relative to village’s full tax base creating idiosyncratic risks that are not indicative of the village’s general credit quality.”
We reiterate that investors need to focus on the underlying economics backing a credit. This is true when a credit is backed by a limited economic/revenue base. In this case, it looks like some buyers focused on a legal approach (even though it was pretty clear that this was a stand-alone credit) and the idea that reputational risk would motivate the Village to use general tax revenues to pay the sales tax bond debt service.
SMALL COLLEGE CREDIT
The latest example of the pressure on smaller private college financial positions is one of the more established names in this sector, Hartwick College. Moody’s Investors Service has downgraded Hartwick College’s (NY) issuer and debt ratings to B2 from B1. Ongoing multi-year deficit operations and decreasing liquidity are the primary sources of difficulty.” Hartwick is in the sector which is increasingly vulnerable to the impacts of demographics and price. Hartwick College is a small, tuition-dependent private liberal arts and sciences college with fall 2022 enrollment of 1,089 full-time equivalent students and fiscal 2022 operating revenue of about $44 million.
Moody’s Investors Service has confirmed Kaweah Delta Health Care District, CA’s (KDHCD) Ba1 revenue bond ratings. The system breached its debt service reserve fund covenant at December 31, 2022 which will require funding of a debt service reserve fund at maximum annual debt service of roughly $18 million. The confluence of weak financial performance and declining reserves will challenge financial covenants for June 30, 2023 with expectations for a breach.
SMALL RURAL HOSPITALS
KDHCD operates a variety of health care facilities including 435-licensed bed Kaweah Delta Medical Center, a skilled nursing facility, a mental health hospital, a rehabilitation hospital, a dialysis center, and various other outpatient facilities including five hospital based federally-qualified rural health clinics. All combined, KDHCD has 613 licensed beds across its various campuses. Facilities are concentrated in Visalia, CA.
Recently, Moody’s affirmed the District’s revenue bond rating at Ba1. It kept the already below investment grade credit on negative outlook. The system breached its debt service reserve fund covenant at December 31, 2022 which will require funding of a debt service reserve fund at maximum annual debt service of roughly $18 million. The confluence of weak financial performance and declining reserves will challenge financial covenants for June 30, 2023 with expectations for a breach.
While the system remains the major tertiary referral center for Tulare County, the negative outlook reflects the risks to achieving projected results for year-end and into fiscal 2024, and a thin cash cushion to absorb any potential cash losses from operations should performance improvement stall.
NATURAL GAS
The use of natural gas is the subject of many debates across legislatures across the country. In some cases, the lead fight is at the state legislative level. This year the issue of natural gas bans in NYS has become highly politicized and a part of the budget process. Other states look at legislation to override local bans on natural gas. On the local level, restrictions on the use of natural gas for newly constructed buildings continue to be enacted.
The latest example of the issue is found in a legislative approach taken by the City of Denver. New building codes in Denver will ban natural gas furnaces and water heaters in new commercial and multifamily construction starting in 2024. And by 2027, natural gas will not be permitted for any heating or cooling equipment in new commercial buildings. Here’s the difference between this and other bans. These restrictions do not apply to gas stoves. It is a clear attempt to split the baby to get support. The culinary industry strongly resists limits on gas for cooking, understandably. Getting that sector on board with the gas ban made its enactment easier.
It also acknowledges the role of politics. My e-mail gets inundated with political messaging about the proposed NY ban. You’d think a van full of stove removal agents is going to pull up in your driveway and take your stove away. Denver’s approach was able to defuse that by exempting stoves.
SMALL NUCLEAR COST SETBACK
The Utah Associated Municipal Power Systems (UAMPS) has been undertaking an effort to develop small modular nuclear generators. The developer of the units – NuScale – is hoping to show that groups of small modular reactors can be a realistic and less costly way to provide energy without carbon. UAMPS was the first municipal utility to try to go down this path. As the high costs of large scale nuclear have been clearly reaffirmed through the Votgle debacle in Georgia, proponents had high hopes for the modular approach.
The plan was for the development of six 77-MW reactors. The plan is now in some jeopardy as NuScale has informed members of UAMPS that the estimated costs of building the six 77-MW reactors had risen by more than 50 percent to $9.3 billion. Ironically, it is not for the “usual reasons” that this nuclear technology is more expensive than when proposed.
The reasons for the updated costs are rooted in general commodity inflation. Copper (up 32%) and steel (up 106%) are markedly more expensive. The major point for the participants is that the new cost estimates will raise their retail price by some 53.4%. That has already led to individual participants dropping out and the project’s power output is only 20% subscribed. The agency has said that it will need to reach 80% for planning and construction to proceed next year.
Good news? NuScale was the first of dozens of companies working on SMRs to have a design approved by US regulators. An application to construct and operate the plant is expected to be submitted to the U.S. Nuclear Regulatory Commission early next year. UAMPS has also decided to continue with the project despite the cost increases. Some 26 out of the 27 remaining UAMPS member agencies voted in favor of continuing the project.
Another proposed modular nuclear generator which developers hoped to build on the Hanford Reservation in Washington State has been forced to look at a relocation. It will now build in Louisiana where the process of approval is felt to be more streamlined. X-energy has been working to meet an Energy Department timeline that calls for bringing the project on line by 2028. That process had effectively stalled.
The California Energy Commission (CEC) approved a staff analysis recommending the state pursue extending operation of Diablo Canyon Power Plant (DCPP) through 2030 to ensure electricity reliability. DCPP is currently scheduled for phased retirement in 2024 and 2025. The nuclear power plant supplies about 17% of California’s zero-carbon electricity and 9% of total electricity.
The Biden administration said on Thursday it is offering $1.2 billion in aid to extend the life of distressed nuclear power plants which, for the first time, could offer funding to a plant that has recently closed. The funding comes from the $6 billion Civil Nuclear Credit program, created by the 2021 infrastructure law, and will be distributed by the Department of Energy (DOE). The plan to offer support for recently closed plants is a plus.
The Palisades plant in Michigan would be able to apply. It closed in May 2022. Michigan is the home state of Energy Secretary Granholm. Holtec International, the current owner, had its first-round application rejected. It has estimated the cost of recommissioning at $1 billion.
CONGESTION PRICING
The MTA released its February Financial Plan, which stated that revenue collection from congestion pricing is now expected to begin in the second quarter of 2024, meaning April 2024 would be the earliest that drivers are charged for driving into Manhattan’s Central Business District. The move will cost it roughly $250 million in anticipated congestion pricing revenue in 2024.
NORTHWEST HYDRO
The municipal utilities in Washington State have long relied on the federal dam system for hydroelectric power. With 145 large federal dams, Washington state is the nation’s leading producer of hydropower. The region has experienced fluctuations in annual precipitation over the years but the region is in much better shape than the Colorado River basin. One example is the recent two years.
Water year 2021 was especially dry in Eastern Washington, most of Oregon, and most of Idaho. 2021 also featured an exceptionally dry spring and of course the record-breaking June heat wave. The result was decreased river flows and a twenty year low in hydropower production.
More snow and rain in 2022 fueled a 17% surge in power production in Washington, including a 19% increase at Grand Coulee Dam, the nation’s largest producer of hydropower. Hydroelectricity generation at rivers in Oregon jumped 19% during the 2022 “water year” from October 2021 to September 2022.
COLLEGE ENROLLMENTS
UC San Diego said it received 130,830 applications, a decline of 396 over the previous year. The change was a significant negative change from last year’s figure was almost 13,000 higher than it was for fall 2021. The number of California residents seeking a spot for this fall increased by 584, to 84,910. And the number of out-of-state applicants rose by 173, to 23,951. But the number of international students fell by 1,153, to 21,969.
The numbers highlight two of our regular themes. The most obvious one is the role of international students in the demand for college spots. These usually full fare paying customers are always attractive to these institutions. If that is indeed the driving force, it shows that the pattern of restrictions on international students has finally made its mark. Initially, it was immigration policies under the Trump Administration that hurt international demand. Then it was the limits due to the pandemic.
The importance of international students’ willingness to pay top dollar has caused political pushback. In 2021, the California legislature looked to UCSD, UCLA and UC Berkeley to reduce the number of undergraduates it accepts from outside California to make more room for students who live here. Some accused the schools of favoring international students because they paid much higher tuition.
While the international shortfall is the primary culprit, the negative demographic trends driving demand reduce the cushion available when one particular demand cohort faces special issues or limitations.
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