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Joseph Krist

Publisher

ISSUE OF THE WEEK

New York’s Metropolitan Transportation Authority plans to issue $2 billion of transportation revenue bonds this week. The effort comes coincident with the publication of a scathing report by the New York Times highlighting the long process of political interference in the Authority’s operations. The report comes as the Authority faces its first decline in ridership in decades after a year of highly visible and seemingly regular service interruptions. While the issues facing the Authority are substantial, it does not appear that these issues have a substantial negative impact on the Authority’s bond credit.

Just last week, Moody’s reaffirmed its A! rating with a stable outlook . It cited ” MTA’s strong operating environment, including the healthy service area economic growth and sound financial condition of supporting governments New York State (Aa1 stable) and New York City (Aa2 stable). The A1 also reflects MTA’s satisfactory finances, supported by sound budget management, governance, and planning, as well as bondholder protections provided by the gross pledge of a highly diversified revenue stream. The A1 also acknowledges the high fixed costs, substantial capital program, and the financial and operational challenges posed by strong collective bargaining units and a massive, aging transportation infrastructure.”

That is not to say that the Authority’s significant reliance on its bonding capacity to fund its capital needs in the wake of consistent reductions in annual funding subsidies from state and local sources do not have implications for the ongoing value. We try not to let our familiarity with the MTA over six decades of ridership color our view of the credit. When one is stuck in a tunnel or packed in an increasingly unreliable subway car, it’s hard to have the words “investment grade” be one’s first thought. Nonetheless, the issues raised in the report highlight valid issues which have been raised about how legislative decisions made by both the State and City of New York which have reduced current funding for MTA operations and capital needs.

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PUERTO RICO HEARINGS REVEAL CONGRESSIONAL GAME PLAN

“Puerto Rico has the potential of being the Hong Kong of the United States, where businesses would flood in there.” Louie Gohmert (R) TX

“Maria gives us the opportunity to bring Puerto Rico’s infrastructure into the 21st century. How can innovative energy technology, such as fuel cells that utilize our nation’s resource of clean-burning natural gas, be used to revitalize the Puerto Rico energy grid?” Rep. Glenn Thompson, R-Penn. Those were just two of the less than realistic comments made by members of the House committee overseeing the Commonwealth of Puerto Rico.

Committee Chair Bob Bishop stated on Tuesday, the main purpose of this week’s hearing was for the Natural Resources Committee to affirm it has the fiscal control board’s back in the bankruptcy-like court proceedings where Puerto Rico’s financial future now sits. The hearings occurred in the wake of the court decision which effectively vetoed the appointment of a chief executive for PREPA, the Commonwealth’s troubled electric utility.

One cannot help but notice the lack of references to the well-being of the citizens, of the role of the rule of law in terms of repayment of debt or the potential for developing mechanisms for supporting efforts to prevent crises like this from happening again. Instead, many of the members saw their prime duty as that of appealing to interest groups in particular the fossil fuel industry. It looked by the end of the week that the answer to the island’s major problems were imported liquefied natural gas.

It looks now that the committee’s greatest objection to the performance of the executive director of PREPA was not the state of the power grid post-Maria but his apparent reluctance to adopt gas fueled generation. One clearly got the sense that the PROMESA board was complicit in this and that it’s attempt to appoint a so-called Chief Technology Officer to run PREPA was a thinly veiled attempt to put someone in the pocket of the natural gas industry in charge.

The hearing bode poorly for the concept of a well thought out plan of recovery for the island. It is not a surprise that Puerto Rico will not get the amount of money it is asking for nor is it a surprise that there will be significant strings attached. It repeats a pattern that emerged in the aftermath of Katrina. The extension of federal recovery aid then was accompanied by efforts to achieve political/policy goals rather than a reasonably quick restoration of life for thousands of displaced residents. We try to avoid politics as much as possible in our analysis but this effort to impose policies through the extension of recovery aid is much more likely to happen when the impacted area is poor and the party in power is “conservative”.

The process has claimed its first major scalp with the announcement that PREPA’s executive director, Ricardo Ramos, was resigning. In his acceptance of the resignation, the Governor said that the ED’s continuance in his role would be a distraction. The hearings this week hammered on the director for his response in reaching out for outside assistance as well as the well publicized Whitefish contract debacle.

In terms of the execution of a PREPA debt restructuring, we see the replacement of the executive director as having no impact on the timetable or amount of any agreement on the debt.

COULD SANTEE COOPER BECOME A REGULATED UTILITY?

It has happened before to other municipal utilities (LIPA, e.g.) but it would be a negative turn of events for the South Carolina Public Service Authority Credit if proposed legislation is enacted by the South Carolina legislature. The State of South Carolina House of Representatives filed a bill for the 2018 legislative session that would require the South Carolina Public Service Authority (Santee Cooper, A1 negative) to gain approval from the state Public Service Commission before changing rates. Currently, state-owned Santee Cooper, which provides electricity and other services, is self-regulated. The legislation also would preclude Santee Cooper from implementing new rates or altering current ones to cover any costs related to its abandonment of Summer Nuclear Station Units 2 and 3.

A foundational aspect of Santee Cooper’s credit quality is a record of timely, self-regulated rate setting that allows the utility to maintain sound financial metrics such as debt service coverage while providing competitive electricity rates. Regulatory oversight would add an additional step and potentially restrict rate raising. With the legislation calling for a prohibition on Santee Cooper’s ability to recover costs related to the abandoned Sumner nuclear project, debt service payments on about $4 billion of outstanding nuclear-related revenue bonds becomes more difficult. Santee Cooper’s current plan is to recover such debt service costs by raising rates sometime after 2021.

The proposal comes before the full impact of Santee Cooper’s rate mitigation plan through 2021 can be implemented.  Before 2021, Santee Cooper planned to use an $898.7 million upfront cash payment it received from the monetization of the Toshiba Corporation parental guarantee on the nuclear project to offset some of the costs associated with the abandoned project. Santee Cooper, which serves both wholesale and retail customers, has announced a cost-reduction plan aimed at mitigating the size of any future rate increase needed to recover Summer 2 and 3 costs.

RATING IMPACT OF HARVEY BECOMES CLEARER

Moody’s Investors Service has concluded rating reviews on 18 issuers that were affected by Hurricane Harvey. The ratings were placed under review for downgrade on September 22nd due to the potential for significant economic and revenue loss associated with damage caused by Hurricane Harvey and the related rainfall that inundated the region for several days. The rating process determined that there was no effective negative impact on the credits. The credits that were the subject of the announcement include:

CNP Utility District, TX (A1/NOO)

Corinthian Point Municipal Utility District 2, TX (Baa3/STA)

Cypress-Klein Utility District, TX (A1/NOO)

Fort Bend County Municipal Utility District 144, TX (Baa2/STA)

Fort Bend County Municipal Utility District 25, TX (A2/NOO)

Fort Bend County Municipal Utility District 117, TX (A2/NOO)

Harris County Municipal Utility District 109, TX (A2/NOO)

Harris County Municipal Utility District 153, TX (A1/NOO)

Kleinwood Municipal Utility District, TX (A2/NOO)

Montgomery County Municipal Utility District 94, TX (A3/NOO)

Montgomery County Municipal Utility District 95, TX (Baa2/STA) Montgomery County Municipal Utility District 95, TX (Baa2/STA)

Montgomery County Municipal Utility District 46 (Aa3/NOO)

Montgomery County Municipal Utility District 9, TX (A1/NOO)

Montgomery County Municipal Utility District 90, TX (Baa2/STA)

Oakmont Public Utility District, TX (A2/NOO)

Pecan Grove Municipal Utility District, TX (A1/NOO)

Varner Creek Utility District, TX (Baa1/NOO)

DALLAS RATING AFFIRMED

This was a difficult year for the City of Dallas, TX. It confronted fiscal difficulties associated with its mounting unfunded pension liability position. After difficult negotiation with its employee labor unions and a complex legislative process at the state level, a resolution to at least a part of the City’s pension funding schemes was obtained. Now that those pieces are in place, the City’s ratings which were on negative outlook by Moody’s have been reviewed and reaffirmed at A1 with a stable outlook.

According to Moody’s, “the rating incorporates the positive effects of pension reform (House Bill 3158) on the city’s near to medium term financial position, specifically the significant reduction in unfunded liabilities associated with the Dallas Police and Fire Pension Fund, as well as the city’s ability to integrate higher pension contributions into its biennial budget. The rating additionally reflects the fact that even with reform, the pension burden relative to operating revenues and the tax base remains elevated and an outlier when compared to peers. Further, pension contributions, while higher, are still below a “tread water” level and we expect the liabilities to grow. The A1 rating also factors in the city’s dynamic economy, adequate reserves and manageable debt burden.”

ENJOY THANKSGIVING!

On the busiest travel holiday of the year (yes, bigger than Christmas) we wish you safe travel. Enjoy your time with family and/or friends and whatever your favorite holiday feast might be.

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.