Joseph Krist
Publisher
TWO CITIES UNDER PRESSURE
Well summer is essentially over. School is back. The big winter sports are underway. It all comes with a sense of refreshment and that it’s time to get back to the normal rhythms of life return. It comes with a renewed sense of focus. In that spirit, we see two significant municipal credits facing significant issues which present risk.
Chicago runs its finances on a calendar year basis, so big decisions are looming over the next couple of months. The Mayor is under immense pressure to balance the 2025 budget. The latest estimates see a $982.4 million shortfall for FY 2025 along with a new projection of a $223 million budget gap at the end of the current year. The Mayor is in a bind as the realities of the City’s budget become clear. The City can’t cut its way out of the problem. So that goes to property tax increases which would be politically fraught. The whole process will pose great political risks for the Mayor and if he is further weakened by the process, it will weigh negatively on the City’s credit.
Then there is New York City. If you’ve spent your life observing NYC politics, nothing about this week’s raids on multiple members of the Adams administration is a shock. It is breathtaking that the homes of the schools chancellor and the Police commissioner were raided on the first day of school. New York is being run by a close circle of individuals with long term ties to the Mayor who have long been the object of concern. They represent a 20th century version of machine politics in a world where that no longer works.
Given the individuals involved, there are real concerns about the Mayor’s ability to run the City. He is also 15 months out from his own reelection bid and he will be challenged. His need to raise money for that (what is the source of his current troubles) and the many challenges facing the City already compete for the Mayor’s attention. The City Council seems to be based on opposition to the Mayor and any real limits on spending.
In that environment, we reiterate our view that the City’s credit not stable and that the outlook in the near term is negative.
ELECTRIC VEHICLES
If you read enough of the hype some 8 or 10 years ago about electric and autonomous vehicles and believed it, you would be very disappointed today. Whether you are a dealer, buyer or producer, the demand has just not been there in line with estimates. The demand situation has begun to manifest itself in the form of some major decisions by the automakers regarding their production lineups. Those have implications not just for the firm’s stakeholders’ but the places counting on new or expanded manufacturing related to electrics.
General Motors and Samsung SDI announced an agreement operate a new factory in New Carlisle, Indiana to make electric vehicle batteries. The plant will open but production would not start until 2027. The plant had been expected to start making cells in 2026. The $3.5 billion plant is being built on a 680-acre site and is expected to employ 1,600 workers. It will make nickel-rich prismatic batteries that store more energy than other chemistries.
Georgia has been holding its breath over the outlook for the development of new production facilities for electric vehicles and batteries. The Army Corps of Engineers said it plans to reassess its environmental permit for Hyundai’s $7.6 billion electric vehicle plant in Georgia. It said that state and local government did not reveal water requirements for the plant eventually expected to employ 8,000 workers. The proposed water withdrawals are being challenged.
As that story unfolds, Hyundai announced that it was going to reorient the plant to increase the share of hybrid rather than fully electric vehicles. Hybrids have been emerging as a more popular short-term choice for climate minded buyers. Weaker than expected EV demand growth is leading some U.S. battery manufacturers and suppliers to delay or cancel planned capacity investments. One supplier delayed operations at a planned South Carolina facility from later this year until late 2025, while another suspended a planned Arizona facility and canceled a planned Michigan plant.
One event that has implications for the South is the successful unionization of an EV production facility at Spring Hill, TN. The region has not been easy on efforts to accomplish that. Elections have had varying results at manufacturing sites. This facility is a joint GM/LG venture which is expected to produce the Ultium. The Ultium is an electric vehicle battery and motor architecture developed by General Motors which would serve as the base platform of vehicles from the GMC electric Hummer and Cadillac Lyriq, as well as joint projects with Honda like the new electric Acura.
COAL LITIGATION
The Prairie States coal generation plant in Washington County, IL has been regularly cited as one of the largest single sources of carbon. It is one of if not the largest emitter in Illinois. The project’s two units produce a combined 1600 MW of electricity. The output of the plant is distributed through a group of primarily municipal electric utilities in Illinois in three neighboring states. As awareness about emissions has grown, the plant has come under increasing pressure.
The Sierra Club has sued the plant’s operating entity alleging the plant has been operating and emitting harmful air pollutants without necessary permits required by the federal Clean Air Act.The plant owners hoped to dismiss the lawsuit filed in the U.S. District Court in the Southern District of Illinois.Instead, the federal magistrate ruled that the allegations are sufficient to move forward with the case. She further noted that this effectively accepts the allegation that the plant has been operating for a decade without a permit “and that the state and federal governments have simply ignored the facility’s existence.”
That is astounding. At the same time the magistrate “further acknowledges that the ultimate relief sought by [the Sierra Club] — halting the operations of a power source for millions of people — is an extraordinary request, by any standard.” Legislation passed in 2021, requires Prairie State and other publicly owned plants to become 100% carbon free by 2045.
The principal municipal utility exposure is that of the Illinois Municipal Energy Agency. It owns 15% of the plant or some 240 MW of capacity. That would also be its share of the financial risk of the plant’s operation. Last year’s climate legislation in Illinois tried to build in some protections for the project and its bondholders. Coal plants which are investor owned would be forced to shut down in 2030 while municipal utility owned Prairie States would be allowed to operate until 2045 or just after the majority of debt from the project is retired.
CARBON CAPTURE
The Iowa Utilities Commission has issued a construction permit for Summit Carbon Solutions’ proposed hazardous liquid pipeline across Iowa. The commission also required the company to secure and maintain a $100 million insurance policy, and agree to compensate landowners for any damages that result from the pipeline’s construction. Construction cannot commence without further approvals from other states.
The commission issued the permit without modifying the previously imposed conditions Summit Carbon must meet in order to begin construction – the most significant of which is that the project must be approved by regulators in North Dakota and South Dakota. Summit says it has signed voluntary easement agreements with 75% of the Iowa route’s landowners. The Iowa Utilities Commission has stated that Summit will be able to use eminent domain in Iowa to force the sale of land from property owners who are opposed to the use of the property for the project.
In Wyoming, a plan to develop one of the world’s largest direct air carbon dioxide capture and storage projects in the southwestern part of the state has been “paused”. The facility was designed to be powered by electricity from a modular nuclear reactor – the 345-megawatt Natrium nuclear reactor being built in Kemmerer, Wyoming, by the billionaire Bill Gates-backed TerraPower LLC. It turns out that the generation capacity of the reactor could only meet one-third of the capture facilities’ needs.
The capture facility makes little sense if it cannot be powered by clean energy. That is what is apparently driving the decision to pause and relocate. The company building the capture facility cited the uneconomic cost of power for the plant and cited a specific culprit – data centers and crypto miners. They are an increasing concern in many areas of the country. They often try to keep old fossil fuel plants running by buying them for themselves and they drive demand and price pressures facing utilities and their other customers.
COWBOY SURPRISE
The Wyoming Supreme Court ruled that the Wyoming Public Service Commission erred when it approved a request by High Plains Power to shift from an annual to a monthly compensation scheme with customers who intermittently contribute their excess solar-generated electricity back to the utility. The court rejected High Plains Power’s plan to compensate solar users for their excess power at a monthly wholesale rate rather than the higher retail rate.
It would have been a blow to solar development if the ruling had gutted net metering provisions. This year, net metering has been under attack in state legislatures as legacy power providers challenge the potential negative revenue and profit impacts on them from rooftop solar. In Wyoming, basic net-metering laws apply to residential and small business customers with 25-kilowatt or smaller solar arrays.
According to state statute, qualifying residential and small business net-metering customers must be credited for the excess power they generate, but don’t use, and supply back into the system. The statute was effectively reaffirmed through this decision. The compensation method struck down by the Wyoming Supreme Court allowed High Plains Power to bypass month-to-month kilowatt-hour credits at the retail rate and instead compensate customers each month at the wholesale rate. That resulted in a major reduction in overall compensation to net-metering customers.
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