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.

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