Joseph Krist

Publisher

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ISSUE OF THE WEEK

MUNICIPAL ELECTRIC AUTHORITY OF GEORGIA

$245,000,000

$175,000,000* Power Revenue Bonds

$70,000,000* General Power Revenue Bonds

Moody’s A1  Fitch A-

In the midst of ongoing dispute and litigation between and among owners of the Votgle expansion units, MEAG comes to the market with refunding bonds. According to Moody’s, these bonds have “the strongest bond security provisions versus peer agencies in the U.S.”. MEAG is unusual in that its participants have also pledged their general obligation to levy unlimited ad valorem taxes in order to meet their contractual obligations to MEAG. The contracts have been court tested and validated in the State of Georgia.

The bonds from this issue are refunding bonds. The refunded debt matures in 2026 but the refunding generates savings for the Authority by extending maturity. So while the refunding lessens the near term pressure on the participants, it offsets some of the benefit by extending the life of the liability. The extension exposes MEAG to greater risk from major regulatory changes or delays which push up costs significantly at MEAG Power’s existing generation facilities thus causing MEAG Power participants to question contract terms and affect their compliance.

Our issue with the credit has to do with concerns that substantial additional cost increases and delays will erode rate payer support for the credit. Yes the legal provisions are strong but legals which are not supported by strong underlying economic fundamentals are not enough to offset the economic issues. Legal provisions let you know where you are in line at bankruptcy court but they don’t magically create money.

What happens if JEA is successful in its efforts to extricate itself from its obligations to pay for now unwanted nuclear capacity? According to Moody’s, this risk is mitigated by the fact that in the case that JEA defaults on its obligation, MEAG Power would still be required to fund future construction costs related to what Project J had been scheduled to finance due to its 22.7% ownership interest. Provisions in a new agreement with GPC provide for up to $300 million of financing capacity to help address this worst case situation.

Additionally MEAG Power and its participants could decide to use available internal liquidity or access external liquidity to fund such a funding requirement. in the case that JEA defaults on its obligation, MEAG Power would still be required to fund future construction costs related to what Project J had been scheduled to finance due to its 22.7% ownership interest. Provisions in a new agreement with GPC provide for up to $300 million of financing capacity to help address this worst case situation. Additionally MEAG Power and its participants could decide to use available internal liquidity or access external liquidity to fund such a funding requirement.

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HOSPITAL MERGERS AND ACQUISITIONS

The California Department of Justice has given conditional approval to the ministry alignment agreement between Dignity Health and Colorado-based Catholic Health Initiatives. The resulting organization, CommonSpirit Health, will operate nearly 140 hospitals in multiple states, including 30 hospitals in California.

CommonSpirit Health is required to maintain emergency services and women’s health services for 10 years. The new entity must also create a health initiative to help homeless patients.

Community Health Systems, Inc. (NYSE: CYH) announced that subsidiaries of the Company have signed a definitive agreement to sell four South Carolina hospitals – 82-bed Chester Regional Medical Center in Chester, 225-bed Springs Memorial Hospital in Lancaster, 396-bed Carolinas Hospital System in Florence, and 124-bed Carolinas Hospital System – Marion in Mullins – along with related businesses, including physician clinic operations and outpatient services, to the Medical University Hospital Authority in Charleston, S.C.(A1 by Moody’s)

In calendar year 2017, the four hospitals combined delivered care through more than 129,000 emergency department (ED) visits, 159,000 outpatient visits (excluding ED visits), 18,800 hospital admissions, and 339,000 clinic visits with physicians. Once the acquisition is completed, MUSC will employ more than 16,400 team members throughout the state. MUSC is the South Carolina’s only comprehensive academic medical center. Founded in 1824, the university is located in Charleston and has awarded more than 36,000 degrees over its history.

The university includes six colleges with more than 1,700 faculty members and awards degrees in 50 specialties. MUSC includes University Medical Associates, a group practice for faculty and clinical professionals and MUSC Foundation, a fundraising organization that also aids in management of endowed funds. The academic medical center also includes Medical University Hospital Authority which owns and operates an over 700 bed full service hospital. When combined the organizations had operating revenue of over $2.3 billion in FY 2016. The medical center is an NCI-designated Cancer Center and Level 1 Trauma Center.

The Massachusetts attorney general approved the merger between Beth Israel Deaconess Medical Center and Lahey Health with various conditions. The combined system will be barred from raising prices beyond the state’s own healthcare cost growth benchmark, which is currently set at 3.1%. It must also participate in the state’s Medicaid program indefinitely, increase access to mental health and substance use disorder treatment and funnel significant investments to its safety net hospitals and programs.

Looking at it from an investment standpoint, the deal should be positive. The Massachusetts​ Health Policy Commission has said that BILH’s market share would nearly equal that of Partners HealthCare System (Partners), market concentration would increase substantially, and BILH would have significantly enhanced bargaining leverage with commercial payers.”

QUESTIONABLE NUMBERS FROM PUERTO RICO AGAIN

The Financial Oversight and Management Board for Puerto Rico announced that after its review of the pension forecasts and projected PayGo payments in the new fiscal plan it had certified on Oct. 23, it concluded that the pension forecasts and projected PayGo payments through fiscal year 2058 were understated by $3.35 billion. The revisions to the existing pension forecasts result in “no net material impact during the first 20 years of the projections (through 2038), and are concentrated in the last 20 years of projections (2039-2058),” according to the board.

The board said it will “further refine” the pension forecasts and projected PayGo payments after it “receives and analyzes more accurate information from the actuaries for the Commonwealth’s pension plans in the coming months.” It is yet another example of what can be so maddening about the effort to restructure the Commonwealth’s debt.

Now there are complaints from some quarters in Puerto Rico about the fact that Congress has been making suggestions to the fiscal oversight board about what actions could or should be take. It continues to astound that there is a view that when one asks for a financial bailout that the party being asked to provide the resources is not entitled to have input over how the funds are spent. In this case, some are objecting to the suggestion that PREPA be privatized. I have always compared this to a child asking a parent for money and then objecting to any strings being attached. One pretty much goes with the other.

It’s not condescending or taking a colonial attitude to want to make some suggestions as to how resources are expended especially when the funding is not generated locally. The unwillingness on the part of multiple administrations in Puerto Rico to admit that there was anything wrong is a large part of the story of how they got in the position in which they find themselves today. I have asked various representatives on multiple occasions about why cities like D.C. and New York had to accept restrictions and oversight in return for outside financial help but that somehow the idea of controls and oversight should not apply to Puerto Rico. We are still waiting for an answer.

REALITY BITES

The outgoing Governor of Maine has made the fight against Medicaid expansion in the Pine Tree State a centerpiece of his administration. Despite being term limited and being replaced by a pro-expansion candidate, he continues to fight on in court against being compelled to expand Medicaid under the ACA. This despite the fact that Maine’s voters approved expansion in a vote. Voters approved Medicaid expansion — a key component of the Affordable Care Act — 59 to 41 percent in the 2017 referendum.

The Maine Department of Health and Human Services requested a stay of a judge’s order that would compel the LePage administration to move ahead with Medicaid expansion. The judge hearing the case had ordered that Maine DHHS had to implement expansion by Dec. 5.  The LePage administration argues that because the federal government has yet to approve the state’s expansion plan, Maine would be at risk of paying the full cost of expansion from July through December, instead of 10 percent of the cost as required by the Affordable Care Act.

Medicaid expansion will cost state taxpayers about $50 to $60 million per year, but Maine will receive more than $500 million annually in federal funds to help pay for health care for newly-eligible Medicaid enrollees. The incoming Governor intends to implement expansion as one of her first official acts.

SMALL STEPS OF PROGRESS IN CYBERSECURITY

Two Iranian nationals were indicted by a federal grand jury for crimes in their connection with cyberattacks over recent months and years which affected a number of governmental and non-profit entities. The two men collected more than $6 million in ransom payments and caused $30 million in damages in attacks that began in December 2015.

“These defendants allegedly used ransomware to infect the computer networks of municipalities, hospitals, and other key public institutions, locking out the computer owners, and then demanded millions of dollars in payments from them”, according to federal prosecutors. Who are some of the victims? Hollywood Presbyterian Medical Center in Los Angeles; Kansas Heart Hospital; MedStar Health in Maryland; Nebraska Orthopedic Hospital; and Allscripts Healthcare Solutions in Chicago .

Atlanta, Newark, the Colorado Department of Transportation and the University of Calgary were among the government agencies attacked. The Atlanta and Colorado attacks were well publicized and this is the first reference we have seen regarding the source of the Atlanta attack which is one of the most extensive so far in terms of municipalities.

While a step forward on the law enforcement front, the news should serve as a warning to other municipal entities. It also reinforces the notion that cybersecurity is and should be a source of increased inquiry and analysis and hopefully will support the efforts of by some investors to press for far more disclosure about the risks of cyber attacks  against municipal credits.

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