Joseph Krist

Publisher

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COAL AND MUNICIPALS NOW IN THE SPOTLIGHT

The Illinois legislature has been considering a package of legislative items to deal with climate change and the need for clean energy. Much of the discussion has revolved around the fate of two privately owned and operated nuclear generating plants. Efforts to gain state subsidies and keep the plants open has been at the center of that debate. Those efforts have revealed corruption and illegality.

Now an effort to address the clean energy needs of Illinois has run into a significant hurdle. The Prairies States Generating Campus began generating power nine years ago this month. It was considered a state of the art plant and was advertised as the industry’s answer to the demand for cleaner electric generation. located adjacent to a coal mine it was supposed to make the case for clean and economical coal generation.

Prairie State has ironically been the single biggest source of carbon dioxide emissions in Illinois. It emitted some 12.7 million metric tons of carbon dioxide equivalent in 2019, according to the most recent federal data. The plant ranks ninth in the country for carbon dioxide releases. So the pressure to limit the plant’s operations is intense.

Pending energy legislation in Springfield would include an expansion of subsidies for nuclear plants, more funding for renewable energy projects and a shorter timeframe for climate targets that would include a phase-out of coal power by 2035. That would force the closure of Prairie States long before its expected useful life and before the retirement of some of the municipal bond debt issued to finance the plant.

The municipal owners  are American Municipal Power (23.26 percent), Illinois Municipal Electric Agency (15.17 percent), Indiana Municipal Power Agency (12.64), Missouri Joint Municipal Electric Utility Commission (12.33 percent). American Municipal Power  is the wholesale power provider to some 135 local municipal distribution systems in OH, PA, MI, KY, VA, WV, MD, and DE. It owns 23.26% of the capacity at Prairie States. If legislation ultimately requires closing the plant, AMP would be owning stranded assets with another 13 years to amortize the bonds. Illinois Municipal Energy Agency acts as wholesale supplier to municipal utilities throughout the state as do its counterparts in Indiana and Missouri. Even the state capitol Springfield faces stranded debt costs.

That’s what has created a hurdle in the legislature. Those costs associated with the stranded assets would be passed through to the customers of the local distribution utility. So while the environmental argument makes clear sense, the local utilities see themselves being held responsible for the debt problem without real input into the decision trail.

POWER MARKET REALITIES

Investors in municipal utility credits continue to deal with the uncertainty and changes resulting from a dynamic market for electricity. PJM, the regional grid operator which supplies power to 65 million people in thirteen states held a new capacity auction. This mechanism allows power generators to offer power to the grid based on cost.  That process unfolded just as the abovementioned energy debate in Illinois unfolds.

While the Legislature is considering subsidies for nuclear plants, Exelon announced that three nukes it owns all failed to sell their power at the PJM auction. Over a three year period, the price at which PJM purchased power dropped 64% from $140/MW-day to $50.  Exelon warned that even two nuclear plants that successfully bid to provide power in the PJM auction remain in danger of “premature retirement.” “unfavorable market rules that favor (carbon) emitting generation.”

MARYLAND P3 TAKES FIRST STEP

The board for the Maryland Department of Transportation approved what is essentially a design contract for its I-270 (see Feb. 1 MCN) expansion project. As we noted earlier, the experience with the Purple Line P3 impacted the process for the new project. The approval begins a 30-day public review period by the state comptroller, treasurer and the legislature’s budget committees before the Board of Public Works is expected to vote in mid-July.

The process has already faced bumps in the road with a failed initial bid process. That process generated one bid which was rejected based on what the State saw as unrealistic numbers. Now the contracts are awarded to Transurban and Macquarie, established players in the P3 space. Transurban operates more than 50 miles of toll lanes in the region already.

The contract would be limited to the two companies doing preliminary design at their own expense which gives them the right of first refusal on a broader contract to build the lanes and keep most of the toll revenue over 50 years.  The predevelopment contract the state would have to reimburse the private team up to $50 million of its predevelopment costs if the project gets canceled.

There had to be flexibility built into the deal. The proposed expansion aspects of the project are drawing opposition and pressure over many of the same issues which plagued the Purple Line. The State will manage the permitting process which is yet to be completed. The project has also been scaled back in response to some of those very concerns. A proposed expansion of the eastern I-270 loop has been shelved. Studies have shown that widening that segment would affect more public parkland, homes and the Walter Reed National Military Medical Center.

MORE BAD NEWS FOR MEAG

This week Georgia Power made an announcement that testing at the first unit of the Votgle nuclear plant expansion was underway in support of an expected November 1 start date. For a project that could use some good news, the announcement was positive. Now however, the state regulatory body (the PSC) in Georgia has announced a somewhat different take on the projects status.

In testimony from independent monitors and state regulators, it was noted that “many of the problems encountered by SNC (Southern Nuclear Company)  should have been resolved long before” the current testing. The first of the new reactors are not likely be in operation until at least the summer of 2022, and the project’s total costs are likely to rise at least another $2 billion.

The second reactor is unlikely to be up and running until at least June 2023. Independent monitors and PSC staff recently testified as to project issues, including work that didn’t meet design plans; construction that wasn’t completed before testing began; known problems that weren’t timely addressed, such as failure to upgrade software; and concrete that contained voids among other issues.

OIL AND STATE BUDGETS

As the economy reopens and demand for fuel increases, we can see the beneficial impact of the recovering economy. While production of oil and gas is increasing, the increase in  drilling activity has been inconsistent. So while states like Texas and North Dakota see production remaining below pre-pandemic levels, there have been positive exceptions to that trend.

When New Mexico was planning for its fiscal 2022 budget, the state’s consensus forecast in February projected $43 a barrel average oil price. In reality, the average price is now trending at $49 per barrel. A $1 increase in the per-barrel price of oil translates into an estimated $23 million impact on the state’s general fund. The state is expected to produce about 390 million barrels in the new fiscal year. That is an increase of 20 million barrels over levels projected in February. Each additional million barrels of oil generates about $3 million for the general fund.

The state government had projected to draw a little over $1 billion from reserves to cover the budget for fiscal year 2022. Now, that requirement is some $350 million lower. In addition, the state also expects to receive nearly $133 million more in its Tax Stabilization Reserve from excess oil and gas taxes. That is driven by both prices and production. The excess has also come as federal leasing activity for oil and gas development has been halted.

ILLINOIS PENSION PROGRESS

It’s one issuer and one pension plan but recent legislation passed by the Illinois legislature is designed to get the Chicago Park District on the road to a fully funded pension plan. The statutory changes laid out in House Bill 0417 call for the use of an actuarially based payment. Currently, a formula to determine payment levels based on a multiplier of employee contributions. The phase in of the higher actuarially required annual contribution will occur over three years. Full funding of the ARC is required in 2024. The goal is to achieve 100% funding by 2055.

The District’s pension fund held $821 million of unfunded liabilities at a 29.9% funded ratio for fiscal 2019 and under its current course would exhaust all assets in 2027 if all future assumptions are met and no additional contributions are made. An initial supplemental payment to the fund of $140 million immediately improves the balance sheet. The change in funding also accompanies the imposition of a new tier of pension beneficiaries.

For employees hired after January 1, 2022, the plan raises their annual contribution to 9% of their salary from 7%. Employees in the new tier three can claim full benefits two years earlier, at 65, and existing tier two employees can opt into the new tier, trading higher contributions for a lower retirement age. The legislation also allows the use of any available funds for pension contributions as the current system required the proceeds of specifically levied taxes. The additional flexibility will ease the pain of higher contribution levels. The bill gives the district $250 million in borrowing authority that will not count against its bonding limits which are based on its tax collections.

The borrowing would be limited to $75 million annually of the authorization to cover payouts in the event of a negative cash situation that could occur based on negative investment results. In the end, the legislation represents a meaningful attempt to deal with those elements currently pressuring the District’s ratings. The  lack of a plan to address a huge and growing unfunded liability has been a major downward pressure on the ratings of the District and all of the major borrowers who share the same City tax base.

INVESTMENT POLICIES MOVE WITH THE TIMES

Legislative Document 99 passed the Maine state legislature this week. It directs the Maine Public Employee Retirement System to divest $1.3 billion from fossil fuel companies by January 1, 2026. It also requires the state treasury to divest by the same date. Both will have to provide annual reports to the legislature’s Appropriations and Financial Affairs Committee until the funds are fully divested.

Activists for a variety of causes have been after major state pension fund investors to divest from a variety of businesses in support of a variety of goals. The process to actually achieve the goals legislatively have historically fallen short.

The law in Maine makes it the first state to actually codify into state law requirements for divestiture by state agencies and funds to actually have to do so for a specific sector.

THE EMERGING CONFLICTS FROM THE CLIMATE CHANGE BATTLE

It is becoming more apparent that the obstacles to achieving a renewable energy future are not technological. They are rooted in social science issues like economics and politics. As those elements gain greater strength, a clear clash of interests is emerging which serves as a much greater obstacle. The budget and legislative cycle has laid bare those conflicts. Deservedly or not, the effort to address climate change will impact many issuers and raise real regulatory and financial issues with the potential to severely impact their economies.

We see it in the debate over the state level subsides for nuclear power. Their greatest advocate may be union labor at those plants. It’s the same issue for closing mines, drill rigs, and generation plants. The biggest objections are nearly always based on jobs and tax revenues. So far the dream of something like the Green New Deal looks increasingly distant. The absolute level of technology needed to provide for a renewably based economy and overall transportation system has in reality barely been developed.

This limits the ability of government providers to identify and fund the needed public infrastructure to support such a world. Filling that void is a host of legislative actions shifting the regulatory landscape including local zoning actions. In some cases, preemption has been used to shift the power to the state by prohibiting local regulation and zoning in an effort to thwart the development of renewable generation in a top down approach. In other cases, local zoning powers have been reinforced in an effort to thwart renewable

Environmentalists have come down on many sides of many fences. Farmers are thwarted from selling or leasing to solar operators due to aesthetic concerns (the view). Transmission expansions or upgrades are slowed over land issues even if they convey sources like hydro. Land use requirements like required setbacks from streets and certain facilities (schools, hospitals) are imposed impacting project economics.

The issue of equity is an additional hurdle. The legacy issues stemming from the location of certain facilities relative to concentrations of poorer communities will serve as a brake on repurposing of some sites which might otherwise be well positioned. It will likely raise costs by limiting locations which can then generate additional capital needs (roads, sewers). And it is not just generating facilities. Projects to expand or relocate highways (I-270 in MD and the I-81 relocation in NYS) are being driven by equity issues.

The point is that advocates for the rapid implementation of a high level of technologically connected hard infrastructure are likely under estimate the length of time it will take until that brave new world is underway. Now my view may be influenced that there’s a crew outside my house replacing standard wood telephone poles with new ones. No technology upgrade there! And the broadband will still be inadequate.

PRIVATE INSURANCE AND HOSPITALS

The pandemic threw a huge wrench into the financial works at many hospitals. Utilization plummeted as the result of COVID 19 as patients were afraid to leave their homes and certainly afraid to do so to go to a hospital. others were concerned that they had lost their medical insurance as the result of cuts and/or layoffs. Many simply delayed contact with the system, resulting in more serious illness and emergency care.

Recently, United Healthcare announced that beginning July 1 it had planned to scrutinize the medical records of its customers’ visits to emergency departments to determine if it should cover those hospital bills.  Anthem, another large insurer that operates for-profit Blue Cross plans, undertook a similar process several years ago that led to a political backlash and a federal lawsuit from emergency room physicians claiming it violated federal protections for patients seeking emergency care. 

Now United Healthcare has decided to delay its program until the declaration of a national health emergency related to COVID 19 is declared over. If United still goes ahead with the change later on, the policy would apply to millions of people in United’s fully insured plans in 35 states, including New York, Ohio, Texas and Washington. People covered through an employer that is self-insured or enrolled in a Medicare Advantage plan or Medicaid would not be affected. The policy would exempt care for children under 2 years old.

For those institutions which have weathered the COVID 19 financial storm, the policy was bad news. For many of the institutions, ratings pressure has decreased but that reflects an assumption that more normal utilization patterns would emerge. The industry saw this effort as one which would discourage utilization especially for things like heart attacks. A recent study in Health Affairs by researchers from the M.I.T. Sloan School of Management, working with Boston Emergency Medical Services, found evidence of an increase in heart attacks that had occurred out of the hospital, particularly in low-income neighborhoods.

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