Joseph Krist

Publisher

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COAL HANGS ON      

The Omaha Public Power District board is taking public comment on a proposal to burn coal at its North Omaha power plant for possibly another three years, until 2026. The board cites the fact new solar and natural gas plants that will replace the North Omaha units are running behind schedule and customer demand for electricity is rising. OPPD previously converted three of the five units there to natural gas. The remaining coal units are newer.

OPPD puts much of the blame on the federal government. Federally required interconnection studies are backlogged across the country. The need for these federal approvals is a constant source of delay for generation projects all over the country. In addition, solar projects all over the country are delayed due to restrictions on solar panel imports. The White House recently took steps to address the issue but the sheer number of projects seeking interconnection continues to grow.

DREAM A LITTLE DREAM FOR ME

The American Dream mall in the New Jersey Meadowlands seems to be falling victim to the impacts of a highly indebted owner, an unprecedented opening environment, and the realities of a post-pandemic world. As all of the factors have converged on the project, the financial impact has been difficult.

The Trustee for some $800,000,000 of outstanding revenue bonds issued through the Public Finance Authority (Wisconsin) informed holders that the May PILOT payment, which was due from the Developer in advance of the semi-annual June 1, 2022, Interest Payment Date, was not paid. The PFA Bonds are payable from Revenues, ultimately derived from the PILOT payments required to be made by the Developer pursuant to the Financial Agreement.

On June 15, the Developer made a payment to the PILOT Trustee in the aggregate amount of $13,870,191.21, which is equal to the amount of the missed May PILOT. The Developer has not fully cured its Default under the Financial Agreement however, as due to the late payment, pursuant to Section 4.02 of the Financial Agreement the Developer is also required to pay interest on the overdue May PILOT. That interest has not been paid.  

Another potential issue reflects the fact that the Developer is challenging the current tax assessment valuation of its interests in the Project in a proceeding under applicable New Jersey law. On March 31st 2022, it filed a Tax Appeal Complaint with the Tax Court of New Jersey to contest the tax assessment imposed on the property known as the American Dream Project for tax year 2022.

For tax years 2019, 2020 and 2021, the developer filed a tax Appeal Complaint to contest the 2019, 2020 and 2021 tax assessments on the American Dream Project. The tax appeals for 2019, 2020, 2021 and 2022 are unresolved at this time. The tax-assessed value is a key component of the revenues for the PILOTs, which are the principal source of repayment for the PFA Bonds.

The bonds bear all the markings of a prime restructuring candidate. If the assessment challenge cannot be adequately addressed, a clear risk will remain. The idea that a need to restructure this bond issue might arise is absolutely no surprise. The tortured development history, the limits of the pandemic and changed habits post-pandemic have created a credit squeeze. The mall partially opened in October 2019, was forced to close in March 2020 under pandemic restrictions and only reopened in October of that year.

Given all of that, operating losses in the first year at 60% of revenues are a problem. For 2021, the project did generate some $175 million in revenue but it resulted in a near $60 million operating loss.

CALIFORNIA HOUSING

The aid received by states from the federal government as the result of the pandemic, is providing an opportunity for the consideration of all sorts of programs seeking to spend money to achieve certain social goals. In California, it has led to a proposal to aid first time homebuyers which would incorporate the use of state funds for down payments, to be recouped later from price appreciation on homes.

The California Dream for All program would issue revenue bonds of $1 billion a year for 10 years to create the fund which would be applied to support the concept of shared appreciation mortgages. The program would create a partial ownership interest on the part of the fund and it would require repayment of the portion of a down payment covered under the program after sale of the property or a refinancing resulting from appreciation related equity.

It is being billed as a program to address “equity” issues. The program would be open to buyers making less than 150% of the median income in their area, and it would target first-generation homebuyers as well as those with high student debt loads. While the proposal may indeed lead to greater “equity”, it may ultimately exacerbate the state’s ongoing affordable housing crisis.

One clue is the support for the plan from the CA Association of Realtors. The plan clearly relies on steady appreciation in house prices. It also would help to drive that appreciation in that the plan only addresses the demand side of the housing equation. Empowering more demand in a market which cannot generate commensurate increases in supply is the definition of a price driver. No wonder the real estate industry supporting the plan.

The plan would do nothing to increase the supply of housing in a state with record breaking homeless populations. It would potentially expose the state to losses on the fund if the expected real estate price increases do not materialize. The other issue is that shared appreciation mortgages are a private sector technique. This would be the largest government sponsored and funded experiment. If for some reason the expected appreciation and repayment of down payments does not materialize, will that create an obligation for the state to fund? Will there be political pressure in future to forgive loans?

HIGH SPEED RAIL SLOWS DOWN

The proposed high speed railroad project undertaken by the State of California has been the target of much criticism. Its budget grew significantly, the timelines for project completion were delayed and extended, and anticipated federal funding was initially delayed under the Trump Administration. The scope of the project initial build out was reduced. All in all, the project was seen by many as just another public works failure.

As that project was unfolding, a planned Houston to Dallas high speed rail project was proposed. The cost of the project when originally proposed ten years ago was $10 billion. The funding for the project was to be entirely privately funded. Now, the expected cost is $30 billion. The funding for that cost is now proposed to include a $12 billion federal Railroad Rehabilitation and Improvement Financing program loan. Construction had been scheduled to be already underway. Instead, litigation challenging the right of the private project to use eminent domain to acquire needed right of way was argued before the Texas Supreme Court.

While the Federal Railroad Administration (FRA) issued its final rule for regulating the high-speed rail project in September 2020, Texas Central must still make an application to begin construction with the Surface Transportation Board. It has yet to do so. Management is at best in flux. It has been reported that the executive staff was let go in April. A Spanish news website reported the project has entered “a hibernation phase in search for financing.

Political opposition at the federal level is based in eminent domain concerns – a real long-standing issue in Texas and the need for federal aid. Issues regarding the use of Japanese train technology are also driving opposition and concern that use of the technology could clash with Buy America requirements in federal legislation.

NUCLEAR LITIGATION

Oglethorpe Power Corp. and the Municipal Electrical Authority of Georgia are suing lead owner Georgia Power Co. over proposed contractual changes from Georgia Power involving the expansion of Plant Votgle. Oglethorpe threatened to back out in 2018 unless it was protected from additional overruns. Georgia Power agreed that above a certain point, it would pay 55.7% of the next $800 million in construction costs, and then 65.7% of the next $500 million. Those extra contributions total $180 million. 

Oglethorpe and MEAG say the agreement activates once shared construction costs rise $2.1 billion above $17.1 billion.  Georgia Power says the base construction cost should be $18.38 billion and that the agreement doesn’t kick in until shared costs reach $20.48 billion. That creates a $695 million obligation for the municipal owners. Southern Co. has acknowledged it will have to pay at least $440 million more to cover what would have been other owners’ costs.

While the litigation process unfolds, Moody’s took the opportunity to review its ratings of debt issued by MEAG for the Votgle expansion. It assigned a Baa2 rating to the Municipal Electric Authority of Georgia’s (MEAG Power) planned issuance of approximately $52 million of Plant Vogtle Units 3&4 Project P Bonds, Series 2022A, and approximately $63 million of Plant Vogtle Units 3&4 Project P Bonds, Taxable Series 2022B. The Bonds are expected to be sold in July. The bonds are secured by payments received from the sale of a portion of MEAG’s interest in the new Votgle units.

That capacity sale is important to the MEAG credit as the purchaser is essentially the sole revenue source for the payment of these bonds for 20 years. The expectation is that sufficient demand from MEAG’s current participants at that time will absorb the capacity. The rating comes with a stable outlook reflecting a continued expectation that progress will continue to be made towards the construction of Vogtle Units 3&4 with commercial operation expected during the first quarter 2023 and fourth quarter 2023, respectively.

MASS TRANSIT SAFETY

While much attention has been focused on the issue of passenger safety in the context of criminal activity and its impact on ridership, another safety issue is plaguing two of the nation’s major subway steams. This week, the MBTA which operates Boston’s rapid transit system pulled all of its new Orange Line trains from service. This is the third time that the rolling stock on the Orange Line has had to be taken out of service over systematic issues.

The last Federal Transit Administration inspection has led to some preliminary conclusions and recommendations. They include increasing staffing at its operations control center, improving general safety operating procedures, and addressing delayed critical track maintenance and safety recertifications for employees. A full report and list of recommendations is due in August.

In Washington, D.C., WMATA has announced the return to service of subway cars which have been the subject of safety reviews over the last seven months. A Metro train derailment near Arlington National Cemetery in October 2021 found a wheel defect in some of the trains. As a result, all 7000-series railcars were removed from service on all D.C, Metro lines, removing nearly 60% of Metro’s fleet. Now, the Authority will begin releasing groups of the cars back into service.  The first release of 64 cars or eight trains in total represents less than 10% of the fleet.

The return to service allows the Authority to restore service levels. The 7000-series cars represent some 60% of the total WMATA fleet. The impact on service levels and safety perceptions were significant. The situation compounded ridership levels in addition to the impacts of pandemic limitations.  

TAXES ON THE BALLOT

The Massachusetts Supreme Judicial Court ruled that a ballot initiative calling for a 4% tax on incomes of $1 million or more. Opponents had challenged description of the initiative produced by the attorney general’s office. If the amendment is approved by voters, any household income over $1 million would be taxed at an effective rate of 9%. The first $1 million of household income would still be taxed at the current 5% tax rate, with a 4% surcharge — or so-called “millionaire’s tax” — tacked onto any additional income.

Opponents took issue with how the proposed constitutional amendment was summarized for voters in language written by the attorney general’s office.  “This proposed constitutional amendment would establish an additional 4% state income tax on that portion of annual taxable income in excess of $1 million. This income level would be adjusted annually, by the same method used for federal income-tax brackets, to reflect increases in the cost of living. Revenues from this tax would be used, subject to appropriation by the state Legislature, for public education, public colleges and universities; and for the repair and maintenance of roads, bridges, and public transportation. The proposed amendment would apply to tax years beginning on or after January 1, 2023.”

SEC CLIMATE DISCLOSURE

We have been generally unsurprised at the reactions against the SEC’s proposed climate change related disclosure regs. They have already been described as an act of terror by one state official in Utah and as is nearly always the case, issuers are expressing concerns with the potential costs of compliance with the proposed rules. Now, we are seeing initial efforts by some to legislate reality away.

The North Carolina House has a resolution which directs that Congress do all it can to legislatively block the SEC from imposing the rules. It is ostensibly in support of small farmers. The claim is that companies which are subject to the regulations will require individual farms to monitor their emissions.

NET METERING COMPROMISE

Every two years, Vermont Public Utility Commission is required to assess the incentives offered to new net-metering systems and decide whether they should be adjusted upward or downward. The latest review was released this week and it includes proposed changes in the state’s net metering scheme. As a result of the review and its resulting adjustments, most existing net-metering systems will see an increase in their compensation. Future systems that apply for permits on and after September 1, 2022, will see a small net decrease in compensation compared to existing systems.

The plan is an attempt to deal with the one aspect of net metering which has been most difficult to resolve around the country. In Vermont, the Commission notes the rapid expansion of solar installations and its potential to raise costs for customers without solar power. It cites the fact that in 2021, nearly 3,000 new solar net-metering systems and one wind net-metering system received were certified in 2021, for a total of approximately 45 megawatts (MW) of new, renewable energy capacity. That is an increase of the approximately 36 MW of net-metering permits issued in 2020 and continues to exceed the amount needed to meet Vermont’s current renewable energy requirements.

To better moderate the pace of new net-metering development, the Commission determined to reduce the compensation offered to new net-metering systems – resulting in a net decrease of $0.00272 per kWh, or less than three-tenths of one cent. However, because of other adjustments made in this order, most existing net-metering systems will benefit from an increase of $0.00728 per kWh, or approximately three-quarters of one cent, in their current incentives.

ALABAMA PRISON REDUX

Last year the State of Alabama attempted to finance a plan to replace two existing prisons with new facilities. The State has been under federal court orders to upgrade its dilapidated existing prisons. The plan had been to employ a public/private partnership with the private entity building and owning the prisons but with the State operating and staffing the facilities.

That plan succumbed to political pressure from the decarceration movement. The complaint was that there should be no way for a private entity to profit from the provision of prison facilities. (MCN 10.11.21) After a campaign of pressure against potential underwriters, that deal was scuttled. While seen as a victory for decarceration advocates, the fact was that the State still faced federal sanctions and that a jail replacement had to be built.

That left prison replacement to be dealt with the old-fashioned way. The State would design, build, staff, and operate the prisons. It would own the prisons. The Legislature would then have to appropriate each year for lease payments to pay debt service on the debt which will now be issued. The passage of time and the impact of inflation also make cost comparisons less favorable. Seems like a bit of an own goal for activists.

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