Joseph Krist

Publisher

PUERTO RICO BEGINS THE JOURNEY BACK

Puerto Rico is poised to undertake the first debt sale as part of its ongoing debt restructuring this week. The GO deal next week poses an interesting opportunity. I look at where the old debt was held and ask myself how many of those holders will be able to buy the new bonds. Do the insurers want to go through this again? Do investors have faith in the government without some supervision? Do you believe that the politics of the Commonwealth will change on a sustained basis? Will PR be able to make the kind of timely disclosure going forward? Will as many individuals who owned PR debt as retail buyers be willing to do so again?

It’s still a distressed situation so that will effectively keep many of the old buyers out of the deal. It would be surprising to see the level of retail ownership that existed prior to the default if only because the vehicles for retail ownership (bond insurance and bond funds) will face limits on their participation.

If the sale is considered a success, it would weigh positively on the PREPA restructuring but the PREPA debt remains in its own category as opposed to tax backed debt.

As for whether I would want to invest, there is no way to go longer than 10 years. I don’t believe that the government is committed to real fiscal reform and the resistance to oversight will continue. This is a credit for speculators and hedge fund type investors. At a price, they will be there. It’s time for mom and pop to move on.

PREPA RESTRUCTURING HITS A ROADBLOCK

The Governor of Puerto Rico and AAFAF’s executive director announced that the government of Puerto Rico has exercised its rights to terminate the restructuring agreement (RSA). The Governor characterized the Commonwealth’s objective as “conversations with all stakeholders to achieve a restructuring agreement that can be implemented.” The Ad Hoc Group asked the Court to appoint a nonjudicial mediator. The group hopes to retool the RSA to be able to be implemented without legislative action by the Commonwealth. It proposed that this specific creditor group be allowed to negotiate with PREPA.

The Court denied the Ad Hoc Group’s Motion insofar as it seeks an order requiring the Oversight Board to participate in, and PREPA to provide unlimited financing for, mediation focused on the interests of a particular subset of creditors under the provision of an RSA that AAFAF has purportedly terminated. The Court noted that “the RSA termination announcement presents the risk of a major setback in progress toward readjustment of PREPA’s liabilities.” Nonetheless, the effort to restrict the group of negotiating creditors raised issues of equity.

Overhanging all of this are deadlines looming in the fourth quarter of 2022. To address those deadlines, the Court ordered that the Oversight Board shall promptly meet and confer with AAFAF, the Ad Hoc Group, and all other major stakeholders and interested parties whose collaboration it believes is necessary to construct a viable basis for a plan of adjustment, to consider whether a consensual mediation arrangement can be entered into promptly to resolve key plan-related issues.

The Oversight Board shall file, by May 2, 2022, a proposed plan of adjustment, disclosure statement, and proposed deadlines in connection with consideration of the disclosure statement, plan-related discovery, solicitation and tabulation of votes, objection period in connection with the confirmation hearing, and proposed confirmation hearing schedule for the PREPA Title III case; or a detailed term sheet for a plan of adjustment or a proposed schedule for the litigation of significant disputed issues in PREPA’s Title III case, or a declaration and memorandum of law showing cause as to why the court should not consider dismissal of PREPA’s Title III case for failure to demonstrate that a confirmable plan of adjustment can be formulated and filed within a time period consistent with the best interests of PREPA, the parties-in-interest and the people of Puerto Rico.

It is not a surprise that the resolution of PREPA’s debt issues would be the most contentious. Only when an RSA can be completed and implemented will the real impacts of a restructured entity become clear. For now, the lack of a resolution holds off the worst fears of management and the workers for at least a little while. The Legislature needs to step up and be part of the solution.

PIPELINES

The Texas Supreme Court heard arguments in a case to determine whether a company has eminent domain authority to build a pipeline across private land to carry a product other than crude petroleum. In this case the substance is polymer-grade propylene (PGP). The issues are whether the pipeline would be a public use as required by the constitution, whether the pipeline company has statutory authority to condemn the property, and finally if the property is condemned, how it should be valued.

The dispute is as much economic as anything else. This not an environmental fight. The landowners have a history of successfully selling easements. Much of the argument centered on valuation issues. That said, it may be decided on non-economic issues by the court with a decision in favor of the landowners seen as a major weapon against eminent domain.

These cases are unfolding as the Tennessee legislature is considering bills which would limit the ability of localities to regulate the location of pipelines within their boundaries.

SOLAR BACKLASH

The effort to impose what are effectively economic penalties for customers who wish to install solar panels to generate energy. The ability of solar owners to sell excess power they produce to the legacy utilities which serve their area under so-called net metering arrangements have been crucial to development in the industry. A number of utilities across the country have made varying efforts to use economic disincentives to discourage or eliminate net metering even in sun drenched states like Arizona and Florida.

Now in Florida, legislation has been passed which would limit and then eliminate net metering. The legislation requires that solar customers pay all fixed costs of having access to transmission lines and back-up energy generation as determined by the Public Service Commission. Florida businesses and homeowners will have until December 2028 to install rooftop solar and receive any financial credit for selling excess energy back to their electric utilities

Starting in 2029, the PSC will impose new rules for how much solar users will be paid when they sell excess energy back to the grid, and how many fees they are charged to stay connected to the grid. That may require additional legislation as the newly passed legislation establishes no standard to guide that decision.

MUNICIPAL UTILITY PRICES

One of the arguments in favor of municipal utilities is their cost of service-based business model rather than a model designed to generate returns for investors. The theory is that the only “profits” a municipal utility would generate would be to fund necessary operation reserves and meet debt service covenants. According to the January 2022 totals released by the Florida Municipal Electric Association, the average residential bill for 1,000 kWh for a municipal utility in the state is $120.67.

The investor-owned utilities are unsurprisingly at the top of the list. Florida Power and Light Northwest and Duke Energy have average bills approaching $200. There is one exception to the rule – Gainesville, FL Regional Utilities. GRU average bills were some $154. That makes this municipal utility the third most expensive – public or IOU. This comes in the wake of a leadership shakeup at GRU which saw the general manager lose his position and the elimination of the chief operating officer position.

P3 FUNDING

Maryland’s troubled Purple Line project was approved for a $1.7 billion Transportation Infrastructure Finance and Innovation Act (TIFIA) loan through the Build America Bureau. The project had previously been approved for a $874.6 million TIFIA loan in 2016; this loan replaces and restructures the previous loan. The funding announcement follows the settlement of contractor issues for this major P3 project. The project also received an additional $106 million in funding through the American Rescue Plan to keep the project alive through the pandemic and the resolution of the contractor issues.

U.S. Department of Transportation also announced that the Build America Bureau provided a $1.05 billion low interest loan to Capital Beltway Express, LLC to refinance an existing loan for the Capital Beltway express lanes and construction of a northern extension called the 495 NEXT Project. This P3 project will extend the existing express lanes by 2.5 miles from the Dulles Access Road to the George Washington Memorial Parkway near the state line. 

The Bipartisan Infrastructure Law, signed by President Biden in November 2021, expanded project eligibility for the TIFIA credit program and extends maturity of the loans, giving borrowers additional flexibility. 

In Pennsylvania, PennDOT announced that Bridging Pennsylvania Partners (BPP) was selected as the Apparent Best Value Proposer to administer the Major Bridge Public-Private Partnership (P3) initiative to repair or replace up to nine bridges across the state. The Major Bridge P3 Initiative is designed to raise revenue through tolling on nine bridges located on Interstate highways throughout the Commonwealth. The department and BPP will now enter into a pre-development agreement to finalize the design and packaging of the bridges to be built, financed, and maintained.

CYBER SECURITY LEGISLATION

On 1 March, the US Senate passed legislation requiring critical infrastructure owners to report relevant cyberattacks to federal agencies. The proposed legislation would require that critical infrastructure owners and operators disclose a major cybersecurity incident to the Department of Homeland Security’s Cybersecurity and Infrastructure Agency within 72 hours and any ransomware payments to Cybersecurity and Infrastructure Security Agency (CISA) within 24 hours.

The legislation comes as utilities are considered to be vulnerable to possible Russian cyber-attacks in connection with its invasion of Ukraine. There is no one particular standard which governs what a cyber-attack target is required to disclose or to whom such disclosures must be made. One goal of the legislation is to provide a standard to address the inconsistency which flows from the lack of one. The thought is that a standard will encourage more fulsome and timely disclosure of events.

DETROIT CLIMBS BACK

Moody’s Investors Service has upgraded the rating on the City of Detroit, MI’s general obligation unlimited tax (GOULT) bonds to Ba2 from Ba3. The outlook remains positive. The city has about $2 billion of debt outstanding. The upgrade and maintained outlook reflect the real progress the City has made in terms of maintaining fiscal balance. It also follows the defeat last summer of a voter initiative which would have forced the city to incur hundreds of millions of expenses without a source of revenues to fund them.

The upgrade action acknowledges the structural weaknesses in the City’s credit – weak property tax wealth, volatile revenue structure, limited revenue raising flexibility and, the city’s significant leverage from debt and pensions. Pension costs remain the one area over which the City has little control. Moody’s lays out a view of what would drive another upgrade – robust revenue growth that makes rising fixed costs easier to accommodate; strengthening of full value per capita, median family income and population trends; accumulation of additional resources in an irrevocable trust to reduce budgetary risk of rising pension costs.

FRAUD, LOSSES, AND DISCLOSURE

The Fresno Bee reported that the city of Fresno lost about $400,000 in 2020 after falling victim to an electronic phishing scam.  The fraud involved the use of fake invoices which a city employee mistook for a real one and paid it.  There were two such payments. The issue isn’t one of fiscal solvency or short-term budget stress. After all, it’s $600K out of a $1.4 billion budget.

It does raise an issue for investors concerned with governance. The prior administration had been aware of the problem but chose not to disclose it either internally or to the public.  A new mayor was informed by the press.  Here’s the rub. The City reported the fraud to federal authorities but not to its City Council or its investors. It was put in the middle of its obligations to disclose material financial information and comply with requests from law enforcement. When the case was turned over from investigators at the Fresno Police Department to the Federal Bureau of Investigations, FBI officials asked investigators from the City of Fresno to keep the information from being disclosed to the public.

Now, the information was leaked to the press anyway.  More concerning are the comments of the mayor regarding other potential municipal victims.  FBI officials told Fresno City officials that the scam targeted “several municipalities across the United States who were victims” including one that lost twice the amount as that of Fresno.

AIR INDUSTRY CONTINUES TO RECOVER

U.S. airline industry (passenger and cargo airlines combined) employment increased to 733,491 workers in January 2022, 3,411 (0.47%) more workers than in December 2021 (730,080) and 16,848 (2.25%) fewer than in pre-pandemic January 2020 (750,339). The January 2022 figure is the highest industry headcount since the start of the COVID-19 pandemic. U.S. scheduled-service passenger airlines employed 450,065 workers in January or 61% of the industry-wide total. Passenger airlines added 5,285 employees in January for a ninth consecutive month of job growth dating back to May 2021. 

The January industry-wide numbers include 625,753 full-time and 107,738 part-time workers for a total of 679,622 FTEs, an increase from December of 3,765 FTEs (0.56%). January’s total number of FTEs remains just 1.71% below pre-pandemic January 2020’s 691,457 FTEs. U.S. cargo airlines employed 253,262 FTEs in January, up 478 FTEs (0.19%) from December. U.S. cargo airlines have increased FTEs by 18,048 (7.67%) since pre-pandemic January 2020.

ENVIRONMENTAL TAX IN PORTLAND

Measure 26-201 was approved by Portland, OR voters in 2018. Voters approved the tax to create the Portland Clean Energy Fund in 2018 as an ambitious way to tackle climate change and social inequities. It created a 1 percent gross receipts tax within the city limit. The tax would apply to retailers with more than $1 billion in national sales and $500,000 in Portland-specific sales. It would also include large service-based firms, including retail banking services. Supporters estimated the tax would raise approximately $30 million a year. City officials expected revenues of $44 million to $61 million annually. Businesses said it would raise far more than that.

It turns out that the businesses were right. This week, an audit from the City of Portland showed that at the end of the last fiscal year, the tax had generated more than $185 million since its inception.  Actual revenues were $63 million in Fiscal Year 2019-20 and $116 million in Fiscal Year 2020-21. That’s great from the point of view of a “social” investor.  From a governance standpoint, the situation has raised issues. The Portland City Auditor’s Office found the program has still out not finalized methods to track, measure and report its performance, as required by the 2018 ballot measure that created it.

The program had made progress with some elements, but othe­­­rs were not yet fully implemented or needed direction from City Council. The program did not report on whether its activities by grant category were consistent with target proportions in the legislation. The presentation of the recommended grants to Council used descriptions that were a mix of funding category and grant type. 

It is a weakness of several prominent efforts to devote public funding to efforts backed by limited notions of what constitutes accountability and transparency. The Thrive NY program led by former Mayor DeBlasio’s wife faced withering criticism over its lack of accountability and transparency. It is not the first time that Portland has been satisfied with less than adequate disclosure. It has in the past made the case that better disclosure is a choice between better information or public safety. For ESG investors, this stuff should matter.

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