It’s hard to imagine a City would make a long-term economic investment in developing a hotel and convention center on an island in Trinity Bay, Texas — the same area where hurricane storm surge stands to overwhelm its coastlines. Also remarkable is the fact that the Issuer wouldn’t thoroughly disclose natural disaster risk to potential investors. Nevertheless we have the Baytown Municipal Development District doing just that.
This week’s non-disclosure distinction goes to:
Baytown Municipal Development District Hotel Revenue Bonds (Baytown Convention Center Hotel)–Series 2021A ($18,115,000*), Series 2021B ($14,195,000*), Series 2021C ($29,175,000*)
The proceeds of the Series will be primarily used to finance the development of an upscale full-service convention center and hotel prepared for opening by the Hyatt Corporation (pg. 1) in the City of Baytown. The Bonds are limited special obligations of the District payable primarily from gross operating revenues generated by the Hyatt Convention Center and Hotel Project, as well as pledged sales taxes (POS pg. 32). The debt schedule runs out to 2050.
Carbon Transition Risk
The City of Baytown sits in an area referred to as the “Golden Crescent”, an area along the Gulf Coast of Texas that is responsible for approximately 80% of the country’s petrochemical production. According to the POS (pg. 4), Baytown is considered the ‘epicenter’ within the Golden Crescent region for petrochemical processing and industrial production. Fossil-fuel intensive facilities in Baytown include Exxon’s largest refinery in the United States, the Chevron Phillips Cedar Bayou Plant, as well as the TGS Cedar Port Industrial Park, which is considered one of the world’s largest industrial transportation centers. These facilities are located within a short drive of the hotel and convention center, which is expected to be used for events related to the petrochemical industry as well as for tourism (POS pg. 3).
Carbon transition risk is an obvious concern for the City and the Project given the potential impacts of increasingly stringent regulations on electricity production businesses and the energy and petrochemical industries as a whole, inevitably before the 2050 debt matures. Digging into the Carbon Transition Risk dashboard on the risQ UI, we find that the project area has high exposure to transition risk given the high CO2 emissions in the area. The area’s electricity production sector ranks 96th and 99th percentile nationally in terms of per capita and aggregate Scope 1 (point of combustion) emissions metrics, respectively; the industrial sector ranks 97th and 99th, and the commercial marine sector ranks 99th and 99th, respectively.
An area with such a heavy dependence on the fossil fuel industry has a level of carbon transition exposure that could materially impact economics at best and catalyze an existential crisis at worst.
Municipal obligors with high carbon transition liabilities are expected to see the costs associated with living, commercial operations, and project financing increase within a municipality’s taxable boundaries and service area enough to materially impair credit. The increasing burden of carbon transition on energy and petrochemical producers is expected to tap the pockets of rate- and taxpayers within affected areas, eroding the aggregate spending power of tax bases, and adversely impacting county tax revenues and assessed values. Reduced demand for fossil fuel-based electricity and increased competition with renewables-based energy producers could lead to reduced revenues and market share erosion for large power company taxpayers, such as Exxon and Chevron which both have large operations planted in Baytown.
Carbon transition and environmental regulatory risk aren’t disclosed or discussed at all in the entire 628 page preliminary officials statement. This is flat out irresponsible, given the fact that the City and the hotel and convention center project have multiple flavors of exposure to the fossil fuel industry. We’ve witnessed similar credit-impairing carbon transition downward spirals take place in the recent past. A 2019 Brookings Institute study found that the collapse of the coal industry will have an adverse impact on the ability of coal-dependent communities to service debt obligations. One example provided by Brookings was Campbell County WY, where the County’s assessed value dropped from $6.2 billion in the 2015–2016 fiscal year down to $4.19 billion for the 2017–2018 fiscal year, driven primarily by falling coal revenues.
Physical Climate Risk
Physical risk is also left out of the (again, 628-page) whale-of-a-POS. Neither “climate change” nor “Hurricane Harvey” appear even once. Disclosure on the flood, hurricane and extreme weather risk receives a failing grade — any discussion of these risks only appears in boilerplate clauses embedded in the Appendix G Form of Design-Build Agreement. The only actual disclosure of any weather-related risk appears on page 6: “The Hotel location presents some inherent challenges that the Design/Builder has spent the past year identifying and addressing. Such challenges include the storm-prone project site which necessitates an expeditious project commencement to dry-in period to ensure the Hotel Facilities and City Facilities do not have prolonged exposure to the elements.”
In actual terms of ‘exposure to the elements’, the Project in question has a lot of it. Looking at the immediate area surrounding the Project, hurricane activity presents material challenges over the next 30 years. A Category 3 event — even without considering the exacerbating effects of climate change and warming sea-surface temperatures — has a 25% probability of occurring over a 30-year period (.955% annual probability) and would drive property losses of 30% within the 6-minute drive time radius surrounding the Project site as a result of extreme wind, flooding and storm surge. This ranks the Project in the 97th percentile nationally for property value-at-risk. The numbers pop higher when we look at GDP impairment, which has material implications for convention centers and hotels that rely on economic activity and tourism for revenue. ‘GDP impairment risk’ is defined as adverse economic impact as a function of downtime/rebuilding time of a workplace facility in the wake of a climate event, and is calculated by considering the proportion of workers in an affected industry workplace location. The final result is an estimate of the expected GDP impairment as a percentage of the total annual GDP produced within a given location. A Category 3 event is expected to drive GDP impairment of over 57% within the 6-minute drive time radius (98th percentile, nationally), and 51% within the 15-minute drive time band. Even the less catastrophic, nuisance events could disrupt economic activity and business operations in future years — the Project site ranks 100th percentile in the State of Texas for coastal flood risk.
We’re able to gauge just how outsized an impact climate change will have on the natural hazard risk profile for the Project site by looking at risQ Scores in the out-years. Warming sea-surface temperatures will raise sea levels and exacerbate high severity and high flood hurricanes, which is reflected in increasing risQ and Hurricane risQ Scores during the time period of the Baytown debt schedule. In 2021, the Project (again, within a 6-minute drive) Scores 3.5 in terms of Total risQ, 3.8 for Flood risQ and 2.8 for Hurricane risQ. These numbers spiral upwards as we drag the Year slider out to 2030 (Total risQ Score 3.8, Hurricane risQ Score 3.1, Flood risQ Score 3.8), and 2040 (Total risQ Score 4.1, Hurricane risQ Score 3.5, Flood risQ Score 3.8). Once we get to the final maturity year of 2050, the Scores really pop off the page and the risQ dashboard blinks red — Total risQ Score increases to 4.6, and Hurricane risQ Score to 3.8 (Flood risQ Score stays at 3.8).
The issuance of debt to finance an upscale hotel and convention center is clearly not serving the socioeconomic interests of the local population, either. The Social Impact Score is on the high end nationally, at 86/100, driven in large part by the Persistent Health Obstacles Score (93/100) and the Low Educational Attainment Score (94/100). A troubling 38% of residents nearby the location of the facility lack health insurance, 97th percentile nationally, and 20% of the population lives below the poverty line, 71st percentile nationally. The majority of the population that live near the planned development are Latino (64%). But the disclosure mentions nothing about what the project will do for the nearby population. The prospects of jobs created by this hotel and convention center being well-paying and actually in service of the vulnerable people nearby are close to nil — especially when considering that Hyatt has a problematic history with worker strikes.
Long story short: If I’m an insurance company, I might take the gamble on covering the Project, that is, as long as I get the benefit of making renewal determinations on an annual cadence. On the other hand, if I’m a long-term investor with an illiquid debt or equity stake in the business, I’d probably have trouble sleeping at night. Even a near-term investment of ~5-years would give me the chills. (By the way, the encompassing Harris County recently had three ‘500-year events’ in a three year span…A LOT can happen in 5 years). And if I’m serious about ESG and allocating my spend to make a positive social impact, I have no business touching this one.
Florida Municipal Power Agency, FL (risQ Score 3.9; Flood risQ Score 3.5; Hurricane risQ Score 3.2) $48,835,000
In April we focused on Florida Municipal Power Agency’s (FMPA) poor climate risk disclosure — this week we’re disappointed to find that they still haven’t changed their ways. How is it possible that an Issuer with obligated cities spread throughout Florida doesn’t mention flood, hurricane, or climate change a single time in their POS? Previously, we took an in depth look at the subset of cities that are part of FMPA’s All-Requirements Project; this week there’s a different, unique set of 15 Participants involved in the St. Lucie Project.
The obligated cities and utility authorities have entered into Power Sales Contracts with FMPA which they in turn secure with their utility system revenues (pg. 2-3). Climate change stands to impact these revenues, and 11 of the 15 Participants rank higher than 90th percentile nationally in terms of expected GDP impairment over the next 10 years. GDP disruption correlates with electricity usage, and therefore the Participants’ revenues.
The POS identifies other risks on the horizon, namely Carbon Transition Risk. The issuer cites a proposed federal CLEAN Future Act which, amongst other things, would cut greenhouse gas (GHG) emissions by 50% by 2030 and set the goal of 100% clean energy by 2050 (pg. 40). Furthermore, retail electricity providers like the Participants would need to provide 80% non-fossil fuel power electricity to consumers by 2030. 4 of the 6 Major Participants in the St Lucie Project (each accounting for more than 10% of revenues in 2020 (pg. 4)) rank higher than 92nd percentile in per capita GHG emissions from the electricity sector. Participants Homestead, Fort Pierce, Lake Worth, and Kissimmee all have Poverty Concentration Scores ranging from 89-91 and Percent of Income Spent on Housing Scores of 93-96. FMPA has a tough one to sort out: anticipated GDP disruption from climate-related events, major customers with relatively high CO2 emissions and limited means to adapt, and an unwillingness to discuss natural disaster risk driven by climate change.
City of Rivera Beach, FL (risQ Score 4.5; Flood risQ Score 3.4; Hurricane risQ Score 3.7 ) $32,040,000
Located within Palm Beach County, Riviera Beach offers a fresher perspective to climate disclosure, unlike other Florida issuers we’ve seen in the past. The POS discusses climate change in four paragraphs, with the Regional Climate Action Plan (RCAP) making an appearance as well (pg. 44). The disclosure covers the potential financial loss, interruptions to government and business operations, and the formation of Southeast Florida Regional Climate Change Compact (the Compact), a joint effort between Broward, Miami-Dade, Monroe, and Palm Beach Counties to work towards climate change mitigation and adaptation strategies (pg. 44). The Compact follows recommendations from the Regional Climate Action Plan, which “provides 110 mitigation adaptation and mitigation strategies for local governments to consider to build resilience”. This includes goals of increasing renewable energy capacity share and access to energy efficiency, establishing a fuel-efficient municipal vehicle fleet and promotion of electric vehicles.
Sitting in the 94th percentile nationally in terms of total emissions with a per capita emissions value of 20.77 metric tons of CO2, the City along with the State depend heavily on natural gas. However, numerous measures are being taken to mitigate emissions, with the City receiving the 2020 Sustainable Practices Recognition Award for its use of concrete as a sustainable solution to help address flooding issues in the low-lying intracoastal neighborhood of Yacht Harbor Manor located on Singer Island.
The issuer also ranks high in terms of need for resources, with a Social Impact Score of 93.5, a Percent of Income Spent on Housing Score of 94.1, a Nonwhite/Minority Population Score of 96.1 (69% Black) and a Poverty Concentration Score of 83.9.
Mount Sinai Medical Center of Florida, FL (risQ Score 4.4; Flood risQ Score 3.7; Hurricane risQ Score 3.8 ) $139,325,000
The issuer comprises three hospitals located on the eastern coast of Florida, north of Miami. Considering the location, we’re baffled as to why hurricanes are only briefly mentioned (pg. 58) and climate change as a whole, including flooding, only mentioned once (pg. 102). Maybe this issuer just isn’t paying enough attention to it’s obligated area. With $140 million at stake, this seems negligent. The main facility sits on Miami Beach and at a drive time catchment of 9-minutes, the Total risQ Score climbs to 4.8 with combined risk ranking in the top 100th percentile nationally. Property losses driven by hurricane flooding rank in the 98th percentile nationally.
The other two facilities listed, located in Aventura and Hialeah, were hit extremely hard by Hurricane Eta last year. Unfortunately, both locations have vulnerable socioeconomic profiles as well — Hialeah is a low income community (Poverty Concentration Score of 94.1), and the population in Aventura struggles with health issues (Persistent Health Obstacles Score of 81.9). A layer of carbon transition exposure will only drive the cost of living and healthcare higher within the area — the Miami Beach location ranks 99th percentile nationally for total emissions, contributing to problems with drinking water quality. Collectively, the Social Impact Score is 89/100. Horrors await no matter how you choose to define the drive time radius in the risQ UI — a fifteen minute radius sees the risQ Score for the Miami Beach location spike to 4.7 and the Social Impact Score jump to 89.3.
Hospitals are needed everywhere. That’s a given for any community. From an ESG perspective, however, Mount Sinai is doing nothing for it’s community when it comes to addressing climate change. Something must be done to treat the actual ailments and not the symptoms.For a hospital system, this issuer does an outright terrible job at diagnosing the issues affecting their institutions.
Babcock Neighborhood Schools, FL (risQ Score 4.5; Flood risQ Score 4.4; Hurricane risQ Score 3.8) $14,950,000
Since hurricane season shows no signs of slowing down, let’s keep our attention focused on Florida. Babcock Neighborhood Schools is located in Southwest Florida, slightly above Cape Coral and adjacent to the Caloosahatchee River. This is significant because Hurricane Elsa flooded several roads across Cape Coral last month. The Charter School is in the 99th percentile nationally for combined risk of property losses, with Category 4 hurricane storm surge expected to drive 48% property losses. Something to consider, obviously, but this issuer didn’t feel like it needed to be addressed in the slightest. In fact, there is no mention of climate change at all in the 300+ page POS — the word flood is buried deep within the appendix (pg. E-47) once in a short paragraph that reads as standard legalese rather than informing investors about the potential hazards of climate.
This area is also one of the highest emitters of CO2. It ranks in the 96th percentile nationally with production at 104.2 metric tons per capita. Though Babcock Ranch seeks to lessen its environmental burden, the City has its work cut out for it, with carbon emissions due to transportation ranking in the 99th percentile nationally. Pollution also threatens the waterways of the area, releasing harmful bacteria from rivers into the City’s wastewater treatment plant. Inevitable flooding will most likely contaminate Punta Gorda’s drinking water. You would think these details would be important not only to investors, but the community of parents and children that contribute and attend. Making no attempts to disclose this ESG aspect sours any goodwill focused on climate justice. When it comes to discussing and disclosing climate change, this POS fails the test.
St. George Academy Charter School, UT (risQ Score 3.7; Wildfire risQ Score 4.5) $8,900,000
The Charter School sits in the southwest corner of Utah and ranks in the 100th percentile statewide for property VaR from wildfire. A 100-year wildfire is expected to drive losses to over ⅓ of properties within a 30-minute drive time radius. This year the region has so far been spared wildfires, but the area has a laundry list of past events. Wildfires last year included the Veyo Fire and the Cottonwood Trail Fire which each burned ~2000 acres and engendered infrastructure damage, evacuations, and road closures. The only mention of fire risk is in reference to their insurance policy (pg. 33); the School is insured against loss or damage to the facility from fire or lightning. But while the School is insured — a wildfire impacting the surrounding population still presents significant impairment potential. The School not only has to battle wildfire — the area also suffers from drought risk. The percentage of time that the region serving the school will experience extreme drought is expected to increase from 1% historically to 23% in 2050 under RCP 8.5 conditions. The region’s 2050 drought risk is in the 88th percentile nationally. Furthermore, the area’s total carbon emissions ranks in the 96th percentile nationally, signifying high carbon transition risk. The only mention of energy in the POS states that portions of the School’s funding is derived from the revenue of non-renewable resources on the State’s land (pg. 24). The POS makes no mention of either drought risk or carbon transition risk. The Schools’ middle-of-the-road Social Impact Score of 38.1 indicates that the social impact of investment would be felt greater elsewhere.
As a cherry on top, the State Charter School Board (SCSB) placed the school on probation in 2019 due to the state of the school’s poor financial health and low enrollment (pg. 66). In 2020, the School was placed on warning status as deficiencies were not timely resolved (pg. A-4). The SCSB has identified ten metrics which the School needs to meet; failure to do so could result in termination (pg. 30). The fulfillment of one financial requirement is contingent on the proposed bond issue (pg. A-8). While the School has made admirable efforts to achieve many of the success metrics, the School falls short on a couple (pg. 66). The School’s transfer rate (16% in 2020) is double the SCSB requirement (7%) and the retention rate (76.4%) is lower than the 80% requirement. The POS notes that COVID could negatively impact enrollment and financial standing (pg. 31). Perhaps this line of thinking could be extended to encompass climate hazards including wildfires — unfortunately, the issuer underperforms on this front. The POS does not make clear how the School is adequately preparing for climate related hazards which may adversely affect enrollment and retention rates (which dictate portions of their funding) as well as their financial standing.