Weekly Preliminary OS Climate Risk Review (10/21/21)

By October 28, 2021 No Comments

You know that something is amiss when, referring to climate change, the Mayor of a City states “the facts are clear” but the City’s representative financing agency states “projections are much less clear and often contradictory.” Time to get on the same page, please.

This week’s climate risk non-disclosure contradiction:

Camden County Public Service Authority, Refunding Revenue Bonds (City Of St. Marys Project), Series 2021 ($28,140,000)

The Series 2021 Bonds

St. Mary’s City sits in the southeastern corner of Georgia just 40 miles north of Jacksonville, Florida. The proceeds from the Series 2021 Bonds will be primarily used to refund Camden County Public Service Authority’s Series 2017. The Bonds are special obligations of the Authority secured  by certain payments made by St. Mary’s under its intergovernmental contract with Camden County, equating to a general obligation of the City (pg. 21). The Bonds are currently dated out to 2032.

Population in the City increased 10.1% during the 2010-2020 period, higher than the population increase in Camden County (8.4%) and just shy of the population increase within the State of Georgia (10.6%). However, according to the POS (pg. 17-18), median household values increased at a lower percentage during 2018-2019 (1.28%, vs. 3.69% and 5.52% for Camden County and State of Georgia, respectively), and per capita income decreased substantially during that same 1-year period (-15.47% vs 3.11% and 2.72%).

“The climate change” non-disclosure

A description of Risk Factors is provided on 3 pages in the POS (pg. 42-44. The first two pages and change are fully dedicated to Coronavirus (COVID-19). The section provides a synopsis of the virus, response measures at the State-level, vaccination efforts, state-allocated funding — in fact, only 1/4 of the COVID-19 risk disclosure is actually dedicated to disclosing risk. However, not in any quantitative fashion but rather in the general pseudo-disclosure language we’ve become so accustomed to seeing in these official statements (“The State and the City’s finances may be adversely affected by the continued spread of COVID-19. The City cannot predict what effect the spread of COVID-19 or the various governmental and private actions taken in response thereto will have on the finances or operations of the City.”)

Following the lackluster disclosure on Coronavirus (COVID-19), the 90-word risk disclosure on Climate Change is smooshed between Operations of the System and Cyber-Security:

Planning for climate change in the State and its impact on the City’s operations is an unknown challenge.

Planning is an “unknown challenge”? Uh, wut. As a matter of fact, the State of Georgia’s climate action planning isn’t unknown, it’s very much known … it’s non-existent. Georgia has never developed a climate change adaptation plan.

The State’s climate is exceedingly variable and projections of future conditions range significantly.

We’ll give the issuer the same words of advice we gave its neighbor Georgia Ports Authority last week: make at least some effort to quantify risk, throw some error bands around your projections, and hit the DISCLOSURE button.

While projections in the State indicate rising average temperatures, precipitation projections are much less clear and often contradictory.

We’ll see your circumvention of discussing inland flood risk (which, by the way, St. Mary’s ranks 92nd percentile statewide) and raise you all-in on coastal flood risk. St. Mary’s 2032 Flood risQ Score is set at 4.5, which is no surprise given the expected property losses from flooding made worse under warming sea surface temperatures and rising sea levels. By 2032, we project that coastal flooding will drive 14% property losses within St. Mary’s, with a 100-year coastal flood event alone driving nearly 12% losses.

Hurricane-induced perils present some real risks for St. Mary’s as well. While flooding from any hurricane event is only expected to drive ~5% property losses, the City’s coastal location exposes it to some catastrophic damage as a result of hurricane-induced storm surge. Storm surge-driven losses from a Category 2 event — which has approximately a 6% probability of occurring by 2032 — would drive nearly 30% property losses within St. Mary’s.

Other potential impacts include changes in the length, intensity, and frequency of droughts and floods.

Wildfire risk anyone? Most of the wildfire activity in Georgia has historically been concentrated further inland, specifically around the Okefenokee National Wildlife Refuge, approximately 30 miles west of St. Mary’s. Okefenokee has fallen victim to the largest wildfires in Georgia’s recorded history, including the Bugaboo Scrub Fire in 2007 which burned over 560,000 acres across the Georgia-Florida border. And while there historically hasn’t been any material wildfire activity near St. Mary’s, the risk of catastrophic burn is expected to increase as Georgia’s hot, dry weather increases wildfire risk.

Historical drought metrics for St. Mary’s — constructed using historical (1979 – 2010) United States Geological (USGS) river gauge observations of daily temperature and precipitation — are relatively low, and the City’s percentage of months with severe drought under that ‘historical’ climate rank in just the 32nd percentile nationally. The City’s severe drought risk is expected to increase into the mid-80th percentile over the coming decades under an RCP 8.5 scenario, equating to a 7 percentage point increase in the number of months with severe drought. The risk of an eventual third-degree burn is high in St. Mary’s (Wildfire risQ Score 3.1), which ranks 96th nationally and 99th statewide across all cities in terms of expected property losses driven by wildfire events. There’s a low probability that a wildfire event will be severe enough to impact St. Mary’s, but in the event that one materializes the losses could be catastrophic. A 500-year wildfire event is projected to drive 40% property losses within the City.

The financial impact of the climate change is not yet known and therefore its future impact on the City cannot be quantified reliably at this time.

Under “the climate change,” 500-year events are expected to become more catastrophic and catastrophic events are expected to become more frequent. Georgia already has a historical benchmark for how financially and socially devastating these large events can be. According to Georgia Emergency Management: “In September 2009, continuous rain resulted in 500-year floods that affected several counties throughout northern Georgia, most of them in and around metro Atlanta. The flood is blamed for at least 10 deaths and $500 million in damage. Some 20,000 homes, businesses and other buildings suffered major damage, and 23 counties received Federal Disaster Declarations. A spring 2009 flood in southern Georgia brought federal disaster declarations to 46 counties.

Now, let’s contrast this non-existent disclosure to comments that the Mayor of St. Mary’s made last year during his State of the City Address: “But we cannot afford to look at just 2020. We have no choice but to look further ahead. As just one example, whether you believe in the climate change argument or not, the facts are clear. Coastal communities from Miami to Charlestown and beyond are feeling the impact of more high tides, more flooding, and ever-increasing vulnerability.” Further contrasting against recent comments made by St. Mary’s City former community development director: “We need to do something, and we’ve got to do it now.”


Failing grades for carbon transition

Physical climate risk is of course just one side of the climate risk coin. This August we explored the potential impacts of carbon transition mandates on municipal obligors that depend on the electricity production sector. One potential implication of a municipalities exposure to the fossil fuel industry includes reduced revenues and market share erosion for large power company taxpayers given reduced demand for fossil fuel-based electricity and increased competition with renewables-based energy, which could flow through to materially erode assessed values and tax revenues.

Thankfully for St. Mary’s, its CO2 emissions within the electricity production sector are 0.0, according to estimates from the NASA Vulcan Project — there isn’t an electricity generating facility within St. Mary’s, and as such, the City does not have Scope 1 emissions exposure within its energy sector. However, when we zoom out to the encompassing Camden County, we find that the Scope 1 emissions within the County rank 87th percentile, reflecting the exposure that the larger region has to the fossil fuel industry. While there are no electricity production emissions within St. Mary’s, the largest taxpayer is Georgia Power Company, which is responsible for nearly (pg. 28) 4% of the City’s 2020 Gross Assessed Value. The Georgia Power Company is owned by Southern Power, which owns and operates 9 of the top 200 highest CO2 emitting power plants in the country (according the EPA’s data on Reported Parent Companies; Vistra Energy and Duke Energy both own 11 of the top 200 CO2 emitting power plants, and American Electric Power is tied with Georgia Power with 9).

St. Mary’s might not be directly responsible and on the hook for electricity production emissions, but its balance sheet still has exposure given the levels of Georgia Power-provided electricity consumption within the City. While the power company has recently pledged to make an effort to achieve net zero carbon emissions by 2050, Georgia Power’s parent Southern Co. apparently isn’t moving fast enough. A report published earlier this year by the Southern Alliance for Clean Energy (SACE) projected that the Southern Co. is not retiring coal-fired power plants and reducing greenhouse gas emissions at a fast enough rate. One silver lining for Georgia Power in the report: SACE notes that Georgia Power is Southern Company’s most critical asset in lowering CO2 emissions given its investments in nuclear power, solar energy production and coal-fired power plant closures. However, according to a report published in early 2021 by environmental advocacy group Sierra Club, Georgia Power received ‘failing grades’ based on its rate of retiring coal plants, limiting gas production, and investing in renewable energy projects over the next decade. Georgia Power scored 13 points out of 100 based on the Sierra Club criteria; Southern Company earned a score of 5 out of 100.

Unsurprisingly, there is not a single mention of carbon emissions or carbon transition risk within the preliminary official statement. The facts are clear: Georgia is failing at its climate action planning, and both Camden County Public Service Authority and the City of St. Mary’s are failing at climate risk disclosure.

Honorable Mentions

Charleston County, SC (risQ Score 3.4, Wildfire risQ Score 4.7) $73,535,000

The Charleston area is notorious for its flood risk. The County sits in the 100th percentile statewide for property losses from coastal flood and hurricane storm surge. A Category 2 hurricane drives ~33% of property  losses in an already high housing-cost burdened area (Percent of Income Spent on Housing Score of 84.5). Also on the table is carbon transition risk, as the County ranks in the 90th percentile nationally for per capita emissions from electricity production. Unlike St. Mary’s City, the County addresses the “overwhelmingly apparent” (pg. 7) risk head-on. In 2020, the County Council approved the integration of a resilience element into the County’s comprehensive plan and in 2021, the Council passed a Climate Action Resolution (pg. 8). To implement and administer resiliency strategies, the County has identified a Chief Resilience Officer. The County is in the process of performing an All-Hazards Vulnerability and Risk Assessment, which will be leveraged to identify vulnerable communities and infrastructure (pg. 8). Since 2004, the County has maintained a Greenbelt Program to preserve greenspace; many projects promise to help manage flooding (pg. 10 of the Comprehensive Annual Financial Report). 
That said, exposure to climate risk and investment in resilience has proven inequitable. In the City of Charleston — the County seat and where there has been greatest investment in climate resilience — redlining and gentrification has pushed low-income communities and Black communities into low lying and flood prone areas (Nonwhite/Minority Population Score of 79.3). Yet, investment into flood mitigation and adaptation seems to concentrate in white, affluent, and tourist-centered neighborhoods. Hopefully, the County’s future plans are equity oriented.

AdventHealth (risQ Score 2.7, Hurricane risQ Score 2.2) $400,000,000

AdventHealth is a premier faith-based health system with several facilities located throughout the Country. The System recently added several hospitals in Florida and Georgia, among others, to its roster of obligated group members — for those with access, a complete list of those members can be found in our UI here. The $400 million in bonds, maturing in 2056, will be partially used to refinance the purchase price of some of its facilities. Despite the fact that this series is dated out more than 30 years, the System fails to outline its facilities’ climate and socioeconomic risks — one would expect some transparency, especially in regards to their riskier Florida investments. 

The lack of climate disclosure throughout the 280+ pages of the POS is somewhat bewildering considering AdventHealth’s portfolio. All they offer is a blurb that’s rubber-stamped into a section on page 67. Blink and you’ll miss it. Considering that quite a few AdventHealth facilities are located in areas of high risk—Total risQ Score >=3.0, this seems negligent. The blurb acknowledges that climate can be problematic, but brushes off just how significant it can affect infrastructure and investments. 
Let’s look at an example. AdventHealth Carrollwood (risQ Score 3.7) doesn’t have the worst Total risQ Score of the bunch, but it’s a good example to disclose the risks that come with each facility. Located in Tampa, FL, the 30-minute drive time radius from the facility ranks 93rd percentile nationally for property losses for combined climate hazards, and 89th percentile for hurricane flood alone. Projections estimate GDP impairment in the 96th percentile (97th by 2056), and a Cat 3 storm surge event drives ~19% property losses. If you dig a little deeper you’ll also notice that the Carrollwood location has extreme per capita emissions from electricity production, ranking 94th, and a population with burgeoning health problems (Persistent Health Obstacles Score 69.3). Again, this is only one example out of a group of 40 facilities owned by AdventHealth.

NewLife Forest Restoration LLC, AZ (risQ Score 2.6, Wildfire risQ Score 3.6) $177,970,319

NewLife Forest Restoration operates three sawmills in northern Arizona and through a public-private partnership with the US Forest Service, is mitigating wildfire risk throughout the Four Forest Restoration Initiative Area. We’ll look at the details of the Four Forest Restoration Initiative (4FRI), how NewLife participates in the program, and which muni bond Issuers may benefit from the wildfire mitigation efforts.

The 4FRI was developed by government and community stakeholders to improve forest habitat and reduce the risk of wildfires to communities near the Kaibab, Coconino, Apache-Sitgreaves, and Tonto Forests; this is accomplished primary by thinning the 2.4 million acres of ponderosa pine forests, which have become overgrown since a logging ban was enacted in the 1990s (pg. 3). In the last decade, AZ has experienced catastrophic fires: burning a total of 1.5 million acres, including the Willow Fire in 2011—the state’s largest fire—which consumed 538,000 acres. As NewLife points out, these unnaturally severe fires are compounded by multiple factors (Sustainability-Linked Bond Framework pg. 4). Among the reasons mentioned, climate change increases instances of drought and extends the duration of the wildfire season. Secondly forest mismanagement—which includes logging bans as well as extinguishing small fires which remove underbrush when they’re left to burn—has led to overgrowth. NewLife remedies these problems by thinning forest floors and removing brush that acts as wildfire fuel—an example of their work can be seen on page 6 of the POS. As part of their contract with the US Forest Services, NewLife has been awarded the right to harvest 300,000 acres of timber to support the Four Forest Restoration Initiative (pg. S-2). 

To get a sense of which Issuers may benefit from the 4FRI wildfire mitigation efforts, we looked at locations that fall within the Four Forest Restoration Initiative Area. Using the UI Security Linked feature, we are able to filter issuers with outstanding debt and see which fall within the Four Forest Restoration Initiative Area. Some examples include Flagstaff (Wildfire risQ Score 3.8), Payson Unified School District (Wildfire risQ Score 3.7) and Sedona City (Wildfire risQ Score 3.2). Issuers with outstanding debt whose territory falls within the Four Forest Restoration Initiative Area can be found in the Pre-sale 10/14 NewLife Forest Restoration folder; view the Map tap to see how the issuers’ territories intersect with the 4FRI. For investors with CUSIPs already in their portfolios overlapped with 4FRI the implication is obvious. A fund dollar invested in debt to mitigate wildfire only mitigates the risk for other aspects of the broader portfolio.

Another interesting UI feature to leverage in this case is the Wildfire Alerts feature. By toggling to All fires for 2020, we can eye-ball it and see that the 2020 Cow Canyon and Bringham fires burned the southeastern tip of the 4FRI territory (which only serves as further confirmation that the area is fire-prone).

There are several reasons to support NewLife’s work, as well as, this bond series which helps finance equipment and operations at their mills. Not only is NewLife helping protect communities from wildfire risk, they are producing beneficial byproducts from their timber trimmings to mitigate greenhouse gas emissions. The company has a contract with Novo BioPower to use the wood residuals as fuel source and also garnered interest from other companies keen on using the wood byproducts as a biofuel substitute for coal power (pg. 27).  Beyond the environmental benefits, NewLife and 4FRI aim to bolster local economies; NewLife employs hundreds of workers in Northern AZ, including low-skill workers and veterans (pg 3), and generates multiple value streams from raw inputs that if left unharvested only serve to worsen the area’s fire risks.

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