Financing in place for water project
The Hot Springs Board of Directors authorized financing for the more than
$100 million Lake Ouachita water supply project last week, floating a $109.7 million debt issue that will be amortized over 30 years at 2.69% interest.
The new rate structure that took effect in 2018 will help secure the debt, increasing the minimum monthly charge for residential customers inside the city
$8 from 2017 rates by next year. Rates for customers outside the city, where most of the regional water system’s more than
35,000 meters are, will increase $12 from
2017 rates.
The rate structure reverts in
2022 to the 3% annual increase stipulated in the city’s utility code.
The bond issue will give the city $106.6 million for the project when Tuesday’s bond sale closes next month. The money will build an intake on Lake Ouachita, 17-mile raw waterline,
15 million-gallon a day treatment plant off Amity Road and transmission and distribution lines for the city’s 23.5 million-gallon a day allocation from the lake.
The city’s been paying the U.S. Army Corps of Engineers
$444,440 a year since 2017 to store the allocation behind Blakely Mountain Dam. The annual payment is the city’s share of $12.4 million in storage costs the Mid Arkansas Water Alliance is paying down over 30 years.
The city has most of MAWA’s 30-mgd allocation, with North Garland County Regional Water District, 5 mgd, and the Hot Springs Village Property Owners Association, 2 mgd, owning rights to the balance of the 50,000-acre feet.
The maturity schedule the board authorized will obligate ratepayers to $161 million in principal and interest payments over 30 years, increasing the total debt load on the water fund to $229 million. The pricing report Bob Wright, senior managing director for Crews & Associates, the city’s financial adviser, presented the board showed an
$8.7 million maximum annual debt service for the water fund.
The city’s rate analyst projected the fund would generate
$25.5 million in annual revenue by 2028, leaving $11.7 million after operating expenses for debt service. The pricing report said money available for annual debt service will be at least 120% of the annual obligation for the life of the indebtedness.
Most of the bonds underwriters Stephens Inc. and Raymond James marketed were sold for more than face value, raising an additional $9.2 million. Wright said investors paid a premium for bonds with higher semiannual interest payments. For example, the 2040 maturities sold for 16.7% above face value and pay 4% of their face value in tax-free semiannual interest payments.
“They’re looking for more cash flow,” he said. “That 4% coupon provides them much more cash flow. They had to pay
116.7% on the dollar to get it.” The city can call bonds with
2031 maturities and beyond in
2030, forcing investors to redeem their bonds in advance of the maturity date. The city’s early call prerogative allows it to refinance the debt with taxable bonds if interest rates drop.
“If rates are lower and it makes sense, we can still look to do a taxable refinance and pay off these 2020 bonds,” Wright said.
Underwriters had not sold all the bonds by Tuesday afternoon, Wright said, explaining that about $20 million of the issue was still on their books. The balance was ultimately sold, but Wright said finding buyers for bonds with longer maturities was challenging.
“It’s not easy to find those kind of people to have their money tied up for 30 years with less than 3% return on their money,” he said. “That takes a while to dig through and find those investors.”
That’s the risk underwriters assumed when they took on the issue for a $652,925 discount, the difference in what they paid the city for the bonds and the price at which they were offered to the public. Wright said a 0.01% increase in interest rates would have significantly cut into the discount.
Because bond prices fall when interest rates go up, the $15.7 million in 2050 maturities offered at 3.5% below face value would have dropped in value had the rate gone up while underwriters were trying to sell the bonds.
“That would’ve taken the dollar price down to (94.5 cents on the dollar), and two points on $15 million is $300,000,” Wright said, referring to a rate increase of 10 basis points. “It doesn’t take much of a move for that discount to be eaten up.”
A drop in interest rates would have increased the underwriter’s discount, as the bonds they bought from the city could have been sold for a higher price.
The discount was part of more than $3 million in issuing costs debited from bond proceeds. They included $406,936 to insure the issue against default, $112,500 for Crews & Associates’ financial management fee and $105,000 for Friday, Eldredge & Clark to prepare the bond documents.
The $1,675,000 put into a capitalized interest fund accounted for most of the issuing costs. Those funds will pay down interest on the issue in 2020, 2021 and 2022. Wright said the fund helps offset interest costs until the full rate increase, which is being phased in over four years, takes effect.