NLR utility aims to avoid ‘cash crunch’
A proposed $60 million restructuring of North Little Rock Electric Department revenue bonds that includes extending the payoff date for the city’s hydroelectric plant by 10 years is meant to avoid a coming “cash crunch,” the utility’s chief said Tuesday.
The utility faces a $26.8 million debt payoff in 2014 that includes the annual $13.2 million payment for the hydro plant and a $13.3 million balloon payment on a fiveyear $15 million bond issue that the utility won’t be able to afford without the restructuring, utility General Manger Mike Russ said.
The reworking of the bond debt would potentially reduce the city’s bond payments in 2014 by about $20 million, according to the proposal that heads to the North Little Rock City Council on Monday.
Electric revenue bonds are backed by utility revenue that mainly comes from ratepayers.
The 30-year bond on the Murray Hydroelectric Plant on the Arkansas River is to end June 30, 2015, with the city having the final year’s payment of $13.2 million already in escrow.
For years, many city officials have pointed to the end of those payments with anticipation that it will relieve the city financially. The expected last payment due in 2014 — when counting the one year’s payment in escrow — even became a point for opposition to last year’s proposed city sales tax increase that voters rejected in November.
However, city officials said Tuesday that they have learned from bond attorneys that the escrowed amount will become available only after the final payment is met and, therefore, cannot be used for the final year’s payment. The utility had planned to use that money to pay off the balloon payment on the 2009 bond issue due in 2014 of almost the exact amount, Russ said.
“Everyone was surprised by this,” Russ said. “We had counted on getting our hands
on it in 2014 and found out we couldn’t.”
Restructuring the utility’s debt is a better alternative than hitting 37,000 ratepayers in North Little Rock and neighboring Sherwood with a rate increase, Russ said. Ratepayers began paying an average of 38 percent more in December 2006, with a pair of 5 percent reductions coming in 2010 and 2011.
The proposal is to restructure $58 million in debt for three outstanding bond issues — $44 million of that being left on the hydro plant bond — with a new 10-year bond issue for almost the same amount because of historically low interest rates, city Finance Director Bob Sisson said.
“That’s why we call it a restructuring of the debt,” Sisson said.
The expected interest rate will be about 3 percent, Sisson added. A 2011 city bond issue had an interest rate of 4.67 percent, he said.
Annual payments for the bond issues to be reworked will drop the debt due in 2014 from $26.8 million to $6.26 million, Sisson said, a difference of about $20.5 million. The hydro bonds would be extended to 2025, he added.
The city-owned electric department needs liquidity in order to better manage its financial future once its current three-year purchase-power contract ends next year and avoid severe increases as happened in 2006, Russ said.
The utility will be switching to an “organized market plan” where power purchases are based on buying and selling every hour with payments for buying power coming due weekly instead of monthly, he said.
The utility will need about $10 million in available cash, Russ said, to qualify for a credit rating high enough to operate under such an agreement.
The utility depleted its
The utility depleted its available cash of more than $7 million over the last year because of poor
weather and low river levels resulting in its hydro plant having “one of its worst years ever,”
Russ said.
available cash of more than $7 million over the last year because of poor weather and low river levels resulting in its hydro plant having “one of its worst years ever,” Russ said. Also, there was a temporary shutdown at the Plum Point Power Plant in Osceola, the source for about 33 percent of the city’s power, he said.
“We depleted all our liquidity,” Russ said. “And we know in 2014 we’ll have a $26 million payment on bond debt. ... It’s a cash-crunch situation.”
Mayor Patrick Hays said Tuesday that the main reason for proposing the bond restructuring is because those escrowed hydro funds wouldn’t become available in the latter half of 2014 as previously believed.
“I had been led to believe the $13 million held in reserve as one payment essentially would be available to make that last year’s payment,” Hays said. “As we looked into our options with those funds, they [bond attorneys] discovered that it really won’t be available until the bonds are paid off.”
Another factor for the proposal, Hays added, was the city having reduced electric rates over the past two years, though the reductions “were justifiable” in giving some relief to ratepayers after the previous 38 percent jump.
“I still feel we will be able to do more,” Hays said.