Q&A on EID’s debt refinancing

EID’s Communications and Community Relations Director Mary Lynn Carlton sat down with EID Finance Director Mark Price and Accounting Manager Tony Pasquarello to talk about the implications of the restructuring of EID’s debt.

Q. Recently EID restructured some of its debt. Can you tell me how much debt EID has and why the district restructured it?

A. We’d like to begin by reviewing the amount of debt the district has and what it was spent on. In order to pay for the necessary capital improvement plan (CIP) projects the district has had over the years to ensure the safety and reliability of its water and wastewater delivery and treatment systems, and catch up on deferred maintenance, we have had to finance the costs of those projects. These improvements were also necessary to ensure that we met state and federal regulatory requirements. To pay for these necessary improvements, the district went out to the bond market to raise the necessary amount of money needed.

We know you covered the subject of CIP’s in last fall and winter’s Waterfront editions, so we won’t go further into CIP spending, but will only focus on how we pay for the debt.

The district currently has a debt portfolio of approximately $365.6 million in outstanding obligations. This consists of $17.5 million in various state loans and $348.1 million in publicly issued debt, which is comprised of $2.7 million in general obligation bonds; $232.9 million in tax-exempt fixed rate revenue certificates of participation/bonds; $1.8 million in taxable fixed rate revenue bonds; and $110.7 million in tax-exempt variable rate revenue certificates of participation. Overall, our debt portfolio structure is balanced, with approximately 50 percent of all outstanding obligations set to amortize over the next 15 years, with future bonding capacity and principal amortization set to occur between 2022 and 2029.

Q. So let’s drill down a bit and talk specifically about what debt was refinanced last month.

A. On July 12 the district successfully went out to market and issued new revenue refunding bonds, referred to as “Revenue Refunding Bonds, Series 2012A and 2012B (taxable).” We did this initially to lower debt payments in 2012 to 2016 so the recent rate increases could be phased in over the same period of time to meet future debt obligations. Secondly, the restructuring and refunding was done to reduce our interest rate on the outstanding 2003A certificates of participation bonds that we were paying more interest on than we felt we should be paying.

An analogy to think about is that it’s sort of like refinancing your home whenever the market offers lower interest rates. Although the sum of your new payments, over time might be higher than the sum of the payments remaining on the existing debt, there is an economic benefit realized, in today’s dollars due to the savings created using the new lower interest rate. This savings, called the “present value savings,” net of the upfront costs, exceeded $2 million for the district.

The key financing objectives achieved that will directly benefit ratepayers are:

1) reduction of debt payments in fiscal years 2012 through 2016 designed to match the cost of service study projections in the financial plan and allowing for the recent rate increases to fully take effect;

2) as described earlier the refunding transaction benefits and costs, viewed over time, generated present value savings of more than $2 million; and

3) overall pricing structure for the Series 2012A Bonds actually reduces the total amount of bonds outstanding by about $3 million. Approximately 50 percent of all existing debt will be retired (paid) over the next 15 years.

Q. I often hear about the district referring to a certain “debt ratio” that it must maintain in order to retain good interest rates and favorable ratings from rating agencies like Moody’s and Standard and Poor’s. Can you tell me what this means?

A. The term “debt ratio” means ensuring that the district annually has revenues exceeding its operating expenses and debt service requirements for that year by 25 percent. This is a legal covenant the district has with its bondholders.

The revenue consists of rate and hydroelectric revenue, property tax, and other nonoperating revenue as well as facility capacity charges (FCCs, also known as hookup fees). The new financial model we use now requires the district’s revenue —excluding FCC revenue — exceed or be equal to its operating expenses and debt service. Internally this is called the 1.0 test. Revenues, without FCCs, should pay for operating expenses and debt service expenses.

We do not want to rely too heavily on FCCs to help fund debt service, as that is what caught us off guard a few years ago when the real estate market dried up and the FCC revenue became almost non-existent. Now, as part of the new financial model, as FCCs are collected they will be used to make current bond payments, fund capital improvements or pay bonds off early.

With this refinancing of the debt, our debt ratio is projected to be 1.46 for 2012 because of the money saved from lower interest rates on the 2012 bonds and due to the restructuring of the principal payments into the future. If you take planned new FCC revenue out of the formula, the ratio is projected to be 1.31, which still exceeds our legal requirement of 1.25. We are always mindful of the debt ratio because of the uncertainty of the FCC fees collected as a result of new construction.

Debt ratio is also a measure that rating agencies use to assess the health of agencies’ finances. If you don’t meet the debt ratio as required by the bondholders, your ratings will go down and it will cost you more money in interest rates. That’s why it is imperative that the district meet or exceed its debt ratio.

Q. What are the district’s ratings by the rating companies?

A. Standard and Poor’s increased EID’s credit rating to A+ from an A. Moody’s still ranks EID A1, but upgraded its outlook to “stable” from “N/A,” which is pretty significant. This has happened because the district has significantly reduced operating costs over the past several years by reducing staff by over 30 percent, renegotiating key employee benefits with the district’s employees, negotiating a financially healthier hydroelectric power contract with PG&E, restructuring debt in tandem with a viable long-term financial plan which included modifying rate structures and raising rates, which reduced the reliance on the previously mentioned, and unreliable, FCC income.

Q. Did the district receive any upside from the increased ratings from the agencies?

A. Yes, we were pleased to see that when we completed the financing, the new refunding bonds totaling $50.7 million were sold at a premium, meaning the bond investors were willing to pay more than face value due to the district’s positive financial position. This premium netted the district an additional $6.6 million and went into the escrow account with the $50.7 million to pay off the 2003A bonds and accrued interest.

Additionally, because of EID’s strong credit fundamentals, we were able to procure insurance for the bonds which then allowed us to purchase a surety policy to fund the debt service reserve requirement, yielding an additional present value savings of $800,000 which is included in the over $2 million savings mentioned earlier.