OPD5 Board Approaches Decision On $26M In New Debt

By VERNON ROBISON

The Progress

The Overton Power District (OPD5) Board of Directors is on the brink of making a decision in how to best take on an additional $26 million in debt. The huge funding package is needed to pay for a series of infrastructure projects that will increase system reliability and keep up with future growth.

Over the past year, the board has held a series of discussions considering when is the best time to lock in the debt, and just how much borrowed capital will be needed.

At a meeting held on Dec. 15, the board heard a final presentation from OPD5 staff on the matter. Board members determined that they would likely take action at the first meeting of 2022 in order to lock in the current low interest rates before they rates increase significantly.

OPD5 General Manager Mendis Cooper prefaced the conversation by saying that he had tuned in to a report given by Federal Reserve Chairman Jerome Powell earlier that same day. Powell had indicated that in the coming year, the Fed would likely give a .25 percent bump-up to interest rates three different times during the span of 2022. Cooper cited other experts who were arguing the need for even steeper increases than that in the next two years.

“So as we begin this discussion, I will just give you that outlook as a backdrop,” Cooper said. “I think that early in the year we are going to be okay. But as the year progresses, we are going to see rate increases. And (this presentation) will show you how those would affect us. It can add up pretty quick.”

What followed was a detailed presentation by OPD5 Finance Manager MeLisa Garcia analyzing a host of options that the district might take in structuring the new debt.

Garcia summarized earlier conversations about how the district had determined it would need $14.7 million for capital projects planned in 2022 alone. Then another $11.3 million would be needed in 2023.

The projects are planned to increase reliability in the OPD5 system. Perhaps most vital among these is a new transmission line connecting the district’s Tortoise substation in Moapa – the OPD’s gateway connection point to the regional grid – to the OPD Gila substation near the Riverside Bridge west of Bunkerville. This new line, which will provide redundancy to the single transmission line currently feeding the Virgin Valley communities is estimated to cost about $17 million on its own.

Garcia pointed out that the current price tag for all of the capital improvement projects being planned by the district is actually around $51 million. The district is only anticipating borrowing around $26 million of that. The rest is expected to come from current budget margins as well as reserve savings, Garcia said.
So the question was how to handle the $26 million in debt, Garcia said. She pointed out that the current market interest rates which had been quoted to her just the day before were at 3.46 percent, factoring in all eligible discounts to the district.

So Garcia’s presentation began with the scenario of borrowing only $15 million now and waiting until some point in the next year to take on the other $11 million that will be needed later.
The trouble with this scenario was the significant interest rate risk, Garcia said.

On a thirty year term, if interest rates increase by just one-half of one percent between the two debt issues, it would increase the cost to the district by $1.1 million in interest. More likely, if the rates increased by a full 1 percent, it would result in a cost increase of nearly $2.3 million in interest.

“When we know that rate increases from the Fed are imminent, the question is: How much rate risk do you want to take?” Garcia said. “Do you want to wait on borrowing the $11 million next year? Or should we really look at borrowing the whole thing now and lock in the current rates that we have?”

Garcia then explored the scenario of locking in the entire $26 million of debt at the current rates over a 30 year term. This would eliminate the interest rate risk, Garcia said.

But it would increase the overall cost of the loan by taking on $11 million of debt at least a year before that capital is actually needed. Of course, that cost could be mitigated slightly by investing the additional $11 million and drawing interest on it while it is waiting to be used, Garcia said.

Garcia also explored the idea of reducing the term of the $26 million loan in order to further reduce the interest expense. She calculated that by dropping the term to 25 years the district would reduce interest expense on the loan by $4.1 million over its maturity. But the shorter term on the loan would compress the loan payments increasing them by $111,886 annually.

Dropping the term down to a 20 year period, or a 15 year period, would also yield sharp reduction in interest expenses. But the payments in those scenarios would increase so much that it could result in cash flow problems for the district, Garcia said.

In her final recommendation, Garcia said that if it was clear that interest rates were going to stay put throughout 2022, it would have made sense to take the $15 million needed in 2022 now, and then wait to lock in the other chunk of $11 million toward the end of the year. But with the indications of aggressive rate increases now being given by the Fed, that strategy makes less sense, she said.

“With what we are hearing from the Fed, that gap between when we would take the first borrowing and when we would take the second is getting closer and closer together,” Garcia said. “From here it looks like we may be able to put off borrowing the second piece for four months maybe. That is saving us just one quarterly payment. In my mind, I don’t know that it is worth all the work for that.”

“So if we know that the rates are going to increase, I believe that we should just take the money now and lock the interest rates in,” Garcia said. “I don’t see any benefit for us waiting for just one quarterly payment to lock the next rate.”

Garcia did see the benefit of reducing the term of the loan down to 25 years, however.
“The cost benefit analysis on that is obvious to me,” Garcia said. “The reduction of $4.1 million in interest with only an increase to the payments of $111,000 (annually) makes good sense for us financially.”

Board members expressed general agreement with Garcia’s recommendations. They asked that the item be brought before them as an action item at the next board meeting which will take place on Jan. 19, 2022 at 3 pm in the Overton Office at 615 N. Moapa Valley Blvd.