Independence Power & Light’s debt extensive, but considered stable
While the city of Independence recently paid off $10.6 million of Power & Light bonds about 15 years ahead of schedule, saving more than $4.5 million in interest payments, it still represents a small amount of the city utility’s total debt obligations.
The $10.6 million, used from surplus cash, was part of what had been $151.5 million in outstanding bond payments through 2046, along with $91 million in future interest. Those bonds were issued to pay for a wide variety of projects, including plants no longer in use.
In addition, the city is obligated long term for $290 million in bond payments through its power purchase agreements with the Nebraska City and Iatan (near Weston) coal plants, according to the city’s annual financial report issued in mid-2020. That includes $165 million through 2038 for the Iatan plant, which started in 2010; and $125 million through 2049 for the Nebraska City plant, which started in 2009.
All told, the IPL has more than a half-billion dollars in scheduled debt obligations. However, experts say the city’s utility debt across the board currently is in good shape – an A-stable rating by Standard & Poor's Global, according to its most recent grades, “which is investor grade,” said Bryan Kidney, the city’s director of finance and administration.
The city utility’s debt portfolio has come into play as officials begin to consider a possible project for new power generation to replace the city’s combustion turbines that are about 50 years old – a project that will be costly no matter how large or small it is. Even a small turbine plant to replace the current turbines’ 93-megawatt capacity, and perhaps run regularly to sell some power, would run into the tens of millions of dollars.
Existing bonds issues with the city
The recently paid early bonds, issued in 2010, paid for, among other things, repairs at the Missouri City (closed in 2017 and since demolished) and Blue Valley (closed in June 2020) plants, as well as the city’s combustion turbines, and some transmission and underground cable projects.
Other outstanding bond issues, according to city documents:
- 2012A: $55.1 million for a 12.3% ownership share in the gas-fired Dogwood plant in Pleasant Hill. The city still owes $53.6 million in principal.
- 2012F: $52.5 million to replace the city’s street lights with LED lights, transmission projects, refunding some 2009 bonds, inspect some turbines and make some repairs at Blue Valley. The city still owes $39.74 million in principal.
- 2016: $47.18 million to pay for, among other things, ash pond closures, turbine inspections and repairs, decommissioning the Missouri City plant, various transmission projects, the new Utilities Center building, the new billing system and potential funds to design a new automated meter system – a plan ultimately shelved after a citizen petition drive. The city has only made interest payments on these bonds.
According to bond documents from 2016, under the current schedule, the city was slated to make about $10.5 million annually in bond payments through 2024, then slightly less through 2036, down to $6.6 million and dipping slightly starting in 2037, until a final $2.3 million payment in 2046.
The city’s current fiscal year budget has $8.3 million in expenditures for Dogwood, and $53.6 million in power purchase agreements, which include about $7.1 million for two wind farms in Kansas and the city’s community solar farm.
Paying them off
The 2010 bonds were paid on their 10-year call date, something Kidney says the city will similarly consider when the 2012 bonds reach their call date next year. Otherwise, those bonds run through 2037, and refinancing between 2022 and then can be trickier and involve tax hits.
The 2016 bonds can be called in 2026, and otherwise run through 2046. The interest on the current bonds ranges between 2 and 5%.
To pay the 2010 bonds, Kidney said the city had considered refinancing with new bonds at lower interest rates – “Just like refinancing a mortgage,” he said – but ultimately waited a bit and defeased them, or paid the outstanding balance at once. The city determined it had those surplus funds using its newly adopted cash balance policy.
The idea of the policy, Kidney explains, is to look at each year based on the end-of-year fund balance, then recalculate what the next target balance will be after covering all necessary expenses. If there’s surplus cash beyond the targeted balance, as financial advisers determined was the case this year, Kidney says his first recommendations would be to defease bonds if possible or apply the funds to one-time capital projects.
“The whole idea is to make sure ratepayers aren’t paying more on debt than they have to,” Kidney said. “That’s the whole purpose of cash balance policies.”
When the 10-year call date hits with the 2012 and 2016 bonds, the city could choose to apply surplus funds to pay them off if possible, or refinance with new debt at lower interest rates.
Kidney said if any refinancing happens with the bonds for the Nebraska City and Iatan plants, it would be through those plants’ owners, who use payments from IPL and other power companies as their revenue sources, and not through the city.
If the city ultimately issued some new bonds to pay for new power generation, it’s possible the city could gain lower interest rates than some of the current bonds.
“It’s all market-driven,” Kidney said. “We’re in an unprecedented time of low interest. To project what those rates will be in a year or two is very difficult, but all indications are rates will stay low for a bit.”
City Council Member Mike Huff, a former division manager within IPL, emphasized a couple weeks ago that he’s simply pushing to replace the combustion turbines with some baseload production that produces some revenue for the city. To say he’s pushing to build a large power plant that would cost hundreds of millions of dollars is “incorrect,” he said.
Paying for replacement power can involve current revenues more than issuing a large amount of debt, he said, and if done well enough can lead to lower rates – not higher rates to pay finance debt.
“What we’re talking about is replacement; we’re talking about replacing the 93 megawatts,” Huff said, amid discussion after the short, rolling blackouts and how IPL theoretically could sell more power in similar events if it had the capability. “This has always been important to IPL. It should not be taken lightly by anyone.”
Even before the cold snap and blackouts, Mayor Eileen Weir said the City Council had to get comfortable with the idea that it would make a power-related decision that would affect the city for decades.
“We’ve got to replace what we currently have,” Weir said after the blackouts. “This isn’t about fear, though this situation got a lot of people’s attention. I understand we have a lot of debt, and it’s not going anywhere overnight, but we have an obligation to at least maintain what we currently have.”