Update (8/20/20) - The city retained PFM Financial Advisors to review bond refinancing options. Here’s a report presented by to the Public Utility Advisory Board at its Aug. 20th meeting which shows how funds can be saved through refinancing.
IPL Finances, Reserves and Bond Debt
There has been an intense conversation about whether Independence Power and Light has excess reserves sufficient for a one-time rebate or support further rate reductions.
The discussion has intensified by COVID-19 resulting loss of the jobs, pressure on business and precipitous economic downturn.
IPL finances, in general, are complicated given significant revenues and expenses, high-dollar capital projects, encumbered funds and substantial bond debt. Also IPL has lacked consistent, monthly financial statements available to the public and others.
Current IPL Finances
The IPL financial statement (as of 12/31/19) shows the city utility earning $2.1 million excess revenue over income. If the trend holds, IPL earnings likely will be less than $8.8 million earned for the prior 12-month period ending June 30, 2019.
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It is unclear, at this point, what impact the pandemic will have on IPL energy use and revenues as businesses shut down and more time is spent in residences.
The Public Utilities Advisory Board recently insisted (April 3) the City Council provide a rebate as required by the City Charter. The City Council rebuffed the request as ill-advised given pressure on city finances.
The issue which has come to the fore is a section in the city charter Section 3.17 which states the electric utility “shall be operated in a businesslike fashion.” The section goes on to say:
“The electric utility shall not be operated for the benefit of other municipal functions, and shall not be used directly or indirectly as a general revenue producing agency for the city, but it may pay to the city an amount in lieu of such taxes as are normally placed upon private business enterprises. After providing for depreciation accruals and amortization of bonds, and for reasonable accumulation of surplus, the electric utility shall apply all annual profits to rate reductions.” (emphasis added)
The charter language is problematic at best. There is no agreed upon methodology for making the financial determination let alone an annul determination of whether “profits” were available for rate reductions.
A further complication is what accounting standard applies. The city operates under accounting standards established by Governmental Accounting Standards Board (GASB), but as utility IPL is also required to use separate accounting standards established by the Federal Energy Regulatory Commission (FERC).
In February, the city sent three city finance employees to a two-day training held by American Public Power Association Public Utility Accounting training. Among the topics covered were financial statement structure and presentation.
The city general acknowledges its financial management systems have been weak and in the process of transition as it installs new financial management software systems. This transition has impeded the city’s ability to produce all the desired financial information and reports.
Lots of money; lots of debt
Little attention or acknowledgement been given to the IPL’s bond debt. This review of IPL’s bond debt, done by Indy Energy, covers publicly available information found in city financial statements and bond documents.
IPL had $252.8 million in bond debt as of June 30, 2019. That total reflects $156.1 million in principal and $96.8 million in interest.
Here’s the four outstanding IPL bond issues. The cover a variety of IPL projects and needs. Most of the outstanding debt carries an interest rate between 3 to 5%. The bonds get paid off at different times. The longest maturity is 2046.
The official bond statements are typically over 300-pages long. The bond summaries include the cover page, the maturity schedule and a description of what is to be funded. Click the Series name to see the summary documents.
Bond project: Cover expenses various projects at the Blue Valley power plant and work on combustion turbines at Substations I and J. It also provided funding for “engineering, permitting and similar costs related to evaluation of the construction of a new generation facility to supply power to the System.”
Bond project: These bonds financed with IPL’s acquisition of a 12.3% interest in the Dogwood natural gas power plant located in Pleasant Hill. Mo.
Bond project: Similar projects as the Series 2010. It covered a new 69 kilowatt transmission line, rebuilding a substation, conversion of city street lights to LED, undergrounding utility lines and also paying off a 2009 bond issue
Bond project: The bond funded the decommissioning of the Missouri City power plant, some production related expenses, fiber optic network communications upgrades, the new utility services center, a new customer billing system, new financial management system and technical services related to design of an automated metering infrastructure (AMI) system.
Strong bond rating
Last October, IPL received an A/Stable bond rating from Standard and Poors, a bond rating agency.
The four-page independent review is a detailed examination of the IPL's financial and operating performance. The review takes into account the recent 6% rate reduction but says those reductions should make IPL more competitive.
The bond agency noted IPL has "stable residential customer base, high but declining rates, and diverse mix of owned generation capacity and purchased power." The bond review note 52.3% of total energy sales go to residential customers.
The bond rates also notes IPL is reducing expenses, replacing inefficient power generation with purchased power and had manageable capital needs.