To: Members of the Castle Rock Water Commission
From: Mark Marlowe, P.E., Director of Castle Rock Water
Paul Rementer, Enterprise Fund Analyst
Title
Debt Ratio Coverage and Evaluation of Additional Future Debt
Town Council Agenda Date: NA
Body
________________________________________________________________________________
Executive Summary
The purpose of this memorandum is to provide Castle Rock Water (CRW) Commission with an update on current debt ratio coverage and future debt and rate recommendations. This memo will outline our current debt position, detail annual performance related to benchmarking standards, and provide a case for issuing additional debt to address future capital needs.
Future Capital Needs
Water Resources (WR) monthly service charges have remained at $26.15 since they were increased by 3% in 2016. CRW has presented a plan to Council with 3% annual increases from 2022 through 2026. Due to future capital demands, rate models indicate the need for large rate increases beyond the 2022 through 2026 increases, beginning in 2029. In order to mitigate significant impact on the rate payers, CRW has created a model that solves for the large rate increases through both the issuance of debt in 2022 and marginal rate increases through 2044.
Current Debt Ratio
Debt Ratio measures the ratio of total liabilities to total assets and is a benchmarking Key Performance Indicator in the AWWA Utility Benchmarking Program. Following is a summary of the current AWWA Debt Ratio benchmarking.
|
|
75th Percentile |
Median |
25th Percentile |
|
Debt Ratio |
23% |
39% |
55% |
Our goal is to be in the top 25% of the utilities who participate in the AWWA Benchmarking Survey. The table below summarizes CRW’s annual Debt Ratio for 2015 through 2021 Q2. CRW consistently remains in the top 25% of utilities for this KPI and performance has continued to improve annually.
|
|
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 * |
|
Debt Ratio |
15% |
15% |
13% |
12% |
11% |
10% |
9% |
* Through Q2 YTD
Financial Management Plan
The CRW Financial Management Plan (FMP) is set in place to outline the main financial policies, procedures and financial performance for past, present and future. FMP goals were derived based upon CRW’s main vision to become a national leader in the water industry and our mission to provide our community with exceptional service. The first two FMP goals are as follows:
1. To minimize future rates at or below the 2013 Hybrid Model levels
2. To minimize debt carrying costs at or below industry standards (the above tables indicate that CRW is achieving this goal)
CRW’s current Debt Ratio performance to the benchmarking standards demonstrates that there is opportunity to issue additional debt while still being an industry leader in this KPI. While the ability to issue more debt is complicated and depends on a number of factors including current market conditions, interest rates, bond coverage ratios, reliability of revenue streams, ability to increase rates, and agency ratings among others, below is a table showing our current debt position along with the amount of additional debt we are able to take on and still remain in the top quartile of lowest debt ratios among our peers.
|
|
Q2 2021 YTD |
75th Percentile |
Median |
25th Percentile |
|
Liabilities |
67,359,531 |
173,721,315 |
294,570,925 |
415,420,535 |
|
Assets |
755,310,064 |
755,310,064 |
755,310,064 |
755,310,064 |
|
Debt Ratio |
9% |
23% |
39% |
55% |
|
Theoretical Debt Capacity Based on KPI |
|
106,361,784 |
227,211,394 |
348,061,004 |
Current Debt Portfolio
The current debt portfolio for CRW primarily contains revenue bonds for water, wastewater, and water resources and a bank loan dedicated to the Stormwater Enterprise. Following is a summary of the current CRW debt portfolio.
|
Debt Obligations |
Remaining Principal YE 2020 |
Interest Rate |
Maturity Date |
|
Water and Sewer Revenue Refunding Bonds, Series 2012 |
$3,795,000 |
2.60% |
2023 |
|
Water and Sewer Revenue Refunding Bonds, Series 2015 |
$3,535,000 |
2.79% |
2026 |
|
2016 Refunding of COP Bonds |
$40,510,000 |
2.51% |
2034 |
|
2019 Stormwater Enterprise Revenue Loan |
$9,000,000 |
1.92% |
2030 |
|
Total |
$56,840,000 |
2.44% |
|
Current Borrowing Market
CRW met with Hilltop Securities to discuss debt options on October 13, 2021. Hilltop Securities confirmed that current interest rates are low and that it would be advantageous for CRW to issue new debt. Hilltop Securities indicated their current timeline would allow for a February 2022 bond issuance date. Negotiated Sale and Competitive Sale were discussed as the two sale options for a potential February debt issuance.
Proposed Debt Issuances
The rates and fees models developed for the 2021 rate study indicated that a potential large rate increase would be needed in 2029 in the Water Resources Fund assuming implementation of the full capital plan proposed. The 2021 capital plan through 2060 for the Water Resources Enterprise includes approximately $523M in investments. There are several options for addressing the potential large rate increase in 2029 including retiming of capital investments through deferment of some of the projects, cancellation of some of the projects to reduce the long term expected investments, utilization of debt to spread the needed rate impacts out over a longer period, and a combination of these options.
One of the options CRW wanted to explore was issuance of additional debt. The model that was created to evaluate using debt to solve for the large projected rate increases in 2029 calls for additional rate increases beyond 2029. Beginning in 2027, the model proposes annual rate increases of 3.5% through 2032 and increases of 3% from 2033 through 2044. In addition to rate increases, the model assumes the issuance of debt of $30M in 2022, $70M in 2029 and $59M in 2045 with the assumption of a 2.5% interest rate is included.
This model using debt allows CRW to avoid large rate increases to the rate payers in 2029 while maintaining a Debt Ratio that falls within the AWWA top quartile for lowest debt to asset ratio over the long term.