City adding $150M in debt, says it’s manageable

By COLLIN GALLANT on July 22, 2020.

cgallant@medicinehatnews.com@CollinGallant

The city’s energy and utilities division plans to add $150 million in debt over the next two years, but the city will remain under a provincially mandated ceiling and its own internal goals, Mayor Ted Clugston stressed on Tuesday.

The previous evening, council approved twinning the north-end power plant and began the process to borrow up to $66 million for the project. In June, council agreed that borrowing $80 million for a gas well abandonment program was the best way to stretch existing long-term reserves by earning a return in the meantime.

Those items, combined with other spending and construction plans, will see the city’s debt rise by about 50 per cent by early 2022, though Clugston said that doesn’t relate to operational spending and the projects are a net benefit to the city’s financial bottom line.

“One of the better things right now is that because of lower interest rates, we’re able to borrow, and servicing (debt) costs are less,” he told a Tuesday press availability.

“I need to stress that this is not like the other two levels of government. We’re not borrowing to pay (salaries) or operate, this is a business. We’re borrowing to further our business interests.”

Clugston also stated that he expects power plant expansion, known as Unit 17, to come in under budget.

“Just like the last one, and we expect to pay it off fairly quickly, just like Unit 16,” he said.

According to the city’s most-recent financial statements, at April 30, the city’s total debt sat at $397.5 million, though about $50 million relates to letters of credit filed with provincial petroleum regulators as well as minor loan guarantees to local non-profit groups, like golf courses, that operate on city land.

That places the city at 51 per cent of its debt ceiling, mandated by the province and determined as twice annual revenue.

Currently the city’s debt limit would be $778.4 million, and, according to city forecasts, new debt would push the total to 65 per cent of that by the end of this year, after which point the ratio would decrease in 2021 and 2022.

Council approved the power plant expansion at the same $66-million budget as work in 2017 to build the initial Unit 16 generator station at the Box Springs Road site, though that project was $10 million under budget in the end. Administrators have also said cost-efficiencies are involved in a twinning, rather than a standalone site.

“I think we’ll get it at much less than that,” said utility committee chair, Coun. Phil Turnbull. “But there might be costs that we’ve missed, and you have to do it (the borrowing bylaw) all at one shot or it gets messy.”

He cited economic conditions and the city’s experience with the project as favourable factors, however the city also benefited from advantageous exchange rates in 2015 when ordering the Unit 16 turbine, worth US$25 million. That situation is now reversed.

“We’ll get the best possible deal we can get,” said Turnbull.

The city will also take on $80 million in debt over the next several years as well-abandonment costs are paid out, and that debt would be paid starting in five years time by withdrawals from a long-term investment program the city has with Alberta public fund manager AIMCo.

Administrators say that the difference between investment income and interest owed could be up to $10 million in the city’s favour over time.

The city’s natural gas and petroleum resource department has zero debt currently.

Energy and utility commissioner Brad Maynes said the department fully expects Unit 17 to be “paid out” from increased sales well before the full debenture comes due.

As per internal policy, borrowing for power distribution projects is paid for via rates charged back to customers, while the cost of new generation projects are factored into pre-dividend profit calculations.

21
-20