Central Arizona Project asks to refinance its debt

The $4 billion Central Arizona Project, a product of federal largesse from the start, is seeking another governmental helping hand.

The CAP wants its debt refinanced at a lower interest rate and a delayed payback schedule because one of its key revenue sources — electric power revenue from the Navajo Generation Station — has crashed in recent years along with energy prices.

Project officials are confident the U.S. Bureau of Reclamation will grant their request, but if not CAP may have to charge more to its urban and industrial customers, including Tucson and Phoenix. Rates could jump even more if CAP has less water to deliver because of Colorado River shortages, which could happen in 2018, because less water available means higher rates for those who buy it.

Cities likely would pass along the higher costs to residential customers, although Tucson Water says it hopes to hold down any price hike.

If the bureau grants CAP’s request to refinance, it will get $5 million to nearly $17 million less each year less than it now gets from Tucson, Phoenix and other water users. CAP also wants an extra 12 years — until 2057 — to pay off the debt.

This would be the third time since the 1990s that the federal government has given Arizona a helping hand regarding repayment — and CAP’s top executive said he has no doubt the request will be granted, although it may require approval by Congress and the courts.

It’s no different than a homeowner refinancing a mortgage when interest rates drop, said Ted Cooke, CAP’s general manager.

“If there is a more favorable interest rate being offered by the U.S. treasury for existing debtors (like CAP), then we are entitled to refinance our debt,” Cooke said. “If the money is available in the market at a lower interest rate than we’re paying, it’s our fiscal responsibility to go out and seek lower-cost money. If the lender, the U.S., will end up receiving less interest on the loan that they made, so be it.”

The bureau says it hasn’t even started analyzing the request and that it will “require consideration of a number of legal, policy, and financial issues,” said David Palumbo, the bureau’s deputy commissioner for operations.

The Tohono O’Odham Tribe’s San San Xavier District and the Gila River Indian Community oppose the refinancing, concerned that it would hurt a federal fund that pays for capital projects and operating expenses to bring CAP water to tribes.

University of Arizona law professor Robert Glennon, who has written two books on water, wonders why the bureau would even want to approve refinancing, given its past history of granting financial incentives for CAP.

“Haven’t you gotten enough out of the feds?” Glennon asked of the CAP. “What more do you want? Other than you’re just not wanting to pay, why is it the feds should redo the contract?”

Glennon said all utilities should charge more for water, with “lifeline” rates for lower-income users. CAP users get a great deal on what should be very expensive water, he said.

“We Arizonans are spoiled. We wake up, turn on the tap and get as much water as we want for less than we pay for a cellphone or cable TV,” said Glennon, author of “Water Follies” and “Unquenchable: America’s Water Crisis and What To Do About It.”

Subsidies and settlements

When approved in 1968, the Central Arizona Project like most federal water projects, got a bargain of an interest rate: 3.342 percent for municipal and industrial users.

That compared to more than 7 percent for a 30-year-home loan in 1968 and more than 17 percent in the inflationary 1980s, although the prevailing mortgage rate today barely exceeds CAP’s interest rates.

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Farmers have never paid interest, an even bigger subsidy tied to the tradition of reclamation projects aimed at helping agriculture.

In the 1990s, the project got another federal boost when a lawsuit settlement lowered Arizona’s share of the repayment tab from $2.2 billion to $1.8 billion. CAP’s Cooke says Arizona’s share of repayment is $1.65 billion, including what’s already been repaid. It will owe about $1.1 billion after making its January 2017 repayment.

The state benefited once more with a federal law passed to settle water rights claims of the Gila River Indian Community and the Tohono O’Odham tribe, among others. The 2004 Arizona Water Settlements Act diverted about $55 million from the federal treasury that CAP had previously contributed each year to a fund that pays to build canals and other infrastructure.

At the time, the law was considered a boon for Arizona in general and for Indian tribes. It provided for future financing of tribal water improvements and assured tribal water supplies while ending the threat of tribal litigation against local and federal governments for depriving them of ancestral water rights.

But to Glennon, the 2004 settlement resembles “a shell game, passing much of the total $4 billion CAP cost back to the federal government.”

Repayment schedule

The coal-fired Navajo Generating Station near Page serves two functions.

It provides electricity to pump Colorado River water 2,900 feet uphill to Tucson. Whatever electricity is left over after CAP and several utilities use their share is sold, with CAP using the revenue to pay down its debt.

But since 2010, falling natural gas prices have forced Navajo to cut prices for coal-fired power. The CAP fund that includes Navajo revenues has dropped by more than half.

In his July letter to the bureau seeking refinancing, CAP’s Cooke said the project would like to pay a 2.87 percent rate — down from 3.34 percent — on the largest share of its federal debt. Cooke said last week that was only an example and he doesn’t know exactly what rate the project officials would want.

Under one possible repayment schedule attached to Cooke’s letter, the project would repay the feds about $39.6 million annually until 2057. It’s currently on the hook for $44 to $56 million a year from 2018 through 2043, then much less for two more years.

CAP’s largest debt as of January 2017 will be $699 million plus interest owed by municipal and industrial customers such as the cities of Tucson and Phoenix. Farmers owe about $411 million, Cooke’s letter to the bureau said.

Because the farmers’ loan is interest-free, they can pay most of it at the end of the loan period, Cooke said. If CAP refinances, it must handle the non-interest-bearing loan first, Cooke said. The project would sell bonds to pay it off, then repay those bonds at market interest rates, he said. Then the project would refinance its interest-bearing loan.

Despite the lower interest, the project would actually have to pay back more money over time because of the delay in the repayment schedule, Cooke said. But because the money paid back later is worth less than money paid now due to inflation, the project would benefit overall.

If the bureau declines to let CAP refinance, it could refinance its debt in the municipal bond market, Cooke said.

For the Sierra Club’s Sandy Bahr, the CAP’s financial struggles show that it’s high time the project halts its dependence coal. The club is suing to block an Environmental Protection Agency-approved plan to scale back production at Navajo — but slower than environmentalists would like. CAP officials fear that if the plant closed, they would have to pay another source much more for power to pump the project’s water.

“Hopefully, it’s a wake-up call to administrators at CAP that they need a better plan for the future,” said Bahr, director of the club’s Grand Canyon chapter. “It also shows how tenuous the whole system of CAP financing is — a little bit of a house of cards.”