4. Discussion

4.1. Public Utilities Code Requirements for Issuance of Securities

Southwest's request is subject to Pub. Util. Code §§ 816, 817, and 818. The Commission has broad discretion under § 816 et seq. to determine if a utility should be authorized to issue debt. Where necessary and appropriate, the Commission may attach conditions to the issuance of debt and stock to protect and promote the public interest.

Pursuant to Pub. Util. Code § 817, a public utility may only issue and use financing for selected purposes.¹ Those purposes not listed in Pub. Util. Code
§ 817 may only be paid with funds from normal utility operations. In particular, Southwest states that even though the term of its notes has a floor of nine months, it does not plan to issue any debt with a term of less than
12 months based on the authority requested in the current application. We reiterate that Debt Securities issued pursuant to Pub. Util. Code § 817 must have a term of greater than 12 months.

Pub. Util. Code § 818 states that no public utility may issue notes or other evidences of indebtedness payable at periods of more than 12 months unless, in addition to the other requirements of law, it shall first have secured from the Commission an order authorizing the issue, stating the amount thereof and the purposes to which the issue or the proceeds thereof are to be applied. Pub. Util. Code § 818 also requires the Commission, in issuing such an order, to find that the money, property, or labor to be procured or paid for with the proceeds of the debt authorized is reasonably required for the purposes specified in the order and, unless expressly permitted in an order authorizing debt, that those purposes are not, in whole or in part, reasonably chargeable to expenses or to income. Southwest has substantiated that its need for issuance of new Debt Securities are necessary and are for proper purposes, as discussed above in Section 4.2 of this Decision. These purposes are authorized by § 817 and, as required by § 818, are not reasonably chargeable to operating expenses or income.

Since Southwest's request is in compliance with Pub. Util. Code § 816
et seq., we will grant it authority to issue new Debt Securities for the aforementioned purposes and terms, and for the amounts determined in the order of this Decision.

4.2. Forecast of Sources and Uses

Utility applications seeking authority to issue debt or other securities are based, in part, on forecasted sources and uses of funds that illustrate the requested need for funding. Southwest used a long-term forecast covering the three-year period of 2010-2012 to determine its future financing needs. Southwest's forecast includes uses of funds such as capital expenditures, redemption of Preferred Equity, and maturities/refinancing of previously issued Debt Securities.² Southwest's forecast also includes sources of funds, such as cash from internal sources, sale of Common Stock, proceeds from drawdown of
tax-exempt bond issues, existing financing authority, and additional cash requirements/surplus. We rely on Southwest's forecast to determine the forecast of Sources and Uses set forth below in Table 1.

Table 1

Sources and Uses Statement for 2010-2012

Southwest has a total estimated existing financing authority of $659,089,470, consisting of $335 million of Debt Securities, $140 million of Preferred Equity, and 5,869,649 shares of Common Stock with an estimated value of approximately $176.1 million.⁵ As shown in Table 1, Southwest is using
$5.859 million of its available Common Stock authority to defray its gross need for funds. Of the remaining $750 million need for funding shown in Table 1, Southwest proposes to use $335 million of Debt Securities and $140 million of Preferred Equity, resulting in a remaining need for funds of $275 million.

Given the net need for funds is greater than the request, it is reasonable to authorize Southwest authority to issue $200 million of new Debt Securities. This new financing will allow Southwest to fund its capital expenditure plans for the period 2010 through 2012, retirement/refinance/refund of existing securities, and to reimburse Southwest for money expended from income or treasury funds, to the extent authorized by Pub. Util. Code § 817(h). We find Southwest's request to be reasonable and supported by the record.

Granting of financing authority to a utility does not obligate the Commission to approve any capital projects. This financing authority provides Southwest with sufficiently liquid resources to timely finance its upcoming public utility projects, to refund maturing debt, and to reimburse its treasury. Review of the reasonableness of capital projects occurs as needed through the regulatory process applicable to each capital project. Therefore, any approval of this financing request would not prejudge any of Southwest's forecasted projects for the period 2010 through 2012.

4.3. Types of Securities to be Issued

Southwest request to issue new Debt Securities, described in Section 3 of this Decision, that are similar to those types of Debt Securities authorized in
D.07-09-007. Southwest also requests that it be allowed to issue new Debt Securities "which may include, without limitation"⁶ the types listed in its application. We cannot authorize something that has not been identified. Therefore, we will authorize Southwest to issue only the specific types of Debt Securities detailed in Section 3 of this Decision and enumerated in the order herein, and deny Southwest's request to use other forms of debt that are not specifically authorized in the order of this Decision.

Also consistent with § 824, Southwest must maintain records to identify the specific securities issued pursuant to this Decision, and demonstrate that proceeds from such securities have been used only for public utility purposes.

4.4. Encumbrance of Utility Property

Southwest also seeks authority to encumber its utility property, including, but not limited to, its accounts receivables and capital leases, as part of issuing secured Debt Securities. This request to encumber utility property is subject to § 851 which states, in relevant part, that no utility shall encumber any part of its plant, system, or other property necessary or useful in the performance of its duties to the public, or any franchise or permit or right there under without first having secured from the Commission an order authorizing it to do so. Consistent with D.07-09-007,⁷ we will authorize Southwest to encumber its utility property, including, but not limited to, its accounts receivables and capital leases.

Also consistent with D.07-09-012,⁸ we will grant Southwest authority to guarantee or to pledge its assets on behalf of a subsidiary or affiliate of Southwest who qualifies to transact financing arrangements pursuant to Pub. Util. Code § 701.5. Southwest's subsidiary or affiliate must be created solely for the purpose of issuing securities to the public or privately to support Southwest's operations or service and Southwest should have 100% ownership and control of the subsidiary.

Consistent with D.02-04-054,⁹ we will grant Southwest authority to issue Debt Securities through a governmental or quasi-governmental entity to obtain tax-exempt status for the securities, whenever Southwest's facilities qualify for tax-exempt financing under federal or state law. In this structured financing, Southwest is authorized to unconditionally guarantee or otherwise secure the issuer's obligations to its debt holders. As a means of securing the issuers obligations, Southwest may issue and pledge or deliver bonds in an equal principal amount to the issuer or a trustee.

4.5. Debt Enhancements

Southwest seeks authority to include certain debt enhancements in the issuance of its Debt Securities, subject to conditions, which can assist in the management of interest rate risk. Southwest also requests that such authority not be considered as additional debt for purposes for calculating the amount of authorization used, since the use of such authority would not increase the amount of the underlying or related securities issues or to be issued. These debt enhancements consist of put options, call options, credit enhancement arrangements, interest rate swap agreements, interest rate cap agreements, interest rate floor agreements, interest rate collar agreements, special-purpose entity transactions, hedges, treasury locks, caps, and collar agreements. The conditions requested by Southwest are included in Attachment A to this Decision.

The Commission has previously given Southwest authority to use similar debt enhancements subject to these conditions and not considered as additional debt as described above.¹⁰ We will again authorize Southwest to use these previously approved forms of debt enhancements to manage interest rate risk and not consider the debt enhancements described above as additional debt for purposes of calculating the amount of authorization used. We also require Southwest to comply with its proposed conditions except, wherever Southwest has used the word "should" we substitute "must."

4.6. Competitive Bidding Rule Exemption

Resolution F-616, issued on October 1, 1986, requires utilities to issue debt using competitive bids. Pursuant to Item 6 of Resolution F-616, the Competitive Bidding Rule applies only to utilities with bond ratings of "A" or higher. Southwest's debt rating is "Baa3" as reported in the 2009 Moody's Bond Rating and "BBB" in Standard & Poor's 2009 Bond Rating. Southwest has been authorized exemptions from the Competitive Bidding Rule in past decisions on the basis of having a bond rating lower than "A".¹¹ Accordingly, Southwest is exempted from the Competitive Bidding Rule in connection with this authorization.

Southwest has not used Diverse Business Entities (DBE) in the issuance of its securities, but does use DBE's for lease financing activities and investment management for employee benefit plants. Consistent with General Order 156, it is expected that Southwest will make greater efforts to include DBEs in future offerings in the issuance of securities and all other underwriting services. We will closely monitor Southwest's progress in its DBE procurement practices going forward.

4.7. Evergreening Authority

Evergreening Authority provides a utility pre-authorization to issue
long-term Debt Securities and Preferred Equity for the purpose of refinancing/refunding/replacing authorized securities at maturity; upon mandatory redemption; upon repurchase for mandatory sinking fund requirements; or upon optional refinancing to reduce financing costs; without corresponding new issue amounts being charged against Commission authorizations for "new money" securities.¹² Evergreening Authority is not intended to facilitate changes in a utility's capital structure or in the nature of the underlying assets being financed, or to expand the permitted uses of proceeds. Debt Securities may be replaced only with Debt Securities, Preferred Stock with Preferred Stock, and Common Stock with Common Stock.

Evergreening Authority is intended to limit or eliminate the need for multiple Commission approvals when a public utility, having such authority, subsequently wants to issue Debt Securities, Preferred Stock, or Common Stock for the retirement of, or in exchange for, one or more outstanding stocks or stock certificates or other evidence of interest or ownership of such public utility, or bonds, notes, or other evidence of indebtedness of such public utility, with or without the payment of cash.

Once the Commission has authorized the issuance of securities, the issuing utility could redeem, repurchase, or roll over those securities at maturity, without further Commission action and without having to deduct the new issue amounts (including any redemption premiums) from the balance remaining under Commission authorizations.

Southwest requests that the Evergreening Authority authorized in
D.05-02-049, that expired on December 31, 2009, be renewed through
December 31, 2015. Southwest anticipates that it will use the Evergreening Authority for certain amounts of its existing long-term Debt Securities and Preferred Securities, when permitted by the timing of the refinancing, and to refinance existing long-term Debt Securities if favorable market conditions exist.

From 1994 through 2009, Southwest has used $1.006 billion of its Evergreening Authority, consisting of $521 million to finance maturing debt instruments and $485 million for optional refinancing. Since it was last authorized in D.05-02-049, Southwest used its Evergreening Authority to:

1. Optionally refinanced $300 million of a Five-Year Revolving Line of Credit, resulting in savings of $495,000 (June 2006). The savings from this transaction were reflected in A.07-12-022, Southwest's most recent General Rate Case (GRC) application.

2. Refinanced $56 million of maturing debt with a Clark County Industrial Development Revenue Bond
(September 2006). The savings will benefit only the customers within the Southern Nevada jurisdiction
(this debt is jurisdiction-specific pursuant to Internal Revenue Services' restrictions).

3. Refinanced $50 million of optional refinancing with a Clark County Industrial Development Revenue Bond
(September 2008). The savings will benefit only the customers within the Southern Nevada jurisdiction (this debt is jurisdiction-specific pursuant to Internal Revenue Services' restrictions).

There are no existing modifications, alterations, or limitations to the Evergreening Authority Guidelines (Guidelines) authorized by D.93-12-022. Guideline (4) provides that any Evergreening Authority authorization shall have an initial term of no more than five years, unless suspended or extended by the Commission.

Granting Southwest's request for a renewal of its Evergreening Authority will provide the utility with greater timing flexibility to take advantage of low interest rates and market opportunities to refinance existing securities and issue new securities when maturities occur, without having to utilize new financing authority or require the filing of a new financing application. Southwest has shown that its previous Evergreening Authority has resulted in savings for its customers. Also, Southwest's request for a five-year renewal of its Evergreening Authority is in compliance with the terms and conditions of the Guidelines.¹³

We will, therefore, grant Southwest Evergreening Authority for long-term Debt Securities, Preferred Stock, and Common Stock subject to the Guidelines authorized by D.93-12-022 until five years from the date of this Decision. Southwest must also file with the Commission, on or before the 25th day of the month following each quarter, a statement for the preceding quarter showing all activity under the Evergreening Authority. This statement must be consolidated with its reports under General Order (GO) 24-B.

¹ 817.

A public utility may issue stocks and stock certificates or other evidence of interest or ownership, and bonds, notes, and other evidences of indebtedness payable at periods of more than 12 months after the date thereof, for any one or more of the following purposes and no others:

(a) For the acquisition of property.

(b) For the construction, completion, extension, or improvement of its facilities.

(c) For the improvement or maintenance of its service.

(d) For the discharge or lawful refunding of its obligations.

(e) For the financing of the acquisition and installation of electrical and plumbing appliances and agricultural equipment which are sold by other than a public utility, for use within the service area of the public utility.

(f) For the reorganization or readjustment of its indebtedness or capitalization upon a merger, consolidation, or other reorganization.

(g) For the retirement of or in exchange for one or more outstanding stocks or stock certificates or other evidence of interest or ownership of such public utility, or bonds, notes, or other evidence of indebtedness of such public utility, with or without the payment of cash.

(h) For the reimbursement of moneys actually expended from income or from any other money in the treasury of the public utility not secured by or obtained from the issue of stocks or stock certificates or other evidence of interest or ownership, or bonds, notes, or other evidences of indebtedness of the public utility, for any of the aforesaid purposes except maintenance of service and replacements, in cases where the applicant has kept its accounts and vouchers for such expenditures in such manner as to enable the commission to ascertain the amount of money so expended and the purposes for which such expenditure was made.

² A.10-04-008 at Exhibit C, Schedules I, III, VI, and IX, Response, and response to follow-up questions.

³ See D.05-02-049 and D.07-09-007 for authorization.

⁴ Surplus (deficit) equals total financial requirements less total source of funds.

⁵ See A.10-04-008, Schedule IX. Southwest used a per share price of $30 multiplied times the authorized unused number of shares, which is similar to the average Southwest per share price for 2010 of approximately $29.

⁶ A.10-04-008 at Section 8.2.

⁷ See D.07-09-007, Ordering Paragraph (OP) 6.

⁸ See D.07-08-012, OP 9.

⁹ See 2002 Cal. PUC LEXIS 277 at 6.

¹⁰ See D.07-09-007 at OP 4; D.05-02-049 at OP 4; and D.02-04-054 at OP's 5-11.

¹¹ See D.07-09-007 at 25-26and D.05-02-049 at 9.

¹² See D.93-12-022, Appendix B, Item 8 "Issuance of securities for optional refinancing of existing securities shall be permitted under the evergreen authorization only if the average annual effective cost of the new securities over their life, including the impact of any refinancing premiums or discounts, is less than the average annual effective cost of the refinanced securities over their remaining life. If more than one series of securities is being issued or replaced, average annual effective cost shall be calculated on a weighted basis (i.e., adjusted to reflect the respective aggregate principal amounts or par values of the different series of securities). This provision shall not apply to refinancing of securities upon maturity, mandatory redemption, or mandatory repurchase to fulfill sinking fund requirements. The grant of evergreen authorization does not constitute Commission pre-approval of the cost of money resulting from specific financing transactions, and the Commission retains the right to review the reasonableness of any such transactions in subsequent ratemaking proceedings.

¹³ See D.93-12-022 at Appendix B, Item (4).