3. Request
In its application, PG&E sought authorization to issue up to $4.75 billion of debt securities and preferred or preference stock, in addition to
previously-authorized amounts, until the aggregate principal amount authorized has been fully utilized to meet its future financing needs based on a long-term forecast covering the three-year period 2012 through 2014. The principal amount, form, terms, and conditions of each series of debt securities will be determined by PG&E's management or Board of Directors according to market conditions at the time of sale or issuance. In general, each series of medium-term notes and long-term debt securities are expected to have a maturity of greater than one year.
PG&E intends to issue debt securities as: first and refunding mortgage bonds; medium-term notes; notes; debentures; direct with banks, insurance companies or other financial lenders; accounts receivable financing; tax-exempt debt issued through one or more governmental entities; variable rate debt; subordinated debt; overseas indebtedness; hybrid securities;3 and foreign currency denominated securities. Such securities may be issued with: a fixed, floating or deferrable rate of interest; secured or unsecured; at par or with a discount or premium; or, to both domestic or foreign investors. PG&E also proposes to issue debt securities through its regulated affiliates or regulated subsidiaries, and governmental entities, and guarantee the securities or other obligations of its regulated affiliates or regulated subsidiaries, and governmental entities that issue securities on behalf of PG&E.
PG&E seeks authority to offer, issue, and sell preferred or preference stock in one or more offerings with the method of sale, price, dividend rate, liquidation preferences, and other rights, preferences, privileges, and restrictions to be determined prior to each offering in consideration of then prevailing market conditions. PG&E anticipates that the terms of such stock may include, but will not be limited to: (i) restrictive redemption provisions; (ii) dividend rates which may be fixed, floating, adjustable, or which may be set by a market auction procedure; (iii) mandatory sinking funds; and (iv) such other provisions as PG&E may deem appropriate in connection with its issuance and sale of the preferred stock. PG&E proposes that each offering of such stock will bear such terms and conditions as may be approved by PG&E's board of directors at or immediately prior to the date of issuance or sale in light of market conditions that may exist at that time. The rights, preferences and privileges applicable to each series of preferred stock will be fixed by resolution of PG&E's board of directors and a certificate of determination of preferences which includes the content of such resolution will be filed with the California Secretary of State.
PG&E proposes to use the proceeds from the issuance and sale of securities authorized pursuant to A.11-11-001, other than for payment of accrued interest, if any, and after payment or discharge of obligations incurred for expenses incident to their issue and sale, for the purposes permitted by Pub. Util. Code § 817 including, without limitation: (1) for the acquisition of property; (2) for the construction, completion, extension or improvement of facilities; (3) for the retirement or refunding of certain previously-issued securities and upon which PG&E paid the fees prescribed by Pub. Util. Code §§ 1904 and 1904.1; and/or (4) to reimburse PG&E for money it has actually expended from income or from any money in its treasury not secured by or obtained from the issuance of stocks or stock certificates or other evidences of interest or ownership, or bonds, notes, or other evidences of PG&E indebtedness for any of the aforesaid purposes except maintenance of service and replacements. The amounts so reimbursed will become a part of PG&E's general treasury funds. PG&E also sought authorization to encumber (sell, lease, assign, mortgage, pledge) utility property, including but not limited to accounts receivables and utility property to secure debt securities authorized herein.
In order to manage interest rate risk, PG&E proposes to utilize debt securities enhancement features including but not limited to: put options; sinking funds; swaptions;4 interest rate caps, collars, swaps, hedges, and floors; credit enhancements; treasury lock caps and collars; redemption provisions; tax-exempt financing; warrants; and forward starting swaps. PG&E is also requesting that its use of such authority not be considered as separate debt for purposes of calculating its remaining financing authorization hereunder, since the use of such interest rate management contracts would not affect the amount of the underlying securities issued.
The terms and conditions of swaps and hedges would be determined by PG&E according to market conditions at the time such transactions are negotiated. PG&E also requests that interest rate hedges entered into by an affiliate may be guaranteed by PG&E. PG&E proposes to comply with the following restrictions regarding swap and hedging transactions entered into pursuant to this Application:
1. PG&E will separately report all interest income and expense (as recorded for ratemaking purposes) arising from all swap and hedging transactions.
2. Swap and hedging transactions will not exceed at any time 20 percent of PG&E's total long-term debt outstanding.
3. If PG&E elects to terminate a swap or hedging transaction before the original maturity or the swap or hedging partner terminates the agreement, all costs associated with the termination hedging transactions will be subject to review in PG&E's next Cost of Capital proceeding.
4. Swap and hedging transactions, and other derivative financial instruments carrying potential counterparty risk which PG&E receives in connection with long-term debt, must have counterparties with investment grade credit ratings.
In addition, PG&E will maintain and make available, within 30 days of request, the following:
1. A report analyzing swap and hedging transactions including all costs associated with the swap and hedge in comparison to a projection of all-in costs without such interest rate risk management transactions.
2. A complete copy of executed swap and/or hedging agreements and all associated documentation.
Additionally, PG&E seeks a partial exemption from the Commission's CBR and to be allowed to report quarterly instead of monthly, as required by GO 24-B.
3 Hybrid securities are securities that have characteristics of both debt and equity securities. The advantage of these securities over a traditional mix of debt and equity financing is that based on recent guidance by the Internal Revenue Service and rating agencies, most new issuances are structured such that the dividends are tax-deductible to the issuer and the securities are treated, in part, like equity by the rating agencies. Recent issues of hybrids have been structured to offer high equity content (50%-75%) and low default risk in a security that is cost competitive and less dilutive than a similar mix of traditional debt and equity. High equity content treatment by the rating agencies is obtained with long maturities (60 years to perpetuity), the ability to defer dividends, and either an intention or a covenant to replace the security at call or maturity with a security of equal or greater equity content. PG&E plans to treat hybrid securities as preferred equity in its cost of capital proceedings and in determining compliance with its authorized capital structure. Such treatment is consistent with the Commission's past practice with respect to other preferred stock alternatives, such as the Quarterly Income Preferred Securities issued by PG&E. Hybrid securities may be issued as subordinated debt directly to the public or structured as a trust preferred security, with PG&E issuing subordinated debt to a subsidiary, generally in the form of a trust, and the trust issuing preferred securities to the public. The terms of hybrid securities may include, but will not be limited to: (i) restrictive redemption provisions, including, but not limited to, capital replacement provisions, (ii) interest rates which may be fixed, floating, adjustable, deferrable or which may be set by a market auction procedure, (iii) mandatory sinking funds, and (iv) such other provisions as PG&E may deem appropriate in connection with its issuance and sale of hybrid securities. Hybrid securities may be registered with the Securities and Exchange Commission and may be listed on a stock exchange. In Decision (D.) 07-05-018, the Commission approved the use by Southern California Edison Company of hybrid securities.
4 The option to enter into a swap.
