3. Request
Park seeks authorization to issue up to $20 million of new First Mortgage Bonds, retire $18 million of existing bonds, and reimburse its treasury in the amount of $2 million for funds expended on capital improvements. This application was supplemented by an August 14, 2008 response to requests by the assigned Administrative Law Judge (ALJ). This supplemental response was placed in the formal file as Item # 1t, a copy of which was provided to protestant Division of Ratepayer Advocates (DRA).
Park's request to issue New First Mortgage Bonds is subject to §§ 816, et seq. of the Public Utilities Code.1 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 to protect and promote the public interest.
3.1. Source of Financing
Park engaged Banc of America Securities LLC (BAS) to act as its financial advisor and Agent to negotiate an extension and/or to refinance $8 million in bonds held by OneAmerica (formerly known as American United) having a 8.18% interest rate with a 2014 maturity date and $10 million in bonds held by Nationwide Life having a 7.32% interest rate, also with a 2014 maturity date.2
BAS successfully negotiated an extension of the 8.18% notes with OneAmerica as to terms, provisions, pricing, with an increase in the principal amount of bonds to $10 million from $8 million. However, BAS was unable to negotiate an extension of the 7.32% bonds with Nationwide. Instead, BAS obtained a commitment from Pacific Life to purchase $10 million in bonds.
These new bonds would be issued as First Mortgage Bonds in conformity with provisions of, and secured by, Park's Trust Indenture, dated November 1, 1973, between Park and certain Trustees, as supplemented, amended and restated by the Eight Supplemental Indentures, dated February 1, 2002. Park anticipates that the form of the new First Mortgage Bonds would be similar to the form of bonds included in its Tenth Supplemental Indentures, dated January 27, 2006, filed as Exhibit C to the application. These new bonds will be identified as the Eleventh and Twelfth Supplemental Indentures of its Trust Indenture.
3.1.1. OneAmerica Bonds
The OneAmerica bonds are to have a final maturity date 25 years from their issuance date with an average life of 22 years. These bonds will carry a 7.46% interest rate, based on a 275 basis point spread above the June 20, 2008 actual 30-year Treasury rate of 4.71%. However, the 7.46% interest rate would increase 10 basis points to 7.56% if the closing dates on these bonds occur after August 19, 2008.3 OneAmerican's commitment to purchase the $10 million in bonds expires if the transaction has not closed by November 1, 2008, within 120 days after July 4, 2008.
3.1.2. Pacific Life Bonds
The Pacific Life bonds are to all mature 30 years after their issuance date and carry a 7.65% interest rate, based on a 300 basis point spread above the 30-year Treasury rate set on June 12, 2008. Park subsequently clarified in a data response to the ALJ that the 7.65% interest rate was actually based on a 300 basis point spread above the 30-year treasury rate of 4.65% set on June 6, 2008, not the 4.77% 30-year Treasury rate set on June 12, 2008. Pacific Life's commitment to purchase the $10 million in bonds expires if the transaction has not been funded by December 31, 2008.
3.2. Use of Proceeds
A majority of the proceeds from the issuance of new bonds would be used to retire $8 million of bonds held by OneAmerica and $10 million held by Nationwide Life. The use of bond proceeds for the retirement of, or in exchange for, outstanding bonds is an allowable use of bond proceeds, as set forth in § 817(g).
Park will deposit the remaining $2 million of new bond proceeds into its treasury to reimburse its treasury for funds used for capital improvements in 1999. Park used approximately $3 million of its treasury funds in 1999 to fund capital projects undertaken by its California corporate office, Central Basin Division, subsidiary Apple Valley Ranchos Water and Montana subsidiary, Mountain Water. Of this amount, approximately $1 million was used for capital improvements in Park's California operations and $2 million in its Montana operations.
Reimbursement of treasury funds expended for capital improvements is an allowable use of bond proceeds, as set forth in § 817(h).
3.3. Reason for Financing
Park seeks authority to issue new bonds on the basis that it has a "limited window of opportunity" to refinance its long-term debt before the principal payments on those bonds are due. Park defined that window of opportunity to be between 2008 and 2011 when principal payments on the bonds scheduled to be retired begins. Principal payments of $2.5 million per year begins in 2011 and ends in 2014 for the $10 million bonds held by Nationwide Life and $2.66 million per year beginning in 2012 and ending in 2014 for the $8 million in bonds held by OneAmerica. Absent such refinancing, Park would need to divert cash earmarked for capital expenditures to pay the principal on the bonds scheduled to be retired.
This diversion of cash would have a significant detrimental effect upon Park's and its subsidiaries' ability to construct and replace necessary infrastructure because the combined annual principal payments on the bonds, once they become due, would require $5.16 million in annual principal bond payments. That amount is over half of the actual 2007 and forecasted annual $10 million capital budget through 2014 for Park and its subsidiaries combined. With an annual availability of approximately $6.4 million cash from depreciation expense and $3 million from earnings, Park's internally generated funds fall short of meeting its annual capital requirements by approximately $1 million without even considering the $5.16 million in principal payments.
1 All statutory references are to the Public Utilities Code unless otherwise stated.
2 The Commission's competitive bidding rule is not applicable in this instance because new debt issues of $20 million or less are exempted from the competitive bidding rule. (Resolution F-616, dated October 1, 1986.)
3 This negotiated 7.46% bond interest rate is not attainable given that the first scheduled Commission meeting date the Commission could consider approval of the application without waiving statutory rules and established procedures was August 21, 2008, two days after the entire transaction had to be closed. This is because: (1) Park did not file its application until July 3, 2008; (2) notice of the application appeared on the July 10, 2008 Commission Daily Calendar; (3) the protest period did not end until August 11, 2008; and (4) the next scheduled Commission meeting that the Commission could consider approving the application was August 21, 2008, assuming that: (a) no protests were received; (b) a draft decision could be prepared and complete draft review within one day; and (c) the Commission delayed a scheduled August 11, 2008 Agenda mailing date.
