4. Discussion

Park borrows funds required by the operations of its Central Basin Division and its subsidiaries and transfers capital as needed to its division and subsidiaries through intercompany transactions. As such, the Commission has recognized a single consolidated capital structure for all of Park and its subsidiaries for ratemaking purposes. The Commission also requires Park to adhere to the conditions pertaining to affiliate transactions enumerated in D.04-06-018 and Section 8 of D.06-01-019. The Montana Public Service Commission also recognizes a single consolidated capital structure for Mountain Water Company under its jurisdiction.

Park has substantiated that it will need $20 million in new First Mortgage Bonds to satisfy its future needs for retiring long-term debt and financing capital expenditures. This purpose is authorized by § 817, and, as required by § 818, the related expenditures are not reasonably chargeable to operating expenses or income. In addition, approval of this application will not result in a material change in Park's overall capital structure. Park's 2008 actual long-term debt ratio of 46.7% is expected to increase to 47.6%; its actual common equity ratio of 53.3% would decrease to 52.4%. Therefore, we may grant Park authority under § 816 et seq. to issue up to $20 million of long-term debt for the aforementioned purpose, as detailed in the application.

4.1. Concern

However, we are concerned with Park's proposal of retiring bonds that are not due to mature until 2014, at the beginning of its 2008 through 2011 "window of opportunity," particularly since Park will incur approximately $2.3 million in early prepayment penalties, 12% of the $18 million principal bonds to be retired or 13% of the $20 million principal bonds to be issued. Park anticipates that it will amortize its prepayment penalties over the remaining life of the bonds being retired as accepted by the Commission for rate setting in D.06-08-015. Park also anticipates that with the $2 million reimbursement into its treasury for previous capital expenditures, it will have adequate monies in its treasury to cover the prepayment penalties. Although we are not considering or approving any rate making methods in this proceeding, we observe that D.06-08-015 was the result of a settlement agreement, which is not precedent setting.

Park explains that any deferral of its refinancing would result in a higher effective cost of debt than refinancing now. This is because, although the prepayment penalties would be reduced, an increase in interest rates forecast for a 2011 refinancing, prior to when principal payments are due, would more than offset the effect of the lower prepayment penalties. A Park comparison of the overall effective debt costs resulting from these two scenarios shows that the overall effective debt cost resulting from refinancing now is 8.3245% compared to an overall effective debt cost resulting from 2011 refinancing of 8.5451%, over 22 basis points higher.

We are also concerned with Park seeking authority to issue new bonds based on a predetermined interest rate based on a June 6, 2008 prior period 30-year treasury rate of 4.65% for the new Pacific Life bonds, and on a June 20, 2008 prior period of 4.71% for the new OneAmerica bonds with an assumption that interest rates will increase substantially during Park's window of opportunity to refinance its old bonds. While we do not forecast interest rates, we observe that the 30-year treasury rate has been decreasing since the benchmark 30-year Treasury rates were set for the new bonds, an indication that interest rates will not substantially increase during Park's window of opportunity to refinance its bonds. In this regard we take official notice of the August 1, 2008 30-year treasury rate of 4.57% and the September 2, 2008 rate of 4.36%, both of which are lower than the benchmark 30-year Treasury rates used for the new negotiated bonds. Park should reassess and document the reasonableness of its negotiated terms for new bonds prior to closing the agreements and provide that documentation as part of its May 1, 2009 scheduled Class A Water Company Cost of Capital Application.

Park recognized in its application that authorization to retire existing bonds and to issue new bonds does not constitute a finding of reasonableness of the resultant capital structure and cost of debt for ratemaking purposes. Park also recognized in its application that the Commission's practice is not to make such findings in its decision on financing applications. Park proposes to include a showing on the reasonableness for ratemaking purposes of the capital structure and cost of debt resulting from these transactions in its May 1, 2009 scheduled Class A Water Company Cost of Capital Proceeding.

4.2. Conclusion

We find that the proposed financing is for allowable purposes, as set forth by § 817. However, we make no finding regarding the reasonableness of the rates, terms, and conditions of debt issued by Park. We will review the reasonableness of the interest rate and associated fees as part of Park's scheduled May 1, 2009 Class A Water Company Cost of Capital application.

Consistent with § 824, Park shall maintain records to identify the specific long-term debt issued pursuant to this decision, and demonstrate that proceeds from such debt has been used only for the purposes authorized by today's decision.