ENERGY/KPC/KOK/DLW/AML
Decision 06-05-029 May 25, 2006
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
Application of SAN DIEGO GAS & ELECTRIC COMPANY (U-902-M) for Authority to Increase its Short-Term Borrowing Authorization to an Aggregate Amount not to Exceed $550,000,000 in Addition to that Amount Otherwise Authorized by Public Utilities Code Section 823(c). |
Application 05-12-026 (Filed December 22, 2005) |
OPINION
1. Summary
This decision grants San Diego Gas & Electric Company (SDG&E) the authority requested in Application (A.) 05-12-026 (Application).
Pursuant to §§ 816 through 830, SDG&E requests authority through December 31, 2010, to increase its current short-term borrowing authority of $400,000,000, granted by Decision (D.) 05-05-047, dated May 26, 2005, to an aggregate principal amount not to exceed $550,000,000. This $550,000,000 of requested short-term borrowing authorization is in addition to the 5 percent issuance of short-term debt that does not require Commission approval pursuant to § 823(c).1
2. Background
SDG&E is an electric and gas corporation organized and existing under the laws of the State of California, and is primarily engaged in the business of providing utility electric and gas service throughout San Diego County and public utility service in a portion of Orange County. SDG&E's current short-term financing request builds on financing authorizations issued beginning in 1992.
Decision 92-11-059, with authority extended through to December 31, 2002, by D.97-11-012, granted SDG&E the authority to issue $200 million of short-term debt to: (i) finance balancing account undercollections and fuel inventories; (ii) temporarily fund new utility plant; (iii) retire and refund long-term debt and preferred stock; and (iv) satisfy other short-term cash needs that might arise from time to time.2
In D.01-02-011, the Commission authorized SDG&E to issue $800 million of short-term and long-term debt to finance the undercollection in SDG&E's Energy Revenue Shortfall Account (ERSA), and superseded the authority granted under D.92-11-059, as modified. The Decision also authorized SDG&E to use $200 million of the $800 million for the purposes authorized by D.92-11-059, as modified, but only to the extent that SDG&E did not need the $200 million to finance its ERSA undercollection.
In D.02-06-024, the Commission reduced SDG&E's authority to issue debt to finance its ERSA from $800 million to $400 million. Of the $400 million authority, SDG&E was authorized to use through December 31, 2002, $200 million for the purposes authorized by D.92-11-059, as modified, and again, only to the extent that it did not need the $200 million excess for ERSA undercollection.
In D.02-12-067, the Commission extended SDG&E's $200 million short-term debt authority to December 31, 2007, and: (i) prohibited SDG&E from using the $200 million to fund inter-corporate borrowings; and (ii) required SDG&E to reduce the aggregate amount of short-term debt to 5% of the par value of long-term capital (long-term debt, preferred stock, and common stock) outstanding, at least once every 12 months.
Decision 05-05-047 is the most recent decision addressing SDG&E's short-term debt authority. In that Decision, the Commission granted SDG&E authority to: (a) issue $400 million of excess short-term debt through December 31, 2010, for the following purposes: (i) provide temporary financing for new utility infrastructure; (ii) finance balancing account undercollections and fuel inventories; (iii) provide temporary financing for the retirement and refunding of SDG&E's long-term debt and preferred stock; and (iv) satisfy other utility-related short-term cash needs that may arise; (b) renew, refinance, extend, or replace, as necessary, the short-term debt issued pursuant to D.05-05-047; (c) be exempted from the 5% condition required under D.97-11-012 and D.02-12-067; and (d) file the General Order (GO) 24-B report on a quarterly basis.
3. Notice and Protests
Notice of the filing of the Application appeared in the Commission's Daily Calendar of December 23, 2005. No protests have been received.
4. SDG&E's Application
SDG&E states, in its Application, that it continues to face a dynamic external and regulatory environment. As such, SDG&E believes it is prudent and necessary to increase its excess existing short-term borrowing authorization now in order to address in the future, and when needed: (1) higher planned infrastructure investments; (2) the impact of increased gas prices (and related Commission regulatory actions); and (3) the timing and size of potential collateral calls up to the proposed ceiling in its hedging program, as requested in SDG&E's Advice Letter 1745-E, filed November 16, 2005, as supplemented by AL 1745-E-A filed on March 22, 2006.
SDG&E's seeks authorization to increase its short-term borrowing authorization to an aggregate amount not to exceed $550,000,000 from the current $400,000,000, in addition to that amount otherwise authorized by
§ 823(c).
PU Code § 823(c) provides:
Notwithstanding the provisions of subdivision (b), no public utility as defined in Sections 201(e) of the Federal Power Act (49 Stat. 847, 16 U.S.C. 824) shall, without the consent of the commission, issue notes payable at periods of not more than 12 months after the date of issuance of the notes if such notes and all other notes payable at periods of not more than 12 months after the date of issuance of such notes on which such public utility is primarily or secondarily liable would exceed in aggregate amount 5 percent of the par value of the other securities then outstanding. In the case of securities having no par value, the par value for the purposes of this subsection shall be the fair market value as of the date of issue.
SDG&E points out that it intends to also use its short-term debt borrowing authorization for basically the same purposes as those indicated in D.05-05-047: (i) temporary financing for new utility infrastructure; (ii) balancing account undercollections; (iii) fuel inventories; (iv) temporary financing for the retirement and refunding of long-term debt and preferred stock; and (v) other short-term cash needs that may arise from time to time.
a. New Utility Infrastructure
SDG&E's indicates that its capital plans, which are in response to its ongoing commitment to enhancing the energy infrastructure of California, have increased substantially. SDG&E points out that, investments are being made in new generation and transmission that are urgently needed as energy needs continue to increase. One of SDG&E's new infrastructure capital investments is the Sunrise Powerlink 500kV transmission line, an "energy superhighway", which will ramp up over 2006-2008, to improve the reliability of the region's electrical transmission grid and provide access to available and proposed electricity supplies from the region and beyond. SDG&E anticipates investing between $2.6 billion and $3.2 billion over the next three years, compared to its historical spending pattern of $350-$500 million per year. SDG&E points out that the temporary financing of these improvements with short-term debt will put additional demands on its short-term borrowing capacity.
b. Gas and Electric Purchasing
SDG&E claims that it and its customers are experiencing the impact of dramatic increases in the price of natural gas. SDG&E points out that combined with SDG&E's re-entry into the electric generation business, which will also necessitate purchases of natural gas, its potential short-term financing needs for gas purchasing will be increasing.
SDG&E claims that approval of its increased short-term borrowing capacity is also a necessary element for the implementation of its updated electric procurement plan. Currently before the Commission is SDG&E's Advice Letter 1745-E, filed November 16, 2005, which updates its electric procurement plan in response to long-term electric procurement authority.3
c. Regulatory Actions
In 2005, the Commission issued D.05-10-015, D.05-10-043 and D.05-10-044, taking several steps to mitigate the impact of high gas prices on California consumers. Among other things, these decisions increased the gas utilities hedging programs, expanded eligibility for energy low-income programs, prohibited utilities from shutting off winter residential customers who make minimum payments, and required a waiver of reconnection fees and deposits for certain qualified energy low-income customers. SDG&E believes that these steps will also increase its potential short-term financing needs.
5. Discussion
During times when market conditions make long-term financing unattractive, it may be necessary for a utility to issue short-term debt to finance its construction expenditures and cash requirements. Debt maturities, opportunities to redeem or repurchase securities at low cost, changes in cash flows, or other unexpected events may make it necessary or desirable to increase short-term borrowing temporarily to meet cash needs. However, short-term borrowing should be reduced when practicable.
Schedule VIII, attached to the Application, shows that, as of September 30, 2005, SDG&E had $1,608,926,000 of total capitalization, which is used to calculate the 5% § 823 allowance.
Short-Term Financing in Excess of CPUC Code § 823 Allowance
($ thousands)
September 30, 2005
Common Stock issued 371,076
Preferred and preference stock 97,225
Long-Term debt (excluding capital leases) 1,140,625
Total capitalization at September 30, 2005 1,608,926
5% allowed by CPUC Code §823 (c) 80,446
Maximum anticipated amount of short-term debt needed 630,446
Total excess financing authority requested in this
Application 550,000
Current Excess financing authority granted under
D.05-05-047 400,000
Additional financing authority requested in this
Application 150,000
SDG&E's authorized $400,000,000 excess short-term debt ceiling, in D.05-05-047, amounted to 29.38% of the utility's total capitalization of $1,361,426,000, as of September 30, 2004.4 The requested $550,000,000 excess short-term debt ceiling amounts to 34.18% of total current capitalization (an increase of only 4.8% from the 2004 percentage of capitalization, exclusive of the § 823 (c) allowance),5 while the capitalization during the same period increased by 18.18%.6
a. Balance Sheet
For the nine months ended September 30, 2005, SDG&E reported total operating revenue of $1,706,676,360 and net income of $194,243,575, as shown in its Statement of Income and Retained Earnings, included in Attachment B to the Application. SDG&E's balance sheet, shown also as part of Attachment B, as of September 30, 2005, is summarized as follows:
(in millions)
Assets Amount
Net Utility Plant $3,475
Other Property and Investments 647
Current and Accrued Assets 552
Deferred Debits 1,981
Total Assets $6,655
Liabilities & Stockholders Equity
Proprietary Capital $1,491
Long-term Debt7 1,235
Other Noncurrent Liabilities 373
Current Liabilities8 1,389
Deferred Credits 2,167
Total Liabilities & Stockholders Equity $6,655
b. Construction Budget
SDG&E's forecasted estimated average capital expenditures, as shown in Schedule I in Attachment D to the Application, for calendar years 2006 through 2008, are as follows:
(in millions)
Components 2006 2007 2008 Total
Gas T&D, Elect Dist. And Generation $ 800 $ 450 $ 500 $1,750
Electric Transmission 300 225 500 1,025
Common/Other 50 50 50 150
Total cash required for construction $1,150 $ 725 $1,050 $2,925
SDG&E's forecasted capital expenditures for 2006 through 2008 totals $2.9 billion.
c. Cash Requirements Forecast
SDG&E's Statement of Cash Requirements for 2006 through 2008 is as follows:
(in millions)
Uses of Cash 2006 2007 2008 Total
Funds for Construction
(Capital Expenditures) $1,150 $725 $1,050 $2,925
Maturities/Refinancings:
Maturities of Long-term Debt 66 66 - 132
Beginning of year cash
(short-term debt) balance (220) (5) (15) (240)
Subtotal $996 $786 $1,035 $2,817
Less: Estimated Cash Available
from Internal Sources (450) (550) (650) (1,650)
External funds required $546 $236 $385 $1,167
SDG&E's Statement of Cash Requirements for the three years, represented above, indicates that it will require additional funds from external sources amounting to approximately $1.2 billion. Subsequent to filing instant application 05-12-016, SDG&E filed application 06-02-017, in which it requested authority to issue $800 million of long term debt and $200 million of preferred and preference stock. We granted this authority on May 11, 2006 in decision 06-05-015. It appears from this forecast that SDG&E may need the addition to its current excess short-term borrowing authority to meet its external funding requirements. While the project expenditures are proper uses of funds, pursuant to § 817(b) and (g), the reasonableness of construction expenditures and refinancing costs are issues normally addressed in other proceedings and we will not address them here.
d. Capital Ratios
SDG&E's capital ratios as of September 30, 2005, are shown below as actual and pro-forma, showing the effect of increase in short-term borrowing:
($ in thousands)
Recorded Pro Forma
Amount Percent Amount Percent
Long-Term Debt $1,140,625 43.3 $1,140,625 35.0
Less: Unamortized expenses (19,233) (0.7) (19,233) (0.6)
Total Long-Term Debt $1,121,392 42.6 $1,121,392 34.4
Short-Term borrowing
Under PUC code §823(c) - 0.0 80,446 2.5
Short-Term Debt - 0.0 550,000 16.8
Total Debt $1,121,392 42.6 $1,751,838 53.7
Preferred Stock $ 97,225 3.7 $ 97,225 3.0
Common Equity9 1,412,615 53.7 1,412,615 43.3
Total $2,631,232 100.0 $3,261,678 100.0
For many years the Commission has granted SDG&E various authorities to issue debt and equity securities, and short-term debt in excess of the limitations of § 823(c). This has provided the utility with necessary financing authorities and flexibility to issue specific types of debt when market conditions are attractive.
In this Application, SDG&E's September 30, 2005 recorded capital structure consists of 42.6% long-term debt, 3.7% preferred stock, and 53.7% common equity. Assuming SDG&E utilizes in full the requested short-term debt amount, its pro-forma capital structure will consists of 53.7% total debt, 3.0% preferred stock, and 43.3% common equity.
SDG&E's authorized capital structures as shown in D.05-12-043 dated December 15, 2005, consists of 45.25% long-term debt, 5.75% preferred equity, and 49% common equity. We note that the authorized capital structure is used as a target. The actual capital structure may vary from the adopted structure due to timing of debt and equity issuances.
Capital structures are normally subject to review in cost of capital or general rate case proceedings. At such time, a particular rate of return will be determined. A debt to equity ratio, which may be different from that resulting from the debt transactions authorized in this Decision, may be inputted, in order to properly pass the cost of debt and equity to ratepayers.
SDG&E is placed on notice, by this Decision, that the Commission does not find that its capital ratios or the inclusion of short-term debt in its capital structure are necessary or reasonable for ratemaking purposes. We also remind SDG&E that in exercising its authorized financings, including existing authorizations, as well as the current short-term debt authority, it shall endeavor to rebalance its capital structure to authorized levels to ensure that the resulting capital structure is in compliance with its most currently authorized capital structure.
This Decision makes no finding regarding the reasonableness of the rates, terms and conditions of any debt issued by SDG&E. The Commission's regular review of cost of capital will provide guidance on future actions and compliance with Commission requirements regarding capital structure.
6. Use of Proceeds
SDG&E proposes to use the proceeds from the issuance of short-term debt for the temporary financing of: the addition and extensions to SDG&E utility plant; undercollections in SDG&E balancing accounts; retirements of SDG&E's long-term debt and preferred stock; the financing of SDG&E's fuel inventories; and such other short-term cash needs described herein.
We will not make a finding in this decision on the reasonableness of these expenditures. Our authorization is not to be construed as a finding of the value of SDG&E's properties nor as indicative of the amounts to be included in proceedings for the determination of just and reasonable rates.
7. Approval of Short Term Borrowing
SDG&E's request for authority to increase the amount of excess short-term debt it may issue from $400 million to $550 million is subject to §§ 816, 823 (b), 823(c), and 823(d) which state, in relevant part, as follows:
§ 816: The power of public utilities to issue debt is a special privilege, the right of supervision, regulation, restriction, and control of which is listed in the state, and such power shall be exercised as provided by law under such rules as the commission prescribes.
§ 823(b): A public utility may issue notes, for proper purposes and not in violation of any provision of law, payable at periods of not more than 12 months after the date of issuance of the notes without the consent of the commission.
§ 823(c): Notwithstanding the provisions of subdivision (b), no public utility...shall, without the consent of the commission, issue notes payable at periods of not more than 12 months after the date of issuance of the notes if such notes and all other notes payable at periods of not more than 12 months after the date of issuance of such notes...would exceed in aggregate amount 5 percent of the par value of the other securities then outstanding. In the case of securities having no par value, the par value for the purposes of this subsection shall be the fair market value as of the date of issue.
§ 823(d): No note payable at a period of not more than 12 months after the date of issuance of such note shall, in whole or in part, be refunded by debt or equity...without the consent of the commission.
The Commission has broad authority under § 816 et seq., to accept or reject a utility's request to issue excess short-term debt. In general, the Commission will authorize a utility to issue short-term debt when the utility can demonstrate a reasonable need to do so.
SDG&E points out that due to the sheer size of the forecasted capital expenditures, along with its other short-term borrowing needs, there is a real possibility that SDG&E's short-term cash requirements could reach the excess capacity ceiling of $550 million. SDG&E believes that the availability of $550 million, in excess of the 5% limit, is important because it allows necessary flexibility to meet short-term borrowing requirements and manage financing needs in a way that will reduce overall debt and equity costs.
It appears that SDG&E's financing and short-term capital needs will increase due to, among other things, the temporary financing of capital improvements, higher gas prices, certain measures the Commission has taken to mitigate the impact on customers of higher gas prices (such as the Commission order to not shut-off service to gas customers this winter who make certain minimum bill payments), and to hedge gas costs for electric generation.
We conclude that it is in the public interest to grant SDG&E's uncontested request for authority to issue up to $550 million of excess short-term debt, in addition to the $80,446,000 in short-term debt that SDG&E may issue without Commission authorization, pursuant to
§823 (c). The health, safety, welfare, and prosperity of California depend on SDG&E having sufficient generation and transmission capacity to meet the needs of its customers.
SDG&E shall not use the short term debt authorized by this Decision to fund dividends, inter-corporate borrowing, or management fees paid to its parent company or other affiliates. Consistent with § 824, SDG&E shall maintain records to (1) identify the specific short-term debt issued pursuant to today's Decision, and (2) demonstrate that the proceeds from such debt have been used only for the purposes authorized by today's Decision.10
8. Category and Need for Hearings
In Resolution ALJ 176-3165, dated January 12, 2006, the Commission preliminarily categorized this proceeding as ratesetting and preliminarily determined that an evidentiary hearing would not be necessary. Based on the record of this proceeding, we affirm that this is a ratesetting proceeding and that a hearing is not necessary.
1 All statutory references are to the Public Utilities Code unless otherwise indicated.
2 This authority was in addition to the short-term debt that SDG&E may issue without Commission authorization pursuant to § 823(c).
3 SDG&E asserts that it may require a significant amount of short-term capital to fund the collateral requirements associated with its hedging program.
4 29.38% = $400,000,000/$1,361,426,000, and excludes $68 million of short-term debt pursuant to § 823(c).
5 34.18% = $500,000,000/$1,608,926,000, and excludes $80 million of short-term debt pursuant to § 823(c), based on the 2005 § 823 capitalization.
6 18.18% = $1,608,926,000-$1,361,426,000/$1,361,426,000
7 Amount includes Advances from Associated Companies.
8 Does not include any short term debt, pursuant to D.05-05-047.
9 Includes paid in capital, retained earnings and other comprehensive income.
10 Section 824 states: "The commission may require...utilities to account for the disposition of the proceeds of all sales of...bonds, notes, or other evidence of indebtedness, in such form and detail as it deems available, and may establish such rules as it deems reasonable and necessary to insure the disposition of such proceeds for the purposes specified in its order."
