5. Request for Financing Authority

Joint Applicants explain that Carlyle/Riverstone Funds propose to finance the Wild Goose purchase as part of the acquisition of all of EnCana's gas storage business - partly through equity and partly through debt. SemGroup's 20% equity investment in Niska Gas Storage does not change the proposal; it merely reduces the amount of cash that Carlyle/Riverstone Funds must bring to the deal. As further explained below, the financing package includes guarantees backed by liens as security. Under § 851, Wild Goose must obtain Commission authority before incurring any debt or pledging any assets as security for financing.¹⁴ Before authorizing either, the Commission must determine if the transaction will adversely affect the public interest.

The Commitment Letter from the Lenders (Exhibit O), the Summary of Indicative Terms and Conditions (Exhibit P), and the Credit Agreement (Exhibit Q) are all made part of the Application.¹⁵ Wild Goose will issue no debt itself; all debt associated with the financing proposal has been or, in the case of the Wild Goose purchase, will be issued at the parent company level by subsidiaries of Carlyle/Riverstone Funds. However, the financing package requires security in the form of cross-collateralized security agreements and cross guarantees. This means that all of the financing will be guaranteed by all of the subsidiaries that own the gas storage facilities and other assets purchased from EnCana. Likewise, the security for all these guarantees will be provided by liens on all of the gas storage assets. Joint Applicants state that such financing is beneficial for lenders, borrowers, and customers because it diversifies financial risk and provides additional revenue support, which allows more favorable rates, terms, and conditions to attach to the financing. In other words, it lowers the cost of debt compared to that available if each gas storage facility were to be financed separately.

Once Niska Gas Storage issues additional debt (US $70 million) to complete the Wild Goose acquisition, this amount will be imputed to Wild Goose. (Likewise, post-acquisition, all equity must be imputed, as Wild Goose will be owned and operated as an asset of Niska Gas Storage and will not issue either debt or equity directly.) The resulting equity to total capital ratio, as further clarified in Joint Applicants' response to the scoping memo, is approximately 65%.¹⁶

In considering this financing proposal, we are mindful that we have not held independent gas storage providers to the same cost of capital standards as the traditional public utilities engaged in the provision of electricity and natural gas. Our rationale for allowing more risky financing for independent gas storage providers is that they have no captive customers, are not subject to cost of service regulation, and bear their own investment and operations risks. We will authorize the financing. However, were the buyers less solvent than the financial records provided to us indicate, we might question this financing package, in part because it requires Wild Goose assets to be pledged to secure the financing of assets acquired outside California. While captive California ratepayers do not rely directly upon Wild Goose's natural gas storage services, such services increasingly are becoming a critical part of the efficient and effective functioning of California's gas infrastructure.

¹⁴ Section 851 provides in relevant part:

No public utility ... shall sell, lease, assign, mortgage, or otherwise dispose of or encumber the whole or any part of its ... line, plant, system, or other property necessary or useful in the performance of its duties to the public, ... without first having secured an order from the commission authorizing it to do so.

¹⁵ These exhibits have been filed under seal by ALJ Ruling dated October 5, 2006.

¹⁶ Joint Applicants have calculated this ratio by dividing the equity amount imputed to Wild Goose by the acquisition cost. As we noted in D.06-06-059 (2006 Cal PUC LEXIS 252) when we approved new financing for Lodi, our acceptance of this calculation for Wild Goose, does not mean we are departing from our practice of using book value of debt and total assets in calculating the debt ratio for a utility subject to rate-of-return regulation.