V. Capital Structure
Capital structure consists of long-term debt, preferred stock, and common equity.13 Because the level of financial risk that the utilities face is determined in part by the proportion of their debt to permanent capital, or leverage, we must ensure that the utilities' adopted equity ratios that are sufficient to maintain reasonable credit ratings and to attract capital.
A. SCE
SCE requested a 2005 capital structure consisting of 43.00% long-term debt, 9.00% preferred stock, and 48.00% common equity. This capital structure reflects a 4.00% reduction in its last authorized debt ratio of 47.00% and a 4.00% increase in its preferred stock ratio. SCE proposed no change to its common equity ratio. The 4% shift of debt to preferred stock was proposed by SCE to mitigate its debt equivalence, improve its financial metrics, encourage the rating agencies to upgrade SCE's credit status, and to lower overall long-term costs.
The only opposition to SCE's proposed capital structure was from Aglet-TURN. Aglet-Turn opposed SCE's request to mitigate debt equivalence by issuing additional preferred stock, as addressed in the prior debt equivalence discussion.
B. PG&E
PG&E requested a true up 2004 capital structure of 48.20% long-term debt, 2.80% preferred stock, and 49.00% common equity. It also requested a 2005 capital structure consisting of 45.50% long-term debt, 2.50% preferred stock, and 52.00% common equity. Its 2005 capital structure reflects a 0.70% reduction in its last authorized long-term debt ratio, a 3.30% reduction in preferred stock, and a 4.00% increase in common equity ratio.
The proposed capital structures of PG&E are consistent with the implementation of its Chapter 11 exit financing and capital structure provision set forth in its Modified Settlement Agreement (MSA). (D.04-12-035, Appendix C, p. 11.)
There is no opposition to PG&E's true up 2004 and 2005 capital structures.
C. Discussion
The capital structures proposed by the utilities are balanced, attainable, intended to maintain an investment grade rating, and to attract capital. For these reasons, we find that the utilities' proposed capital structures are fair. PG&E's true up 2004 capital structure of 48.20% long-term debt, 2.80% preferred stock, and 49.00% common equity and the following test year 2005 capital structures for the utilities are consistent with law, in the public interest, and should be adopted.
SCE |
PG&E | |
Long-Term Debt |
43.00% |
45.50% |
Preferred Stock |
9.00% |
2.50% |
Common Equity |
48.00% |
52.00% |
The next step in determining a fair ROE is to establish reasonable long-term debt and preferred stock costs.
