3. Protest

The Santa Clarita Organization for Planning and the Environment (SCOPE) protested the Application (A.) 08-10-001 on October 28, 2008 to prohibit preferences that favor Valencia affiliated companies and to ensure that community water resource and ratepayer needs will remain top priority as part of Valencia's issuance of new long-term debt.

SCOPE protested this application on the basis that: (1) Valencia did not disclose the rate of its existing and proposed loans in its Application, and (2) Valencia did not clearly state its financing needs. To the extent that Valencia's financing request is approved, SCOPE recommends that the new long-term debt issuances include a provision that if Valencia's stock is subsequently sold, such a sale will not trigger an acceleration of the maturity date, interest rate, or a payment of loan assumption fees.

3.1. Disclosure of Loans

Valencia's existing long-term debt consists of a single $11 million debt issuance which was approved by the Commission pursuant to D.94-02-069 and as modified by D.94-05-067. That current debt issuance bears an interest rate of 8.00%. It was issued on June 15, 1994 and is to be retired by June 15, 2009.

Valencia proposes to issue new long-term debt by June 1, 2009 for the purpose of retiring its currently outstanding long-term debt. In this regard, Valencia executed a Letter of Commitment with Pacific Life Insurance Company. The terms of that commitment provide for the issuance of $12 million in 30-year Senior Secured Notes due in 2039 bearing an interest rate of 7.37%.

The remaining $18 million balance of its requested $30 million long-term debt authority is to be used to reimburse Valencia's treasury for monies expended and to be expended for the construction, completion, extension, and improvement of utility plant facilities through the financing vehicles identified in Valencia's Application and summarized in this decision. These long-term debt issuances are to be issued with due regard for Valencia's financial condition and requirements and then prevailing and anticipated market conditions, including competing demands for funds, existing at the time of each financing.

Valencia has fully disclosed its existing and proposed loans in its application, as identified on pages 3 and 5 of the Application and detailed in Exhibits A and E to the Application.

3.2. Financing Needs

Valencia is seeking authority to refinance $11 million of outstanding long-term debt that is due to Pacific Life Insurance Company on June 15, 2009, and to reimburse its treasuries for monies already expended and to be expended for public utility purposes, proper purposes under Pub. Util. Code § 817¹ for issuing long-term debt. To the extent that funds are needed for prior and future public utility purposes such funds are subject to the Commission's affiliated transaction rules imposed on Valencia as enumerated in D.07-09-026.

Valencia has clearly stated its financing needs, including an immediate need to refinance its existing long-term debt by June 15, 2009. Whatever investments Valencia undertakes with the proceeds of Commission authorized indentures will be subject to review and evaluation in future general rate cases to consider and determine whether such investments have been prudent and provide facilities that are used and useful for Valencia's public utility ratepayers.

3.3. SCOPE's Provision for Approval

SCOPE seeks to preclude any acceleration of the maturity date, interest rate, or payment of loan assumption fees of new long-term Notes to be issued pursuant to this decision due to a reorganization of Valencia's parent holding companies Newhall Land and Farming, L.P. and LandSource Communities Development, LLC under the supervision of the United States Bankruptcy Court. (See United States Bankruptcy Court District of Delaware Docket, filed June 8, 2008.)

Valencia acknowledges that the lender of the proposed new long-term Notes required inclusion of a provision that, within ten days of a change of control, Valencia must offer to prepay the Notes with the lender afforded an option to accept or decline that offer. A change of control is defined as the existing principal shareholder of Valencia ceasing to hold a number of shares of voting common stock sufficient to cause the election of a majority of Valencia's Board of Directors.

Such an acceleration obligation is not unique. Valencia's Note Agreement executed in 1994 in connection with its existing Notes that must be retired by June 15, 2009 contains a similar acceleration obligation upon the event of a change of control.

There is no dispute that the ongoing bankruptcy reorganization of Valencia's parent holding companies may result in a change of control over Valencia as that term is defined in the Note Agreement. However, any person or entity considering an opportunity to acquire ownership of a controlling interest in Valencia's voting common stock will need to assess and provide for the mandatory offer to prepay Valencia's debt that such a change of control would entail. Further, any change in control of Valencia will require Valencia and the party acquiring control of Valencia to obtain Commission authorization pursuant to § 854, at which time any change in the terms of long-term financing will be scrutinized.

3.4. Conclusion

SCOPE's provision for approval of this financing request is premature. The terms and conditions of any subsequent change in control of Valencia, including debt financing, are subject to review and approval of the Commission.

Valencia has fully disclosed its existing and proposed loans in its application and has clearly stated its financing needs. With Valencia's need to retire its existing 1994 Senior Secured Notes prior to June 15, 2009, time is of the essence. To the extent that the proposed financing is to be used for Public Utility purposes and is in compliance with the Pub. Util. Code § 817, the application should be approved. SCOPE's protest is without merit.

¹ All statutory references are to the Public Utilities Code unless otherwise stated.