5. Discussion
Valencia's request to issue Debt Instruments is subject to §§ 816 et seq. The Commission has broad discretion under §§ 816 et seq. to determine if a utility should be authorized to issue debt. Where necessary and appropriate, the Commission may attach conditions to the issuance of debt to protect and promote the public interest.
5.1. Issuance of Debt Instruments
Valencia intends to apply the net proceeds from the proposed $30 million issuance of Debt Instruments to retire $11 million of senior secured notes due June 15, 2009, and to reimburse its treasury $19 million for monies expended and to be expended for the construction, completion, extension, or improvement of utility plant facilities.
In regards to the retirement of its senior secured debt, Valencia has executed a September 2, 2008 Pacific Life Insurance Company Letter of Commitment to purchase $12 million of 7.37% senior secured notes due 2039 from Valencia, Exhibit E to the application. This letter of commitment will expire if the transaction has not been funded by June 1, 2009.
In regards to Valencia's $19 million request to reimburse its treasuries for capital improvements, it provided supplemental financial information to substantiate its need, Exhibit C to its application. That supplemental financial information included a five-year construction budget totaling approximately $54 million, of which $20 million is to be provided by internal cash flows and $15 million from advances for construction and contributions in aid of construction.
Additional supplemental financial information provides a December 31, 2007 pro-forma capital ratio statement showing that the proposed financing will result in a more balanced capital structure for both Valencia and its ratepayers, Exhibit B to the application. Valencia's current capital ratio of 26.5% long-term debt and 73.5% equity will improve to a 49.5% long-term debt and 50.5% equity structure.
Valencia has substantiated that the requested authorization is necessary to retire its senior secured notes due June 15, 2009 and to satisfy its needs for financing capital expenditures, a proper purpose under § 817 for issuing debt. Moreover, as required by § 818, these expenditures are not reasonably chargeable to operating expenses or income. Therefore, we will grant Valencia authority under § 816 et seq. to issue up to $30 million of long-term debt for the aforementioned purposes, as detailed in the application.
Consistent with § 824, Valencia 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 this decision.
5.2. Encumbrance of Utility Property
Valencia also seeks authority to mortgage and encumber its utility property as part of issuing its Debt Instruments similar in terms to the Indenture filed with the Commission on July 25, 1994. This request to encumber utility property is subject to § 851 which states, in relevant part, that no utility shall encumber any part its plant, system, or other property necessary or useful in the performance of its duties to the public, or any franchise or permit or right there-under without first having secured from the Commission an order authorizing it to do so.
Consistent with previous Commission decisions, we will authorize Valencia to mortgage and encumber its utility property to improve the terms and conditions of the Debt Instruments and to lower Valencia's overall cost of money for the benefit of ratepayers.
5.3. Competitive Bidding Rule Exemption
Resolution No. F-616, issued on October 1, 1986, requires utilities with bond ratings of "A" or higher to issue debt using competitive bids. The purpose of this requirement, known as the Competitive Bidding Rule, is to reduce the cost of debt issued by utilities.
Valencia seeks an exemption from this Competitive Bidding Rule with respect to any and all issuances of the Debt Instruments to minimize its overall costs to ratepayers. Valencia explains that a negotiated offering would lead to a lower cost as compared with competitive bidding because it is a relatively small size utility, and infrequently participates in the capital and debt markets. Valencia further explains that typically when it is necessary to issue Debt Instruments, Valencia does so through a process of loans with banks or financial institutions and private placement with institutional lenders such as large insurance companies that historically have purchased water utility company debt issues.
In support of its exemption request, Valencia explains that it is substantially smaller size, lacks a bond rating, and has never participated in the capital and debt markets. In support of its exemption request, it cites D.07-02-014 in which Golden State Water Company and D.08-07-018 in which San Gabriel Valley Water Company, water utilities substantially larger in size of Valencia, were granted exemptions from the Competitive Bidding Rule with respect to the issuance of Debt Instruments.
Valencia does not need to seek an exemption from the Competitive Bidding Rule. This is because Valencia is not subject to the Commission's Competitive Bidding Rule at this time. Ordering Paragraph 6 of Resolution F-616 setting forth the Commission's competitive bidding policy specifically states that the Commission's Competitive Bidding rule is only applicable to utilities with bond ratings of "A" or higher. Valencia does not have a bond rating. Therefore, Valencia may negotiate and/or seek competitive bids on its requested debt instruments.
However, Valencia should be aware that the Commission will be revisiting the Competitive Bidding Rule and may make changes to the rule that impact Valencia. To the extent that Valencia has not exercised its entire requested financing authority upon the effective date of any changes to the Competitive Bidding Rule, Valencia will be required to comply with those changes, if applicable, in exercising its remaining financing authority.
We make no finding regarding the reasonableness of the rates, terms, and conditions of debt issued by Valencia pursuant to the exemptions and modifications granted herein. However, we will review the reasonableness of the interest rate and associated fees in Valencia's next general rate case or cost of capital proceeding.
5.4. Reporting Requirement
General Order (GO) 24-B requires utilities to submit a monthly report to the Commission that contains, among other things: (i) the amount of debt issued by the utility during the previous month; (ii) the total amount of debt outstanding at the end of the prior month; (iii) the purposes for which the utility expended the proceeds realized from the issuance of debt during the prior month; and (iv) a monthly statement of the separate bank account that the utility is required to maintain for all receipts and disbursements of money obtained from the issuance of debt.
The Commission has granted utilities authority to report quarterly the information required by GO 24-B in order to reduce their administrative cost of complying with the GO and to conform to past practice. 2 Valencia should be treated no differently. Valencia may report quarterly to the Commission the information required by GO 24-B.
2 See, for example, D.05-08-008 mimeo., p. 36, D.04-10-037 (2004) mimeo., p. 51; and D.03-12-052 (2003) mimeo., pp. 11-12.
