4. Protest

A protest to the application was filed by Marshall S. Mayer, an attorney, on behalf of his wife Shirley A. Mayer, a customer of Del Oro. The protest alleged that Del Oro's proposed refinancing and $1 million of additional debt would place the utility in a seriously over-leveraged position. Protestant claims that Del Oro's liabilities exceed the value of its assets and the utility's rate base is overvalued.

In the protest and at hearing on April 11, 2001, protestant asserted that Del Oro's net income of $441,234 and yield of 9% on its capital investment pose a serious question as to the ability of the utility to have sufficient cash flow to meet payments on additional borrowing. Protestant argued that Del Oro's financial reports show that the utility is in danger of collapse; protestant urged that this Commission take steps to place the utility in receivership and transfer its franchises to a responsible private or public entity.

Del Oro responded that the $5,158,229 in liabilities referred to in the protest includes $1,308,230 in Contributions in Aid of Construction (CIAC). CIAC does not require repayment. Where third parties such as developers transfer assets to a utility as an inducement for the utility to extend the scope of its operations to serve their projects, such transfers are accounted for on a utility's balance sheet as CIAC. Since there is no obligation on the utility's part to reimburse the contributor, contributed assets are not considered to be debt obligations of a company.

Del Oro contends that it is far from being bankrupt because its net worth is in excess of $1,700,000 (total assets of $6,909,186 less total liabilities of $5,158,299). If the utility incurs an additional $1 million in debt, its total debt would be less than $5 million.

Protestant asserted in pleadings and at hearing that a yield of 9% on Del Oro's capital investment poses a serious question as to the company's ability to have sufficient cash flow to meet the agreed payments of principal and interest. Del Oro responded that protestant's determination of "yield" is premised upon a flawed interpretation of Del Oro's balance sheet, and that protestant confused operating income with net income. Del Oro's witness testified that the requested refinancing of $2.4 million will lower interest expense by $5,800 per month or almost $70,000 a year.

Protestant asserted that cash flow of $863,000 per year "will be required to amortize the proposed loan in 5 years" and that payments of over $14,000 per month will be necessary to service the loans of other lenders. Del Oro responded that protestant's figures are not correct, that its proposed loan is repayable over 15 years, not 5 years, and that its cash flow is sufficient to service new and existing debt.