Order 15514 - Valley Gas, Bristol & Warren Gas: Appl. to Issue Common Equity & Debt

 

STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS

DIVISION OF PUBLIC UTILITIES AND CARRIERS

REPORT AND ORDER

On October 14, 1997 the Valley Gas Company and the Bristol & Warren Gas Company ("Applicants") filed an application with the Division of Public Utilities and Carriers ("Division") seeking authority to (1) issue $6,456,100 of common stock to their parent corporation, Valley Resources, Incorporated ("Valley Resources"); and (2) to enter into a $7,000,000 term note with Valley Resources. The filing was made pursuant to Section 39-3-15 of the Rhode Island General Laws, and Rule 14 of the Division's Rules of Practice and Procedure (Applicants Exh. 1).

In response to the filing, the Division conducted a duly noticed public hearing on January 13, 1998. The following individuals entered appearances:

For the Applicants: Wallis Koutsogiane, Esq.

For the Division's Advocacy Section: Stephen Scialabba, Chief Accountant

The Applicants proffered the prefiled direct testimony of Ms. Sharon Partridge, the Applicants' Assistant Vice President of Finance and Treasurer (Applicants Exh. 2). Ms. Partridge explained the need to issue the additional common stock as follows:

Standard & Poor's recently stated in their utility credit report on Valley Gas Company, "Although financial ratios have been weak for the rating, an infusion of equity from the parent's proposed common stock offering will provide funds to reduce high short-term debt balances and improve cash flow coverage ratios at the utility...The effect of these planned financings will also create a more balanced capital structure at the ... utility -- one more in line with the benchmarks for the current rating." It is important that the utility operations maintain their investment grade rating in order to generate both long-and short-term funds at favorable rates to finance operations, inventories and construction (Applicants Exh. 2, p.3).

According to the witness, this sale of common stock will allow the Applicants to increase additional paid in capital by $6,456,100 (Id., p. 2).

Ms. Partridge described the term note as a 30-year note, issued in a private placement. She related that the proposed financings would be used to reduce short-term debt, which at July 31, 1997, totaled $13,985,000. She also related that the financings would be used to maintain the Applicants' equity percentage in relation to their total debt. Ms. Partridge noted that during the last peak winter period short-term borrowings totaled $23,000,000 (Id.).

Ms. Partridge testified that the private placement of common stock carries no assigned costs. She related that Valley Resources will pass down to the Applicants the net proceeds of a recent issue of common stock. Ms. Partridge related that the term note will actually be an assignment of unsecured 7.70% debentures recently issued by Valley Resources, which mature in 2027 (Id.). She testified that the cost of issuance of the debentures was $338,000, an amortized expense of $11,300 per year (Id.). Additional terms of the Valley Resources debentures were also provided, as reflected below:

The unsecured debentures mature on September 1, 2027, with a stated interest rate of 7.70 percent. Redemption rights by the holders are limited to deceased beneficial owners and to an aggregate principal amount of $210,000 per year. The company can redeem the debentures beginning in 2002, at a premium of 104 percent declining by 1 percent per year for the next four years (Applicant's Exh. 2, p. 3).

In her final comments, Ms. Partridge proffered a comparison of the Applicants' capitalization ratios before and after the proposed stock and note issuances. She illustrated the comparison with the tables reproduced below:

The Division's Advocacy Section did not proffer a witness in this proceeding. Instead, the Advocacy Section offered a compilation of discovery responses from the Applicants for the record (Advocacy Section Exh. 1). Subsequently, the Advocacy Section indicated that it had thoroughly reviewed the instant proposal and wished to go on the record in support of the Applicants' application filing. In qualifying its approval, the Advocacy Section noted that it was recommending approval of the instant application "... with the understanding that the resulting capital structure at this particular snapshot in time is not necessarily one we would or would not endorse at any future rate proceeding..." (Tr. 17).

Findings

After a comprehensive examination of the record in this matter, the Division reluctantly finds the application filing of the Applicants, seeking authority to issue $6,456,100 of common stock to their parent corporation, Valley Resources; and authority to enter into a 7,000,000 term note with Valley Resources, to be reasonable, infra.

The Division must strongly voice its dissatisfaction with the manner in which the Applicants and Valley Resources have already encumbered themselves relative to the debentures in issue. Additionally, the Division was disappointed with the quality and comprehensiveness of the instant filing.

Speaking to the latter point first, the Division discerned a number of deficiencies in the Applicants' filing. Specifically, the Applicants' filing is replete with references to the $7,000,000 debenture, but nevertheless, the Applicants failed to include a copy of the debenture with their filing. The Advocacy Section was compelled to seek this most relevant document through a discovery request.

The filing also lacked information regarding the date on which Valley Resources actually received the proceeds of the debenture agreement. This deficiency necessitated another discovery request by the Advocacy Section. In a related deficiency, the Applicants failed to indicate when they actually received the benefits of these same proceeds. The Division was only provided a cursory capital structure table which reflects a reduction in short-term debt. This issue needed to be explored through cross-examination.

The filing also inadequately acknowledges the distinct corporate structures of the Valley Gas Company and Bristol & Warren Gas Company. Albeit two separate corporations exist, the filing mixes its references to the two corporations, sometimes referring to each as a distinct utility, and at other times, treating the two as a singular corporate entity. This deficiency was most noticeable in the filing's treatment of the proposed stock sale to the Applicants' parent. Nowhere in the filing is a description provided which details the actual number of shares being sold by each individual Applicant. Furthermore, although both Applicants ostensibly seek authority to enter into a $7,000,000 term loan with Valley Resources, the term note attached to the application only includes the Valley Gas Company as the proposed assignee of the Valley Resource debenture. Similar inconsistencies can be found in the "certificate" and "vote of the Board of Directors of the Company" which are attached to the application (Applicants Exh. 1, Exhibit B and B-1).

In short, the Division found the filing to be prepared with little attention to detail. The Division must conclude that the Applicants have lost sight of the crucial importance of Section 39-3-15 and the protections it affords ratepayers. It is this observation which brings focus back to the Division's primary difficulty with this filing, namely, the encumbering of ratepayer funds prior to Division approval.

In this docket, the record reflects that Valley Resources entered into a debt obligation with Mellon Bank in August of 1997. That obligation is manifested in the form of a $7,000,000 unsecured debenture which carries a 7.7% interest rate. The Applicants in turn filed the instant application on October 14, 1997 seeking authority to become the assignee of the $7,000,000 debt obligation. By coming in after the fact, the Applicants have placed the Division in a position where it is effectively precluded from seeking the best terms for ratepayers, which is the primary goal contemplated under Section 39-3-15. In this docket the Division was unable to properly evaluate the reasonableness of the many terms and conditions of the $7,000,000 debt in issue. For example, the reasonableness of the 7.7% interest rate, the unsecured nature of the debt, the applicable redemption penalties, and the 30-year term were all reduced to moot issues. Indeed, the Division was limited to a simple approval or rejection of the proposed debt obligation.

Under the specific circumstances surrounding this case, the Division has determined that an approval would be more prudent and more in the best interests of the ratepayers than a blanket rejection at this time. This determination was reached reluctantly, and principally predicated on the possibility that a rejection at this after-the-fact juncture could result in additional costs to the Applicants' ratepayers.

However, the Division will not allow the fundamental ratepayer protections provided by the Section 39-3-15 regulatory process to become undermined and meaningless. In this particular case, the Applicants and Valley Resources ought to have first sought and received permission from the Division before committing to the debt in issue. This must not happen again.

Consequently, the Applicants are hereby placed on notice that the Division will no longer tolerate application filings which seek financing authority pursuant to Section 39-3-15, effectively, after-the-fact. Any such future filing may be denied by the Division on this ground alone.  [1 See also, Providence Water Supply Board Petition to enter into Master Lease. Docket No. D-97-9, Order No. 15455, issued on November 20, 1997.]

Accordingly, it is

(15514) ORDERED:

1. That the October 14, 1997 application filing by the Valley Gas Company and the Bristol & Warren Gas Company, seeking authority to (1) issue $6,456,100 of common stock to Valley Resources, Incorporated and (2) to enter into a $7,000,000 term note with Valley Resources, Incorporated, is hereby approved.

2. That the Division hereby limits approval of the instant application to the specific terms and details identified herein.

3. That the Valley Gas Company and the Bristol & Warren Gas Company shall file all future Section 39-3-15 applications in a more timely and detailed manner.

4. That the Valley Gas Company and the Bristol & Warren Gas Company are hereby directed to file with the Division within fourteen (14) days from the issue date of this order clarification responses which address the concerns and deficiencies identified herein.

DATED AND EFFECTIVE AT PROVIDENCE, RHODE ISLAND ON JANUARY 30, 1998.

Division of Public Utilities and Carriers