Order 15560 - Prov. Gas Co.: Appl. for Authority to Issue Bonds

 

STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS

DIVISION OF PUBLIC UTILITIES AND CARRIERS

100 ORANGE STREET

PROVIDENCE, RHODE ISLAND 02903

REPORT AND ORDER

On February 11, 1998 the Providence Gas Company ("ProvGas" or "Applicant") filed an application with the Rhode Island Division of Public Utilities and Carriers ("Division") seeking authority to issue and sell $15,000,000 of 6.82% first mortgage bonds - Series S, dated on or about April 1, 1998 and due on or about April 1, 2018. 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 (Applicant's Exhibit 1).

In response to the filing, the Division conducted a duly noticed public hearing on March 9, 1998, at the Division's hearing room located at 100 Orange Street in Providence. The following individuals entered appearances:

For the Applicants:                   Michael P. DeFanti, Esq.

For the Division's

Advocacy Section:                    Stephen Scialabba, Chief Accountant

The Applicants proffered the prefiled direct testimony of Harry J. Bishop, the Applicant's Director of Finance, in support of the filing (Applicant's Exhibit 2). Mr. Bishop also sponsored and authenticated the instant application (Applicant's Exhibit 1).

The application reflected the following relevant information:

- The Applicant's authorized capital stock consists of 2,500,000 shares of common stock, $1.00 par value, of which 1,243,598 shares are issued and outstanding, and an unlimited number of shares of preferred stock, of which 48,000 shares, $100.00 par value, are outstanding.

- The Applicant's long-term debt as of September 30, 1997 is 71,200,000 which represents 40.4% of total capitalization.

- The Applicant desires to issue and sell $15,000,000 of 6.82% First Mortgage Bonds - Series S, dated on or about April 1, 1998 and due on or about April 1, 2018 at an interest rate of 6.82%. The bonds are to be sold at par, plus accrued interest, to Metropolitan Life Insurance Company of Covent Station, New Jersey, without registration under the Securities Act of 1933.

- The net proceeds of sale will be applied to the repayment of outstanding short-term debt and to finance long-term capital projects.

- The bonds will be issued pursuant to the First Mortgage of Indenture dated as of January 1, 1922 between the Applicant and State Street Bank and Trust Company, Trustee, as supplemented by eighteen supplemental indentures and by a nineteenth Supplemental Indenture to be entered into between the Applicant and State Street Bank and Trust Company.

- At a meeting of the Board of Directors held on December 18, 1997, votes were taken authorizing the Applicant to issue and sell said bonds. Additional votes approving the principal terms of the debt issuance will be taken at a meeting of the Executive Committee Board of Directors to be held on February 26, 1998.

- The bonds are expected to be callable at any time upon payment of principal plus payment of yield maintenance premium, if any.

- The bonds will be secured primarily by a lien on the Applicant's tangible and real property, excepting cash, securities, inventory, consumable supplies and motor vehicles. The Series S Bonds will rank pari passu, except as to any sinking fund or similar fund provided for bonds of a particular series with all other bonds at any time outstanding under the Mortgage.

- The Bonds will not be issued either partly or wholly for property, services or consideration other than money (Applicant's Exhibit 1, pp. 1-2).

The application also included a summary of the proposed terms (Applicant's Exhibit 1, "Exhibit A") and the Applicant's Balance Sheet as of September 30, 1997 (Id., "Exhibit B")

Mr. Bishop supplemented the information contained in the application with testimony and some additional exhibits. He related that the bonds will not be subject to an annual sinking fund payment, and that the principal will be paid in full on the twentieth anniversary of the bonds (Applicant's Exhibit 2, p. 2).

Mr. Bishop offered the following explanation for the bond issue:

Providence Gas Company has not issued new debt in approximately two years. During the past two years, Providence Gas Company has retired $3.2 million in First Mortgage Bonds through sinking fund payments, retired $1.6 million in Preferred Stock through a sinking fund payment, plus it had capital expenditures of approximately $43 million. As of September 30, 1997, Providence Gas Company had $25 million in short term debt, including the current portion of its long-term bonds. Providence Gas Company has been closely monitoring the bond market for the past six months, and feels that the time is right to lock in what we feel are very attractive long-term interest rates due to the relatively small spread between short and long-term rates ... (Id., pp. 2-3).

He also explained that this proposed debt transaction was part of the Applicant's recently finalized Price Stabilization Plan ("Plan").  [1 Recently approved by the Public Utilities Commission in Docket No. 2581.]  Mr. Bishop did note that the interest rate estimate contained in the Plan was based on 30 year treasury yields. He related that since then, 30 year treasury yields have decreased considerably. He also related that Standard & Poors has upgraded Providence Gas's debt rating from BBB+ to A in October 1997. He stated that on January 14, 1998, Duff & Phelps upgraded Providence Gas's debt rating from A- to A. Mr. Bishop testified that these "two rating increases have had a favorable impact on our financing" (Id., p.3).

Mr. Bishop also provided details on the following additional information:

- That ProvGas's weighted cost of long-term debt will be lowered from 8.16 percent to 7.93 percent (Id., p.3).

- That BancBoston Securities, Inc., a wholly owned subsidiary of BankBoston Corporation, will place the bonds with the bond purchasers. This choice was based on RFP's received from six placement agents (Id., pp.3-4).

- That with this issuance, ProvGas's long-term debt will increase from 40.4 percent of total capitalization to 49 percent. However, total debt, including short-term debt, will be approximately 52 percent both before and after the issuance (Id., p.4).

- The Applicant expects to incur one-time placement, accounting, legal, printing and filing fees of $100,000 in connection with this transaction. The associated annual amortization expense, based on a twenty-year amortization period, is estimated to be $5,000. Annual interest expense for the bonds will be $1,023,000, based on an interest rate of 6.82 percent and a principal amount of $15 million. This amount will be offset by annual short-term interest savings of $900,000 based on an annual interest rate of 6 percent and a principal amount of $15 million. The resulting pretax net impact of this interest burden on the profit and loss statement is estimated to be $128,000; the net after-tax impact is projected to be $84,480 (Id., pp. 4-5).

In his final comments, Mr. Bishop explained the Applicant's rationale for issuing long-term debt at higher interest rates rather than continuing to take advantage of lower short-term interest rates. He also discussed the Applicant's ability to issue additional future first mortgage bonds if it becomes necessary. Mr. Bishop proffered two exhibits illustrating the Applicant's responses to these issues. (Id., pp. 6-7; and Exhibits F and E).

The Division's Advocacy Section did not proffer a witness in this proceeding. Instead, the Advocacy Section indicated that it had thoroughly reviewed the instant proposal and wished to go on record in support of the Providence Gas Company's application filing.

Findings

After a comprehensive examination of the record in this docket, the Division finds the application filing of the Providence Gas Company, seeking authority to issue and sell $15,000,000 of 6.82% First Mortgage Bonds - Series S, dated on or about April 1, 1998 and due on or about April 1, 2018, to be reasonable and in the best interests of ratepayers.

Accordingly, it is

(15560) ORDERED:

1. That the February 11, 1998 application filing by the Providence Gas Company, which seeks authority to issue First Mortgage Bonds in the principal amount of $15,000,000 is hereby approved.

2. That the Division hereby limits approval of the instant application to the terms and details contained in the evidence of record.

Dated and Effective at Providence, Rhode Island on March 9, 1998.

Division of Public Utilities and Carriers