Order 15718 - Prov. Gas Co.: Appl. to Issue Mortgage 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 October 2, 1998, the Providence Gas Company ("ProvGas"), 100 Weybosset Street, Providence, Rhode Island, filed an application with the Rhode Island Division of Public Utilities and Carriers ("Division") seeking consent and authority to issue first mortgage bonds in the principal amount of $15,000,000. The application was filed pursuant to the requirements of Rhode Island General Laws, Section 39-3-15 and Section 14(a) of the Division's Rules of Practice and Procedure.

According to the application, the bond proceeds will be applied to the repayment of outstanding short-term debt and the retirement of "First Mortgage Bonds, Series M" (ProvGas Exh. 1). The application also provided the following relevant information:

- That ProvGas' 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 par value, are outstanding;

- That ProvGas' long-term debt as of August 31, 1998 is $83,700,000 which represents 47.7% of total capitalization;

- That ProvGas desires to issue and sell $15,000,000 of approximately 6.75% First Mortgage Bonds - Series T, dated on or about January 31, 1999 and due on or about January 31, 2029 at an interest rate of approximately 6.75%. The bonds are to be sold at par, plus accrued interest, to the public, with registration under the Securities Act of 1933;

- That the bonds will be issued pursuant to the First Mortgage of Indenture dated as of January 1, 1922 between ProvGas and State Street Bank and Trust Company, as supplemented by nineteen supplemental indentures and by a twentieth supplemental indenture to be entered into between ProvGas and State Street Bank and Trust Company;

- The bonds are expected to be callable after five years at par;

- The bonds will be secured primarily by a lien on ProvGas' tangible and real property, excepting cash, securities, inventory, consumable supplies and motor vehicles. The Series T 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; and

- That the bonds will not be issued either partly or wholly for property, services or consideration other than money. (ProvGas Exh. 1).

In response to the application filing, the Division conducted a duly noticed public hearing on October 27, 1998. The hearing was held at the Division's hearing room located at 100 Orange Street in Providence. The following individuals entered appearances:

For ProvGas:                                                    Alycia L. Goody, Esq.

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

ProvGas proffered one witness in support of its application. The witness was identified as Mr. Harry J. Bishop, who was ProvGas' Director of Finance at the time the application was filed  [1 Mr. Bishop has since been promoted, but retains responsibility over the proposed bond issue.]. The Division's Advocacy Section did not proffer any witnesses.

Mr. Bishop testified that ProvGas has decided to take advantage of currently low interest rate levels to reduce its long-term debt rate by retiring higher cost debt and replacing it with new lower cost debt (ProvGas Exh. 2, p.2). He related that the anticipated 6.75 percent bonds will be used to retire previously issued 10.25 percent bonds (Id.). Mr. Bishop stated that ProvGas will save $1.8 million over the next 30 years as a consequence of this refinancing (Id.). He added that the net after-tax impact of the interest burden on ProvGas' profit and loss statement is projected to be a savings of $36,488 (Id., p.6; and exhibit C). He further stated that the proposed debt issue is consistent with ProvGas' "Price Stabilization Plan."  [2 See Docket No. 2581.]

Mr. Bishop testified that there will be a negligible change in the total debt component of ProvGas as this new issuance will merely replace short-term debt and the Series M long-term debt. He related that:

... our capitalization before this issuance and before the retirement of the Series M Bond consisted of 48 percent long-term debt. With the retirement of the Series M debt and this issuance, our long-term debt will comprise approximately 53 percent of our capitalization. The total debt will be approximately 50 percent both before and after the issuance (Id., p. 6).

On the matter of issuance costs, Mr. Bishop testified that ProvGas expects to pay a placement fee of approximately $475,000. He related that ProvGas will also purchase an insurance feature for this debt issue, which is anticipated at $350,000. He related that legal, accounting, registration fees, and printing fees will total approximately $150,000. Including a $1.4 million call premium on the Series M debt being retired, Mr. Bishop testified that the instant costs, amortized over 30 years, will result in "an annual total charge of less than $80,000 per year" (Id., p.7).

Mr. Bishop also proffered a number of exhibits in support of the application in issue. The exhibits provided information on historical interest rates; ProvGas' outstanding first mortgage bonds; its capital structure; the effect the proposed debt will have on its profit and loss statement, its estimated bondable additions, and its consolidated balance sheets (Id., exhibits A-F).

In his final comments, Mr. Bishop related that while ProvGas has projected the interest rates for this bond issue to be "approximately 6.75%", he noted that the interest rate, when the bonds are issued in January 1999, could actually be higher. Consequently, Mr. Bishop proposed that the Division approve the instant bond issue application with an interest rate cap of 7.0%. He maintained that ProvGas and its ratepayers would still benefit from the issuance of bonds at this higher rate. He further related that although he expects the final rate to be less than 6.75%, establishing a cap of 7.0% would negate the need for ProvGas to seek subsequent Division approval if the final rate actually exceeds 6.75%.

Mr. Scialabba, representing the Division's Advocacy Section, voiced support for ProvGas' application. Mr. Scialabba stated that approving ProvGas' $15,000,000 bond issuance proposal is in the best interest of ratepayers. Mr. Scialabba also supported ProvGas' request that the Division authorize a 7.0% cap for the proposed bond issue.

FINDINGS

After a thorough examination of the record, the Division finds that ProvGas' request to issue $15,000,000 in First Mortgage Bonds is reasonable and in the best interest of ratepayers. The Division additionally finds ProvGas' proposal for a 7.0% interest rate cap to be reasonable.

Accordingly it is

(15718) ORDERED:

1. That the Providence Gas Company's October 2, 1998 application filing, seeking authority to issue $15,000,000 in First Mortgage Bonds, at a maximum interest rate of 7.0 percent, is hereby granted.

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

Dated and Effective at Providence, Rhode Island on October 28, 1998.

Division of Public Utilities and Carriers