Order 15727 - Block Island Power Co.: Appl. for Loan Authorization

 

STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS

DIVISION OF PUBLIC UTILITIES AND CARRIERS

100 ORANGE STREET

PROVIDENCE, RHODE ISLAND 02903

REPORT AND ORDER

Whereas, On April 23, 1998, the Block Island Power Company ("BIPCO") filed an application with the Rhode Island Division of Public Utilities and Carriers ("Division") seeking authority to extend a $1,200,000 note, which had matured on April 14, 1998.

Whereas, The Division conducted a duly noticed public hearing on BIPCO's application and issued a report and order on May 14, 1998 (Order No. 15614). Through its May 14 report and order the Division approved BIPCO's proposed loan extension. However, for reasons expressed in its May 14 report and order, the Division directed BIPCO to immediately seek refinancing bids in order to determine whether better loan terms and conditions were available (Id.).

Whereas, BIPCO complied with the Division's directive, and on October 9, 1998 filed an application with the Division seeking authority to refinance its existing loan, then in the approximate amount of $960,000.

Whereas, Through its October 9, 1998 application, BIPCO also seeks authority to borrow an additional maximum amount of $350,000 to finance the replacement of its tank farm for the purpose of complying with environmental regulations; and to borrow an additional maximum amount of $80,000 to finance the purchase of a "digger truck" which digs holes for electric poles on Block Island.

Whereas, Both the original April 23, 1998 and the instant October 9, 1998 applications were filed pursuant to the requirements of Rhode Island General Laws, Section 39-3-15, et seq.

Whereas, In response to the October 9, 1998 application filing, the Division conducted a duly noticed public hearing on November 4, 1998, at the Division's hearing room located at 100 Orange Street in Providence. The following individuals entered appearances:

For BIPCO:                                                     Michael R. McElroy, Esq.

For the Division's Advocacy Section:                Elizabeth Kelleher, Esq.

THE RECORD EVIDENCE

BIPCO proffered the pre-filed direct testimony of two witnesses in support of its application. The witnesses were identified as Mr. Michael Wagner, BIPCO's General Manager; and Mr. Walter E. Edge, Jr.,  [1 Due to illness, Mr. Edge did not appear for the hearing. The Advocacy Section cross-examined Mr. Edge through the discovery process prior to the hearing. The Advocacy Section did not object to the admission of Mr. Edge's prefiled testimony.] a consultant with the firm of Bacon & Edge, One Worthington Road, Cranston, Rhode Island. The Division's Advocacy Section did not proffer any witnesses.

Mr. Walter Edge testified that BIPCO is proposing to effectuate the three financings through a loan from the Washington Trust Company. He summaried the three financings and the relevant loan terms as follows:

A) Refinance of Commercial Loan #39903

B) $350,000 fuel tanks

C) $80,000 digger truck

Terms:

- Loan amount:

A) $958,140.88 (as of July 23, 1998)

B) $350,000 (up to but not exceed)

C) $80,000 (up to but not exceed)

- Interest rate:

A) Fixed rate of 2.25 basis points over cost of funds (8.0% at 9/18/98)

B) Same as (A)

C) Fixed rate of 2.50 basis points over cost of funds (8.25% at 9/18/98)

- Fees: No points. There are, however, the customary closing fees.

- Term:

A) Nine years eight months (remaining term of current loan)

B) Five years

C) Five years

- Prepayment premium:

A) There is a "yield maintenance prepayment premium"

B) Same as (A)

C) Same as (A)

- Collateral

A) All BIPCO assets

B) Same as (A)

C) First lien position on the "vehicle being purchased"

- Guarantors: Personal guarantee of owners (BIPCO Exh. 2, p. 2)

Mr. Edge testified that the refinancing of the current debt will not affect BIPCO's debt/equity ratio. He related that since this refinancing "will not provide any cash out," the debt and equity amounts will remain the same (Id., p. 3).

Mr. Edge explained that BIPCO will receive no proceeds from the refinancing. He related that the refinancing "is merely to reduce the interest rate paid on the current debt (from 9.5% to 8.0%)" (Id.). Mr. Edge related that the financial loan covenants remain the same as they were in May of 1998 when BIPCO obtained approval from the Division to extend the original 1992 loan (Id.).

Mr. Edge next discussed BIPCO's proposal to borrow an additional $350,000 to replace its fuel tank farm. He explained that federal law requires that BIPCO's old fuel tanks be replaced by December 1998. He related that this issue has been addressed in Public Utilities Commission ("Commission") Docket No. 1998, a docket which was established to consider environmental surcharge rates for BIPCO. Mr. Edge testified that the Commission did approve such a surcharge for BIPCO and, in fact, has increased and extended the surcharge for two years. He related that the surcharge allowance includes moneys in the first year to remove the tanks "and in the second year to pay debt service payments on the loan for the tanks being requested here" (Id., p. 5).

Mr. Edge testified that BIPCO will only borrow as much of the $350,000 actually needed to replace the tanks. He characterized the $350,000 request as a cap for the funds potentially required (Id.). He also related that with the addition of the $350,000 to BIPCO's debt, BIPCO's debt equity ratio will change from 3.6/1 to 4.4/1 (Id., p. 6). Mr. Edge opined that this debt equity ratio "is acceptable" (Id.).

Mr. Edge testified that the $80,000 loan for the digger truck will further change BIPCO's debt equity ratio to 4.59/1 (Id., p. 7). He again opined that "this level is still well within the reasonable range for debt equity ratios (3/1 - 6/1)" (Id.).

Mr. Edge also testified that BIPCO will not be seeking a rate increase at this time to cover the cost of these three financing items. He related that the refinancing of the current debt will actually reduce cost and the $350,000 borrowing is included for the most part in the environmental surcharge for the next two years. He stated that the debt service payments for the digger truck will be paid by the owners until a full rate case is filed, "probably in late 1999 or 2000" (Id., p. 8).

Mr. Edge attached a number of supporting documents to his prefiled direct testimony. These documents primarily represent correspondence received from the Washington Trust Company relative to the proposed commercial loan (Id., exhibit 1).

Mr. Michael Wagner testified that since the Division's last proceeding, and based on the Division's order, BIPCO applied to ten lending institutions and received positive responses from two, the Washington Trust Company and Bank of Boston. He related that Bank of Boston's quoted rate was 1/4 percent below that of the Washington Trust Company. However, he explained that BIPCO determined that the "up front costs" associated with the Bank of Boston loan more than offset any savings the lower rate would provide (BIPCO exh. 3, p. 1).

Mr. Wagner further testified that since the application filing date of October 9, BIPCO has made an additional payment on its current debt. As a result of this payment, BIPCO's current principal balance on its current debt was reported to be $944,032.

Mr. Wagner also discussed some of the details surrounding BIPCO's fuel tank replacement efforts and the project's concomitant costs. He echoed Mr. Edge's statement that BIPCO will draw down from the $350,000 loan only what is necessary to complete the tank replacement project (Id., p. 2).

Mr. Wagner also explained why BIPCO is seeking a new digger truck. He noted that BIPCO's current truck is 33 years old. He related that a new digger truck is approximately $120,000-$130,000. Mr. Wagner related that for $80,000, BIPCO expects to purchase a used truck which "should suit our needs for many years to come" (Id., p. 3).

At the conclusion of its case presentation, BIPCO, through its attorney, requested that the Division allow BIPCO flexibility to choose between a fixed rate or an adjustable rate loan. BIPCO related that the Washington Trust Company has offered both options, as evidenced by a July 23, 1998 commitment letter (BIPCO exh. 2, exhibit 1). BIPCO characterized both options as attractive, but wanted to have the flexibility to choose one over the other when the loan documents are finalized.

The Division's Advocacy Section voiced support for BIPCO's application. However, the Advocacy Section expressed "pause" concerning BIPCO's request for the flexibility to choose an adjustable rate loan over a fixed rate loan. The Advocacy Section noted that the prefiled testimony proffered in this case did not directly address the possibility of an adjustable rate option. Due to this omission the Advocacy Section related that it did not perform an analysis on the reasonableness of this option.

The Advocacy Section concluded that albeit BIPCO should be permitted the flexibility to choose the adjustable rate option, the prudence of that decision ought to be subject to criticism in any future rate case wherein BIPCO might seek an additional debt service allowance. BIPCO agreed, and stipulated that it would not object if the Division felt compelled to recommend against an additional debt service allowance, related to this issue, in any future rate proceedings before the commission.

In its final comments, the Advocacy Section also recommended that BIPCO be directed to report back to the Division regarding the actual funds spent from the $350,000 and $80,000 loans. The Advocacy Section recommended that the report also provide details on exactly how the funds were used. BIPCO did not object to these reporting requirements.

FINDINGS

After a thorough examination of the record, the Division finds BIPCO's proposed financings reasonable and in the best interest of ratepayers.

The Division also finds the Advocacy Section's recommendation for reporting requirements to similarly be reasonable.

Finally, the Division must also express concern relative to the adjustable rate option discussed herein. The Division cautions BIPCO that while it will grant BIPCO's request for managerial discretion relative to this issue, the Division may oppose any future rate increase requests designed to recoup debt service expenses which exceed those contemplated under the fixed rate option described in this record.

Accordingly it is

(15727) ORDERED:

1. That the Block Island Power Company's October 9, 1998 application seeking authority to: (1) refinance its current debt now in the principal amount of approximately $945,000; (2) to borrow an additional maximum amount of $350,000 to finance the replacement of its tank farm for the purpose of complying with federal and state environmental regulations; and (3) to borrow an additional maximum amount of $80,000 to finance the purchase of a used digger truck; is hereby granted

2. BIPCO is hereby directed to comply with the reporting requirements described herein.

3. 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 November 5, 1998.

Division of Public Utilities and Carriers