The Commonwealth of Massachusetts
DEPARTMENT OF PUBLIC UTILITIES
August 20, 1996
D.P.U 96-64
Application and Petition of The Berkshire Gas Company to the
Department of Public Utilities pursuant to Sections 8 and 14 of Chapter 164
of the General Laws for approval and authorization to issue and sell on a
negotiated basis a Senior Note in an aggregate principal amount of up to
$16,000,000; to issue and sell not in excess of 200,000 shares of Common
Stock, $2.50 par value, pursuant to the Company's Share Owner Dividend
Reinvestment and Stock Purchase Plan; for an exemption from the advertising
and competitive bid requirements of Section 15 of Chapter 164 of the General
Laws; and for such other actions as may be deemed necessary or appropriate
in connection with the foregoing.
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APPEARANCES: Eric J. Krathwohl, Esq.
Emmett E. Lyne, Esq.
Rich, May, Bilodeau & Flaherty, P.C.
294 Washington Street
Boston, Massachusetts 02108
FOR: THE BERKSHIRE GAS COMPANY
Petitioner
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I. INTRODUCTION
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On June 13, 1996, The Berkshire Gas Company ("Berkshire" or "Company")
filed a petition with the Department of Public Utilities ("Department")
pursuant to G.L. c. 164, [SECTION] [SECTION] 8, 14, and 15, for approval and
authorization of: (1) the issuance and sale of up to $16,000,000 in a Senior
Note at 7.8 percent; (2) the issuance and sale of not more than 200,000
shares of common stock, $2.50 par value, through a Share Owner Dividend
Reinvestment and Stock Purchase Plan ("Plan"); and (3) an exemption from the
advertising and competitive bidding requirements of G.L. c. 164, [SECTION]
15. The Company's petition was docketed as D.P.U. 96-64.
Pursuant to notice duly issued, a public hearing was held at the
Department's offices on July 24, 1996. In support of its petition, the
Company presented the testimony of Michael J. Marrone, vice president,
treasurer and chief financial officer; and Shaun E. Sprague, manager of
general accounting. The evidentiary record includes five exhibits and two
record requests. There were no intervenors in the case.
II. DESCRIPTION OF THE PROPOSED FINANCING
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A. Issuance of Up To $16,000,000 in a Senior Note
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Berkshire Gas seeks authorization from the Department to issue and
sell, up to $16,000,000 in a Senior Note, with a maturity of 25 years, at a
fixed interest rate of 7.8 percent (Tr. at 5). The Company stated that the
proposed issuance and sale of up to $16,000,000 in a Senior Note is to be
used to finance the purchase of a portion of the Company's debt prior to its
maturity (Exh. BGC-1, at 5, 7).(1) The Company stated that at the time of
the financing, interest rates for long term debt instruments were
significantly lower than some of the Company's outstanding debt (id. at 6).
The Company further stated that the issuance and sale of up to $16,000,000
in a Senior Note at the rate of 7.8 percent resulted in savings on a pro
forma annual basis of approximately $288,000 per year (Tr. at 15). The
Company stated that it proposes to pay for the premium associated with the
redemptions by accumulating the unamortized debt issuance expense on the
repurchased debt, adding to that the premium paid to call the existing debt,
and amortizing the total over the life of the Senior Note (Exh. BGC-1, at
8).
The Company stated it negotiated to sell the Senior Note to a single
purchaser, First Colony Life Insurance Company of Virginia ("First Colony"),
which is also the holder of Berkshire's 8.4 percent preferred stock (id. at
8). The Company stated that the 7.8 percent rate of the proposed financing
was arrived at after extensive negotiations between First Colony and First
Albany Corporation ("First Albany"), the Company's investment bank (id. at
8-9). The Company further stated that the 7.8 percent rate is competitive
with market rates (id. at 8).
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(1) The Company stated that it evaluated the refinancing costs associated
with the following debt: Series K and M Bonds at 7.875 and 9.375
percent, respectively; an outstanding public debenture series at a
rate of 9.25 percent; and preferred stock at 8.4 percent (Tr. at 12-
13). The Company stated that there were savings, though minimal,
associated with the redemption of the Series K and M bonds which had
no premium associated with the purchase (id. at 12). The Company
stated that although there was a three percent premium associated
with calling the public debenture series, the Company concluded that
this redemption was also cost-justified (id. at 13). The Company
stated that it realized substantial savings via an income tax
deduction of 40 percent for dividends on debt issuances by converting
its 8.4 percent preferred stock to debt (Exhs. BGC-1 at 7, BGC-3,
Att. B at 2; Tr. at 13-14).
B. Issuance of Common Shares Pursuant to the Plan
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Berkshire Gas seeks authorization from the Department to issue and
sell, from time to time, not in excess of 200,000 shares of Common Stock,
$2.50 par value, through the continued operation of the Plan. The Company
is currently authorized to issue and sell up to 100,000 shares of common
stock through the Plan (Exh. BGC-5, at 2);(2) Berkshire Gas Company, D.P.U.
93-182 (1990).
Under the Plan, participants have the option to reinvest cash
dividends automatically on all or a portion of their shares of common stock
or to purchase common stock at any time in any amount from a minimum of
fifteen dollars in any calendar month to a maximum of five thousand dollars
in any calendar month (Exh. BGC-4, at 1; Tr. at 2 1).(3) The Company stated
that the Plan will be administered by the Plan Committee appointed by the
Company's Board of Directors (Exh. BGC-4, at 4).
The Company stated that the price for the stock under the Plan would
be set at 97 percent of the average of the bid and the asked price of the
Company's common shares in the over-the-counter market during the period of
five days preceding the purchase date (Exh. BGC-5, at 3). The Company
stated that the three percent discount may be suspended at any time, at the
Company's discretion, and would be required to be suspended by the terms of
the Plan in the event that the discounted price of the Company's shares
falls below the book value of the stock (id.). The Company stated that the
Plan provides significant benefits to the Company, its shareholders, and
customers as it provides funds for capital itnprovements at a very
inexpensive cost (Exh. BGC-2, at 5; Tr. at 21).
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(2) The Company noted that of the 100,000 shares authorized by the
Department in D.P.U. 93-182, 47,400 were outstanding on March 31,
1996 (Exh. BGC-5, at 2-3). The Company anticipates that during the
calendar year 1996, an additional 46,000 shares will be purchased
under the Plan which will deplete the remaining supply of authorized
shares pursuant to D.P.U. 93-182 (id. at 3).
(3) All holders of record of ten or more common shares of the Company
who are not employed by the Company and all employees of the Company
owning of record one or more shares are eligible to participate in
the Plan (Exh. BGC-4, at 5).
C. Use of Proceeds.
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The Company stated that the proceeds from the proposed issue and sale
of up to $16,000,000 in a Senior Note and up to 200,000 shares of common
stock pursuant to the Plan will be used to repay short term borrowings that
were used to call the higher interest rate bonds, debentures, and higher
cost preferred stock of the Company (Exhs. BGC-1, at 6; BGC-5, at 4-5). In
addition, the Company stated that the proceeds will be used for financing
additions to the Company's property, plant and equipment and/or repayment of
short term debt incurred from time to time by the Company (Exh. BGC-2, at
5). The Company asserted that the issuance of shares and use of proceeds is
consistent with the Company's traditional method of financing capital
additions temporarily through short term borrowing or internally generated
funds and later permanently financing such additions by the issuance of
equity securities or long term indebtedness (id.). The Company stated that
the Company's Board of Directors authorized the sale and issuance of the
proposed financing on June 4, 1996 (Exh. BGC-3, Att. A).
D. Exemption from G.L. c. 164, [SECTION] 15
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In addition, the Company requests exemption from the advertising and
competitive bidding requirements of G.L. c. 164, [SECTION] 15. The Company
stated that a negotiated, private sale rather than a public sale is more
favorable as the size of the offering would not likely attract bids on the
open market, and the costs of bidding, advertising, and issuance associated
with a public sale are much greater (Exh. BGC-5, at 4). The Company stated
that it chose First Albany as its investment banker on the basis of cost-
effectiveness as well as its long-standing relationship with First Albany
and First Albany's unique relationship with First Colony (Exh. BGC-1, at 9;
Tr. at 23).(4)
III. CAPITAL STRUCTURE OF THE COMPANY
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The Company provided financial statements and an analysis of its
capital structure as of March 31, 1996 (Exh. BGC-3, Schs. 2-6). The
Company's financial statements indicate that as of March 31, 1996, Berkshire
had: (1) $5,345,000 of common stock (2,137,963 shares at par value of
$2.50); (2) $8,406,000 of preferred stock ($406,000 preferred stock,
4.8 Percent Series plus $8,000,000 preferred stock, 8.4 Percent Series);
and (3) $16,147,000 premium on capital stock for a total of $29,898,000 of
shareholder equity (id., Sch. 4).(5) The Company also has long-term debt of
$24,000,000 (id.). The Company indicated that total securities outstanding
equalled $53,898,000 (id.). The Company's utility plant in service of
$95,328,000, less accumulated depreciation of $25,057,000 equalled a net
utility plant of $70,271,000 (id.). The Company determined an excess of net
utility plant to total securities of $16,373,000, as of March 31, 1996
(id.). After making pro forma adjustments including the redemption of the
$8,000,000 preferred stock, the Company estimated that the excess of net
utility plant to total securities after issuance of up to $16,000,000 in a
Senior Note and the 200,000 shares of common stock pursuant to the Plan for
which it is petitioning for approval equals $5,273,000 (id.). At the time of
the hearing, the Company indicated that its financial statement had not
changed since March 31, 1996 (Tr. at 22).
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(4) The Company noted that First Albany acted as the Company's
investment banker for several other sales of debt and equity capital,
including the sale of the 8.4 percent preferred issuance to First
Colony (Tr. at 24).
(5) The Company determined total securities by adding common stock (at
par), premium on common stock, preferred stock, and long-term debt
excluding retained earnings (Exh. BGC-3, Sch. 4).
IV. STANDARD OF REVIEW
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In order for the Department to approve the issuance of stocks, bonds,
coupon notes, or other types of long-term indebtedness(6) by an electric or
gas company, the Department must determine that the proposed issuance meets
two tests. First, the Department must assess whether the proposed issuance
is reasonably necessary to accomplish some legitimate purpose in meeting a
company's service obligations, pursuant to G.L. c. 164, [SECTION] 14.
Fitchburg Gas & Electric Light Company v. Department of Public Utilities,
395 Mass. 836, 842 (1985) ("Fitchburg II"), Fitchburg Gas & Electric Light
Company v. Department of Public Utilities, 394 Mass. 671, 678 (1985)
("Fitchburg I"). Second, the Department must determine whether the Company
has met the net plant test.(7) Colonial Gas Company, D.P.U. 84-96 (1984).
The Court has found that, for the purposes of G.L. c. 164, [SECTION]
14, "reasonably necessary" means "reasonably necessary for the
accomplishment of some purpose having to do with the obligations of the
company to the public and its ability to carry out those obligations with
the greatest possible efficiency." Fitchburg II at 836, citing Lowell Gas
Light Company v. Department of Public Utilities, 319 Mass. 46, 52 (1946).
In cases where no issue exists about the reasonableness of management
decisions regarding the requested financing, the Department limits its
Section 14 review to the facial reasonableness of the purpose to which the
proceeds of the proposed issuance will be put. Canal Electric Company, et
al., D.P.U. 84-152, at 20 (1984); see, e.g., Colonial Gas Company, D.P.U.
90-50, at 6 (1990).
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(6) Long-term refers to periods of more than one year after the date of
issuance. G. L. c. 164, [SECTION] 14.
(7) The net plant test is derived from G.L. c. 164, [SECTION] 16.
The Fitchburg I and 11 and Lowell Gas cases also established that the
burden of proving that an issuance is reasonably necessary rests with the
company proposing the issuance, and that the Department's authority to review
a proposed issuance "is not limited to a 'perfunctory review.'" Fitchburg I at
678; Fitchburg II at 842, citing Lowell Gas at 52. Regarding the net plant
test, a company is required to present evidence that its net utility plant
(original cost of capitalizable plant, less accumulated depreciation) equals
or exceeds its total capitalization (the sum,of its long-term debt and its
preferred and common stock outstanding) and will continue to do so following
the proposed issuance. Colonial Gas Company, D.P.U. 84-96, at 5 (1984).
Pursuant to G.L. c. 164, [SECTION] 15, an electric or gas company
offering long-term bonds or notes in excess of $1 million in face amount
payable at periods of more than five years after the date thereof must
invite purchase proposals through newspaper advertisements. The Department
may grant an exemption from this advertising requirement if the Department
finds that an exemption is in the public interest. G.L. c. 164, [SECTION]
15. The Department has found it in the public interest to grant an exemption
from the advertising requirement where there has been a measure of
competition in private placement. See, e.g., Western Massachusetts Electric
Company, D.P.U. 88-32, at 5 (1988); Eastern Edison Company, D.P.U. 88-127,
at 11-12 (1988),Berkshire Gas Company, D.P.U. 89-12, at 11 (1989). The
Department also has found that it is in the public interest to grant a
company an exemption from the advertising requirement when a measure of
flexibility is necessary in order for a company to enter the bond market in
a timely manner. See, e.g., Western Massachusetts Electric Company, D.P.U.
88-32, at 5 (1988). However, G.L. c. 164, [SECTION] 15 requires advertising
as the general rule; and waiver cannot be automatic but must be justified
whenever requested.
Where issues concerning the prudence of the Company's capital
financing have not been raised or adjudicated in a proceeding, the
Department's decision in such a case does not represent a determination that
any specific project is economically beneficial to a company or to its
customers. In such circumstances, the Department's determination in its
Order may not in any way be construed as ruling on the appropriate
ratemaking treatment to be accorded any costs associated with the proposed
financing. See, e.g., Boston Gas Company, D.P.U. 95-66, at 7 (1995).
V. ANALYSIS AND FINDINGS
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Based on the foregoing, the Department finds that the proposed
issuance of up to $16,000,000 in a Senior Note with a term of twenty-five
years and bearing an interest rate of 7.8 percent per annum and the proposed
issuance and sale of up to 200,000 shares of common stock under the Plan is
reasonably necessary to repay short term borrowings that were used to call
the higher interest rate bonds, debentures, and higher cost preferred stock
of the Company as well as to finance additions to the Company's property,
plant and equipment and repay short term borrowings incurred from time to
time by the Company. As such, the Department finds that the proposed
issuance and sale of up to $16,000,000 in a Senior Note and up to 200,000
shares of common stock pursuant to the Plan is reasonably necessary to
accomplish some legitimate purpose in meeting the Company's service
obligations in accordance with G.L. c. 164, [SECTION]14. The Department
further finds that the costs associated with the proposed financing,
including costs associated with the redemption of the preferred stock and
debt securities should be amortized over the life of the Senior Note.
In regard to the net plant test, the Department finds that the
Company's proposed financing meets the net plant test, since the Company's
net utility plant equals or exceeds its total capitalization and will
continue to do so following the proposed issuance. Regarding the Company's
request for an exemption from the requirements of G.L. c. 164, [SECTION] 15,
we find that it is appropriate to allow the Company the flexibility offered
by the private placement process in order to assist the Company in
responding to market conditions and to take advantage of prevailing
interest rates. The record in this case further demonstrates that the
Company ensured a competitive rate through the private placement process.
Therefore, the Department finds that it is in the public interest to exempt
the Company from the advertisement and bidding requirements of G.L. c. 164,
[SECTION]15.
VI. ORDER
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Accordingly, after due notice, hearing, and consideration, the
Department
VOTES: That the issuance and sale by Berkshire Gas Company of a Senior
Note in the aggregate principal amount of up to $16,000,000 is reasonably
necessary for the purpose for which the Company has petitioned; and it
FURTHER VOTES: That the issuance and sale, from time to time, by
Berkshire Gas Company of not in excess of 200,000 shares of common stock,
$2.50 par value, pursuant to its Share Owner Dividend Reinvestment and Stock
Purchase Plan, is reasonably necessary for the purpose for which the Company
has petitioned; and it is
ORDERED: That the Department hereby approves and authorizes the issue
and sale of a Senior Note in the aggregate principal amount of up to
$16,000,000, to bear interest at a rate of 7.8 percent, due to mature not
later than 25 years from the date of issue; and it is
FURTHER ORDERED: That the Department hereby approves and authorizes
the issuance and sale from time to time of not in excess of an additional
200,000 shares of common stock, $2.50, par value, pursuant to its Share
Owner Dividend Reinvestment and Stock Purchase Plan; and it is
FURTHER ORDERED: That the costs associated with the proposed
financing, including costs associated with th6 redemption of the preferred
stock and debt securities, be amortized over the life of the Senior Note;
and it is
FURTHER ORDERED: That the issuance and sale by Berkshire Gas Company
of a Senior Note in the aggregate principal amount of up to $16,000,000,
without inviting proposals for the purchase thereof by publication in
certain designated newspapers, is in the public interest, and such issue
shall be exempt from the provisions of G.L. c. 164, [SECTION]15; and it is
FURTHER ORDERED: That the net proceeds from such sale of all such
securities shall be used for the purposes as set forth herein; and it is
FURTHER ORDERED: That the Secretary of the Department shall within
three days of the issuance of this Order cause a certified copy of it to be
filed with the Secretary of the Commonwealth.
By Order of the Department,
/s/ John B. Howe
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John B. Howe, Chairman
/s/ Mary Clark Webster
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Mary Clark Webster, Commissioner
/s/ Janet Gail Besser
A true copy --------------------------------------
Attest; Janet Gail Besser, Commissioner
/s/ Mary L. Cottrell
MARY L. COTTRELL
Secretary
Appeal as to matters of law from any final decision, order or ruling
of the Commission may be taken to the Supreme Judicial Court by an
aggrieved party in interest by the filing of a written petition praying
that the Order of the Commission be modified or set aside in whole or in
part.
Such petition for appeal shall be filed with the Secretary of the
Commission within twenty days after the date of service of the decision,
order or ruling of the Commission, or within such further time as the
Commission may allow upon request filed prior to the expiration of twenty
days after the date of service of said decision, order or ruling. Within ten
days after such petition has been filed, the appealing party shall enter the
appeal in the Supreme Judicial Court sitting in Suffolk County by filing a
copy thereof with the Clerk of said Court. (Sec. 5, Chapter 25, G.L. Ter.
Ed., as most recently amended by Chapter 485 of the Acts of 1971).