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EXHIBIT 99(A)
DEPARTMENT OF PUBLIC UTILITIES
August 15, 1996
D.P.U. 96-63
Application and Petition of Fall River Gas Company to the Department of Public
Utilities pursuant to Section 14 of Chapter 164 of the General Laws for approval
and authorization to issue and sell on a negotiated basis additional First
Mortgage Bonds (or other long-tenn debt securities) in an aggregate principal
amount up to $7,000,000, to be sold at par; to issue and sell not in excess of
250,000 shares of Common Stock, $0.83-113 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: FALL RIVER GAS COMPANY
Petitioner
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L. Scott Harshbarger, Attorney General
By: William McAvoy
Assistant Attorney General
200 Portland Street
Boston, MA 02114
Intervenor
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D.P.U. 96-63 Page 3
I. INTRODUCTION
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On May 23, 1996, Fall River Gas Company ("Fall River" or "Company",
pursuant to G.L. c. 164, [Section]14 and 15, filed a petition with the
Department of Pubic Utilities ("Department") for approval and authorization of:
(1) the issuance and sale of First Mortgage Bonds ("FMB") or other long-term
debt securities in an aggregate principal amount up to $7,000,000 to be sold at
par;(1) (2) the issuance and sale of up to 250,000 shares of common stock,
$0.83-1/3 par value, through a Share Owner Stock Purchase and Dividend
Reinvestment Plan ("Plan"); and (3) an exemption from the advertisement and
bidding requirements of G.L. c. 164, [Section]15. The Company's petition was
docketed as D.P.U. 96-63. Pursuant to notice duly issued, a public hearing was
held at the Department's offices in Boston on July 17, 1996. In support of its
petition, the Company presented the testimony of Peter H. Thanas, senior vice
president and treasurer of Fall River. The evidentiary record includes three
exhibits and one record request. The Attorney General was the only intervenor
in the case. On August 7, 1996 the Attorney General filed a letter-brief ("AG
Brief"). The Company filed a response ("Response") on August 9, 1996.
II. DESCRIPTION OF THE PROPOSED FINANCING
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A. Issuance of First Mortgage Bonds
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Fall River seeks authorization from the Department to issue and sell, from
time to time, at par value, up to $7,000,000 of FMBs or other long-term debt
securities, with a maturity of 30 years, at a fixed interest rate of 7.99
percent (Exhs. FRG-1, at 2-3; FRG-3, at 1; Tr. at 9). The Company stated that
the FMBs have a "make-whole" call premium (Tr. at 19). The Company's Board of
Directors authorized the sale and issuance of the proposed financing on February
8, 1996 (Exh. FRG-l, at 2).
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(1) The Company originally petitioned for authority to issue and sell up to
$8,000,000 of FMBs. Subsequently, the Company determined that it would issue up
to $7,000,000 of FMBs and as such, the Company petitions the Department for
authority to issue and sell such amount to which the Company and the bond
purchaser are committed (Letter to Department, dated July 30, 1996).
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D.P.U. 96-63 Page 4
The Company stated that the use of the FMBs allows the Company to access
low interest rates (id. at 5). Additionally, the Company stated that the
thirty-year maturity of the FMBs fits well with the Company's cash requirements
given its current level of outstanding debt and that the issuance of FMBs
combined with the issuance of common stock through the Plan is designed to
maintain a target debt to equity ratio of approximately 50-50 (ID.).
B. Share Owner Dividend Reinvestment and Stock Purchase Plan
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Fall River seeks authorization from the Department to issue and sell not
in excess of 250,000 shares of common stock, $0.83-1/3 par value, pursuant to
the Company's Plan (ID. at 2-3). Under the Plan, record shareholders have the
option to automatically reinvest cash dividends 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 (ID. at-3; Tr. at 10).(2) The Company
stated that the Plan will be administered by the Plan Committee appointed by the
Company's Board of Directors (Exh. FGR-1, Prospectus at 4). The Company also
stated that the Plan is similar to most dividend reinvestment plans of other
utilities (Tr. at 9).
The Company stated that the price for the stock under the Plan would be
set at 97 percent of the current market price as long as such price exceeded the
book value of the Company's common stock and the par value (Exh. FRG-1, at 3).
The Company stated that because the Plan did not involve commission expenses,
Fall River could offer the price quoted and as such, encourage investment in the
Plan (Tr. at 15). The Company stated that the Plan provides significant benefits
to the Company, its shareholders and customers as it offers ongoing and
significant capital infusion at a very low cost (Exh FRG-l at 3).
C. Use of the Proceeds
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The Company stated that the proceeds from the sale of the FMBs or other
long-term debt securities and shares of common stock pursuant to the Plan will
be used to retire short-term debt
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(2) The Company initially proposed a ceiling of three thousand dollars in any
calendar month which it later changed to five thousand dollars (Tr. at 10). The
Company noted that other similar plans have increased their ceiling to five
thousand dollars (ID.).
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D.P.U. 96-63 Page 5
which the Company incurred to finance additions to property, plant and equipment
(Exhs. FRG-l, at 6; FRG-3, at 2; Tr. at 9) (3) The Company stated that its
proposed use of proceeds is consistent with the Company's traditional method of
financing capital additions, I.E., temporarily through short-term borrowings or
internally generated funds and later permanently via the issuance of equity or
debt securities (Exh. FRG-1, at 4).(4)
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 (ID. at 5; Tr. at 13). The Company stated that it
contacted seven investment banks and reviewed each bank's proposal (Tr. at
13-14). The Company stated that it retained the Bank of Boston, N.A. on the
basis of cost and marketing capabilities (Exh. FRG-l at 5-6; Tr. at 13-14).
III. POSITION OF THE PARTIES
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A. Attorney General
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The Attorney General states that he has concerns with the make-whole terms
of the Company's issuance of up to $7,000,000 of FMBs which arise from the
Company's experience with a prior issuance of $6,500,000 FMBs, as approved by
the Department in D.P.U. 89-199 (AG BRIEF at 1). The Attorney General states
that although the make-whole provision included in the terms of the prior
issuance allowed for redemption of the FMBs in theory, it imposed a prepayment
penalty of $1,538,610 which made it economically prohibitive to refinance the
FMBs
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(3) The Company stated that it incurred large construction expenditures for new
and replacement services, main replacements and system improvements to provide
reliable service to existing and new customers (Exh. FRG-l, at 4).
(4) The Company stated that banks are reluctant to issue lines of credit to
Fall River if it does not issue long term debt over time to reduce its
short-term borrowings, I.E., debt less than one year in term (Tr. at 17).
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in the case of lower interest rates (ID.). The Attorney General maintains that
if the Company had negotiated the prior issuance with more reasonable call
terms, the Company could have more easily refinanced its prior bond issue and
experienced interest rate savings of $94,250 per year (ID.). The Attorney
General recommends that the Department disallow inclusion of the make-whole
provision in the issuance of $7,000,000 FMBs and that the Department deny the
issuance until said FMBs include less costly call terms (ID. at 2).
B. Company
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The Company states that the Attorney General's suggestions would increase
costs to ratepayers (Response at 1). The Company further states that the
Attorney General does not provide any evidence in support of his cost savings
assertions (ID. at 2). Fall River maintains that the Attorney General's
calculations omit prepayment premium costs which are significant (ID.). Further,
the Company maintains that make-whole provisions, such as the one used by Fall
River, are the norm used by utility investment bankers (ID. at 1). The Company
also asserts that the terms of the make-whole provision were arrived at after
extensive review of market alternatives with expert investment banking advice,
that the interest rate of the proposed financing is very favorable, and that the
Department should approve the financing as proposed (ID. at 2).
IV. CAPITAL STRUCTURE OF THE COMPANY
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As of March 31, 1996, the Company's utility plant in service was
$53,931,956, with accumulated depreciation of $17,428,445, resulting in net
utility plant of $36,503,511 (Exh. FRG-l, sch. 2, at 1, sch. 3). As of March 31,
1996, the Company's capitalization consisted of long term debt of $7,300,00,
common stock of $1,834,445, and paid in capital of $1,356,043. Therefore, the
excess of utility plant amounted to $26,013,023 as of March 31, 1996 (Exh.
FRG-l, schs. 3, 4).
V. STANDARD OF REVIEW
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In order for the Department to approve the issuance of stock, bonds,
coupon notes, or other types of long-term indebtedness(5) by an electric or gas
company, the Department must
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(5) Long-term refers to periods of more than one year after the date of
issuance. G.L. c. 164, [Section]14.
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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"), CITING 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.(6) 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).
The FITCHBURG I AND II 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
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(6) The net plant test is derived from G.L. c 164, [Section]16@.
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D.P.U. 96-63 Page 8
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).
VI. ANALYSIS AND FINDINGS
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Based on the foregoing, the Department finds that the proposed issuance
and sale of up to $7,000,000 of FMBs or other long-term debt securities with a
term of thirty years and bearing an interest rate of 7.99 percent per annum and
the proposed issuance and sale of 250,000 shares of commons stock under the Plan
is reasonably necessary to retire short term debt which the Company incurred to
finance plant, property and equipment to provide reliable service to existing
and new customers. As such, the Department finds that the proposed issuance and
sale of up to $7,000,000 in FMBs and 250,000 shares of common stock pursuant to
the Plan is reasonably necessary to accomplish some legitimate purpose in
meeting a Company's service obligations in accordance with G.L. c. 164,
[Section]14.
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The Department finds that the Company's proposed issuance and sale of
FMB's meets the net plant test, since the Company's total capital stock and
long-term debt will not exceed the Company's net plant after the proposed
issuance. Based on the Company's estimated net proceeds to be received from the
proposed sale of up to 250,000 shares of common stock under the Plan, there will
continue to be an excess of net utility plant to total securities at the
completion of the Company's proposed financings, after accounting for the
issuance and sale of the common stock through the Plan and the aggregate
principal amount of $7,000,000 FMBs. As such, the Department finds that the
proposed issuances meet the net plant test.
The Department rejects the Attorney General's request that the Department
deny the issuance of up to $7,000,000 in FMBs until said FMBs contain less
costly terms. SEE FALL RIVER GAS COMPANY, D.P.U. 89-199, at 8-9 (1989). The
Department finds that the Attorney General did not provide any evidence to
support his cost savings assertions. Moreover, the evidence indicates that the
Company, in consultation with investment bankers, reviewed interest rates, call
dates, and call premiums to propose a financing that was reasonable.
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
has surveyed banks and financial institutions so as to ensure 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.
Issues concerning the prudence of the Company's capital financing have not
been addressed in this proceeding, and the Department's decision in this case
does not represent a determination that any project is economically beneficial
to the company or its customers. The Department emphasizes that its
determination in this Order shall not in any way be construed as a ruling
relative to the appropriate ratemaking to be accorded any costs associated with
the proposed financing.
VII. ORDER
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Accordingly, after due notice, hearing, and consideration, the Department
VOTES: That the issuance and sale by Fall River Gas Company of First
Mortgage Bonds or other long-term debt securities in the aggregate principal
amount of up to $7,000,000 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 Fall
River Gas Company of not in excess of 250,000 shares of common stock, $0.83-1/3
par value per share, 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 First Mortgage Bonds in the aggregate principal amount of up to
$7,000,000, to bear interest at a rate of 7.99 percent, due to mature not later
than 30 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 250,000 shares of common
stock, S0.83-1/3 par value per share, at a price not less than par, pursuant to
its Share Owner Dividend Reinvestment and Stock Purchase Plan; and it is
FURTHER ORDERED: That the issuance and sale by Fall River Gas Company of
First Mortgage Bonds in the aggregate principal amount of up to $7,000,000,
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
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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,
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Joseph B. Howe, Chairman
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Mary Clark Webster, Commissioner
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Janet Gail Besser, Commissioner
A true copy
Attest:
MARY L. COTTRELL
Secretary
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D.P.U. 96-63 Page 12
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).