ENMAX Power Corporation

Transcription

1 Decision D ENMAX Power Corporation 2015 Application to Issue Debt May 29, 2015

2 Alberta Utilities Commission Decision D ENMAX Power Corporation 2015 Application to Issue Debt Proceeding May 29, 2015 Published by the: Alberta Utilities Commission Fifth Avenue Place, Fourth Floor, 425 First Street S.W. Calgary, Alberta T2P 3L8 Telephone: Fax: Website:

3 Contents 1 Introduction Process Background Application details Discussion of issues Debt issuance and request for elimination of pro forma capital structure statement Commission findings Target capital structure Commission findings Order... 6 Appendix 1 Proceeding participants... 7 Appendix 2 Summary of Commission directions... 8 Decision D (May 29, 2015) i

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5 Alberta Utilities Commission Calgary, Alberta ENMAX Power Corporation Decision D Application to Issue Debt Proceeding Introduction 1. On March 27, 2015, ENMAX Power Corporation (EPC) filed an application with the Alberta Utilities Commission seeking approval to issue debt to its parent company and sole shareholder, ENMAX Corporation (EC), in the principal amount of no more than $189,180, In addition to the $189,180,000 in debt issuance requested, EPC solicited Commission approval to eliminate the pro forma capital structure statement provided in past debt applications, and to maintain an actual capital structure that may differ from the deemed capital structure approved by the Commission. 2 Process 3. On March 31, 2015, the Commission issued a notice of application advising interested parties to file a statement of intent to participate with the Commission no later than April 10, The Commission did not receive any SIPs. 4. In reviewing the application, the Commission determined that there was a need for further information. By letter dated April 20, 2015, the Commission set out further process and, pursuant to that process, the Commission issued information requests (IRs) to EPC on April 24, 2015, and EPC provided responses to the IRs on May 5, For the purposes of this decision, the Commission considers the record closed on May 5, Background 6. EPC is the owner of a public utility to which Section 101 of the Public Utilities Act, RSA 2000, c. P-45, applies. Section 101(2)(a)(ii) of the Public Utilities Act states: 101(2) No owner of a public utility designated under subsection (1) shall (a) issue any (ii) bonds or other evidences of indebtedness, payable in more than one year from the date of them, unless it has first satisfied the Commission that the proposed issue is to be made in accordance with law and has obtained the approval of the Decision D (May 29, 2015) 1

6 Commission for the purposes of the issue and an order of the Commission authorizing the issue, 7. Consequently, EPC is required to obtain approval from the Commission before issuing any bonds or other evidences of indebtedness for terms greater than one year. 4 Application details 8. EPC stated in its application that the purpose of the debt issuance is to finance EPC s 2015 transmission and distribution capital expenditure forecast, totalling $214.6 million. 1 EPC has $25.5 million of unused Alberta Capital Finance Authority (ACFA) funds carried forward, 2 and is requesting approval to issue an additional $189.2 million to support the remainder of their 2015 budgeted capital expenditures. 9. The issue of $189,180,000 will be made up of four debt issuances, 3 as follows: a five-year, $21,770,000 debenture at a forecast rate of per cent a 10-year, $3,580,000 debenture at a forecast rate of per cent a 20-year, $18,540,000 debenture at a forecast rate of per cent a 25-year, $145,290,000 debenture at a forecast rate of per cent 10. EPC s utility debt is primarily borrowed indirectly from ACFA, which is a provincial authority that acts as an agent of the Alberta Crown. ACFA s business is to provide local entities with financing for capital projects and it is able to borrow in capital markets at interest rates that would not be available to local authorities acting independently. ACFA makes loans to Alberta municipalities, school boards and other local entities at interest rates based on the cost of its borrowings. 4 EPC is able to borrow from ACFA, through The City of Calgary, because it is a subsidiary of the municipality of Calgary. 11. The funds borrowed from ACFA by EPC flow through The City of Calgary to EC in accordance with contracts between those entities, and further flow from EC to EPC in accordance with contracts between EC and EPC. ACFA accesses capital markets to borrow the money it lends, and the funds are guaranteed by the province of Alberta, which holds a bond rating of AAA by Standard & Poor s, Moody s and the Dominion Bond Rating Service. Given the AAA bond rating attributable to ACFA s borrowings, ACFA is able to borrow funds at attractive interest rates. As consideration for guaranteeing the ACFA funds in the event that EC defaults, The City of Calgary adds a 0.25 per cent loan guarantee and administration charge to Exhibit X0001, Appendix 8.1, page 54 of 64. Exhibit X0001, Appendix 8.3, page 58 of 64. Exhibit X0001, paragraph 23, page 8 of 64. Exhibit X0001, paragraph 4, page 2 of Decision D (May 29, 2015)

7 the interest rate when it lends these funds to EC, which, in turn, lends these funds to EPC with no additional charges EPC explained that the debt will be issued pursuant to a Grid Inter-company Loan Advance Acknowledgement. Pro forma Grid Inter-company Loan Advance Acknowledgements were provided in support of this application. 6 The rates of interest in the pro forma documents are shown as the forecasted rate. The actual rates of interest will be adjusted in the executed Grid Inter-company Loan Advance Acknowledgements to reflect the actual rates of interest on the date of issue. EPC will advise the AUC of the actual interest rates for each of the debentures in its next debt application EPC cited sections 253(1) and 253(2) of the Municipal Government Act, RSA 2000, c. M-26, and stated that, pursuant to the requirements of the those sections, the funds will be used for the purpose for which they are borrowed, namely EPC s regulated operations. EPC also submitted that until the funds are required for capital expenditures, it is entitled to use the funds for operating purposes and may invest those funds as long as those funds are available when required for capital purposes EPC submitted that the proposed debt issue will be made in accordance with law as required by Section 101(2)(a)(ii) of the Public Utilities Act, and included a legal opinion from Torys LLP. 5 Discussion of issues 5.1 Debt issuance and request for elimination of pro forma capital structure statement 15. In past debt applications, EPC has provided the pro forma capital structure that it would attain after the issuance of the applied for debt. EPC requested approval of the Commission to eliminate this portion of its debt applications in the future. 16. EPC stated that the test for approving the issuance of debt by a utility is well-established and does not require the Commission to consider the utility s actual capital structure. Rather, EPC must satisfy the Commission that the proposed issuances are to be made in accordance with the law and the Commission must approve the purpose of the issue. 9 EPC stated that the opinion from EPC s legal counsel demonstrates that the proposed issuances are to be made in accordance with the law, and the evidence shows that the proposed new debt will be used to finance EPC s 2015 capital additions Commission findings 17. In determining whether to grant EPC s application, the Commission must consider Section 101(2)(a)(ii) of the Public Utilities Act, reproduced in paragraphs 6 and 7 above Exhibit X0001, paragraph 5, page 2 of 64. Exhibit X0001, Appendix 7.2, page 17 of 64. Exhibit X0001, paragraph 24, page 8 of 64. Exhibit X0001, paragraph 6, pages 2-4 of 64. Public Utilities Act, Section 101(2)(a)(ii). Exhibit X0001, paragraph 19, page 7 of 64. Decision D (May 29, 2015) 3

8 Therefore, the primary focus of this review is to determine: (1) whether the proposed issuances are to be made in accordance with the law; and (2) whether the Commission approves the purpose of the issue. 18. In determining whether the proposed debt issuance is to be made in accordance with law, the Commission must be sufficiently assured that attention and effort has been given by the issuer to ensure compliance with applicable corporate and securities law and any other legal requirements pertaining to such transactions. The Commission typically requires and relies upon the opinion of the applicant s Alberta legal counsel to confirm that the public utility is authorized to undertake the issuance of the debt proposed and that the debt issuance is to be made in compliance with applicable laws. Based on the opinion provided by EPC s legal counsel, Torys LLP, dated March 27, 2015, the Commission is satisfied that due diligence is being exercised and steps have been taken to ensure that the issuance will be made in accordance with law. 19. The Commission has reviewed the application and finds that the proposed debt issue under consideration appears to be in the public interest for purposes of financing assets or activities in the operation of the public utility. 20. The Commission finds that the requirements of Section 101(2)(a)(ii) of the Public Utilities Act have been met and approves EPC s debt issuance of $189,180, The Commission does not approve EPC s request to no longer provide a pro forma capital structure with its debt application. The Commission finds a pro forma capital structure assists in the Commission s analysis to determine the purposes of the issue as long as the deemed capital structure is sufficiently similar to its actual capital structure. The Commission may revisit this finding subject to EPC filing its request to maintain an actual capital structure different from the deemed structure in the next generic cost of capital proceedings as detailed below. 5.2 Target capital structure 22. EPC requested approval from the Commission to maintain an actual capital structure that may differ from the deemed capital structure approved by the Commission. EPC stated it will continue to set its rates based on its approved deemed capital structure EPC uses the capital structure approved by the Commission for ratemaking purposes. However, EPC submitted that there is no risk or harm to either EPC or its ratepayers if EPC were to maintain an actual capital structure that differs from the deemed capital structure approved by the Commission EPC supported it s position with the following: Among other things, when determining the approved capital structure, the Commission looks at credit ratings and metrics and the actual capital structures of entities with A- range credit ratings, and awards common equity ratios that are intended to allow the utilities, on a stand-alone basis, to target credit ratings in the A- range Exhibit X0001, paragraph 13, page 5 of 64. Exhibit X0001, paragraph 11, page 5 of 64. Exhibit X0001, paragraph 14, pages 5-6 of 64. Exhibit X0001, paragraph 17, pages 6-7 of Decision D (May 29, 2015)

9 Since EPC obtains funding for capital purposes through the ACFA, EPC s actual capital structure has no impact on the interest rates it pays for debt or the rates paid by customers (since the rates are determined using the approved capital structure). This distinguishes EPC from utilities who must access debt from the markets, since a capital structure that is more highly leveraged may be considered a higher risk and could result in a higher interest rate. [footnotes removed] 25. In the IR EPC-AUC-2015APR24-002(c), the Commission questioned EPC on why it considered the appropriate place to ask for the ability to maintain an actual capital structure different from the approved or deemed capital structure was in a debt application In its IR response, EPC stated it was not asking for a change to the approved deemed capital structure approved by the Commission that is used for ratemaking purposes. Rather, as explained in the response to EPC-AUC-2015APR24-001(a), EPC was requesting that the AUC approve flexibility with respect to the actual capital structure that EPC could consider using in the future. This flexibility is available because of EPC s access to ACFA funding. Consequently, EPC considered that the debt application was an appropriate venue to make this request. Furthermore, EPC stated its view that in the periodic generic cost of capital proceedings, the Commission approves the deemed capital structure that is used for ratemaking purpose, but that it oversees the actual capital structure through the approval of long term debt pursuant to the Public Utilities Act Commission findings 27. The Commission has considered EPC s request to maintain an actual capital structure that differs from the deemed structure approved in the generic cost of capital proceeding. 27. In IR EPC-AUC-2015APR24-001(a), EPC was asked to confirm if the actual capital structure EPC wishes to maintain is lower than the approved capital structure approved in Decision 2191-D EPC s response to the IR was as follows: 18 Not confirmed. EPC s application was intended to seek approval from the AUC that would allow EPC the flexibility to consider maintaining a different actual capital structure from the approved deemed capital structure approved in Decision 2191-D As EPC would continue to use the approved deemed capital structure for rate setting purposes and funds would continue to be borrowed using the Alberta Capital Finance Authority ( ACFA ) mechanism there would be no impact on rate payers if this flexibility was approved by the AUC. 28. EPC further stated in IR response to EPC-AUC-2015APR24-001(b): However, to be clear, EPC is not willing to risk its ROE [return on equity] in return for the requested flexibility. Consequently, if the Commission is of the view that EPC must maintain an actual capital structure that is consistent with the approved deemed capital 15 Exhibit X0007, EPC-AUC-2015APR24-002, response (c). 16 Exhibit X0007, EPC-AUC-2015APR24-002, response (c). 17 Decision 2191-D : 2013 Generic Cost of Capital, Proceeding 2191, Application , March 23, Exhibit X0007, EPC-AUC-2015APR24-001, response (a). Decision D (May 29, 2015) 5

10 structure in order to be permitted a reasonable opportunity to earn the approved generic ROE, EPC will do so. 29. EPC s request involves a method to obtain a utilities return that has not been evaluated or considered in the generic cost of capital proceedings, which are the proceedings designed to consider questions of deemed capital structure and ROE, the most recent being the 2013 Generic Cost of Capital proceeding. The Commission is not able to fully evaluate and consider EPC s request given the limited scope of information in this debt application. Therefore, the Commission will not consider EPC s request to maintain an actual capital structure that may differ from the deemed capital structure in this application and instead, should EPC wish to pursue this request, it is directed to bring forward this aspect of its application to the next generic cost of capital proceeding, where it can be considered in the full context of setting a capital structure and ROE. 6 Order 30. It is hereby ordered that: (1) ENMAX Power Corporation is authorized, on or before June 15, 2015, to issue debt in the principal amount of up to $189,180,000. Dated on May 29, Alberta Utilities Commission (original signed by) Bill Lyttle Commission Member 6 Decision D (May 29, 2015)

11 Appendix 1 Proceeding participants Name of organization (abbreviation) Counsel or representation ENMAX Power Corporation (EPC) The Alberta Utilities Commission Commission Panel B. Lyttle, Commission Member Commission Staff E. von Engelbrechten (Commission Counsel) C. Strasser N. Mahbub Decision D (May 29, 2015) 7

12 Appendix 2 Summary of Commission directions This section is provided for the convenience of readers. In the event of any difference between the directions in this section and those in the main body of the decision, the wording in the main body of the decision shall prevail. 1. EPC s request involves a method to obtain a utilities return that has not been evaluated or considered in the generic cost of capital proceedings, which are the proceedings designed to consider questions of deemed capital structure and ROE, the most recent being the 2013 Generic Cost of Capital proceeding. The Commission is not able to fully evaluate and consider EPC s request given the limited scope of information in this debt application. Therefore, the Commission will not consider EPC s request to maintain an actual capital structure that may differ from the deemed capital structure in this application and instead, should EPC wish to pursue this request, it is directed to bring forward this aspect of its application to the next generic cost of capital proceeding, where it can be considered in the full context of setting a capital structure and ROE.... Paragraph 29 8 Decision D (May 29, 2015)