Comments of the Telecommunications, Gas and Water Division (TW-26)
Mail Log Nos. 213105, 214465
April 4, 2017
Page 4
Number TW-26
Date April 4, 2017
Mail Log Nos. 213105, 214465
To: W. Kevin Hughes, Chairman
Harold D. Williams, Commissioner
Michael T. Richard, Commissioner
Anthony J. O’Donnell, Commissioner
FROM: Anthony Myers, Executive Director
RE: Terrapin Utility Services, Inc. has Filed an Application for Authority to Issue Long-Term Debt in the Form of a Promissory Note with Its Parent, American States Utility Services, Inc. in the Amount of Ten Million Dollars.
Description of Application:
On February 27, 2017, Terrapin Utility Services, Inc. (“Terrapin” or “the Company”) filed an Application for Authority to Issue Long-Term Debt in the form of a promissory note with its parent, American States Utility Services, Inc. (“ASUS”) in the amount of ten million dollars.
Parties which should receive a copy of Staff Recommendations:
Terrapin Utility Services, Inc.
Office of People’s Counsel
Recommended Action (Including Conditions):
Staff recommends that the Commission grant Terrapin’s request for authority to issue $10 million in long-term debt.
______
Juan C. Alvarado, Director Leslie M. Romine
Telecommunications, Gas and Water Division Staff Counsel
Commission Action on______:
Approved______Disapproved______Accept for Filing______
cc: H. Robert Erwin Jr., General Counsel
David J. Collins, Executive Secretary
Terry J. Romine, Chief Public Utility Law Judge
Obi Linton, Director, Office of External Relations
Tori Leonard, Communications Director
COMMENTS OF THE TELECOMMUNICATIONS GAS AND WATER DIVISION
Description of Filing:
On February 27, 2017, Terrapin filed an Application for Authority to Issue Long-Term Debt in the form of a promissory note with its parent, ASUS, in the amount of ten million dollars.
Applicable Law:
Under Pub. Util. §§6-101(a)(2) and 5-203(b), a public service company that operates in Maryland may not, without prior Commission authorization, assume, guarantee, or issue an obligation or liability with respect to stocks, bonds, securities, notes, or other evidence of indebtedness of any person that is payable wholly or partly more than 12 months after the date issued. Under Pub. Util. § 6-102(b), the Commission shall authorize the public service company to issue stocks, bonds, or other evidence of indebtedness, payable wholly or partly more than 12 months after the date of issuance if the Commission finds that the issuance is reasonably required to, among other things, (1) construct, complete, improve or extend its facilities, (2) maintain or improve its service, (3) discharge or lawfully refund its obligations, or (4) reimburse money, not secured by or obtained from the issuance, that is expended for one of the forgoing purposes, within five years before the filing of the application with the Commission for the reimbursement.
COMAR 20.07.04.02 provides detailed requirements applicable to the issuance of bonds and long-term debt by a public service company. These requirements include a full description of the issuance, its purpose, the details of any improvement proposed attested to by three directors of the public service company. COMAR 20.07.04.02 also requires publication of notice of the application for issuance of indebtedness.
Background:
The Commission granted Terrapin authority to operate as a water company and sewage disposal company by Order No. 80449, issued December 14, 2005 in Case No. 9051.[1] The Company is currently in the eleventh year of a fifty-year contract with its sole customer, the United States Air Force.[2] The Company raises capital through intercompany borrowing from its parent, ASUS. The Commission granted the Company approval to issue long-term debt in the form of a promissory note with its parent on December 21, 2006[3], April 12, 2012[4], and September 4, 2013.[5]
The 2016 Promissory Note (“2016 Note”) was issued in November 2016 and allows Terrapin to borrow up to $10 million. The terms of this note require Terrapin to repay all amounts borrowed at least once every twelve months, qualifying this note as short-term debt. As of the end of 2016, the Company had borrowed approximately $8.5 million of the 2016 Note. The Company would like to extend its pay-off date to May 23, 2018, which requires Commission authorization because the effective period of the financing would be longer than twelve months.
The Company indicates in its application that it intends to use the funds to construct, complete, extend, or improve its facilities. The construction activities performed by Terrapin generally consists of the replacement of existing facilities (pipes, valves, meters, manholes, clean-outs, storage tanks, etc.) and the installation of facilities to provide service to new housing or building developments.
Analysis
The Company is seeking authority to extend the terms of the 2016 Promissory Note with its parent company, ASUS, past the current twelve-month payoff limit. In doing so, the Company must obtain authority from the Commission under Sections 5-203(b), 6-101(a)(2), and 6-102(b) of the Public Utilities Article.
In its application, the Company indicated that it is seeking funding to (1) construct, complete, extend, or improve facilities, (2) refund its obligations, and/or (3) maintain or improve service. The Company subsequently affirmed to Staff, and provided in an affidavit (Mail Log No. 214465) pursuant to COMAR 20.07.04.02.A(8), that it is only seeking funding to construct, complete, extend, or improve facilities. The affidavit also stated that due to the variety in size and scope of the activities performed by Terrapin until the time of repayment, it was not currently possible to provide specific costs of the activities. However, the Company anticipates the costs would not exceed $10 million.
Staff examined the effect that the long-term debt will have on the Company’s capital structure. The table below provides the Company’s capital structure as of December 31, 2016 (which includes the $8.5 million already borrowed against the 2016 Note) and if the Company drew all $10 million of its 2016 Note.
Terrapin's capital structureType of capital / Ratio as of December 31, 2016 / Estimated ratio after full draw of 2016 Note
Debt / 47.8% / 51.7%
Equity / 52.2% / 48.3%
Staff has reviewed the information provided by the Company and finds that it meets the applicable COMAR requirements. Staff concludes that Terrapin’s request for authority to issue $10 million of long-term debt is appropriate and reasonable. Staff recommends that the Commission grant Terrapin’s request for authority to issue $10 million in long-term debt.
Recommended Action (Including Conditions):
Staff recommends that the Commission grant Terrapin’s request for authority to issue $10 million in long-term debt.
______Tanu Pongsiri
Regulatory Economist
[1] Re Terrapin Utility Services, 96 Md. PSC 330 (2005).
[2] The Company provides water and wastewater services at Andrews Air Force Base and off-site installations in Brandywine and Davidsonville, Maryland.
[3] See Order No. 81172, Case No. 9095, In the Matter of the Application of Terrapin Utility Services, Inc. to Borrow from American States Utility Services, Inc. Long-Term Debt in the Amount of $8,000,000 and to Issue up to an Additional 900 Shares of Stock.
[4] See Order No. 84817, Case No. 9292, In the Matter of the Request of Terrapin Utility Services, Inc. for Authority to Issue Debt in the Amount of $6,000,000.
[5] See Order No. 85821, Case No. 9333, In the Matter of the Request of Terrapin Utility Services, Inc. for Authority to Issue Debt in the Amount of $5,000,000.