ORDER NO. 99-412

ENTERED JUL 06 1999

This is an electronic copy. Appendices and Footnotes may not appear.

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

UF 4166

In the Matter of the Application of Avista Corporation for Authority to Issue and Sell Not More Than $400 Million of Debt Securities. )

) ORDER

 DISPOSITION: APPLICATION APPROVED WITH REPORTING REQUIREMENTS

On April 26, 1999, the Commission received an application from Avista Corporation (the Company), filed pursuant to ORS 757.415, ORS 757.480, and OAR 860-027-0030, requesting authority to engage in certain financial transactions. The 30-day statutory requirement to issue an order in this docket was extended by letter dated May 13, 1999.

Based on a review of the application and the Commission’s records, the Commission finds that the application satisfies applicable statutes and administrative rules. At its Public Meeting on June 22, 1999, the Commission adopted Staff’s recommendation to approve the application subject to reporting requirements. Staff’s recommendation is attached as Appendix A and is incorporated by reference.

OPINION

Jurisdiction

ORS 757.005 defines a "public utility" as anyone providing heat, light, water, or power service to the public in Oregon. The Company is a public utility subject to the Commission’s jurisdiction.

Applicable Law

ORS 757.415(1) provides that:

A public utility may issue [stocks and bonds, notes, and other evidences of indebtedness] for the following purposes and no others. . .:

(a) The acquisition of property, or the construction, completion, extension or improvements of its facilities.

(b) The improvement or maintenance of its service.

(c) The discharge or lawful refunding of its obligations.

(d) The reimbursement of money actually expended from income or from any other money in the treasury of the public utility not secured by or obtained from the issue of stocks or bonds, notes or other evidences of indebtedness, or securities of such public utility, for any of the purposes listed in paragraphs (a) to (c) of this subsection . . .

(e) *****

When an application involves refunding of obligations, the applicant must show that the original borrowings were made for a permissible purpose. Avion Water Company, Inc., UF 3903, Order No. 83-244 at 3; Pacific Power & Light Co., UF 3749, Order No. 81-745 at 5.

ORS 757.415(2) provides that:

[The applicant] shall secure from the commission . . . an order . . . stating:

(a) The amount of the issue and the purposes to which the proceeds are to be applied; and

(b) In the opinion of the commission, the [proceeds] reasonably [are] required for the purposes specified in the order and compatible with the public interest, which is necessary or appropriate for or consistent with the proper performance by the applicant of service as a public utility, and will not impair its ability to perform that service; and

(c) Except as otherwise permitted in the order in the case of bonds, notes, or other evidences of indebtedness, such purposes are not, in whole or in part, reasonably chargeable to operating expenses or to income.

The Commission believes that the proposed transaction is reasonably required for the purposes stated, is compatible with the public interest, and is consistent with the proper performance of the Company’s public utility service. The proposed transaction will not impair the Company’s ability to perform that service. The purposes of the proposed issuance are not, in whole or part, reasonably chargeable to operating expenses or to income.

For ratemaking purposes, the Commission reserves judgment on the reasonableness of the Company’s capital costs and capital structure. In its next rate proceeding, the Company will be required to show that its capital costs and structure are just and reasonable. See ORS 757.210.

CONCLUSIONS

1. The Company is a public utility subject to the Commission’s jurisdiction.

2. The Company’s application meets the requirements of ORS 757.415.

3. The application should be granted.

ORDER

IT IS ORDERED that the application of Avista Corporation for authority to issue and sell not more than $400 million of debt securities is granted, subject to the conditions stated in Appendix A.

 Made, entered, and effective ________________________.

BY THE COMMISSION:

______________________________

Vikie Bailey-Goggins

Commission Secretary

A party may request rehearing or reconsideration of this order pursuant to ORS 756.561. A request for rehearing or reconsideration must be filed with the Commission within 60 days of the date of service of this order. The request must comply with the requirements of OAR 860-014-0095. A copy of any such request must also be served on each party to the proceeding as provided by OAR 860-013-0070. A party may appeal this order pursuant to ORS 756.580.

 Appendix A ITEM NO. CA 1

PUBLIC UTILITY COMMISSION OF OREGON

STAFF REPORT

PUBLIC MEETING DATE: June 22, 1999

REGULAR AGENDA CONSENT AGENDA X EFFECTIVE DATE

DATE: June 15, 1999

TO: Bill Warren through Mike Myers

FROM: John S. Thornton

SUBJECT: UF 4166­Avista Corporation’s Application for Authority to Issue and Sell not more than $400 Million of Debt Securities

SUMMARY RECOMMENDATION:

I recommend approving the application, with reporting requirements.

DISCUSSION:

On April 26, 1999, Avista Corp. (Avista) filed an application pursuant to Oregon revised statutes (ORS) 757.415, 757.480, and Oregon administrative rule 860-27-030 for authority to issue not more than $400,000,000 of unsecured debt securities (Debentures), unsecured medium-term notes (MTNs), or convertible debt. The thirty-day statutory requirement to issue an order in this docket was extended by letter dated May 13, 1999.

Debentures, MTNs, and Convertibles (the Securities)

The Securities will have maturities ranging from nine months to forty years, and will be sold through underwriters or agents, or privately placed directly to investors with or without the use of agents. The interest rates might be fixed or floating. If the interest rates are fixed, then they will not exceed US Treasury rates plus a spread. The proposed spreads depend on the Security’s maturity and are attached as Table 1. If the interest rate is floating, then the interest rate will not exceed one of four base rates plus a spread. The spread depends on the base rate chosen, and the term of the debenture. The schedule of floating-rate spreads is included as Table 2. Underwriting fees for issuing the Securities will not exceed 1.5 percent of the aggregate issue amount. Other expenses are not anticipated.

Use of Proceeds

Avista will use the proceeds for the following purposes: the acquisition of utility property or the construction, extension or improvement of utility facilities; the improvement or maintenance of service; the discharge or lawful refunding of its obligations (such as relatively higher-coupon debt and maturing debt previously authorized by the Commission); and, refunding the company's treasury expended on utility purposes. To the extent the company's treasury is refunded, the original expenditures, or their precedents, were made for purposes described by ORS 757.415 (1) (a), (b), or (e). To the extent that obligations are discharged or refunded, those obligations or their precedents were used for purposes described by ORS 757.415 (1) (a), (b), or (e).

Avista’s application also indicates that it might sell the Securities through private placements. I recommend a reporting requirement below to help ensure that any private placements are sold at competitive market interest rates.

Avista’s authority should be valid without specific termination date as long as it maintains investment-grade bond ratings (or higher) on its senior secured debt by both Standard and Poor's Corporation (BBB+ or better) and Moody's Investors Service, Inc. (Baa1 or better).

I am also concerned that any early refundings be cost-effective. I recommend a reporting requirement below to address my concern.

Avista also indicates that the all-in spreads from Table 1 are too narrow, currently, because credit spreads are unusually large. Avista proposes a temporary all-in spread table to replace Table 1 as long as the rate on the thirty-year U.S. Treasury security is below 6.5 percent. That table appears as Table 4. The request appears reasonable.

STAFF RECOMMENDATION:

I recommend the Commission approve Avista’s application issue not more than $400 million of debt securities in the form of debentures, unsecured MTNs, and/or convertible debt, subject to three reporting requirements: (1) Avista should demonstrate that it achieves a competitive rate on any publicly offered security (such as by providing at least one MTN posting in addition to any such posting under which an MTN was issued); (2) Avista should demonstrate that it achieves a competitive rate on any privately placed security by providing a comparable MTN posting and through any other means; and, (3) Avista should demonstrate that any early refundings are cost effective. Avista should file the usual Report of Securities Issued and Net Proceeds Statements as soon as possible after each issuance and sale.

Table 1

FMB/MTN Spreads over US Treasury

Fixed-Rate Spreads

Greater Than or Equal To

  

Less Than

  

Maximum Spread Over Benchmark Treasury Yield
9 months  

2 years

  

+ 70 basis points
2 years  

3 years

  

+ 80 basis points
3 years  

4 years

  

+ 90 basis points
4 years  

6 years

  

+100 basis points
6 years  

9 years

  

+105 basis points
9 years  

10 years

  

+115 basis points
10 years  

11 years

  

+120 basis points
11 years  

15 years

  

+130 basis points
15 years  

20 years

  

+140 basis points
20 years or more      

+165 basis points

 

 

 

 

 

Table 2

Securities’ Maximum All-in Spread Over Index

Floating-Rate Spreads

Term in Years

1

2

3

4

5

6

7
Index              

LIBOR

+50

+75

+85

+90

+95

+100

+110

CP

+60

+85

+95

+100

+105

+110

+115

T-Bills

+85

+110

+125

+130

+135

+140

+150

Fed Funds

+85

+110

+125

+130

+135

+140

+150

 

Table 3

Commissions to MTN Agents

 

Range of Maturities

  

Commission (Percentage of Aggregate Principal Amount of MTNs Sold)
From 9 months to less than 1 year  

.125%
From 1 year to less than 18 months  

.150%
From 18 months to less than 2 years  

.200%
From 2 years to less than 3 years  

.250%
From 3 years to less than 4 years  

.350%
From 4 years to less than 5 years  

.450%
From 5 years to less than 6 years  

.500%
From 6 years to less than 7 years  

.550%
From 7 years to less than 10 years  

.600%
From 10 years to less than 15 years  

.625%
From 15 years to less than 20 years  

.700%
20 years and more  

.750%

 

 

 

Table 4

Temporary Fixed-Rate Spreads over US Treasury

(Valid if 30-Year US Treasury Bond Rates are Below 6.5%)

Greater Than or Equal To

  

Less Than

  

Maximum Spread Over Benchmark Treasury Yield
9 months  

2 years

  

+ 170 basis points
2 years  

3 years

  

+ 180 basis points
3 years  

4 years

  

+ 190 basis points
4 years  

6 years

  

+200 basis points
6 years  

9 years

  

+205 basis points
9 years  

10 years

  

+215 basis points
10 years  

11 years

  

+220 basis points
11 years  

15 years

  

+230 basis points
15 years  

20 years

  

+240 basis points
20 years or more      

+265 basis points