EXHIBIT 4-A
11. SECURITIZATION
11.1 Amount
California American Water agrees to finance a portion of the
MPWSP with a tax exempt securitization, set at an amount that will allow
California American Water to maintain a fixed equity investment equal to approximately
27.0% of the value of the total project costs for the desalination plant and
the CAW-Only Facilities and which allows for collections from Surcharge 2 as
defined below. Examples of calculations using this financing for both the 9.6
mgd and 6.4
mgd plant size are provided in Appendix 2.
11.2 California American Water shall have the opportunity to
invest equity in the MPWSP such that it has the opportunity to earn its
authorized rate of return. The Parties agree that California American Water will
be taking on significant risk with the MPWSP and some equity investment serves
the public interest. The securitization must allow California American Water to
maintain a fixed equity investment equal to approximately 27% of the total cost
of the MPWSP facilities upon completion of the financing. The proceeds from the
securitization need to be received by California American Water in a manner
such that State Revolving Funds (SRF) (or other long-term debt in the event SRF
is not available and equity) can be used to balance the fixed equity investment
to approximate as close as possible to the equity amount of 27% of the total
costs for the desalination plant and CAW-Only Facilities. Further, SRF (or
other long-term debt in the event SRF is not available and equity) used to pay
off any short-term debt provided by California American Water during
construction would also be available to balance the fixed equity investment
target. Examples of the sources and uses of each component of financing is referenced
in Section 15 and included as Appendix 3.
11.3 Criteria
The Parties agree that using securitization as a component of
financing for the MPWSP costs is only reasonable if the following conditions
are met:
(a) The securitization lowers the cost to customers. The Parties
agree that as a reasonable benchmark to ensure that sufficient benefits accrue
to customers, the estimated annual customer benefits must, at a minimum, exceed
1.0% of the total annual revenue requirement for the MPWSP facilities.
(b) The securitization does not adversely affect other
California American Water customers within California American Water’s other
service areas outside of the Monterey County District. Securitization shall
only be used to finance the costs of the desalination plant and CAW-Only
Facilities so long as it will not negatively impact the credit ratings of
American Water or its affiliate American Water Capital Corporation, or in the
event that California American Water is a stand-alone entity, then so long as
the securitization will not negatively impact the credit ratings of California
American Water, computed as a standalone entity. This will be determined by the
letters from the ratings agencies provided for below.
(c) The securitization does not require a separate California
American Water-specific credit rating.
(d) The securitization does not change California American
Water’s debt to-equity ratio for the portion of the MPWSP costs not financed
with securitized funds. Excluding the
securitization amount and any equity related to California American Water’s investment
in the Special Purpose Entity (“SPE”), California American Water will balance
the remaining MPWSP costs with debt and equity at its authorized ratio.
California American Water’s currently authorized debt-to-equity ratio is 47% to
53%.
(e) The securitization does not change California American
Water’s authorized rate of return on equity. California American Water’s
currently authorized rate of return on equity is 9.99%.
(f) The securitization does not materially delay the MPWSP. The securitization
amount must be available in a manner to allow for SRF (or other long-term debt in
the event SRF is not available and equity) to be used to balance the equity
target as discussed in Section 11.2.
(g) The securitization does not create a taxable event for
California American Water. The tax impacts of securitization must be considered
as part of the customer benefit analysis determination and must be recoverable
in rates. The Parties agree that there shall be no adverse tax implications
that might accrue to the Monterey County District or other California American
Water customers.
11.4 Implementation
(a) To implement the securitization, California American Water
will establish a SPE, which will issue debt that will be purchased by the
public agency, which in turn will issue financing. The public agency will issue
the financing through “Water Rate Relief Bonds” and lend the proceeds to the
SPE. California American Water will sell to the SPE a property right consisting
of the right to impose, collect, and adjust from time to time a non-bypassable
charge to California American Water customers. The sale of the property right
by California American Water will be a true sale for bankruptcy purposes. The
payment of principal and interest on the Water Rate Relief Bonds are provided
for through the non-bypassable charge received by the SPE and remitted to the
public agency for payment of principal and interest on the Water Rate Relief
Bonds.
(b) The securitization will be non-recourse to California
American Water and a default of the bonds will not be a default of California
American Water.
(c) The securitization will be of a long-term nature (20-30
years), with a preference for 30 years.
(d) Under Rev. Proc. 2005-62, California American Water will be
required to capitalize the SPE. California American Water will capitalize the
SPE at the minimum amount that is required to have it accounted for as a
legally distinct entity and to provide reserves as needed. The amount of
capitalization is expected to be approximately 1% of the Water Rate Relief
Bonds. California American Water will place this amount in rate base and will
earn interest on the amount at California American Water’s then-authorized rate
of return.
(e) Securitization will require authorization from the
California legislature and a financing order from the Commission. The
legislation will authorize the creation of the property right to impose,
collect, and adjust from time to time the non-bypassable charge to California
American Water customers sufficient to pay off the securitization. The
legislation will authorize the Commission to issue a financing order to enable
the financing.
(f) There shall be automatic true-up adjustments of the
securitization surcharge, as necessary, to ensure sufficient funds for the
timely payment of securitization principal, interest, and related costs. The
Parties agree that such adjustments shall be done through a Tier 1 advice
letter.
(g) The public agency will secure the legislation from the
California legislature for the securitization. The public agency will structure
the financing and obtain the necessary documentation. The public agency will
obtain the rating for the financing and arrange for sale of the debt.
(h) The public agency will endeavor to structure the
securitization in a manner that will permit California American Water to avoid
significant cash management costs. The Parties shall pursue a system of cost
management approach that satisfies the requirement of securitization without
resulting in excessive costs.
(i) California American Water will file an application with the Commission
for a financing order pursuant to the legislation. To the extent necessary, California
American Water will establish any internal financial separation systems
required for the securitization. Any costs that are necessary will be added to
working cash and recovered as set forth below.
(j) In the course of having the bonds rated by Standard &
Poors and Moody’s ratings agencies, the public agency will request a letter
from each of the rating agencies that will affirm that the securitization will
not negatively impact the credit of California American Water, as a stand-alone
entity, or American Water.
(k) The public agency agrees to provide a legal opinion that the
proposed securitization does not create a taxable event for California American
Water.
11.5 Use of Proceeds and Recovery of Costs
(a) The
proceeds of the securitization will be used for the following:
(i)
Financing the MPWSP at the agreed-upon level.
(ii)
Reimbursement of public agency fees and expenses associated with
securitization.
(iii) California
American Water will be reimbursed for all fees and expenses it incurs as a
result of the securitization effort, including carrying cost on such fees and expenses
at the actual cost incurred to fund such efforts (as referenced in Section
14.3). The reimbursement will occur at the time the securitization is funded.
(b) If the securitization is not successful, California American
Water may recover all of its reasonably and prudently incurred costs related to
the securitization from customers in the Monterey County District. California
American Water will track its securitization costs as debit entries in a new
subset of the Surcharge 1 memorandum account until such time as the Commission
approves the Surcharge 2 project collection memorandum account, at which time
the expenditures will be offset against the Surcharge 2 collection portion of
the project construction cost memorandum account.
(c) If California American Water is shown to have been
negatively impacted by the securitization at any time over the amortization
period of the bonds, California American Water may seek a determination of the
impact in the Cost of Capital or other applicable Commission proceeding and may
recover the cost of the negative impact from the customers in the Monterey
County District. If California American Water is shown to have been negatively
impacted by the securitization at any time after the issuance of the bonds but
over the life of the bonds, California American Water may seek a determination
of the impact in the Cost of Capital or other applicable Commission proceeding
and may recover the cost of the negative impact from the customers in the
Monterey County District.
11.6 Contingency
(a) If the public agency is unsuccessful in obtaining a
tax-exempt securitization, the public agency may pursue an alternative form of
public agency contribution (Proposition 218 process) if such contribution is
feasible, will result in lower costs to customers, and will be accomplished to
meet all of the requirements of Section 11.1 through 11.5.
(b) However, understanding the urgency to finance, construct and
bring the desalination project on line, California American Water stands ready
to provide long-term debt financing (either through American Water Capital
Corporation or the California Pollution Control Financing Authority, whichever
is lowest cost to customers) and equity financing.
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