| (a) Purpose. This section establishes criteria to demonstrate
that an owner or operator of a retail public utility has the financial
resources to operate and manage the utility and to provide continuous
and adequate service to the current and proposed utility service area.
(b) Application. This section applies to new and existing
owners or operators of retail public utilities that are required to
provide financial assurance under this chapter.
(c) Financial assurance must be demonstrated by compliance
with subsection (d) or (e) of this section, unless the commission
requires compliance with both subsections (d) and (e) of this section.
(d) Irrevocable stand-by letter of credit. Irrevocable
stand-by letters of credit must be issued by a financial institution
that is supervised or examined by the Board of Governors of the Federal
Reserve System, the Office of the Controller of the Currency, or a
state banking department, and where accounts are insured by the Federal
Deposit Insurance Corporation. The retail public utility must use
the standard form irrevocable stand-by letter of credit approved by
the commission. The irrevocable stand-by letter of credit must be
irrevocable for a period not less than five years, be payable to the
commission, and permit a draw to be made in part or in full. The irrevocable
stand-by letter of credit must permit the commission's executive director
or the executive director's designee to draw on the irrevocable stand-by
letter of credit if the retail public utility has failed to provide
continuous and adequate service or the retail public utility cannot
demonstrate its ability to provide continuous and adequate service.
(e) Financial test.
(1) An owner or operator may demonstrate financial
assurance by satisfying the leverage and operations tests that conform
to the requirements of this section, unless the commission finds good
cause exists to require only one of these tests.
(2) Leverage test. To satisfy this test, the owner
or operator must meet one or more of the following criteria:
(A) The owner or operator must have a debt to equity
ratio of less than one, using long term debt and equity or net assets;
(B) The owner or operator must have a debt service
coverage ratio of more than 1.25 using annual net operating income
before depreciation and non-cash expenses divided by annual combined
long term debt payments;
(C) The owner or operator must have sufficient unrestricted
cash available as a cushion for two years of debt service. Restricted
cash includes monetary resources that are committed as a debt service
reserve which will not be used for operations, maintenance or other
payables;
(D) The owner or operator must have an investment-grade
credit rating from Standard & Poor's Financial Services LLC, Moody's
Investors Service, or Fitch Ratings Inc.; or
(E) The owner or operator must demonstrate that an
affiliated interest is capable, available, and willing to cover temporary
cash shortages. The affiliated interest must be found to satisfy the
requirements of subparagraphs (A), (B), (C), or (D) of this paragraph.
(3) Operations test. The owner or operator must demonstrate
sufficient cash is available to cover any projected operations and
maintenance shortages in the first five years of operations. An affiliated
interest may provide a written guarantee of coverage of temporary
cash shortages. The affiliated interest of the owner or operator must
satisfy the leverage test.
(4) To demonstrate that the requirements of the leverage
and operations tests are being met, the owner or operator must submit
the following items to the commission:
(A) An affidavit signed by the owner or operator attesting
to the accuracy of the information provided. The owner or operator
may use the Applicant's Oath adopted by the commission as part of
an application filed under §24.233 of this title (relating to
Contents of Certificate of Convenience and Necessity Applications)
for the purpose of meeting the requirements of this subparagraph;
and
(B) A copy of one of the following:
(i) the owner or operator's independently audited year-end
financial statements for the most recent fiscal year including the
"unqualified opinion" of the auditor; or
(ii) compilation of year-end financial statements for
the most recent fiscal year as prepared by a certified public accountant
(CPA); or
(iii) internally produced financial statements meeting
the following requirements:
(I) for an existing utility, three years of projections
and two years of historical data including a balance sheet, income
statement and an expense statement or evidence that the utility is
moving toward proper accountability and transparency; or
(II) for a proposed or new utility, start up information
and five years of pro forma projections including a balance sheet,
income statement and expense statement or evidence that the utility
will be moving toward proper accountability and transparency during
the first five years of operations. All assumptions must be clearly
defined and the utility must provide all documents supporting projected
lot sales or customer growth.
(C) In lieu of meeting the leverage and operations
tests, if the applicant utility is a city or district, the city or
district may substantiate financial capability with a letter from
the city's or district's financial advisor indicating that the city
or district is able to issue debt (bonds) in an amount sufficient
to cover capital requirements to provide continuous and adequate service
and providing the document in subparagraph (B)(i) of this paragraph.
(5) If the applicant is proposing service to a new
CCN area or a substantial addition to its current CCN area requiring
capital improvements in excess of $100,000, the applicant must provide
the following:
(A) The owner must submit loan approval documents indicating
funds are available for the purchase of an existing system plus any
improvements necessary to provide continuous and adequate service
to the existing customers if the application is a sale, transfer,
or merger; or
(B) The owner must submit loan approval documents or
firm capital commitments affirming funds are available to install:
(i) the plant and equipment necessary to serve projected
customers in the first two years of projections; or
(ii) a new water system or substantial addition to
an existing water system if the applicant is proposing service to
a new CCN area or a new subdivision.
(6) If the applicant is a nonfunctioning utility, as
defined in §24.3(23) of this title (relating to Definitions of
Terms), the commission may consider other information to determine
if the proposed certificate holder is capable of meeting the leverage
and operations tests.
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