20181019Decision Memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER RAPER
COMMISSIONER ANDERSON
COMMISSION SECRETARY
COMMISSION STAFF
FROM:BRANDON KARPEN
DEPUTY ATTORNEY GENERAL
DATE: OCTOBER 19,2018
SUBJECT: AMENDMENT TO QUESTAR GAS AND DOMINION RESOURCES
MERGER AGREEMENT; CASE NO. QST-G-16-01.
In August 1990 the Commission issued Order No. 23282 granting a Certificate of
Public Convenience and Necessity to Questar Gas Company's predecessor, Mountain Fuel
Supply Company. The Commission's Certificate authorized Questar to serve customers in
Franklin County with natural gas utility services. Id. Order No. 23282 also approved "a
regulatory service contract" with the Utah Public Service Commission pursuant to ldaho Code $
61-505. This section allows the Idaho Commission "to contract with regulatory agencies of
neighboring states . . . [to] set rates and charges for customers in Idaho located in or nearby
border communities served by utilities principally located in" neighboring states. The Idaho
Commission found in its Order approving the contract:
that the provision of utility service to small border communities by a willing
out-of-state utility can be facilitated by entering into a regulatory service
contract with a regulatory agency of the neighboring state in which the utility
has greater presence. Such contracts reduce the regulatory costs to the utility
and enhance the expansion of [utility] service across state boundaries.
Order No. 23282 at 3. On October 19, 2016, the Commission issued Order No. 33628
acknowledging a merger of Dominion and Questar. Pursuant to the provisions of the regulatory
service contract with the Utah Public Service Commission, Idaho Commission Staff participated
in the Utah proceedings, and, at with this Commission's approval, signed the settlement
stipulation approving the merger
In2017, the federal government passed the Tax Cuts and Jobs act of 2017 (Act), that
contained certain tax reforms that have affected the merged Company's operations, including a
IDECISION MEMORANDUM
reduced tax rate, and the elimination of bonus depreciation. Amended Settlement Stipulation at
l-2 (attached). As a result of those changes, Moody's Investors Service changed its rating
outlook for the Company from "stable" to "negative." Id. ln an effort to avoid a rating
downgrade, the Company requests approval to modifu the merger Settlement to allow it to issue
additional equity beginning December 2018. This plan may require the Company to exceed a
common equity percentage of total capitalization above the 55Yo cap set forth in the Settlement.
Accordingly, the Company now seeks approval to modiff the Settlement Stipulation
to change the equity cap language to allow the Company to exceed the 55Yo cap. Id. The
modification includes a provision that the Company will work to maintain equity levels that are
within a range "of a basket of A rated peers," or specify specific factors why it is not within that
range. 1d. These provisions are aimed to keep the Company's credit rating, save customers from
paying for higher cost debt, while also "honoring the original intent of the Settlement Stipulation
and holding customers harmless." Id. at2-3.
STAFF RECOMMENDATION
Staff has reviewed the proposal and agrees with the Company's plan. Staff thus
requests Commission approval to sign onto the modified stipulation.
COMMISSION DECISION
Does the Commission wish to approve Staff s request to sign onto the modified
Settlement Stipulation?
ttornev
I:\Legal\GASZZZ_CLOSED GAS\QST\Memos\QSTGl60l_bk3 doc
2DECISION MEMORANDUM
STIPULATION TO MODIFY COMN{ISSION ORDEIT IN
DOCKET 16-057-01 AND APPROVE AME,NDED SETTLEMENT STIPULATION
Pursuant to Utah Code Ann. $$ 54-7-1 and 54-7-14.5, and this Commission's Order
Memorializing Bench Ruling Approving Settlernent Stipulation, dated September 14, 2016, in
Docket No. 16-057-01 (Merger Order), Questar Gas Company dba Dominion Energy Utah
(DEU, Questar Gas, or Company); Dominion Energy, Inc. (Dominion); the Utah Division of
Public Utilities (Division); the Utah Office of Consumer Services (the OCS); the Utah
Association of Energy Usels (UAE); the American Natural Gas Councii, Inc. (ANGC); and the
State of Utah, Governor's Office of Energy Development (collectively Parlies or individually a
Par-ty) subrnit this Stipulation (Stipulation) requesting that the Courmission enter an order
modifying the Merger Order to approve an amendment to the Settlement Stipulation (Settlernent
Stipulation) in Docket No l6-057-01, as discussed in more detail below. The amendment of the
Settlement Stipulation sliall be effective upon the entry of a final order of approval by this
Commission (Commission or Utah Comrnission).
BACKGROUND
On August 15,2016, the Parties entered into the Setllement Stipulation in Docket
No. l6-057-01. On September 14,2016, the Utah Commission issued the Merger Order in
which it approved the Settlement Stipulation. The Merger Order became final on October 14,
2016. ln 2017 , the federal government passed into law the Tax Cuts and Jobs Act af 2017 (Act).
Ihe Act provided for certain tax reforms, including changes that have affected DEU's
operations. One unintended consequence of the Act is that it has put pressure on the DEU's
credit metrics. Specifically, on January 79,2018, and in response to the Act, Moody's Investors
Service chmged its rating outlook for 24 regulated utilities and utility holding companies from
'ostable" to "negative." DEU was one of these 24 utilitics.
The Act caused the statutory tax rate to be reduced from 35Yo to 2lo/o and eliminated
bonus depreciation. These two changes have in tum reduced the amount of cash collected from
customers, and put negative pressure on credit metrics. The Funds From Operations (FFO)
metric, which measures the cash flow divided by debt, has been particularly impacted by the
Act. A deterioration of this and other credit metrics could result in a downgracle in DEU's credit
ratings, which would in turn result in a higher cost of debt for the Company and its customers.
In an effor-t to improve DEU's credit metrics in response to tirc Act, the Company
believes it necessary to issue additional equity to replace debt to hopefully avoid a credit
dorvngrade. It is anticipated that these additional equity infusions will begin Decernber 2018.
This action may require the Company to issue equity in an amount that would put its common
equity percentage of total capitalization above the 55% cap set forth in Paragraph 23 of the
Settlement Stipulation that was approved by the Merger Order.
Accordingly, in an effort to avoid a credit downgrade, while honoring the original intent
of the Settlement Stipulation and holding customers harmless, the Parties agree that Parugraph23
of the Settlement Stipulation should be amended as set forth belor.v and request that the
Cornmission enter an order modifying the Merger Order.
1. The Parties proposed that Paragraph 23 of the Settlement Stipulation be
stricken in its entirety and replaced with the following language:
Dominion tfuough Questar Gas will provide equity funding, as needed, for the first
four calendar years following the Effective Time, in order for Questar Gas to maintain
an end-of-year common equity percentage of total capitalization in the range of 48 to
55 percent through December 31,2019. If, during the first four calendar years
-2-
follolving the Effective Time, Questar Gas increases its common equity percentage of
totaf capitalization above 55Yo to maintain credit metrics, the equity percentage of total
capitalization proposed by Questar Gas in its first general rate case after the Effective
Time shall not exceed 55%. ln the second general rate case following the Effective
Time, Questar Gas will work to rnaintain and plopose equity levels that are lvithin the
equity level ranges ofa basket ofA rated peers. Ifit proposes an equity level
above the equity level ranges of a basket of A rated peers, it must specifically identify
factors unique to Questar Gas that prevent being within that range. The Parties do not
intend that allowing equity capitalization at or abovc 55olo creates any presumption
that the outcome of a general rate case rr,'ould allor,v equity capitalization at or above
55%.
2. All other provisions in the Settlernent Stipulation remain in effect and are
binding upon the Parties.
3. The Parties agree that this proposed amendment to the Settlement Stipulation
and an order modifying the Merger Order to adopt this change is in the public interest and is just
and reasonable in result.
4. The Parties agree that, within 45 days after execution of this Stipulation, DEU
will prepare and file a Petition to Modify Commission Order with the Utah Commission, seeking
approval of the above amendment to the Settlement Stipulation.
5. DEU and the Division, will, ancl the other parties may, make one ol'rllore
witnesses available to explain and support this Stipulation to Modify to the Commission. Such
u,itnesses lvill be available for examination.
6. T'his Stipulation to Modify may be executecl by individual Parties tllough two
or more separate, conformed copies, the aggregate of which will be considered as an integrated
instrument.
-3-
RESPECTFULLY SUBMI'|'I'ED :
--,
20
of Public Uttlities
Questar Gas dba Utoh
\.u
Dominion Inc.
Energy
4 ,, 1 \-2, ,,r-r>r7vJ rri i L.t
Arueric'ait Nattrril cat Ciauiiil, iii.
State of Utah, Governor's Ofice of Energt
Development
-4-
I
i'/.n
)t
Idaho Ptblic Utilities Contmission Staff
-5-