Alright. Let's go ahead and go on the record. Good morning, everyone. Welcome to the Arizona Corporation Commission. This is the time set for the hearing in the matter of the application of Arizona Water Company pursuant to ARS sections 40 dash two eight five, 40 dash three zero one, and forty dash three zero two for authority to issue long term debt securities in an amount not to exceed $100,000,000 and to pledge its assets in connection therewith. The docket number is WDash01445ADash25Dash0191.
Administrative law judge Charles Haynes have been assigned to proceed preside over this matter, and I'll start by taking appearances of the parties beginning with the applicant. Thank you, your honor. Megan Grable from Osborne, Maladon on behalf of Arizona Water Company. With me at council table is its vice president and general counsel, Robert Speer. With me in the audience is its president, Fred Schneider, its CFO, Kevin Rogers, and I believe remotely participating is mister Nick Liu, the vice president of regulatory. Okay. I don't see anybody inside the at least online, I don't show anybody else being in here. So Right. If he's he's on the way if if we're expecting him are are you expecting
him? He did say he would participate, but we can proceed without him. Okay. Alright. He might pop on. Alright. And we on behalf of the utilities division. Sean Botkin on behalf of the utilities division. And with me, I have Travie Fan from the utilities division as well. Alright. Very good. Thank you, everybody. And to start with, are there any procedural matters that have cropped up since we had the procedural conference only a couple of days ago? No? No. Alright. Very good. Alright. In that case, now is the time for public comment. Is there anyone present who would wish to provide comment with regard to the application before us this morning? Alright.
Hearing no takers, let the record reflect there was no one who wished to provide comment with regard to this application this morning. Okay. On to opening statements. Miss Grable or mister Speer? Thank you, your honor. This matter concerns, among other things, Arizona Water's company's application for authority to incur 100,000,000 in long term debt over a period of six years and the waiver of the statutory limitations on short term debt issuances. The company would very much like to thank commission staff for the time they spent working on this financing application and for the staff report, which the company supports in all but one respect,
the recommendation to place an interest rate cap on short term borrowings. The company and staff discussed that issue after the staff report was docketed, and staff has agreed to remove the recommendation. As a general matter, the company does not support placing interest rate caps on any debt issuance, but but has agreed to the cap on long term debt issuances here to be consistent with the company's last financing authorization. Placing a cap on short term debt borrowings, however, is concerning for three reasons. First, unlike long term debt, which has a fixed interest rate, short term borrowings have variable interest rates that change daily, and the company has no control over what that rate will be on any given
day. The interest rate could be below the cap on a Friday and above it on a Monday, and the company would not be able to timely cure any lack of compliance with the order. Second, an interest rate cap is intended to protect share customers rather from high interest rates. But Arizona Water's short term debt is not included in the company's capital structure for rate making purposes, so it has no rate making impact that would raise debt costs for customers. Simply put, a cap on short term debt for these reasons does not serve the purpose of the cap. And finally, placing an interest rate cap on short term debt is inconsistent with the commission's last
financing authorization for Arizona Water Company, which only capped the the interest rate on long term borrowings. For these reasons, we respectfully ask that his honor issue a recommended opinion and order that adopts the staff report's recommendations except for the interest rate cap on short term debt. And this request will be supported at the hearing today by the testimony of mister Fred Schneider, the company's president. Thank you very much. Thank you. And mister Bodkin? Not a lot to add, judge Haines. We agree it's been a pleasure to work with the applicant, the staff also agrees that short term, a short term interest rate cap would probably be inappropriate in this situation.
Financing rates are very fluctuating quite a bit right now, interest rates seem to be going all over the place and we do want the applicant to be able to secure short term debt and appropriately convert it to long term debt when appropriate. Thank you. Alright. Thank you. In that case, miss Greg, do you wanna call your first witness? Yes, your honor. Thank you. I call mister Fred Schneider. Thank you. Do you solemnly swear or affirm that the testimony you're about to give will be the truth, the whole truth, and nothing but the truth? Yes. I I do. Thank you. Good morning. Good morning. Please state your name and business address for the record.
Frederick Kenneth Schneider. And the business address is 3805 North Black Canyon Highway, Phoenix, Arizona 85015. By whom are you employed and in what capacity? I'm employed by Arizona Water Company as its president and chief operating officer. You should have before you a notebook containing two exhibits marked a one and a two. Do you see those? Yes. What is exhibit number a one? Here's a copy of our application. Was exhibit a one prepared by you or under your direction and control?
Yes. It was. Exhibit a one contains pre filed testimony of Fred Schneider, yourself, and Kevin Rogers. Do you adopt mister Rogers' testimony as your own today? Yes. I do. Are the contents of a one, including the attached testimony, true and correct to the best of your knowledge? Yes. It is. And please describe exhibit a two. A two is, Arizona Water Company's response to staff's report. Was exhibit A2 prepared by you or under your direction and control? Yes it was. Are the contents of A2 true and correct to the best of your knowledge? Yes. Thank you. At this time I'd like to move to admit exhibits A1 and A2.
Is there any objection to the admission of either exhibit A1 or A2? No, Judge. Alright. Exhibits A1 and A2 are hereby admitted. Thank you. Mr. Schneider, please briefly summarize the company's requests contained in the financing application Exhibit A1. Yes. As among other things, there are five things that we're seeking, generally. An increase, the approved long term debt authorization by $100,000,000 and up to six borrowings over a six year period, approve the ability to refinance, renew, reissue,
rollover, repay, redeem and refund existing long term debt of $145,000,000 obtain short term debt in excess of the statutory amount and the time limit over the six year period be able to refinance, renew, reissue, rollover, repay, redeem, and refund short term debt from time to time within that six year period, and to be able to fully refinance, refund and repay the short term debt within the six months by obtaining long term debt in an accurate amount of $100,000,000
not to exceed $100,000,000 excluding interest and charges. Thank you. Had to write that down. There's a lot of stuff packed in there. Why does the company need the additional fine debt financing authority? To help fund the, utility plant improvements that we have planned for the company over the next six years. And why is $100,000,000 the appropriate amount to request for the six year period? Based on our what our projections are for the next six years of our construction budget, we think that gives us enough breathing room to make sure that we can fund all of those improvements with a combination of equity and debt.
Why does the company need flexibility relating to short term debt borrowing? So flexibility in two fold. First, we need the ability to exceed the 7% cap, which is currently just over $20,000,000 Generally, when we go out for borrowings for long term debt, the investors who buy that debt, generally life insurance companies, have a requirement of they like to see purchases of $30,000,000 to $40,000,000 So what we like to do is be able to accrue enough short term debt so that when we go to the market,
we can go to the market with say a $30,000,000 or $40,000,000 bond and then in turn pay off that debt and not necessarily get stuck with a bunch of cash just sitting at the bank. And then generally to get that large amount of short term debt, we generally will be borrowing for more than a year. And currently without this provision we'd have to pay all of our short term debt within back within twelve months. So those are the two provisions. Thank you. Does the company propose that its short term debt financing, should be included in its capital structure? No, we do not.
Why not? Generally, it's not included because it is highly variable from time to time, but also, by not having it excluded having it excluded allows us, the dollars that are necessary when we go out for debt to be able to pay those interest payments until such time as that debt can get rolled into our rate cases. So it is only the debt cost on the company's long term borrowing that makes it into the company's capital structure. Is that correct? That's correct. Only long term debt. Thank you. Are the company's requests in this financing authorization related to short term debt similar to what the commission office authorized for Arizona Water in its last finance financing application?
Yes. It is. And does commission staff recommend approval of the request that Arizona Water made in this current application? They do. They did make some recommendations, however. Correct? That is correct. They made some recommendations, of which we support with staff. Some of them so for the most part, we've accepted all of those exceptions. The only one that we ultimately did work through is the, cap on short term debt. And why does the company disagree with staff's recommendation in the staff report anyway to apply an interest rate cap on short term borrowings? As we stated earlier, it's highly variable. It's not something we can control.
The market can change quite suddenly and to be out of compliance with the commission order is a nonstarter for us. We're always looking to be compliance. But then more fold is once we exceed that amount, we cannot issue any more short term debt, which means we could not continue to fund the construction that we have ongoing and then bring all of our processes and construction to a standstill. There's also no rate making impact for customers associated with the interest rate on short term debt, correct? Correct. All of the short term, interest that is paid is is borne by our shareholders not by the customers.
Did the company talk to staff about its position on the recommendations? Yes we did. How did staff respond? We had a few discussions with them and I believe once we, kind of made our case and explained, the things I described as well as, you know, what the costs are borne by our shareholders and not the customers, staff was in agreement with removing the short term interest rate cap. Thank you. The company's application seeks an order, in this matter by 03/31/2026, which is this month. Is that still the company's request? No. It is not. In looking at our construction budget and our investments,
we believe we have more time before we need a decision and we can probably wait till say June or July before we have a final decision by the commission. Do you have anything else you'd like to put on the record today? No. I do not. Thank you. Witness is open for cross examination. Alright. Thank you. Any questions for this witness? Oh, you're right. Just one question. Can you elaborate a little bit more on the process of how the shareholders pay for the interest on short term debt? So basically, it comes out of our, our return on investment. So we pay out a dividend, the balance is retained earnings and then that is then funded out of the retained
earnings the company would otherwise have. So the costs are not paid by the customers, they're all paid by our shareholders. Your Honor. Alright, thank you. Good morning. Morning Judge. So just to be clear so I have it all in one place, the company is okay with the rate interest rate cap for the long term debt correct? Yes, we generally prefer not to have that because we don't control it but I believe we have a very good process worked out with staff. When there is a cap and there's an issue we've been pretty quick to meet with staff, resolve that and get something in front of the Commission for approval.
So I think generally we've found a way to make that work fairly well. Okay. In terms of the Short Term Debt, I gathered all the reasons you pointed to why you're not interested in it for the market volatility going on with interest rates. I get that. Why is that not something that can be addressed simply by setting a higher cap? I did note in the staff recommendation it's set the same cap for both. Why can't it be just a higher cap for the short term debt? The challenge is that this decision goes on for six years and none of us have a crystal ball to know what's going to happen over the next six years.
Most of us recall what happened in the financial crisis, 2007, 2008, 2009, where things changed quite dramatically. I don't think we ever anticipated what just happened over the weekend. So those things can have an impact on the market. And again, if the rates exceeded the threshold, we would have to cease and desist all borrowing which means we couldn't pay any of our contractors monies that are due for construction and basically bring us to a standstill. You're generous just going back to the o eight time frame. I was thinking, like, the nineteen eighties when, you know, you had the 18%,
you know, things like that. So, okay. So but but I mean, to my mind, I'm looking at things like the the revolving line of credit, other things, those kinds of short term debt instruments. You get closer to being more like a credit card in that sense. Is that you would agree with that? It's similar. I mean, it's set on a market. I mean, a credit card is generally arbitrarily set by the credit card company and we know how those can be sometimes well overboard. Ours are not. Ours are based on the federal overnight, I don't know the exact term, federal overnight rate.
I actually wrote it down. So like LIBOR or something? No. So the LIBOR is what we used to use. It's been replaced, by the Federal Government. It's called the Federal Reserve Bank Secured Overnight Bank Financing Rate. So instead of LIBOR, now we have this really long name. So it's set on that plus 150 basis points. So it's set by the federal government, not by some individual, you know, party that is, like your credit card company. Okay. Well, I mean alright. Why why have a short thing when you could have a long one? But to the point,
though, that I'm getting at was that even with, like, a credit card, I mean, they may have a a cap on it, like an APR cap of, like, you know, say, something ridiculous, like eighteen, nineteen, 20%, whatever. I I I'm that that's what I'm asking is why can't it just be just a very large interest rate cap? I guess you could have our interest rate cap if you set it high enough but the same thing would happen if for some reason 1980s happen all over again and we hit that cap we would have to bring all of our construction to a standstill. Contractors would literally pull off the job that day because we could not incur any
more costs and because we couldn't pay our bills, may not be able to make full payroll, and you have construction jobs that have traffic control in the middle of major intersections and the contractor just has to leave the job site. And in terms of the the shareholder impact versus the rate payer impact, in any event you would agree that even with the long term debt there's no ratepayer impact until you've actually incurred the debt and you're in for a rate case at that time. Correct? Correct. And a finer point, we have to come in for three different rate cases because we're kind of set up in this group. So it would take a period of time for all those costs to actually be
rolled into rates and then borne by the customers. By group you're talking about the Northern Group, Western Group, Eastern Group? That's correct. We have the three groups, yes. And with regard to the Short Term Debt not having a ratepayer impact, I'm not sure I followed whether that was something that's inherently because of the Short Term Debt or because of the arrangement that you've made that you're going to absorb the absorb the short term debt. And then once you've accumulated a large enough body of short term debt to replace it with a long term debt so that you maybe I I'm gonna say what
I understood you to be saying, and you tell me if I've accurate we captured it. You wanna pile up enough short term debts that you can go with a package of debt and go to the market and say, this is what I wanna get paid off with a long term debt. Correct? That is correct. Yes. Okay. And so this is this isn't something inherently because of short term debt. That's not why it's not going to the rate payers because this is how you plan to to structure this. That's correct. And because it's not included in our capital structure of our rate cases, therefore it's not included in any of our cost of service or our revenue requirements,
so it's not borne by the customers. Alright. And so that's why you need the waiver on the one year time frame on the short term debt because you could have some of these dispersals could be going the full length of the six years. Right. I mean we may have short term debt for say two years before we finally are ready to go to the market and we have to have that exception beyond the twelve month period. Okay. And it could be coming in, in batches. That's correct. And generally as we're able to, we'll pay our short term debt down over time and then it'll rack back up
over time. So it does change week by week as monies are doing for construction or as we have revenues to pay it off, we'll pay that debt down if we can. One thing I did note inside the application speaking to this point of the interest rate caps and very clear unenthusiasm for for rate caps, and you and inside the application, it mentions that, I think it's on page four, it mentions that the company doesn't borrow long term from affiliates, so you have no control over the interest rates that you get. Do you recall that or does that sound familiar to you? That is correct.
Yes. Just because the distinction was made about from Affiliates, so is the short term debt potentially from Affiliates? It can be. We have an agreement with our parent company to borrow on a short term basis. It is generally about 25 basis points lower than the rate of which we borrow from BofA. But, yeah, we may borrow from affiliate for a month or two. At some point, they may need that money back. We would then borrow from BofA and pay that short term debt back to our affiliate. So there is and it's just highly variable from month to month. Alright,
I think that's all the questions I had with regard to the debt component. So there are two questions I had for staff but on the off chance you might be able to answer them for me because these are so small and I just don't want to belabor this if at all necessary, you have had an opportunity to review the staff report, yes? Yes. So one thing in there that I noticed in the staff report it mentions with regard to the analysis there's a table there on the debt that's labeled the loan surcharge amortization. I just want to be clear there's no loan surcharge being requested for authorization in this, correct? There is not.
Okay. And the second one I alluded to during the procedural conference, it had to do within the engineering report. There was a table showing the compliance status of the company with regard to ADWR and ADEQ. Yes. You saw I mentioned that? Yeah. And they mentioned a system, Northern Group Forest Town and it's it just has not NA for not applicable for every category across the board including a location. Is there is there something unusual about that or is that something I'm gonna have to follow-up with staff to figure out what's going on?
The unusualness of it is very small and is not regulated by, DWR and DEQ because of its size. I think there's, like, seven connections. So it's just a really small system and there is no compliance requirement in essence. I see. Okay. Alright. That's that's very helpful. Alright. I think that's all the questions I have for you. Yeah. Alright. Unless there's anything additional from staff that you no. You're You're good. Any redirect? Just a couple questions, your honor. Mister Schneider, outside of preparing to borrow long term, does Arizona Water normally use short term debt,
as part of its day to day cash plan and operations? Yes. Part of our our daily operations will we don't use it to to pay expenses, but we use it to fund construction. Okay. So the company doesn't use short term debt as a credit card? No. No. Okay. And with respect to the long term debt cap, does the company, request the ability to come in quickly if needed to adjust the cap the cap if market conditions require that? Yes. We request that. But I would say staff has been very open to those discussions. So we prepare them when we go out to the market if we think there
may be an issue with the entry cap. We usually brief staff before we go out and then once we have that quote from the entity we're planning to borrow from, we come back and review that with staff and they've been very, supportive and favorable to those discussions. Thank you. No further questions. Alright. Thank you for your testimony. Thank you. Alright. And you're done for the company? Sorry, your honor. Yes. That's it for the company. Alright. Thank you. Mister Bodkin, are you ready to call your first witness? Yes, sir. We'd like to call Travie Phan to the stand. Do you solemnly swear or affirm that the testimony you're about to give will be
the truth, the whole truth, and nothing but the truth? Thank you. I need to punish you. I I've looked for one. I don't even know if there's one. Do we have anything? Alright. Try to stay up there. Alright. Well, good morning. Could you please state your name and your business address for the record? My name is Jaffee Fan. The business address is 1200 West Washington Street, Phoenix, Arizona 85007. And could you please state who you're employed to and what your role is? I work for Arizona Corporation Commission, and I am the utility financial analyst.
Alright. Could you, do you have exhibit s one in front of you? Yes. I do. Can you tell us what that exhibit is? What you're asking me? What what what what is that? What is exhibit s one? S one. Hold on. Is that the staff report that you prepared? Yes. I did. So you you that report was prepared by you or under your direction. Correct? By me. By you. Okay. Quick question about that report. We were talking a little about short term rate caps. Did staff originally propose a short term interest rate cap for the company? Yes. Does staff still believe that a short term interest rate cap is appropriate for the
company? No. Can you tell me why? The short term business loans are priced based on prime rate. So, the prime rate is currently, right now, prime rate is 6.755%. So if the rate is set too close to the grant, the lenders have little room to account for risk. K. So, is staff now the position that the cap for short term interest rate should be
removed, but not for long term interest rates? Yes. Would, if if a short term interest rate cap was instituted by the commission, what do you think an appropriate short term interest rate cap would be? If we have to set the rate cap, I think it's a 9.790.75%. Yeah. Because right as as 02/26/2026, the current prime rate is 6.75%. So the lender needs, the risk
risk for the rate add on that. Okay. At this point Judge, I'd like to ask to admit exhibit S1. Alright. Is there any objection to the admission of exhibit s one? No, your honor. Alright. Exhibit s one is hereby admitted. Do you have anything you would like to add at this point regarding the exhibit or your testimony? No. No further questions, your honor, and she is open for cross examination. Alright. Very good. Any questions for this witness? Thank you, your honor. Just one question. First of all, thank you so much for your work on this staff report. You testified just now that we're an interest rate cap to be applied to short
term debt. You recommend 9.75%. Is that correct? If I have to. That's not your recommendation. Correct. If if the market were to jump and the prime rate exceeded 9.75%, how would the company cure its lack of compliance? Can you repeat the question again, please? Certainly. If there is a 9.75% interest rate cap on short term debt and the interest rate unexpectedly jumped to 10% and the company you know, without the company's ability to control it, how would the company be able to cure its lack of compliance with that short
term debt interest rate cap? That's the reason why staff removed the rate cap on short term debt. Thank you very much. No further questions. Good morning, miss Pan. Good morning. Just out of curiosity, what is the 9.75? How does that compare to the last, approved rate of return or, excuse me, like, return on equity for the company if you know if you know? Could you please repeat the question again? Sure. In the company's last rate case or currently pending rate case, do you happen to know, if you do,
what the return on equity they've asked for? No. I don't. Okay. You would agree that generally debt is supposed to be cheaper than equity though. Correct? I cannot answer the question right now. Okay. Okay. That's fine. With regard to the interest rate caps, so just to be clear, and so I got it out of view as well. So staff is still recommending the 7.25 for long term debt. Debt. Correct? Yes. Staff is not recommending any interest rate cap on the short term debt at any rate. Correct. Yes. No cap rate for short term debt. Alright. And you were present earlier for the testimony of mister Schneider?
Say it again, please. Earlier this morning when mister Schneider was testifying, were you in the room and and listening to his testimony? Yes. Okay. I asked him a couple of questions with regard to loan surcharge amortization table. Do you recall that? Yes. You'd agree there's no loan surcharge being requested here? We do, but I don't think it's related. Okay. Is it okay. So so just to the extent that it said loans are charged on the table, that's just a template? Correct. Okay. And you would also agree with the characterization with regard to the Forest Town system
that mister Schneider gave? Say it again, please. The testimony that mister Schneider said earlier that Forest Town, that system is so small, it's not regulated. You agree with that or you have no disagreement with it? No. I don't know about that. Okay. Alright. With regard to the 9.75 that you're suggesting would be would be, hypothetically, the recommendation if an interest rate cap were adopted for the short term debt. Where how did you come up with a 9.75? As I mentioned earlier, currently, right now, the prime rate is 6.75.
So I give the company long term debt a 7.25 plus, like, 2.5% for the rate risk for the lenders too. Okay. So it's it's judgment call. It wasn't wasn't I mean, I guess it's it's all arbitrary no matter how you do it because you're guessing into the future. No matter what we do, we're guessing. So but it wasn't, like, you know, 50% or, you know, something like that. It was just 2.5% was was where you landed. Based on the ramp rate currently because I don't know in the future gonna go
up, so no one knows. Okay. Alright. You would agree with the company's characterization that rate payers should not be suffering any sort of detriment based on any interest rate on the short term debt given that the company intends to swallow that up with whatever long term debt once it ultimately incur incurs that to pay off the whole thing? Yes. Oh, yes. Alright. Alright. I don't think I have any further questions. Any follow-up on that? No, your honor. Okay. Any redirect? No, your honor. Okay. Alright. Thank you for your testimony. Thank you.
Alright. Any additional witnesses? Or No, your honor. Okay. Alright. In that case, any closing? No, your honor. I waive closing. Thank you. Alright. For staff? No, your honor. Okay. Alright. In that case, thank you, everyone. This was, as I expected, when we last spoke, a short proceeding. I appreciate everybody's participation. And with that, unless there's anything else, I'm not seeing any interest out there. So, everybody have a good rest of your day. I will go and prepare a recommended opinion in order in due course. I don't think it's gonna take until June,
but I appreciate that. Actually, you know, to that point, I thought the company so you were originally trying to target, like, you had SEC filings or something like that, but was it you wanted to get ahead of those or after those? Or your honor, we don't have SEC filings. We were looking at our, cash and budget projections. Okay. So we've we've got ourselves a little more time here. Okay. For some reason, I thought it was some sort of reporting, and that was that was what was causing the time frame. But okay. So maybe I just misremembered. But in any event, thank you everyone for your participation here. And with that, we are adjourned.