Texas Administrative Code › Title 16 - ECONOMIC REGULATION › Part 2 - PUBLIC UTILITY COMMISSION OF TEXAS › Chapter 24 - SUBSTANTIVE RULES APPLICABLE TO WATER AND SEWER SERVICE PROVIDERS › Subchapter A - GENERAL PROVISIONS › Section 24.11 - Financial Assurance

Current through Reg. 49, No. 28; July 12, 2024
(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 §
												RSA
				  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 §
											RSA
				  24.3<subdiv>(23)</subdiv> 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.