<PAGE>
As filed with the Securities and Exchange Commission
on May 7, 1997
File No. 70-8787
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
PRE-EFFECTIVE AMENDMENT NO. 3
TO THE
FORM U-1 APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
----------------------------------
New Century Energies, Inc.
1225 Seventeenth Street
Denver, Colorado 80202
----------------------------------
(Name of company filing this statement
and address of principal executive offices)
None
----------------------------------
(Name of top registered holding company)
Richard C. Kelly
Executive Vice President,
Chief Financial Officer and Treasurer
1225 Seventeenth Street
Denver, Colorado 80202
(Names and addresses of agent for service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application-Declaration to:
Patricia T. Smith, Esq. Gary W. Wolf, Esq.
William M. Dudley, Esq. Cahill Gordon & Reindel
Public Service Company of Colorado 80 Pine Street
1225 Seventeenth Street New York, New York 10005
Denver, Colorado 80202
William S. Lamb, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019
<PAGE>
TABLE OF CONTENTS
Page
Item 1. Description of Proposed Transaction . . . . . . . . . . . . . . . . 1
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. General Request . . . . . . . . . . . . . . . . . . . . . . . 2
2. Overview of the Transaction . . . . . . . . . . . . . . . . . 3
B. Description of the Parties to the Transaction. . . . . . . . . . . 4
1. General Description . . . . . . . . . . . . . . . . . . . . . 4
a. PSCo . . . . . . . . . . . . . . . . . . . . . . . . . . 4
b. SPS. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
c. NCE and its Subsidiaries and Investments . . . . . . . . 6
i. NCE . . . . . . . . . . . . . . . . . . . . . . . . 6
ii. PSCo. . . . . . . . . . . . . . . . . . . . . . . . 7
iii. SPS . . . . . . . . . . . . . . . . . . . . . . . . 7
iv. Cheyenne. . . . . . . . . . . . . . . . . . . . . . 8
v. PSCo Merger Corp. . . . . . . . . . . . . . . . . . 8
vi. SPS Merger Corp.. . . . . . . . . . . . . . . . . . 8
vii. NC Services . . . . . . . . . . . . . . . . . . . . 8
viii. NC Enterprises . . . . . . . . . . . . . . . . . . 9
ix. WestGas Interstate, Inc.. . . . . . . . . . . . . . 10
2. Description of Facilities . . . . . . . . . . . . . . . . . . 10
a. PSCo . . . . . . . . . . . . . . . . . . . . . . . . . . 10
i. General . . . . . . . . . . . . . . . . . . . . . . 10
ii. Electric Generating Facilities and Resources. . . . 11
iii. Electric Transmission Facilities. . . . . . . . . . 13
iv. Gas Facilities. . . . . . . . . . . . . . . . . . . 14
v. Other . . . . . . . . . . . . . . . . . . . . . . . 14
b. SPS. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
i. General . . . . . . . . . . . . . . . . . . . . . . 15
ii. Electric Generating Facilities. . . . . . . . . . . 15
iii. Electric Transmission Facilities. . . . . . . . . . 16
iv. Other . . . . . . . . . . . . . . . . . . . . . . . 17
3. Non-Utility . . . . . . . . . . . . . . . . . . . . . . . . . 17
a. PSCo . . . . . . . . . . . . . . . . . . . . . . . . . . 17
b. SPS. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
C. Description of Transaction . . . . . . . . . . . . . . . . . . . . 24
1. Background and Negotiations Leading to the Proposed
Transaction . . . . . . . . . . . . . . . . . . . . . . . . . 24
2. Merger Agreement. . . . . . . . . . . . . . . . . . . . . . . 26
D. PSCo and SPS Benefit Plans . . . . . . . . . . . . . . . . . . . . 27
E. Management and Operations of NCE Following the Merger. . . . . . . 28
Item 2. Fees, Commissions and Expenses. . . . . . . . . . . . . . . . . . . 29
Item 3. Applicable Statutory Provisions . . . . . . . . . . . . . . . . . . 30
A. Legal Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 31
1. Section 10(b) . . . . . . . . . . . . . . . . . . . . . . . . 33
a. Section 10(b)(1) . . . . . . . . . . . . . . . . . . . . 34
i. Interlocking Relationships. . . . . . . . . . . . . 34
ii. Concentration of Control. . . . . . . . . . . . . . 34
-i-
<PAGE>
b. Section 10(b)(2) -- Fairness of
Consideration. . . . . . . . . . . . . . . . . . . . . . 37
c. Section 10(b)(2) -- Reasonableness of Fees . . . . . . . 40
d. Section 10(b)(3) . . . . . . . . . . . . . . . . . . . . 41
2. Section 10(c) . . . . . . . . . . . . . . . . . . . . . . . . 43
a. Section 10(c)(1) . . . . . . . . . . . . . . . . . . . . 44
i. Retention of Gas Operations . . . . . . . . . . . . 45
ii. Other Businesses. . . . . . . . . . . . . . . . . . 54
I. Direct Subsidiaries of NCE . . . . . . . . . . 55
II. Subsidiaries and Investments of NC
Enterprises. . . . . . . . . . . . . . . . . . 56
III. Subsidiaries and Operations
of PSCo. . . . . . . . . . . . . . . . . . . . 71
IV. Leasing of Space Between and Among
Associate Companies. . . . . . . . . . . . . . 74
V. Applicability of the 15% of Net Capitalization
Test Under Rule 58 . . . . . . . . . . . . . . 74
b. Section 10(c)(2) . . . . . . . . . . . . . . . . . . . . 76
i. Efficiencies and Economies. . . . . . . . . . . . . 76
ii. Integrated Public Utility System. . . . . . . . . . 79
I. Electric System. . . . . . . . . . . . . . . . 79
II. Gas Utility System . . . . . . . . . . . . . . 85
3. Section 10(f) . . . . . . . . . . . . . . . . . . . . . . . . 86
4. Other Applicable Provisions -- Section 9(a)(1). . . . . . . . 86
B. Intra-System Transactions. . . . . . . . . . . . . . . . . . . . . 88
1. Services, Goods, and Assets Involving the Utility Operating
Companies . . . . . . . . . . . . . . . . . . . . . . . . . . 89
2. NC Services . . . . . . . . . . . . . . . . . . . . . . . . . 90
3. Non-Utility Sale of Goods and Services to EWGs,FUCOs, and
QFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
4. UE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
a. Services Provided by UE to Utility Associate Companies . 94
b. Services Provided by UE, or Joint Ventures Involving UE,
to Non-Utility Associate Companies . . . . . . . . . . . 95
5. Specific Requests for Exemptions from
Section 13. . . . . . . . . . . . . . . . . . . . . . . . . . 95
Item 4. Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . . 96
A. Antitrust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
B. Federal Power Act. . . . . . . . . . . . . . . . . . . . . . . . . 96
C. State Public Utility Regulation. . . . . . . . . . . . . . . . . . 97
Item 5. Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100
Item 6. Exhibits and Financial Statements . . . . . . . . . . . . . . . . .100
A. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100
B. Financial Statements . . . . . . . . . . . . . . . . . . . . . . .103
Item 7. Information as to Environmental Effects . . . . . . . . . . . . . .104
-ii-
<PAGE>
Item 1. DESCRIPTION OF PROPOSED TRANSACTION
A. INTRODUCTION
This Application/Declaration seeks approvals relating to the proposed
combination of Public Service Company of Colorado ("PSCo") and Southwestern
Public Service Company ("SPS"), pursuant to which PSCo and SPS will become
wholly-owned subsidiaries of New Century Energies, Inc. ("NCE"), a new Delaware
holding company (the "Transaction"). Following the consummation of the
Transaction, NCE will register with the Securities and Exchange Commission (the
"Commission") as a holding company under the Public Utility Holding Company Act
of 1935 (the "Act").
The Transaction is expected to produce substantial benefits to the
public, investors and consumers, and meets all applicable standards of the Act.
Among other things, PSCo and SPS believe that the Transaction will allow the
shareholders of each of the companies to participate in a larger, financially
stronger company that, through a pooling of the equity, management, human
resources and technical expertise of each company, will be able to achieve
increased financial stability and strength, greater opportunities for earnings
and dividend growth, reduction of operating costs, deferral of certain capital
expenditures, efficiencies of operation, better use of facilities for the
benefit of customers, seasonal diversity of demand, improved ability to use new
technologies, greater retail and industrial sales diversity, and improved
capability to make wholesale power purchases and sales. In this regard, PSCo
and SPS believe that synergies created by the Transaction will generate
substantial cost savings to NCE that would not be available absent the
Transaction. PSCo and SPS have estimated the dollar value of certain synergies
resulting from the Transaction to be approximately $770 million, net of costs to
achieve the savings, over the first 10-year period from 1997 to 2006. The
expected Transaction benefits are discussed in further detail in Item 3.A.2.b.i.
below.
The shareholders of PSCo and SPS both approved the Transaction at
their respective meetings held on January 31, 1996. PSCo and SPS have submitted
applications requesting approval of the Transaction and/or related matters to
(i) the Public Utilities Commission of the State of Colorado (the "CPUC"),
(ii) the New Mexico Public Utility Commission (the "NMPUC"), (iii) the Public
Service Commission of the State of Wyoming (the "WPSC"), (v) the Public Utility
Commission of the State of Texas ("PUCT"), (vi) the Kansas Corporation
Commission (the "KCC"), (vii) the Federal Energy Regulatory Commission (the
"FERC") and (viii) the Nuclear Regulatory Commission (the "NRC"). The following
regulatory agencies have approved the Transaction: the KCC in a written order
issued November 28, 1995, and in a written order issued December 3, 1996; the
NRC in a letter dated February 22, 1996; the WPSC in an oral bench decision on
May 30, 1996, which was subsequently confirmed in a written order issued on
August 16, 1996; the CPUC in an oral decision on August 23, 1996, which was
subsequently confirmed in a written
<PAGE>
decision issued on November 26, 1996, and in a decision on rehearing issued
January 15, 1997; the NMPUC in a written decision issued on January 28, 1997;
the PUCT in a written decision on February 14, 1997; and the FERC in a
decision issued on March 12, 1997. Finally, both companies made the required
filings with the Antitrust Division of the U.S. Department of Justice (the
"DOJ") and the Federal Trade Commission (the "FTC") under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act") on August 22, 1996. The required thirty-day waiting period expired on
September 21, 1996. See Item 4 below for additional detail regarding these
regulatory approvals. Apart from the approval of the Commission under the
Act, all required regulatory approvals have been obtained. The foregoing
approvals are the only regulatory approvals required for the Transaction. In
order to permit timely consummation of the Transaction and the realization of
the substantial benefits it is expected to produce, NCE requests that the
Commission's review of this Application/Declaration proceed as expeditiously
as practicable.
1. GENERAL REQUEST
Pursuant to Sections 9(a)(2) and 10 of the Act, NCE hereby requests
authorization and approval of the Commission to acquire, by means of the
mergers described below, all of the issued and outstanding common stock of
PSCo, SPS, and Cheyenne Light, Fuel and Power Company ("Cheyenne"), a Wyoming
public utility company and currently a wholly-owned subsidiary of PSCo. NCE
also hereby requests that the Commission approve (i) the acquisition by NCE
of all of the outstanding voting securities of New Century Services, Inc.
("NC Services"), NC Enterprises, Inc. ("NC Enterprises"), West Gas
Interstate, Inc. ("WGI"), a subsidiary of PSCo that is engaged in the gas
transportation business, (1) and PS Colorado Credit Corporation ("PSCCC"), a
subsidiary of PSCo that finances (factors) certain of PSCo's current assets,
under Section 9(a)(1) of the Act; (ii) the acquisition by NC Enterprises of
securities of all of SPS's and certain of PSCo's non-utility subsidiaries
under Section 9(a)(1) of the Act; (iii) the acquisition by NCE, NC
Enterprises, or e prime, inc. ("e prime"), a subsidiary of PSCo which is to
become a subsidiary of NC Enterprises, of all of the outstanding voting
securities of New Century International, Inc. ("NC International"); (iv) NC
Services as a subsidiary service company in accordance with the provisions of
Rule 88 of the Act and the Utility Service Agreement and the Non-Utility
Service Agreement as a basis for NC Services to comply with Section 13 of the
Act and the Commission's rules thereunder; (v) certain additional affiliate
transactions as being in accordance with the provisions of Section 13 of the
Act; and (vi) the issuance of NCE Common Stock in connection with the
Transaction.
- ------------------------------------
(1) WGI is regulated by the FERC, but is not a public-utility company within
the meaning of the Act.
-2-
<PAGE>
2. OVERVIEW OF THE TRANSACTION
Pursuant to an Agreement and Plan of Reorganization, dated as of
August 22, 1995, as amended on December 8, 1995 (the "Merger Agreement"), PSCo
Merger Corp., a Colorado corporation and a wholly-owned subsidiary of NCE ("PSCo
Merger Corp."), will be merged with and into PSCo, with PSCo continuing as the
surviving corporation (the "PSCo Merger"), and SPS Merger Corp., a New Mexico
corporation and a wholly-owned subsidiary of NCE, will be merged with and into
SPS, with SPS as the surviving corporation (the "SPS Merger"). As a result of
the PSCo Merger and the SPS Merger, and the declaration of a dividend by PSCo to
NCE of all of the stock of Cheyenne, PSCo, SPS, and Cheyenne will become
operating subsidiaries of NCE, and NCE will be a holding company within the
meaning of the Act.
In addition, WGI will become a direct subsidiary of NCE and NC
International may become a direct subsidiary of NCE (by the declaration of a
dividend by PSCo to NCE of WGI's and NC International's stock), as will NC
Services and NC Enterprises (newly formed corporations). PSCCC will also become
a direct subsidiary of NCE by a declaration of a dividend by PSCo of PSCCC's
stock. Upon consummation of the Transaction, the non-utility subsidiaries and
investments of SPS will become subsidiaries and investments of NC Enterprises,
and certain of the non-utility subsidiaries of PSCo will become direct and
indirect subsidiaries of NC Enterprises, certain others will remain subsidiaries
of PSCo (as described below), and one, NC International, may become a direct
subsidiary of NCE, or alternatively a direct or indirect subsidiary of NC
Enterprises. NCE is also requesting approval of the terms of (1) the Utility
Service Agreement (described below in Item 3.B.2), and (2) the Non-Utility
Service Agreement (also described below in Item 3.B.2). NCE is also requesting
approval of the acquisition by NC Enterprises of securities, directly and
indirectly, of certain of the non-utility subsidiaries, affiliates, and
investments of PSCo and of SPS. The two SPS subsidiaries, Quixx Corporation
("Quixx") and Utility Engineering Corporation ("UE") will be transferred through
the sale by SPS of all of the outstanding common stock of such subsidiaries to
NC Enterprises in exchange for debt of NC Enterprises. The subsidiaries of PSCo
to be transferred to NC Enterprises, including NC International if NCE
ultimately determines that it should be placed directly or indirectly under NC
Enterprises, will be transferred by a declaration of a dividend of their stock
to NCE and subsequent capital contribution of their stock to NC Enterprises or a
subsidiary thereof. A chart of the proposed corporate structure of NCE
following consummation of the Transaction is attached hereto as Exhibit E-6.
The common shareholders of PSCo and SPS will receive one and 0.95 of
one share of common stock, par value of $1.00 per share, of NCE ("NCE Common
Stock"), respectively, and will become common shareholders of NCE (see Item
1.C.2 below). The Transaction will have no effect on the shares of preferred
stock of PSCo and SPS issued and outstanding at the time of the consummation of
the Transaction, each series of which and each share of which will remain
-3-
<PAGE>
unchanged. SPS presently has no shares of preferred stock outstanding. A copy
of the Merger Agreement is incorporated by reference as Exhibit B-1 hereto.
B. DESCRIPTION OF THE PARTIES TO THE TRANSACTION
1. GENERAL DESCRIPTION
a. PSCo
PSCo was incorporated under the laws of the State of Colorado in 1924
and is a public utility holding company exempt from regulation by the Commission
under the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(2)
of the Act and Rule 2 thereunder. Pursuant to Rule 2, PSCo has filed a
statement with the Commission on Form U-3A-2 for the year ended December 31,
1996, which statement and an amendment thereto are incorporated by reference as
Exhibits H-3 and H-4 hereto.
PSCo and Cheyenne are primarily engaged in providing electric and gas
service in Colorado and Cheyenne, Wyoming. As of December 31, 1996, and
December 31, 1995, PSCo provided electric utility service to approximately 1.1
million customers throughout Colorado, primarily in the Denver metropolitan and
Front Range areas. At these same dates, Cheyenne provided electric utility
service to 34,000 customers in the Cheyenne area. In addition, as of these same
dates, PSCo and Cheyenne, respectively, provided gas utility service to
approximately 950,000 and 27,000 customers. PSCo's and Cheyenne's service
territories are shown in Exhibit E-1.
PSCo is subject to regulation as a public utility under the Colorado
Public Utilities Law as to retail electric and gas rates and other matters by
the CPUC. Cheyenne is subject to regulation in connection with its electric and
gas retail sales and other matters by the WPSC. PSCo and Cheyenne are also
subject to regulation by the FERC with respect to the classification of
accounts, rates for any wholesale sales of electricity, the interstate
transmission of electric power and energy, interconnection agreements, issuances
of securities not regulated by state commissions, if any, and acquisitions and
sales of certain utility properties under the Federal Power Act. In addition,
PSCo and Cheyenne are subject to regulation by the FERC under the Natural Gas
Act of 1935, as amended. PSCo is also currently subject to regulation by the
NRC in connection with its ownership of the Fort St. Vrain nuclear generating
facility. This facility ceased operations on August 29, 1989. On March 22,
1996, all physical decommissioning work was completed in accordance with the
terms of orders issued by the NRC, and it is currently expected that
decommissioning site release activities will be completed in 1996 and that
PSCo's NRC Part 50 license will be terminated in early 1997.
PSCo directly owns a majority of the issued and outstanding common
stock of nine non-utility companies. In addition, PSCo has a controlling
interest in six small water and ditch
-4-
<PAGE>
companies, a general partner interest in a partnership engaged in gas
storage, and minority interests in a number of limited partnerships.
The common stock, par value of $5.00 per share, of PSCo ("PSCo Common
Stock") is listed on the New York Stock Exchange ("NYSE"), the Chicago Stock
Exchange, and the Pacific Stock Exchange. As of December 31, 1996, there were
64,818,759 shares of PSCo Common Stock and 2,874,892 shares of PSCo preferred
stock outstanding. PSCo's principal executive office is located at 1225
Seventeenth Street, Denver, Colorado 80202. A copy of the Restated Articles of
Incorporation of PSCo is incorporated by reference as Exhibit A-3.
For the years ended December 31, 1996 and 1995, PSCo's operating
revenues on a consolidated basis were approximately $2.17 billion and
$2.11 billion, respectively, of which approximately $1.49 billion/$1.45 billion
were derived from electric operations, $640 million/$625 million from gas
operations, and $42 million/$37 million from other operations. Consolidated
assets of PSCo and its subsidiaries at December 31, 1996 and 1995 were
approximately $4.6 billion and $4.4 billion, respectively, consisting of
approximately $2.7 billion/$2.6 billion in identifiable electric utility
property, plant and equipment; approximately $805 million/$777 million in
identifiable gas utility property, plant and equipment; and approximately $1.1
billion/$1.0 billion in other corporate assets.
A more detailed summary of information concerning PSCo and its
subsidiaries is contained in PSCo's Annual Reports on Form 10-K for the years
ended December 31, 1996 and December 31, 1995, Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1996, June 30, 1996, and September 30, 1996,
and Statement on Form U-3A-2 for the year ended December 31, 1996, copies of
which are incorporated by reference as Exhibits H-1.1 and 1.2, H-5, H-6, H-7,
H-3 and H-4, respectively.
b. SPS
SPS, incorporated under the laws of the State of New Mexico in 1921,
is a public utility company as defined in the Act. SPS is engaged in the
generation, transmission, distribution, and sale of electric energy. It serves
a population of approximately one million in a 52,000 square-mile area of the
Panhandle and south plains of Texas, eastern and southeastern New Mexico, the
Oklahoma Panhandle, and southwestern Kansas. SPS provides electric energy to 48
communities with a population of 2,000 or more: 37 in Texas, 9 in New Mexico,
and 1 each in Oklahoma and Kansas. Approximately 56 percent of SPS's operating
revenues during the twelve months ended August 31, 1996 (which constitutes SPS's
1996 fiscal year), excluding sales to other utilities, were derived from
operations in Texas. A map showing SPS's service area is attached as Exhibit
E-1.
As a public utility under the laws of the states of Texas, New Mexico,
Kansas, and Oklahoma, SPS is regulated by the PUCT, NMPUC, KCC, and the Oklahoma
Corporation Commission (the "OCC"), respectively, as to its retail rates,
services, accounts,
-5-
<PAGE>
depreciation, and acquisitions and sales of utility properties, and in other
respects. In addition, issuances of securities by SPS are regulated by the
NMPUC, and the issuances of securities secured by a lien on Oklahoma property
are regulated by the OCC. SPS is also subject to regulation by the FERC with
respect to borrowings and the issuance of securities not regulated by the
state commissions listed above, if any, the classification of accounts, rates
to any wholesale customers, the interstate transmission of electric power and
energy, interconnection agreements, and acquisitions and sales of certain
utility properties under the Federal Power Act.
SPS also directly owns all of the issued and outstanding common stock
of two corporations engaged in non-utility businesses, which are described in
more detail below.
The common stock of SPS, par value $1.00 per share (the "SPS Common
Stock"), is listed on the NYSE, the Chicago Stock Exchange, and the Pacific
Stock Exchange. As of December 31, 1995, and December 31, 1996, there were
40,917,908 shares of SPS Common Stock outstanding and as of December 31, 1996,
there were no shares of preferred Stock outstanding. SPS may issue one or more
series of preferred stock prior to the consummation of the Transaction, subject
to obtaining the necessary regulatory approvals. SPS's principal executive
office is located at SPS Tower, Tyler at Sixth, Amarillo, Texas 79101. A copy
of the SPS Restated Articles of Incorporation is incorporated by reference as
Exhibit A-4.
On a consolidated basis, SPS's operating revenues, together with
operating revenues of Quixx, UE, and their subsidiaries, for the calendar years
ended December 31, 1996 and 1995, were approximately $967 million and $902
million, respectively, and its total assets at December 31, 1996 and 1995, were
approximately $2.0 billion and $1.9 billion, respectively.
More detailed information concerning SPS is contained in the Annual
Report of SPS on Form 10-K for its fiscal year ended August 31, 1996, and
Quarterly Report of SPS on Form 10-Q for its fiscal quarters ended November 30,
1996 and February 28, 1996, which are incorporated by reference as Exhibits H-2,
H-8, and H-9.
c. NCE AND ITS SUBSIDIARIES AND INVESTMENTS
i. NCE
NCE was incorporated under the laws of the State of Delaware on
August 21, 1995 to become a holding company for PSCo and SPS following the
Transaction and for the purpose of facilitating the Transaction. NCE filed a
Restated Certificate of Incorporation on December 11, 1995. NCE has, and prior
to the consummation of the Transaction will have, no operations other than those
contemplated by the Merger Agreement to accomplish the Transaction. Following
consummation of the Transaction, NCE will be a public utility holding company
and will own all of the issued and outstanding common stock of PSCo, SPS,
Cheyenne, NC Services, NC Enterprises, WGI, and PSCCC.
-6-
<PAGE>
NC Enterprises will, in turn, own all of the issued and outstanding common
stock of the SPS direct non-utility subsidiary companies and certain of the
PSCo direct non-utility subsidiary companies, as described in Item 1.B.3.
below. At present, the common stock of NCE, which consists of 200 issued and
outstanding shares, is owned by PSCo and SPS, each of which owns 100 shares.
A copy of the Restated Certificate of Incorporation of NCE is attached as
Exhibit A-1.
ii. PSCo
Following the consummation of the Transaction, PSCo will become a
direct subsidiary of NCE. PSCo's utility operations and facilities are
described in Item 1.B.2.a. below and its non-utility subsidiaries,
affiliates, and investments and operations are described in Item 1.B.3.a.
below. Under current plans, all of PSCo's existing non-utility subsidiaries,
affiliates, and investments will become either direct or indirect
subsidiaries, affiliates, and investments of NCE as explained in greater
detail under Item 3.A.2.a.ii. below. The following existing PSCo direct
subsidiaries will remain subsidiaries of PSCo: 1480 Welton, Inc. ("1480
Welton"), P.S.R. Investments, Inc. ("PSRI"), Fuel Resources Development
Company ("Fuelco"), Green and Clear Lakes Company ("Green and Clear Lakes"),
and several small water and ditch companies described in more detail in Item
3.A.2.a.ii. The remaining existing direct non-utility subsidiaries of PSCo,
including e prime, inc. ("e prime"), will become subsidiaries of NC
Enterprises, except WGI and PSCCC, both of which will become direct
subsidiaries of NCE. (2) Moreover, after the completion of the Transaction, it
is presently contemplated that after some interim period, but no later than
September 30, 1997, NC International, which is presently a direct subsidiary
of PSCo, will become (i) a direct subsidiary of e prime and thereby an
indirect subsidiary of NC Enterprises, (ii) a direct subsidiary of NC
Enterprises, or (iii) a direct subsidiary of NCE. In no event, however, will
NC International remain a subsidiary of PSCo beyond the interim period.
iii. SPS
Following the consummation of the Transaction, SPS will become a
direct subsidiary of NCE. SPS's utility operations and facilities are described
in Item 1.B.2.b. below and SPS's non-utility subsidiaries and investments are
described in Item 1.B.3.b. below. Under current plans, all of SPS's existing
non-utility subsidiaries and investments will become indirect subsidiaries and
investments of NCE through NC Enterprises, as explained in greater detail under
Item 3.A.2.a.ii. below.
- ------------------------------------
(2) After the consummation of the Transaction, PSCCC is expected to remain a
direct subsidiary of PSCo for some interim period. The regulatory approval
of the CPUC will be required before PSCCC can become a direct subsidiary of
NCE.
-7-
<PAGE>
iv. CHEYENNE
Following the consummation of the Transaction, Cheyenne will become a
direct subsidiary of NCE. Cheyenne's utility operations and facilities are
described in Item 1.B.2.a. below. Cheyenne does not currently own any interest
in any non-utility subsidiaries, affiliates, or investments.
v. PSCO MERGER CORP.
Solely for the purpose of facilitating the Transaction proposed
herein, PSCo Merger Corp. will be incorporated under the laws of the State of
Colorado prior to the consummation of the Transaction. The authorized capital
stock of PSCo Merger Corp. will consist of 100 shares of common stock, no par
value ("PSCo Merger Corp. Common Stock"), all of which will be held by NCE.
PSCo Merger Corp. has not had, and prior to the closing of the Transaction will
not have, any operations other than the activities contemplated by the Merger
Agreement necessary to accomplish the combination of PSCo Merger Corp. and PSCo
as herein described.
vi. SPS MERGER CORP.
Solely for the purpose of facilitating the Transaction proposed
herein, SPS Merger Corp. will be incorporated under the laws of the State of New
Mexico prior to the consummation of the Transaction. The authorized capital
stock of SPS Merger Corp. will consist of 100 shares of common stock, no par
value ("SPS Merger Corp. Common Stock"), all of which will be held by NCE. SPS
Merger Corp. has not had, and prior to the closing of the Transaction will not
have, any operations other than the activities contemplated by the Merger
Agreement necessary to accomplish the combination of SPS Merger Corp. and SPS as
herein described.
vii. NC SERVICES
NC Services has been incorporated in Delaware to serve as the
service company for the NCE system. NC Services will provide PSCo, SPS,
Cheyenne, and the other companies of the NCE system with a variety of
administrative, management, engineering, construction, environmental, and
support services. NC Services will provide these services directly or may
contract with affiliated or non-affiliated entities as needed.
NC Services will enter into individual service agreements with all of
the direct and indirect subsidiaries and affiliates of NCE that utilize its
services. Each service agreement will be one of two types: (1) the "Utility
Service Agreement," which NC Services will enter into on an individual company
basis with PSCo, SPS, Cheyenne, WGI, those present PSCo subsidiaries that
currently support
-8-
<PAGE>
utility operations, (3) and NCE itself; and (2) the "Non-Utility Service
Agreement," which NC Services will enter into on an individual company basis
with other NCE subsidiaries and affiliates. A copy of the forms of Utility
Service Agreement is included as Exhibit B-2, and a form of the Non-Utility
Service Agreement is included as Exhibit B-3. Attached to both types of
agreements will be an identical appendix entitled "Description of Services to
be Provided by New Century Services, Inc. and Determination of Charges for
Such Services to the Operating Companies and Affiliates."
The authorized capital stock of NC Services will consist of 1,000
shares of common stock, par value $.01 per share. Following consummation of
the Transaction, all issued and outstanding shares of NC Services common
stock will be held by NCE.
viii. NC ENTERPRISES
NC Enterprises has been incorporated in Delaware to serve as a
holding company for (and directly or indirectly acquire the outstanding
capital stock of) the following non-utility subsidiary companies of PSCo and
SPS: e prime, Natural Fuels Corporation ("Natural Fuels"), Quixx, and UE.(4)
NC Enterprises may also directly acquire the capital stock of NC
International. Quixx has the following direct and indirect subsidiaries and
investments: BCH Energy Limited Partnership, Vedco Louisville, L.L.C., Quixx
Jamaica, Inc., KES Jamaica, L.P., Quixx Jamaica Power, Inc., KES Montego,
Inc., Quixx Carolina, Inc., Carolina Energy Limited Partnership, Quixx WPP94,
Inc., Windpower Partners 1994, L.P., Quixx Power Services, Inc., Quixx
Resources, Inc., Quixx WRR, L.P., Quixlin Corp., Quixx Linden, L.P.,
Mosbacher Power Group, L.L.C., Mosbacher Power International, L.L.C., Quixx
Borger Cogen, Inc., Borger Energy Associates, L.P., Quixx Mustang Station,
Inc. and Denver City Energy Associates, L.P. UE currently has two
wholly-owned subsidiaries -- Universal Utility Services Company ("Utility
Services") and Precision Resource Company ("PRC") -- and one 49% owned
subsidiary, Vista Environmental Services L.L.C. ("Vista Environmental"). e
prime has the following direct subsidiaries: Young Gas Storage Company
("Young Gas"), Texas Ohio Gas, Inc. ("Texas Ohio Gas"), Texas Ohio Pipeline,
Inc. ("Texas Ohio Pipeline"), ep3, L.P. ("ep3"), Johnstown Cogeneration
Company, LLC ("Johnstown Cogeneration"), e prime
- ----------------------
(3) These subsidiaries are PSCCC, 1480 Welton, Green and Clear Lakes, and
Fuelco.
(4) Prior to the anticipated closing of the Transaction, PSCo currently
expects to establish a company (as yet unnamed) that will sell, finance,
install, and service satellite receiver dishes and a variety of ancillary
components to enable customers to receive direct broadcast satellite service.
The provision of such services will be contingent upon the company's
qualification as an ETC, or the subsequent approval of such activities by the
Commission. NC Enterprises will directly hold this company after the
consummation of the Transaction.
-9-
<PAGE>
Telecom, Inc. ("e prime Telecom"), e prime Networks, Inc. ("e prime
Networks"), e prime projects international, inc. ("e prime international"), e
prime (Belize) Limited, and e prime Energy Marketing, Inc. ("e prime
Marketing"). After the consummation of the Transaction, NC International may
also become a wholly-owned subsidiary of e prime. Natural Fuels has the
following direct subsidiaries: Natural/Total Limited Liability Company,
Natural/Peoples Limited Liability Company, and Natural/Total/KN Limited
Partnership. These companies are described below in Item 1.B.3.
The authorized capital stock of NC Enterprises will consist of
1,000 shares of common stock, par value $.01 per share. Upon consummation of
the Transaction, all issued and outstanding shares of NC Enterprises common
stock will be held by NCE. NC Enterprises will also have issued debt to SPS
in connection with its acquisition of UE and Quixx as more fully described in
Item 3.A.4 below.
ix. WESTGAS INTERSTATE, INC.
WGI is a natural gas transmission company operating in Colorado and
Wyoming that will be a wholly-owned subsidiary of NCE following consummation of
the Transaction. WGI's interstate pipeline system consists of approximately
0.23 miles of 8-inch pipe, 11.45 miles of 4-inch pipe, a 300 foot 8-inch
discharge main, and a meter station. The facilities extend from PSCo's Chalk
Bluffs meter station in Weld County, Colorado, approximately two miles south of
the Wyoming border, north to the WestGas Paraffin Meadows meter station in
Laramie County, Wyoming. This meter station is interconnected with the Cheyenne
distribution system, approximately four miles south of the City of Cheyenne,
Wyoming.
The system's peak day capacity is 13 MMcf, and annual throughput is
2,900 MMcf. Annual 1996 revenues were approximately $114,000. WGI currently
serves only two customers: Cheyenne and Frontier Oil and Refining Company.
2. DESCRIPTION OF FACILITIES
a. PSCO
i. GENERAL
For the years ended December 31, 1996 and 1995, PSCo and its utility
subsidiaries sold the following amount of electric energy (at retail or
wholesale) and distributed the following amount of natural or manufactured gas
at retail:
<TABLE>
<CAPTION>
December, 1996 December 1995
-------------- -------------
<S> <C> <C>
PSCo
Kwh of electric energy sold 25,032,409,033 23,649,058,597
Mcf of gas distributed at retail 155,863,429 148,646,374
</TABLE>
-10-
<PAGE>
<TABLE>
<S> <C> <C>
Cheyenne
Kwh of electric energy sold 822,093,297 805,091,065
Mcf of gas distributed at retail 5,398,797 5,251,043
</TABLE>
ii. ELECTRIC GENERATING FACILITIES AND RESOURCES
As of December 31, 1996, PSCo had a total net generating capability of
approximately 3303 MW available from the following units:
Arapahoe: Arapahoe is located in Denver, Colorado and has an installed
gross capacity of 262 MW and a net dependable capacity of 246 MW. Its
major fuel source is coal.
Cabin Creek: A pumped storage hydro station located near Georgetown,
Colorado, Cabin Creek has a total capacity of 324 MW at maximum load and a
net dependable capacity of 162 MW.
Cameo: Cameo is located near Grand Junction, Colorado and has an installed
gross capacity of 77 MW and a net dependable capacity of 72.7 MW. Its
major fuel source is coal.
Cherokee: Cherokee is located in Denver, Colorado and has an installed
gross capacity of 784 MW and a net dependable capacity of 723 MW. Its
major fuel source is coal.
Comanche: Comanche is located near Pueblo, Colorado and has an installed
gross capacity of 725 MW and a net dependable capacity of 660 MW. Its
major fuel source is coal.
Craig: Craig is located near Craig, Colorado and is comprised of three
units, two of which are partially owned by PSCo. The total installed gross
capacity of the units is 894 MW, of which PSCo has a 9.72% undivided
ownership interest. PSCo's share in the installed gross capacity is 86.90
MW. Its share in the net dependable capacity is 83.20 MW. Its major fuel
source is coal.
Fort St. Vrain: Fort St. Vrain is located near Platteville, Colorado and
is in the process of being repowered as a gas-fired combined cycle
generating plant which will have installed capacity of 471 MW when the
repowering is complete. The repowering of Phase 1A was completed in May
1996 with an installed gross capacity of 141.45 MW and a net dependable
capacity of 126.75 MW. Phase 1B, scheduled for completion in 1998, will
have an installed capacity of 102 MW, and Phase 2, scheduled for completion
in 2000, will have an installed capacity of 239 MW. Its major fuel source
is natural gas.
Hayden: Hayden, located near Hayden, Colorado is comprised of two units,
Units 1 and 2, which have gross maximum capabilities of 202.01 MW and
285.96 MW, respectively. PSCo has a 75.5% undivided ownership interest in
Unit 1 and a 37.4% undivided ownership interest in Unit 2. Its total share
in the installed gross capacity of these units is 259.47 MW. Its total
share in
-11-
<PAGE>
the net dependable capacity is 236.90 MW. Its major fuel source
is coal.
Pawnee: Pawnee is located near Brush, Colorado and has an installed gross
capacity of 530 MW and a net dependable capacity of 495 MW. Its major fuel
source is coal.
Valmont: Valmont is located near Boulder, Colorado and has an installed
gross capacity of 188 MW and a net dependable capacity of 178 MW. Its
major fuel source is coal.
Zuni: Zuni is located in Denver, Colorado and has an installed gross
capacity of 115 MW and a net dependable capacity of 107 MW. Its major fuel
source is coal.
PSCo has six combustion turbine units at various locations. The total
installed gross capacity of these units is 209 MW. The units' net
dependable capacity is 171 MW.
In addition to Cabin Creek, PSCo has 14 hydro units at various
locations, including one station (two units) not owned by PSCo but operated
by it under contract. These units have a total installed gross capacity of
53.35 MW. The units' net dependable capacity is 36.55 MW. Seasonal hydro
plant net dependable capabilities are based upon average water conditions
and limitations for each particular season. The individual plant seasonal
capabilities are sometimes limited by less than design water flow.
PSCo has two diesel generators with a total of 5.5 MW installed gross
capacity and net dependable capacity.
PSCo purchases capacity and energy from various regional utilities as
well as Qualifying Facilities ("QFs"), as that term is defined in the
Public Utility Regulatory Policies Act of 1978 ("PURPA"), in order to meet
energy needs of its customers. Together, PSCo and Cheyenne purchased
approximately 37% of the total electric system energy input for 1995.
PSCo's 1995 and 1996 summer peak loads, which occurred on August 11,
1995, and August 13, 1996, were 4262.2 MW and 4381.2 MW, respectively, and its
1995 and 1996 winter peak loads, which occurred on January 4, 1995, and
January 30, 1996, were 3927.8 MW and 4028.0 MW, respectively.
Cheyenne does not generate any electricity, but purchases all of its
electric energy requirements from an unaffiliated electric utility. Cheyenne
does own five small diesel generating units (nameplate rating of 2 MW each),
which are held on cold standby and which have been contractually placed under
the control of the unaffiliated electric utility company that supplies all of
Cheyenne's electric energy requirements.
-12-
<PAGE>
iii. ELECTRIC TRANSMISSION FACILITIES
PSCo's transmission system is located primarily within Colorado
although small portions of two jointly-owned lines are located in New Mexico and
Nebraska, both along the Colorado border. As of December 31, 1996, PSCo's
transmission system consisted of approximately 112 circuit miles of 345 KV
overhead lines; 1,916 circuit miles of 230 KV lines; 15 circuit miles of 230 KV
underground lines; 65 circuit miles of 138 KV overhead lines; 999 circuit miles
of 115 KV underground lines; 20 circuit miles of 115 KV underground lines; 344
circuit miles of 69 KV overhead lines; 143 circuit miles of 44 KV overhead
lines; and 1 circuit mile of 44 KV underground lines. PSCo jointly owns with
other utilities approximately 342 circuit miles of 345 KV overhead lines and 360
miles of 230 KV overhead lines, of which PSCo's share is 112 miles and 147
miles, respectively, which shares are included in the amounts referred to above.
The system is interconnected with the systems of the following
utilities with which PSCo has major firm purchase power contracts; capacity and
energy are provided primarily by generating sources in the locations indicated:
<TABLE>
<S> <C>
Utility Location
Basin Electric Power Cooperative Southeast Wyoming
PacifiCorp West & Northwest U.S.
Northwest Colorado
Platte River Power Authority Northcentral Colorado
Tri-State Southeast Wyoming and
Northwest Colorado
</TABLE>
PSCo has wheeling agreements with the above, and with other utilities
and public power agencies, which are utilized to provide capacity and energy to
PSCo's system from time to time.
PSCo's transmission system also interconnects with the system of the
Western Area Power Administration ("WAPA").
PSCo is a member of the Western Systems Coordinating Council (the
"WSCC"), an interstate network of transmission facilities that are owned by
public entities and investor-owned utilities. WSCC is the regional reliability
council providing planning and coordination for member electric power systems in
the Western United States. PSCo is also a member of the Western Systems Power
Pool (the "WSPP") which is an economic power pool that operates an electronic
bulletin board and acts as a clearinghouse for bulk power transactions among
over 90 member utilities and marketers. The WSPP Agreement, to which PSCo is a
signatory, originally provided for the sale and purchase of capacity, energy and
transmission services
-13-
<PAGE>
at market-based rates with a cost-based floor and ceiling.(5) The WSPP
Agreement was amended and refiled to comport with the transmission
requirements of FERC Order No. 888, PROMOTING WHOLESALE COMPETITION THROUGH
OPEN ACCESS NON-DISCRIMINATORY TRANSMISSION SERVICES BY PUBLIC UTILITIES
(issued April 24, 1996) ("FERC Order No. 888").
Cheyenne owns two 115 KV transmission line segments that total 25.5
miles in length that fall within and are operated by WAPA's Loveland control
area.
iv. GAS FACILITIES
The gas property of PSCo at December 31, 1996 consisted chiefly of
approximately 15,304 miles of distribution mains ranging in size from 0.50 to 30
inches and related equipment. The Denver distribution system consisted of 8,691
miles of mains.
The gas property of Cheyenne at December 31, 1996 consisted chiefly of
approximately 551 miles of distribution/transmission mains ranging in size from
1 to 16 inches and related equipment.
v. OTHER
PSCo owns and operates four underground gas storage facilities:
Roundup, Asbury, Fruita (all conventional depleted gas reservoirs), and Leyden
(a converted mined cavern). These combined facilities have a maximum working
volume of 18,974,000 Mcf, and a maximum daily send out capacity of 252,000 Mcf/
day.
PSCo's steam heating property at December 31, 1996 consisted of 10.5
miles of transmission, distribution, and service lines in the business district
of Denver, including a steam transmission line connecting the steam heating
system with PSCo's Zuni electric power plant. Steam is supplied from boilers
installed at PSCo's Denver Steam Plant, which has a capability of 295,000 pounds
of steam per hour under sustained load. An additional 300,000 pounds of steam
per hour is available from PSCo's Zuni electric generating plant on a peak
demand basis. PSCo also owns service and office facilities in Denver and other
communities located throughout its service territory.
In addition PSCo and its subsidiaries own other property, plant, and
equipment supporting their electric and gas utility functions.
- -------------------
(5) SPS is also a member of the WSPP.
-14-
<PAGE>
b. SPS
i. GENERAL
For the fiscal year 1995 and calendar year 1996, SPS sold 20.3
billion and 21.1 billion, respectively, kwh of electric energy (at retail and
wholesale).
ii. ELECTRIC GENERATING FACILITIES
At December 31, 1996, SPS had a total of 4135 MW net generation
capability.
SPS's steam generation stations have a combined net capability of 3990
MW. These stations are:
Harrington: Harrington, located near Amarillo, TX, has a net capability of
1066 MW. Its principal fuel source is coal.
Tolk: Tolk, located near Muleshoe, TX, has a net capability of 1080 MW.
Its principal fuel source is coal.
Jones: Jones, located near Lubbock, TX, has a net capability of 486 MW.
Its principal fuel source is natural gas.
Plant X: Plant X, located near Earth, TX, has a net capability of 442 MW.
Its principal fuel source is natural gas.
Nichols: Nichols, located near Amarillo, TX, has a net capability of 457
MW. Its principal fuel source is natural gas.
Cunningham: Cunningham, located near Hobbs, NM, has a net capability of
267 MW. Its principal fuel source is natural gas.
Maddox: Maddox, located near Hobbs, NM, has a net capability of 118 MW.
Its principal fuel source is natural gas.
Moore County: Moore County, located near Sunray, TX, has a net capability
of 48 MW. Its principal fuel source is natural gas.
CZ-2: CZ-2, located near Pampa, TX, has a net capability of 26 MW. Its
principal fuel source is purchased steam.
SPS's other electric generation facilities -- gas turbines and diesel
engines -- have a total net capability of 145 MW. These stations are:
Carlsbad (gas turbine): Carlsbad, located in Carlsbad, NM, has a net
capability of 16 MW.
CZ-1 (gas turbine): CZ-1, located near Pampa, TX, has a net capability of
13 MW.
-15-
<PAGE>
Maddox (gas turbine): Maddox, located near Hobbs, NM, has a net capability
of 76 MW.
Riverview (gas turbine): Riverview, located near Borger, TX, has a net
capability of 25 MW.
Tucumcari (diesel engine): Tucumcari, located in Tucumcari, NM, has a net
capability of 15 MW.
SPS's summer peak loads for its fiscal years 1995 and 1996, which
occurred on July 28, 1995, and August 6, 1996, were 3952 MW and 3876 MW,
respectively, and its 1995 and 1996 winter peak loads, which occurred on
February 28, 1995, and January 31, 1996, were 2486 MW and 2671 MW, respectively.
iii. ELECTRIC TRANSMISSION FACILITIES
As of December 31, 1996, SPS's transmission system consisted of 319
circuit miles of 345 KV lines, 1,524 circuit miles of 230 KV lines, 2,361
circuit miles of 138 KV lines, and 1,839 circuit miles of 69 KV lines. SPS is
in the southwest corner of the Eastern Interconnection of the United States and
is a member of the Southwest Power Pool ("SPP"), one of the seven reliability
councils in the Eastern Interconnection. SPS is bordered to the south and
southeast by the Electric Reliability Council of Texas ("ERCOT") and to the west
by the WSCC. SPS is not interconnected with ERCOT.
SPS is connected with utilities west of its service territory through
two high voltage direct current (HVDC) interconnections in New Mexico and has
four interconnecting transmission lines with utilities of the SPP. These
interconnections are described in the following table:
<TABLE>
<CAPTION>
Voltage (kilovolts)
-------------------
Other
Location Interconnecting Utility The Company Utility
-------- ----------------------- ----------- -------
<S> <C> <C> <C>
Near Artesia, NM El Paso Electric Co. and
Texas-New Mexico Power Co. 230* 345
Near Clovis, NM Public Service Company of
New Mexico 230* 345
Near Oklaunion, Public Service Company of
TX Oklahoma 345 345
Near Elk City, Public Service Company of
OK Oklahoma 230 230
Near Shamrock, West Texas Utilities
TX 115 115
Near Guymon, OK West Plains Energy 115 115
</TABLE>
*These are HVDC interconnections owned by the interconnecting utilities.
SPS has scheduling capabilities over these facilities through the WSPP
agreement and pursuant to agreements with the interconnecting utilities.
-16-
<PAGE>
Transactions with the SPP are handled through interties near Elk City
and Guymon, Oklahoma, and Shamrock and Oklaunion, Texas. These interties allow
SPS to sell energy to or to purchase energy from the eastern electrical grid.
Sales through eastern interties accounted for 2.0%, 1.0%, and 1.0% of fiscal
1995, fiscal 1996, and calendar year 1996 total sales, respectively.
HVDC interconnections link SPS with the western electrical grid of the
United States. SPS purchases and sells energy through HVDC interties near
Artesia and Clovis, New Mexico. Sales through these interties accounted for
4.1%, 3.2%, and 4.1% of fiscal 1995, fiscal 1996, and calendar year 1996 total
sales, respectively.
iv. OTHER
In addition, SPS and its subsidiaries own property, plant and
equipment supporting their electric utility functions.
3. NON-UTILITY
a. PSCo
PSCo presently has nine direct non-utility subsidiaries.(6) Eight of
these subsidiaries are wholly-owned: WGI, e prime, NC International, 1480
Welton, PSCCC, PSRI, Fuelco, and Green and Clear Lakes. PSCo owns 80.03% of
the capital stock of Natural Fuels. WGI is a natural gas transmission
company operating in Colorado and Wyoming (see Item I.B.1.c.vi.); e prime
directly or indirectly offers energy related products and services to
energy-using customers and to selected segments of the utility industry, and
holds or will hold interests in QFs, EWGs, FUCOs, and ETCs; NC International
has been formed to hold a 50% interest in Yorkshire Electricity Group plc(7) and
other investments in EWGs and FUCOs; Fuelco has been engaged in the
exploration for, and the development and production of, natural gas and oil,
principally in Colorado, but now is a corporation in dissolution under
Colorado law; 1480 Welton is a real estate company which owns certain of
PSCo's real estate interests for use in its utility business; PSRI owns and
manages company owned life insurance (COLI) policies on certain past and
present employees, the benefits from which are to provide future funding for
general corporate purposes; PSCCC is a company that finances (factors)
certain of PSCo's current assets; Green and Clear Lakes owns water rights and
storage facilities for water used at PSCo's Georgetown Hydroelectric Station;
and Natural Fuels sells compressed natural gas as a transportation fuel to
retail markets, converts vehicles for natural
- ----------------------
(6) Prior to the consummation of the Transaction, PSCo also expects to
establish a new ETC. See note 4, SUPRA.
(7) In an order issued on February 19, 1997, in File No. 70-8985, the
Commission authorized PSCo to acquire its indirect interest in Yorkshire
Electricity Group plc pursuant to Section 3(b) of the Act and Rules 10 and 11
thereunder.
-17-
<PAGE>
gas usage, constructs fueling facilities, and sells miscellaneous fueling
facility equipment.
e prime has the following direct subsidiaries and investments: Young
Gas, a wholly-owned subsidiary, which holds a 47.5% interest in a limited
partnership which owns an underground gas storage facility; Texas Ohio Gas, a
wholly-owned subsidiary, which provides natural gas and retail electric
marketing services; Texas Ohio Pipeline, a wholly-owned subsidiary, which owns
and operates a 900 foot interstate gas pipeline linking the pipelines of Texas
Eastern Corporation and Tennessee Gas Pipeline; ep3 (of which e prime holds a
20% general partnership interest and a 30% limited partnership interest), which
was formed to engage, or invest, in the business of marketing, developing,
financing, constructing, managing and operating, electrical energy transmission,
distribution or generation facilities or providing consulting services related
thereto, in Latin America and other emerging foreign markets; Johnstown
Cogeneration, a limited liability company (of which e prime has a 50% ownership
interest), which owns a 3 MW QF located in Johnstown, Colorado; e prime Telecom,
which will provide long-haul fiber capacity on a wholesale basis to non-
associate companies and seek qualification as an ETC under Section 34 of the Act
and the Federal Communications Commission's ("FCC") regulations implementing
that section; e prime Networks, which will provide remote meter reading services
to PSCo and other utilities using a fixed network; e prime international, which
has been formed to hold investments in EWGs and FUCOs and presently has a 25%
interest in Kazak Power Partners Limited, which owns the Karaganda Steam Power
Station GRES 2 ("Karaganda II"), an EWG located in Topar, Kazakstan, and which
wholly owns e prime operating, inc., which has entered into a contract to
operate Karaganda II and intends to operate other EWGs; e prime (Belize)
Limited, which has been formed to acquire an interest in an EWG in
Belize; 8 and e prime Marketing, which has been formed to engage in the electric
and gas marketing activities that e prime is currently engaging in directly.
NC International owns a 50% interest in Yorkshire Power Group Limited,
which through a wholly-owned subsidiary Yorkshire Holdings plc, has completed a
tender offer to acquire Yorkshire Electricity Group plc, a regional electric
company operating in the United Kingdom. PSCo has obtained authorization from
the Commission to acquire the contemplated interest in Yorkshire Electricity
Group plc. See File No. 70-8985. After the consummation of the Transaction, NC
International will become a wholly-owned subsidiary of e prime, of NC
Enterprises, or of NCE directly. It will not remain a subsidiary of PSCo except
during an interim period. After such transfer from PSCo to one of these
affiliates, Yorkshire Electricity Group plc will be qualified as a FUCO under
Section 33 of the Act.
- --------------------
(8) It is not presently expected that e prime (Belize) Limited will actually
acquire an interest in the project, and therefore it may be dissolved in the
near future.
-18-
<PAGE>
It is presently contemplated that NC International may acquire interests in or
operate other FUCOs. (9)
Natural Fuels has the following direct subsidiaries and investments:
A 50% ownership interest in Natural/Total Limited Liability Company
("Natural/Total"), a Wyoming L.L.C., which owns and operates natural gas fueling
stations located at Total Petroleum Gas Stations in Colorado; a 50% profits
interest (25% capital interest) in Natural/Peoples Limited Liability Company, a
Wyoming L.L.C., which owns and operates one natural gas fueling station located
in Castle Rock, Colorado; and a 67% ownership interest through Natural/Total in
Natural/Total/KN Limited Partnership, which owns the profits interests in the
natural gas fueling stations located at Total Petroleum sites in the Colorado
towns of Grand Junction and Glenwood Springs.
PSCo holds a greater than 50% interest in several other relatively
small ditch and water companies: namely, East Boulder Ditch Company, Hillcrest
Ditch and Reservoir Company, United Water Company, Consolidated Extension Canal
Company, Enterprise Ditch Company, and Las Animas Consolidated Canal Company.
PSCo also holds a less than 50% interest in the following small ditch and water
companies: namely, Fisher Ditch Water Company, Bough Lateral Ditch Company,
Beenan Irrigating Ditch and Milling Company and Jones and Donelley Ditch
Company. (These companies are collectively referred to as the "Ditch
Companies.") These Ditch Companies' capital requirements are not significant
and are not consolidated in PSCo's financial statements or statistical
data. 10 Each of these ditch and irrigation companies was acquired for the
purpose of providing cooling water for generation facilities. All but two of
them are currently utilized in that capacity. The remaining two companies are
being held in anticipation of the need to build additional generation facilities
in the future.
Together, at December 31, 1996, and at December 31, 1995, PSCo's
investments in its non-utility subsidiaries constituted less than four percent
of the consolidated book value of the assets of both PSCo and its subsidiaries.
A corporate chart of PSCo and its subsidiaries, showing their
non-utility interests, is filed as Exhibit E-4.
- --------------------
(9) PSCo through NC International (or alternatively e prime) expects to acquire
prior to the closing of the Transaction for $2 million a minority interest in
Independent Power Corporation PLC ("IPC"), a British company that is in the
business of developing, owning, and operating foreign generating plants.
(10) The aggregate revenues of the five Ditch Companies in which PSCo holds a
50% or greater interest at December 31, 1996 were $144,270. Their aggregate
assets at that time were $148,170.
-19-
<PAGE>
A discussion of the bases on which the businesses of these
subsidiaries may be retained is set forth in Item 3.A.2.a.
b. SPS
SPS wholly owns two direct non-utility subsidiaries, UE and Quixx. No
assets of Quixx or UE are presently, or will following the consummation of the
Transaction be, included in the rate base of any public utility company within
the NCE system. UE is a wholly-owned subsidiary formed in 1986. It is engaged
in a variety of engineering, development, design, procurement, construction and
other related services. UE also owns twenty-five electric substations. These
substations are leased to twelve industrial customers of SPS. UE employs
approximately 120 employees. In addition, it is contemplated that approximately
fifty-five to seventy-five employees of PSCo will be transferred to UE upon
consummation of the Transaction. UE's assets at December 31, 1996, and
December 31, 1995, were approximately $47.8 million and $43.4 million,
respectively, and total revenues for calendar years 1996 and 1995 were
$21.1 million and $29.8 million, respectively. UE is primarily involved in
projects for nonaffiliate customers, providing general engineering, development,
design, procurement, construction and other related services. SPS is one of
UE's major clients. UE also works jointly with Quixx on cogeneration and other
independent power and related projects, providing such services. It is intended
that UE will service primarily unaffiliated customers, and for fiscal 1996 and
calendar 1996, approximately $14.7 million and $14.1 million, or 69.5% and
66.7%, respectively, of UE's revenues were derived from unaffiliated customers.
Quixx is a wholly-owned subsidiary formed in 1986. Its primary
business is investing in and developing cogeneration and energy-related
projects. In 1996, Quixx invested $9.8 million in such projects. Quixx
operates, as a division, Amarillo Railcar Services, a railcar maintenance
facility that provides inspection, light and heavy maintenance, and storage for
unit trains. A majority of these services are provided for railcars that
transport coal for use by SPS. In addition, Quixx has royalty interests in coal
and other minerals produced and to be produced from certain New Mexico
properties owned by the Pittsburgh and Midway Coal Mining Company. Quixx also
finances sales of heat pumps and markets other non-utility goods and services.
Quixx employs approximately 45 employees. Quixx's assets at December 31, 1996
and December 31, 1995 were approximately $80.6 million and $86.0 million,
respectively, and total revenues for calendar years 1996 and 1995 were
$18.0 million and $19.7 million, respectively.
UE owns 49% of Vista Environmental. Vista Environmental performs
environmental consulting services, client-regulatory interfacing, site
assessments, due diligence, waste management planning, remedial action design
and implementation, groundwater valuation, mineral surveys, and on-site field
supervision in both the private and governmental sectors and is providing site
remediation services, and will continue to provide site remediation and other
-20-
<PAGE>
services, to SPS and may in the future provide such services to NCE's utility
subsidiaries and non-utility subsidiaries and affiliates. Annual revenues to UE
from Vista Environmental are approximately $675,000. UE's investment in Vista
Environmental is $175,000.
UE currently has two wholly-owned subsidiaries: Utility Services, and
PRC.
Utility Services provides services related to the engineering, design,
procurement, and construction of cooling towers for power plants, as well as
plant construction, distribution, operation and maintenance activity, resource
recovery, and wood product fabrication (cooling tower components and utility
pole crossarms)to unaffiliated parties. Such services may also be provided to
utility and non-utility subsidiary companies and affiliates. Utility Services
contracts with SPS for personnel to perform transmission substation operations
and maintenance for third parties. Following the Transaction, these
transactions for personnel will be made in accordance with the requirements of
Rules 87, 90, and 91 under the Act.
PRC provides a technical personnel resource database service. Its
database is comprised of names of unaffiliated individuals with technical
expertise who can be dispatched to provide temporary services for various
projects to associate companies and unaffiliated parties.
Quixx has nine wholly-owned subsidiaries, eight of which hold
partnership interests in various energy-related limited partnerships. In
addition, Quixx directly holds interests in four other entities. 11 The
following is a description of Quixx's subsidiaries and investments:
Quixx holds a 42% limited partnership interest in BCH Energy Limited
Partnership ("BCH"), which owns a waste-to-energy facility located near
Fayetteville, North Carolina. The operation of the BCH facility has been
suspended. The Facility provided steam to a Du Pont De Nemours & Company ("Du
Pont") plant near Fayetteville and electric power to Carolina Power & Light
Company. In December of 1996, because of the operational problems that rendered
the project not economically viable, Quixx wrote off approximately $16 million,
representing its entire investment in the project.
- --------------------
(11) Such entities do not include Lindsay Cogeneration, L.P. At the time
of the filing of the initial Application/Declaration, Quixx had an additional
investment entitled Lindsay Cogeneration, L.P. Notice of dissolution of that
partnership was sent to the partnership on December 27, 1996, and the
dissolution will be effective on March 27, 1997, at which time the appropriate
filings will be made with the California authorities.
-21-
<PAGE>
Quixx holds a 95% interest in Vedco Louisville L.L.C., which owns a
facility consisting of two gas-fired boilers providing steam to a Du Pont plant
in Louisville, Kentucky.
Quixxs Jamaica, Inc. owns a 99% limited partnership interest in KES
Jamaica, L.P., an EWG which owns a 42.3 megawatt oil-fired combustion turbine
power plant located in Montego Bay, Jamaica, W.I., and sells electricity to
Jamaica Power Services. The remaining 1% general partnership interest is owned
by KES Montego, Inc. Quixx Jamaica Power, Inc. has reached an agreement in
principle to acquire 100% of the stock of KES Montego, Inc. Both Quixx Jamaica,
Inc. and Quixx Jamaica Power, Inc. are wholly-owned subsidiaries of Quixx.
Quixx holds a 32-1/3% limited partnership interest and, through Quixx
Carolina, Inc., a wholly-owned subsidiary of Quixx, a 1% general partnership
interest in Carolina Energy, Limited Partnership ("Carolina Energy"), which is
developing, and will own and operate solid waste fueled cogeneration facilities
in Wilson and Lenoir Counties, North Carolina, which will provide steam to a Du
Pont plant and will sell electric power to Carolina Power & Light Company. The
project is a companion to the BCH project described above, and Quixx and the
other debt and equity owners of the project are currently studying the economic
viability of it. Quixx has approximately $13.2 million invested in this
project.
Quixx holds a 24.67% limited liability partnership interest and,
through Quixx WPP94, Inc., a wholly-owned subsidiary of Quixx, a 0.33% general
partnership interest in Windpower Partners, 1994, L.P., which owns a 35 megawatt
windplant in Texas and sells the electricity to the City of Austin and the Lower
Colorado River Authority.
Quixx Power Services, Inc. ("QPS"), a wholly-owned subsidiary of
Quixx, has operated and maintained the BCH facility in North Carolina and will
operate and maintain the Linden cogeneration facility and KES Jamaica facility.
Quixx has recently entered into a memorandum of understanding with
Golden Spread Electric Cooperative, Inc. and an unaffiliated independent power
producer (the "PP") to construct a 488 MW combined cycle generating facility to
be called the Mustang Station which, subject to obtaining regulatory approvals,
would be completed by 1998. Golden Spread and a limited partnership called
Denver City Energy Associates, L.P. ("Denver City Energy Associates") (of which
the PP and Quixx will be the general partners and in which each will have a 50%
interest) would each own a 50% undivided interest in the Station. Quixx will
hold its interest in Denver City Energy Associates through a wholly-owned
subsidiary, Quixx Mustang Station, Inc. The power from the Station would be
supplied principally to Golden Spread. The Station will be interconnected with
the SPS system. The limited partnership will be an EWG and the PP will be the
Project Manager. UE and certain unaffiliated third parties submitted a bid in a
competitive bidding process conducted by
-22-
<PAGE>
the PP to engineer, procure, and construct the Station. UE's bid was not
accepted.
Quixx holds a 1% general partnership interest and, through Quixx
Resources, Inc., a wholly-owned subsidiary of Quixx, a 99% limited partnership
interest in Quixx WRR, L.P., which will hold all of Quixx's water rights located
in Roberts, Gray, Hutchinson and Carson Counties, Texas.
Quixx holds a 99% limited partnership interest and through Quixlin
Corp., a wholly-owned subsidiary of Quixx, a 1% general partnership interest in
Quixx Linden, L.P., which will construct a 23 MW cogeneration facility that will
provide electricity, steam and compressed air to General Motors at its plant
located in Linden, New Jersey. This project will be a QF. At least 50% of
Quixx's interest will be sold to an unaffiliated party upon completion of the
facility. UE was selected through a competitive bidding process to engineer,
procure equipment and parts for, and construct the facility.
In February, 1997, Quixx announced it will hold a 50% interest in the
proposed 216 MW cogeneration plant that would be located at the Phillips
Refinery Complex near Borger, Texas. Quixx will hold this interest through a
wholly-owned subsidiary, Quixx Borger Cogen, Inc. ("Borger CoGen"), which will
in turn be a 50% partner of Borger Energy Associates, L.P., the owner of the
plant. Quixx will share ownership of the facility with LS Power. The plant
will be a QF. Construction is expected to begin in 1997 and the plant is
expected to be operational in the summer of 1998.
Quixx has recently executed an agreement to purchase a 50% membership
interest in Mosbacher Power Group, L.L.C. and Mosbacher Power International,
L.L.C. (together the "Mosbacher Companies"), which are independent power
development companies with interests in the development stage in Cambodia,
Colombia, Mexico, and Brazil. It is contemplated that all of the projects to be
developed by the Mosbacher Companies will be EWGs or FUCOs.
Together, SPS's investments in its non-utility subsidiaries
constituted approximately 15% and 16% of the consolidated book value of the
assets of SPS and its subsidiaries at December 31, 1996 and August 31, 1996,
respectively.
UE and Quixx had net earnings in the aggregate of approximately $2.0
million (including $7.7 million from the sale of water rights and a $10.4
million loss from the write-off of the BCH Project) and $12 million (including
$7.7 million from the sale of water rights) in calendar 1996 and fiscal 1996,
respectively.
A corporate chart of SPS and its subsidiaries and investments, showing
their non-utility interests, is filed as Exhibit E-5.
-23-
<PAGE>
A discussion of the bases on which the businesses of these
subsidiaries and investments may be retained is set forth in Item 3.A.2.a.
C. DESCRIPTION OF TRANSACTION
1. BACKGROUND AND NEGOTIATIONS LEADING TO THE PROPOSED TRANSACTION
PSCo and SPS have had numerous discussions over the past several years
related to various means of better utilizing their facilities, including
pursuing possibilities to enter into joint ventures for the construction of
various generation and transmission facilities. In addition, PSCo and SPS share
the view that fundamental changes in the electric energy industry are inevitable
and that such changes are leading to greater competition in a once monopolistic
industry.
The Energy Policy Act of 1992 (the "1992 Act") granted the FERC the
authority to order electric utilities to provide transmission service to other
utilities and to other buyers and sellers of electricity in the wholesale
market. The 1992 Act also created a new class of power producers, exempt
wholesale generators ("EWGs"), that are exempt from regulation under the Act.
The exemption from regulation under the Act of EWGs has increased the number of
entrants into the wholesale electric generation market, thus increasing
competition in the wholesale segment of the electric utility industry.
Commencing in December 1993, pursuant to its authority under the 1992
Act, the FERC issued a number of orders in specific cases directing utilities to
provide transmission services. Under the FERC's evolving transmission policies,
utilities are being required to offer transmission services to third parties on
a basis comparable to service that the utilities provide themselves. On
April 7, 1995, the FERC issued a notice of proposed rule making under which it
proposed to implement on a comprehensive basis the comparable transmission
service policies it has developed in specific cases. The notice of proposed
rulemaking culminated in the issuance of FERC Order No. 888 on April 24, 1996.
The FERC's actions to date and its transmission rulemaking proceeding have
increased the availability of transmission services, thus creating greater
competition in the wholesale power market.
In addition, state regulatory bodies in certain states have initiated
proceedings to review the basic structure of the industry. These bodies are
considering proposals to require some measure of competition in the retail
portion of the industry.
With the passage of the 1992 Act and the rapidly changing utility
environment in general, both PSCo and SPS began investigating their individual
strategic options related to the new competitive landscape. Both companies
reached the same conclusions:
-24-
<PAGE>
1. A key to future success would be to become a quality low cost
provider;
2. Size would be a key factor related to the various options that
could be provided to meet customer demands and further reduce
costs; and
3. Financial strength would be essential in the changing
environment.
On March 29, 1995, following an electric utility industry meeting in
Washington, D.C., senior management from both PSCo and SPS met to discuss a
variety of business opportunities the two companies could jointly pursue as part
of the changing environment, including a possible merger.
Soon after this meeting, PSCo engaged the law firm of LeBoeuf, Lamb,
Greene & MacRae, L.L.P. ("LeBoeuf Lamb") to advise it with respect to the
potential business combination, and SPS engaged the law firm of Cahill Gordon &
Reindel ("Cahill Gordon") to advise it with respect to the potential business
combination.
On May 12, 1995, certain PSCo employees met with certain SPS employees
to discuss, among other items, (i) the hiring of Deloitte & Touche LLP
("Deloitte & Touche") to assist the managements of PSCo and SPS in preparing a
detailed synergy analysis; (ii) establishing a timetable to investigate a
possible merger; (iii) the financial and operational modeling and analysis that
would be required; and (iv) the exchange of preliminary information requests.
On May 12, 1995, a Confidentiality and Standstill Agreement was signed between
PSCo and SPS. Pursuant to that agreement, the two companies and their
representatives agreed to provide non-public information to each other with a
view toward exploring a possible business combination.
Following those preliminary discussions, PSCo engaged Barr Devlin &
Co. Incorporated ("Barr Devlin") to act as its financial advisor in connection
with a possible business combination with SPS, and SPS engaged Dillon, Read &
Co. Inc. ("Dillon Read") to act as its financial advisor in connection with the
possible business combination with PSCo.
During the months of June, July and August of 1995, PSCo and SPS
management personnel and representatives of Deloitte & Touche had numerous
meetings in Dallas and Denver to analyze all aspects of the synergy study (e.g.,
operations and maintenance, capacity deferrals, fuel savings, and other
corporate programs). In these meetings, PSCo and SPS management personnel, with
the assistance of Deloitte & Touche, analyzed potential savings that would be
created by the Transaction and that could not be obtained absent the
Transaction, and savings that would be accelerated as result of the merging of
the operations of the two companies. Costs of achieving the merger-related
savings, as well as savings which were already planned to be achieved through
other means, were also identified and
-25-
<PAGE>
quantified so that the synergy savings would be a "net" amount. In addition,
preliminary due diligence activities and financial and operating modeling
assumptions were discussed, and conferences were held between the respective
financial advisors and counsel with respect to merger-related matters. In July,
representatives of LeBoeuf Lamb and Cahill Gordon began drafting the Merger
Agreement. Throughout this period, the Boards of Directors of PSCo and SPS
discussed various aspects of the Transaction and the status of the negotiations.
On August 22, 1995, the PSCo Board met to review and approve the
Mergers. Barr Devlin rendered its written fairness opinion, provided the PSCo
Board with information supporting that opinion, and discussed in detail the
analysis underlying its opinion. The PSCo management and its legal advisors
also made presentations reviewing the transaction, including valuation issues,
legal issues, and issues concerning the Merger Agreement and related documents.
After the presentations, the PSCo Board approved the Merger Agreement and
related documents.
On August 22, 1995, the SPS Board met to approve the Mergers. SPS
management and its legal and financial advisors made presentations reviewing the
transaction (valuation, legal, Merger Agreement and related documents). Dillon
Read delivered its fairness opinion to the SPS Board. After the presentations,
final negotiations were held with representatives of PSCo regarding the
conversion ratio. At the conclusion of those discussions and negotiations, the
SPS Board unanimously approved the Merger Agreement and related documents.
On January 31, 1996, the shareholders of PSCo and SPS, respectively,
met and voted to approve the Transaction.
Additional information regarding the background of the Transaction is
set forth in the NCE Registration Statement on Form S-4 (Exhibit C-1 hereto).
2. MERGER AGREEMENT
The Merger Agreement provides for SPS Merger Corp. to be merged with
and into SPS, and PSCo Merger Corp. to be merged with and into PSCo. The Merger
Agreement is incorporated by reference as Exhibit B-1.
Under the terms of the Merger Agreement, upon consummation of the
Transaction:
- each issued and outstanding share of PSCo Common Stock, 12 together
with appurtenant rights, shall be converted into
- --------------------
(12) Other than treasury and certain other shares that will be canceled,
fractional shares and shares held by holders who dissent in compliance with
Colorado law.
-26-
<PAGE>
the right to receive one share of NCE Common Stock (the "PSCo
Conversion Ratio");
- each issued and outstanding share of SPS Common Stock, 13 together
with appurtenant rights, shall be converted into the right to receive
0.95 of one share of NCE Common Stock (the "SPS Conversion Ratio" and,
together with the PSCo Conversion Ratio, the "Conversion Ratios");
- each share of PSCo Merger Corp. Common Stock issued and outstanding
prior to the Transaction will be converted into one share of Common
Stock of PSCo as the surviving corporation;
- each share of SPS Merger Corp. Common Stock issued and outstanding
prior to the Transaction will be converted into one share of Common
Stock of SPS as the surviving corporation; and
- all shares of capital stock of NCE issued and outstanding immediately
prior to the Transaction will be canceled.
The shares of preferred stock of PSCo and any shares of preferred stock of SPS
outstanding at the time of the consummation of the Transaction will remain
preferred stock of PSCo and SPS, respectively. The Transaction is conditioned
on being tax-free to PSCo and SPS shareholders (except as to dissenters' rights
and fractional shares.) Based on the capitalization and the Conversion Ratios
of PSCo and SPS on December 1, 1995, the shareholders of PSCo and SPS would own
securities representing approximately 62.0% and 38.0%, respectively, of the
outstanding shares of common stock.
The Transaction is subject to customary closing conditions, including
the receipt of the requisite shareholder approvals of PSCo and SPS and all
necessary governmental approvals, including the approval of the Commission.
The Transaction is designed to qualify as a tax-free reorganization
under Section 351 of the Internal Revenue Code of 1986, as amended. PSCo and
SPS believe that the Transaction will be treated as a "pooling of interests" for
accounting purposes.
D. PSCo AND SPS BENEFIT PLANS
PSCo and SPS currently have eight plans which involve the issuance of
shares of the companies' common stock to participating employees, or, in the
case of dividend reinvestment plans,
- --------------------
(13) Other than those shares that will be canceled, fractional shares and
shares held by holders who dissent in compliance with New Mexico law.
-27-
<PAGE>
shareholders. They are as follows: the PSCo Employee Savings and Stock
Ownership Plan, the PSCo Omnibus Incentive Plan, the PSCo Automatic Dividend
Reinvestment and Common Stock Purchase Plan, the SPS Directors' Deferred
Compensation Plan, the SPS 1989 Stock Incentive Plan, the SPS Employee
Investment Plan, the SPS Dividend Reinvestment and Cash Payment Plan for
Employees, and the SPS Dividend Reinvestment and Cash Payment Plan for
Shareholders.
It is anticipated that for an undetermined period of time after the
consummation of the Transaction all such PSCo and SPS plans, except the
dividend reinvestment plans, the PSCo Omnibus Incentive Plan, and the SPS
1989 Stock Incentive Plan, will be maintained on substantially the same
terms, except that shares of NCE Common Stock will be used instead of PSCo
Common Stock and SPS Common Stock. It is also anticipated that the PSCo
Dividend Reinvestment Plan and the two SPS Dividend Reinvestment Plans will
be terminated in connection with the consummation of the Transaction to be
replaced by an NCE dividend reinvestment plan (the "NCE DRIP"). NCE filed a
separate Form U-1 Application/Declaration (File No. 70-9007) seeking
authorization from the Commission as required in connection with NCE shares
to be issued in financing transactions following consummation of the
Transaction, including shares to be issued under the PSCo or the SPS plans or
the NCE DRIP. In such Form U-1, NCE system companies also requested
authorization for various financing transactions and for the retention of a
financing entity, Southwestern Public Service Capital I.(14)
At some point subsequent to the consummation of the Transaction, it
is intended that certain stock-based plans of NCE (the "NCE Stock-Based
Benefit Plans") will replace the PSCo or SPS benefit plans with a similar
name. It is intended that each of the NCE Stock-Based Benefit Plans will
contain substantially the same provisions as the existing PSCo or SPS plans
with similar name. The NCE Stock-Based Benefit Plans may be adopted and
approved by PSCo and SPS, as the shareholders of NCE, prior to the
consummation of the Transaction. NCE has sought authorization from the
Commission as required in connection with NCE shares to be issued under the
NCE Stock Based Benefit Plans in the above-referenced filing (File
No. 70-9007).
E. MANAGEMENT AND OPERATIONS OF NCE FOLLOWING THE MERGER
Pursuant to the Merger Agreement, the NCE Board consists of fourteen
members, eight designated by PSCo and six by SPS. Upon consummation of the
Transaction, the NCE Board of Directors shall have four committees as
follows: an audit committee, a compensation committee, a finance committee,
and a nominating and civic responsibility committee. PSCo and SPS each shall
designate the
- -------------------
(14) Applicants also request that SPS be authorized to retain Southwestern
Public Service Capital I, a wholly-owned trust, that issued the trust
preferred securities and loaned proceeds to SPS. (Refer to SPS's historical
capital structure in Item 3.A.1.d.)
-28-
<PAGE>
chairmen of two of these committees. In addition to the chairmen, each
committee shall consist of two members designated by PSCo and two members
designated by SPS. The Merger Agreement provides that for four and one-half
years following consummation of the Transaction, these arrangements
concerning the NCE Board of Directors and its committees may not be modified
unless the terms of such modification are approved by a vote of two-thirds of
the NCE Board of Directors.
Mr. Helton is Chairman of the Board of Directors and Chief Executive
Officer of NCE and Mr. Brunetti is NCE's Vice-Chairman of the Board,
President and Chief Operating Officer. Mr. Helton and Mr. Brunetti each have
an employment agreement with NCE. The forms of these employment agreements
are attached as Annexes VI and VII to NCE's Registration Statement on Form
S-4, incorporated by reference herein as Exhibit C-1. In addition, persons
have been selected to serve as officers of NCE and certain of its
subsidiaries following consummation of the Transaction.
The Merger Agreement provides that NCE shall maintain (i) its
corporate offices in Denver, Colorado and (ii) significant operating offices
in Amarillo, Texas. Such provision cannot be modified for four and one-half
years following the consummation of the Transaction unless the terms of such
modification are approved by a vote of two-thirds of the NCE Board of
Directors.
Following consummation of the Transaction, the activities of NCE will
be governed by its Restated Certificate of Incorporation and Restated Bylaws,
attached hereto as Exhibits A-1 and A-2 respectively.
Item 2. FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses to be paid or incurred, directly
or indirectly, in connection with the Transactions, including the
solicitation of proxies, registration of securities of NCE under the
Securities Act of 1933, and other related matters, are estimated as follows:
Commission filing fee relating to
Application/Declaration on Form U-1 ........... $ 2,000
Commission filing fee for the
Registration Statement on Form S-4 .......... 1,223,000
Accountants' fees ............................. 200,000
Legal fees and expenses related to the Act .... 1,495,000
Other legal fees and expenses ................. 139,600
Shareholder communication and proxy
solicitation ................................ 1,793,000
-29-
<PAGE>
Stock Exchange listing fee .................... 51,000
Exchanging, printing, and engraving of
stock certificates .......................... 808,000
Investment bankers' fees and expenses:
Barr Devlin & Co. Incorporated .............. 6,000,000
Dillon, Read & Co. Inc. ..................... 5,000,000
Consulting fees related to human
resource issues, public relations,
regulatory support, and other
matters relating to the
Transaction ................................. 6,139,000
Expenses related to integrating
the operations of the merged company
and miscellaneous ........................... 659,400
-----------
TOTAL: ........................................ $23,510,000
Item 3. APPLICABLE STATUTORY PROVISIONS
The following sections of the Act and the Commission's rules
thereunder are or may be directly or indirectly applicable to the proposed
transaction:
Section of the Act Transactions to which section or rule is or may be
applicable
4, 5 Registration of NCE as a holding company following the
consummation of the Transaction
6(a), 7 Issuance of NCE Common Stock in the Transaction in
exchange for shares of PSCo and SPS Common Stock;
issuance to NC Enterprises of stock of certain
non-utility subsidiaries of PSCo and SPS; issuance by
NC Enterprises of debt to SPS; issuance by NC
Enterprises of stock to NCE; issuance by NC Services
of stock to NCE; posible guarantee by NCE of note
issued by NC Enterprises to SPS
9(a)(2), 10(a), Acquisition by NCE of common stock
(b), (c) and (f) of PSCo, SPS, and Cheyenne
9(a)(1), 10 Acquisition by NCE of stock of WGI, PSCCC,
NC Services, NC Enterprises, and possibly
NC International; acquisition by NC Enterprises
of stock of certain non-utility subsidiaries of
PSCo and SPS; possible acquisition of stock by
e prime
-30-
<PAGE>
of stock of NC International; acquisition
by SPS of debt of NC Enterprises
8, 11(b), 21 Retention by NCE of gas operations and other
businesses of PSCo and Cheyenne
13 Approval of the Utility Service Agreement and services
provided thereunder by NC Services to certain
affiliates; approval of the Non-Utility Service
Agreement and services provided to certain affiliates
thereunder by NC Services; and approval of the
performance of certain services between the NCE system
companies
Rules
58 Retention of energy-related companies or
investments
80-91 NC Services' charges to NCE system companies; certain
NCE system companies' charges to other NCE system
companies
87(a)(3) Services among NCE system companies
88 Approval of NC Services as a subsidiary service
company
93, 94 Accounts, records, and annual reports by NC Services
To the extent that other sections of the Act or the Commission's rules
thereunder are deemed applicable to the Transaction, such sections and rules
should be considered to be set forth in this Item 3.
A. LEGAL ANALYSIS
Section 9(a)(2) makes it unlawful, without approval of the Commission
under Section 10, "for any person . . . to acquire, directly or indirectly, any
security of any public utility company, if such person is an affiliate . . . of
such company and of any other public utility or holding company, or will by
virtue of such acquisition become such an affiliate." Under the definition set
forth in Section 2(a)(11)(A), an "affiliate" of a specified company means "any
person that directly or indirectly owns, controls, or holds with power to vote,
5 per centum or more of the outstanding voting securities of such specified
company," and "any company 5 per centum or more of whose outstanding voting
securities are owned, controlled, or held with power to vote, directly or
indirectly, by such specified company."
PSCo, SPS, and Cheyenne are public utility companies as defined in
Section 2(a)(5) of the Act. Because NCE will acquire more
-31-
<PAGE>
than five percent of the voting securities of each of PSCo, SPS, and Cheyenne
as a result of the Transaction, and because PSCo, SPS, and Cheyenne will
become "affiliates" of NCE as a result of the Transaction, NCE must obtain
the approval of the Commission for the Transaction under Sections 9(a)(2) and
10 of the Act. The statutory standards to be considered by the Commission in
evaluating the proposed transaction are set forth in Sections 10(b), 10(c),
and 10(f) of the Act.
As set forth more fully below, the Transaction complies with all of
the applicable provisions of Section 10 of the Act and should be approved by
the Commission. Thus:
- the consideration to be paid in the Transaction is fair and
reasonable;
- the Transaction will not create detrimental interlocking relations or
concentration of control;
- the Transaction will not result in an unduly complicated capital
structure for the NCE system;
- the Transaction is in the public interest and the interests of
investors and consumers;
- the Transaction is consistent with Sections 8 and 11 of the Act; and
- the Transaction will comply with all applicable state laws.
Furthermore, this Transaction also provides an opportunity for the
Commission to follow certain of the interpretive recommendations made by the
Division of Investment Management (the "Division") in the report issued by
the Division in June 1995 entitled "The Regulation of Public Utility Holding
Companies" (the "1995 Report"). While the Transaction and the requests
contained in this Application/Declaration are well within the precedent of
transactions approved by the Commission as consistent with the Act prior to
the 1995 Report and thus could be approved without any reference to the 1995
Report, a number of the recommendations contained therein serve to strengthen
the Applicants' analysis and would facilitate the creation of a new holding
company better able to compete in the rapidly evolving utility industry. The
Division's overall recommendation that the Commission "act administratively
to modernize and simplify holding company regulation . . . and minimize
regulatory overlap, while protecting the interests of consumers and
investors,"(15) should be used in reviewing this Application/Declaration
since, as demonstrated below, the Transaction will benefit both consumers and
shareholders of NCE and the other federal and state regulatory authorities
with jurisdiction over this Transaction have approved it as in the public
interest. In addition, although discussed in more detail in each applicable
item below, the specific recommendations of the Division with regard to
financing
- ---------------------
(15) Letter of the Division of Investment Management to the Securities and
Exchange Commission, 1995 Report.
-32-
<PAGE>
transactions,(16) utility ownership,(17) and diversification(18) are
applicable to this Transaction.
1. SECTION 10(b)
Section 10(b) provides that, if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)
unless:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public utility companies, of a kind or to an
extent detrimental to the public interest or the interests of investors or
consumers;
(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other remuneration, to
whomsoever paid, to be given, directly or indirectly, in connection with
such acquisition is not reasonable or does not bear a fair relation to the
sums invested in or the earning capacity of the utility assets to be
acquired or the utility assets underlying the securities to be acquired;
or
(3) such acquisition will unduly complicate the capital structure of
the holding company system of the applicant or will be detrimental to the
public interest or the interests of investors or consumers or the proper
functioning of such holding company system.
- ---------------------
(16) E.g., the reduced regulatory burdens associated with routine
financings. 1995 Report at 50.
(17) E.g., the Commission should apply a more flexible interpretation of the
integration requirements under the Act; interconnection through power pools,
reliability councils, and wheeling arrangements can satisfy the physical
interconnection requirement of section 2(a)(29); the geographic requirements
of section 2(a)(29) should be interpreted flexibly, recognizing technical
advances consistent with the purposes and provisions of the Act; the
Commission's analysis should focus on whether the resulting system will be
subject to effective regulation; the Commission should liberalize its
interpretation of the "A-B-C" clauses and permit combination systems where
the affected states agree, and the Commission should "watchfully defer" to
the work of other regulators. 1995 Report at 71-7.
(18) E.g., the Commission should promulgate rules to reduce the regulatory
burdens associated with energy-related diversification and the Commission
should adopt a more flexible approach in considering all other requests to
enter into diversified activities. 1995 Report at 88-90.
-33-
<PAGE>
a. SECTION 10(b)(1)
i. INTERLOCKING RELATIONSHIPS
By its nature, any merger results in new links between previously
unrelated companies. However, these links are not the types of interlocking
relationships targeted by Section 10(b)(1), which was primarily aimed at
preventing business combinations unrelated to operating synergies.
The Merger Agreement provides for the Board of Directors of NCE to be
composed of members drawn from the Boards of Directors of both PSCo and SPS.
This is necessary to integrate PSCo and SPS fully into the NCE system and will
therefore be in the public interest and the interests of investors and
consumers. Forging such relations is beneficial to the protected interests
under the Act and thus is not prohibited by Section 10(b)(1).
ii. CONCENTRATION OF CONTROL
Section 10(b)(1) is intended to avoid "an excess of concentration and
bigness" while preserving the "opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations" afforded by the
coordination of local utilities into an integrated system. American Electric
Power Co., 46 SEC 1299, 1309 (1978). In applying Section 10(b)(1) to utility
acquisitions, the Commission must determine whether the acquisition will create
"the type of structures and combinations at which the Act was specifically
directed." Vermont Yankee Nuclear Corp., 43 SEC 693, 700 (1968). As discussed
below, the PSCo-SPS strategic alliance will not create a "huge, complex, and
irrational system," but rather will afford the opportunity to achieve economies
of scale and efficiencies which are expected to benefit investors and consumers.
American Electric Power Co., 46 SEC 1299, 1307 (1978).
Size: If approved, the NCE system will serve approximately
1.5 million electric customers in six states and 980,000 gas customers in
Colorado and Wyoming. As of and for the twelve months ended December 31, 1996,
for PSCo and SPS: (1) the combined assets of PSCo and SPS would have totaled
approximately $7 billion; (2) combined operating revenues of PSCo and SPS would
have totaled approximately $3.0 billion; and (3) combined owned generating
capacity would have totaled approximately 7,438 MW.
By comparison, the Commission has approved a number of acquisitions
involving significantly larger operating utilities. See, e.g., CINergy Corp.,
HCAR No. 26146 (Oct. 21, 1994) (combination of The Cincinnati Gas & Electric Co.
and PSI Resources; combined assets at time of acquisition of approximately
$7.9 billion); Entergy Corp., HCAR No. 25952 (Dec. 17, 1993) (acquisition of
Gulf States Utilities Companies; combined assets at time of acquisition in
excess of $21 billion); Northeast Utilities, HCAR No. 25221 (Dec. 21, 1990)
(acquisition of Public Service of New Hampshire; combined assets at
-34-
<PAGE>
time of acquisition of approximately $9 billion); The Southern Company, HCAR
Nos. 24579 and 24579A (February 12, 1988 and February 26, 1988, respectively)
(acquisition of Savannah Electric and Power Company; combined assets at time
of acquisition of approximately $20 billion); Centerior Energy Corp., HCAR
No. 24073 (April 29, 1986) (combination of Cleveland Electric Illuminating
and Toledo Edison; combined assets at time of acquisition of approximately
$9.1 billion); American Electric Power Co., 46 SEC 1299 (1978) (acquisition
of Columbus and Southern Ohio Electric; combined assets at time of
acquisition of approximately $9 billion).
As the following table demonstrates, seven of the fifteen registered
electric utility holding company systems are larger than NCE will be following
the Transaction in terms of assets, operating revenues, customers, and/or sales
of electricity:(19)
Total Operating Electric Sales in KWH
System Assets Revenues Customers (Millions)
Total ($ Millions) ($ Millions) (Thousands)
Southern 30,554 9,180 3,572 146,200
AEP 15,902 5,670 2,911 120,760
Entergy 22,266 6,274 2,400 103,465
CSW 13,869 3,735 1,683 59,934
GPU 9,870 3,805 1,976 45,753
Northeast 10,545 3,749 1,694 39,618
CINergy 8,220 3,031 1,369 54,220
NCE 6,018 2,881 1,476 44,229
In addition, NCE will be smaller than two of the registered holding
companies to be formed as a result of recently announced mergers, specifically
the merger of Wisconsin Energy Corp. and Northern States Power Company (combined
1995 year-end assets of approximately $10.6 billion and operating revenues of
$4.4 billion) and Union Electric Company and CIPSCO, Inc. (combined as of
June 30, 1996, assets of approximately $8.6 billion and operating revenues of
$3.0 billion).
NCE will be a mid- to small-size registered holding company, and its
operations would not exceed the economies of scale of current electric
generation and transmission technology or provide undue power or control to NCE
in the region in which it will provide service.
Efficiencies and economies: As noted above, the Commission has
rejected a mechanical size analysis under Section 10(b)(1) in favor of assessing
the size of the resulting system with reference to the efficiencies and
economies that can be achieved through the integration and coordination of
utility operations. More recent pronouncements of the Commission confirm that
size is not determinative. Thus, in Centerior Energy Corp., HCAR No. 24073
(April
- --------------------------------
(19) Amounts are as of December 31, 1995 or for the year ended December 31,
1995.
-35-
<PAGE>
29, 1986), the Commission stated flatly that a "determination of whether to
prohibit enlargement of a system by acquisition is to be made on the basis of
all the circumstances, not on the basis of size alone." In addition, in the
1995 Report, the Division recommended that the Commission approach its
analysis on merger and acquisition transactions in a flexible manner with
emphasis on whether the Transaction creates an entity subject to effective
regulation and is beneficial for shareholders and customers as opposed to
focusing on rigid, mechanical tests.(20)
By virtue of the Transaction, NCE will be in a position to realize the
"opportunities for economies of scale, the elimination of duplicate facilities
and activities, the sharing of production capacity and reserves and generally
more efficient operations" described by the Commission in American Electric
Power Co. 46 SEC at 1309. Among other things, the Transaction is expected to
yield significant capital expenditure savings through the deferral or
elimination of certain capacity requirements and a reduction in reserve margin;
savings through greater purchasing power; labor cost savings; administrative and
general savings; and cost-of-capital savings. These expected economies and
efficiencies from the combined utility operations are described in greater
detail below and are projected to result in net savings of approximately
$770 million over the first ten years alone.
Competitive Effects: As the Commission noted in Northeast Utilities,
HCAR No. 25221 (Dec. 21, 1990), the "antitrust ramifications of an acquisition
must be considered in light of the fact that public utilities are regulated
monopolies and that federal and state administrative agencies regulate the rates
charged consumers." On August 22, 1996, PSCo and SPS filed Notification and
Report Forms with the DOJ and FTC pursuant to the HSR Act describing the effects
of the Transaction on competition in the relevant market and no request for
additional information was received before the expiration of the applicable
thirty-day waiting period on September 21, 1996. It is a condition to the
consummation of the Transaction that the applicable waiting periods under the
HSR Act shall have expired or been terminated, which condition has been
satisfied.
In addition, the competitive impact of the Transaction has been fully
considered by the FERC in connection with its approval of the merger of PSCo and
SPS. A detailed explanation of the reasons why the Transaction will not
threaten competition in even the most narrowly drawn geographic and product
markets is set forth in the prepared testimony of Dr. Robert Spann, filed with
the FERC on behalf of PSCo and SPS, a copy of which is filed as Exhibit D-1.2.1.
The application filed by PSCo and SPS with the FERC is filed as Exhibit D-1.1.
PSCo and SPS have entered into a settlement agreement with various intervenors
resolving all issues in that proceeding, including market power issues. The
FERC Trial Staff has submitted comments
- --------------------------------
(20) 1995 Report at 73-4.
-36-
<PAGE>
supporting that settlement agreement. In his order certifying the settlement
to the FERC for review and decision, a Presiding Administrative Law Judge
rejected the claim of the intervenor opposing the settlement agreement that
the Transaction raised disputed issues of material fact regarding the
Transaction's competitive effects. In fact, the Presiding Administrative Law
Judge found that "Staff and Applicants have shown that the merger is not
anti-competitive, and, in fact, may be pro-competitive." On that basis, he
certified the settlement agreement without an initial decision. On March 12,
1997, the FERC issued an order approving the merger. Filed herewith as
Exhibit D-1.4, Exhibit D-1.5, and Exhibit D-1.6, respectively, are copies of
the FERC settlement agreement, the Certification of Contested Settlement
Agreement in the FERC proceeding, and the FERC's order. See Item 4.B. for
additional detail.
For these reasons, the Transaction will not "tend toward interlocking
relations or the concentration of control" of public utility companies, of a
kind or to the extent detrimental to the public interest or the interests of
investors or customers within the meaning of Section 10(b)(1).
b. SECTION 10(b)(2) -- FAIRNESS OF CONSIDERATION
Section 10(b)(2) requires the Commission to determine whether the
consideration to be given by NCE to the holders of PSCo Common Stock and SPS
Common Stock in connection with the Transaction is reasonable and whether it
bears a fair relation to investment in and earning capacity of the utility
assets underlying the securities being acquired.(21) Market prices at which
securities are traded have always been strong indicators as to values. As shown
in the table below, most quarterly price data, high and low, in the years 1994,
1995, and 1996, for PSCo and SPS Common Stock provide support for this
conversion ratio.
- --------------------------------
(21) The shares of PSCo preferred stock and any SPS preferred stock
outstanding at the time of the consummation of the Transaction will remain
outstanding preferred stock of PSCo and SPS, respectively.
-37-
<PAGE>
PSCo SPS*
---- ----
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
---- --- --------- ---- --- ---------
1994
First Quarter $ 32 1/8 $ 28 1/2 $ 0.50 $ 30 7/8 $ 27 5/8 $ 0.55
Second Quarter 29 3/4 25 3/8 0.50 29 1/8 23 3/4 0.55
Third Quarter 27 7/8 24 3/4 0.50 27 1/4 24 7/8 0.55
Fourth Quarter 30 1/8 25 7/8 0.50 28 25 3/8 0.55
1995
First Quarter 31 1/2 29 0.51 29 3/8 26 1/2 0.55
Second Quarter 32 7/8 29 1/4 0.51 29 7/8 27 3/4 0.55
Third Quarter 34 1/2 30 5/8 0.51 32 7/8 28 5/8 0.55
Fourth Quarter 35 7/8 33 3/8 0.51 33 7/8 32 0.55
1996
First Quarter 36 1/2 33 3/4 0.525 33 7/8 31 7/8 0.55
Second Quarter 36 3/4 32 3/8 0.525 34 1/8 30 1/4 0.55
Third Quarter 36 7/8 34 3/4 0.525 33 3/8 30 3/4 0.55
Fourth Quarter 39 1/2 35 1/4 0.525 36 3/4 32 1/4 0.55
- --------------------------------
* The information is provided for calendar quarters. Fiscal quarters for SPS
end on the last day of each November, February, May and August.
On August 22, 1995, the last full trading day before the public
announcement of the execution and delivery of the Merger Agreement, the closing
price per share on the NYSE Consolidated Tape of (i) PSCo Common Stock was
$31 1/2 and (ii) SPS Common Stock was $29 3/8, a ratio of 1 to 0.93.
The fairness of the Transaction's consideration is also evidenced
by the fact that the Transaction is a pure stock-for-stock exchange and
qualifies for treatment as a pooling of interests for accounting
purposes.(22) As set forth more fully above, each share of
- --------------------------------
(22) Twelve specific conditions must be met to qualify as a pooling. The
Transaction should meet those criteria as follows: (1) Both PSCo and SPS
were autonomous and were not a subsidiary or division of another corporation
within two years before the plan of combination was initiated; (2) At the
date of the merger initiation and at the date of consummation SPS and PSCo
are independent of each other; (3) SPS and PSCo will undertake a course of
action which will attempt to complete the transaction within one year in
accordance with a specific plan, or completed in a single transaction.
Litigation or proceedings of a governmental authority that delay the
completion of a plan are excepted from the one-year rule, provided they are
beyond the control of the combining companies; (4) At the consummation date
of the plan, NCE will offer and issue its majority class of stock (voting
rights) for no less than 90% of the voting common stock interests of SPS and
PSCo. The 90%, or more of the voting common stock interests being acquired
is determined at the date the plan is consummated; (5) No changes in the
equity interests of the voting common stock of
(continued...)
-38-
<PAGE>
PSCo Common Stock will be converted into the right to receive one share of NCE
Common Stock, and each share of SPS Common Stock will be converted into the
right to receive 0.95 of one share of NCE Common Stock. The Transaction will
therefore involve no "acquisition adjustment" or other write-up of the assets of
SPS or PSCo.
In addition, the Conversion Ratios are the product of extensive and
vigorous arms-length negotiations between PSCo and SPS. These negotiations were
preceded by months of due diligence, analysis, and evaluation of the assets,
liabilities and business prospects of each of the respective companies. See NCE
Registration Statement on Form S-4 (Exhibit C-1 hereto).
Finally, nationally-recognized investment bankers for each of PSCo and
SPS have reviewed extensive information concerning the companies and analyzed
the Conversion Ratios employing a variety of valuation methodologies, and have
opined that the Conversion Ratios are fair, from a financial point of view, to
the respective holders of PSCo Common Stock and SPS Common Stock. The
investment bankers' analyses and opinions are attached as Annexes II and III to
NCE's Registration Statement on Form S-4 and are described on pages 33-43 of the
Form S-4 (Exhibit C-1 hereto).
In light of these opinions and an analysis of all relevant factors,
including the benefits that may be realized as a result of the Transaction, NCE
believes that the Conversion Ratios fall within the range of reasonableness, and
the consideration for the Transaction bears a fair relation to the sums invested
in, and the earning capacity of, the utility assets of PSCo and SPS.
- --------------------------------
(22) (...continued)
SPS or PSCo were to be made in contemplation of a pooling of interests. This
restriction is for a period beginning two years prior to the initiation date
of the plan of combination and for the period between the initiation date and
the consummation date; (6) SPS and PSCo will not reacquire any of its voting
common stock in substance or form to effect a business combination. Any
reacquisition must be a normal amount as evidenced by both companies'
patterns of reacquisition prior to the merger; (7) Each SPS and PSCo common
stockholder will receive a voting common stock interest exactly in proportion
to his or her voting common stock interest prior to the combination; (8) The
SPS and PSCo common shareholders will receive the rights they are entitled to
and will not be deprived or restricted in any way from exercising those
rights; (9) The entire merger agreement will be effected on the date of
consummation; (10) Subsequent to consummation the combined corporation, NCE,
will not agree to reacquire or retire any of the stock which was issued to
effect the transaction; (11) NCE will not enter into any agreements to the
benefit of the former shareholders of SPS or PSCo, such as loan guarantees;
(12) NCE will not plan to dispose of substantial amounts of the assets of SPS
or PSCo within two years of the date of the combination other than routine
transactions in the ordinary course of business or to eliminate excess
capacity.
-39-
<PAGE>
c. SECTION 10(b)(2) -- REASONABLENESS OF FEES
NCE believes that the overall fees, commissions and expenses incurred
and to be incurred in connection with the Transaction are reasonable and fair in
light of the size and complexity of the Transaction relative to other
transactions and the anticipated benefits of the Transaction to the public,
investors, and consumers; that they are consistent with recent precedent; and
that they meet the standards of Section 10(b)(2).
As set forth in Item 2 of this Application/Declaration, PSCo and SPS
together incurred a combined total of approximately $23.5 million in fees,
commissions and expenses in connection with the Transaction. By contrast,
Cincinnati Gas & Electric Company and PSI Resources incurred $47.12 million in
fees in connection with their reorganization as subsidiaries of CINergy,
Northeast Utilities alone incurred $46.5 million in fees and expenses in
connection with its acquisition of Public Service of New Hampshire, and Entergy
alone incurred $38 million in fees in connection with its recent acquisition of
Gulf States Utilities -- which amounts all were approved as reasonable by the
Commission. See CINergy, HCAR No. 26146 (Oct. 21, 1994); Northeast Utilities,
HCAR No. 25548 (June 3, 1992); Entergy Corp., HCAR No. 25952 (Dec. 17, 1993).
With respect to financial advisory fees, PSCo and SPS believe that the
fees payable to their investment bankers are fair and reasonable for similar
reasons.
Pursuant to the terms of Barr Devlin's engagement, PSCo paid Barr
Devlin for its services in connection with the Transaction: (i) a financial
advisory retainer fee of $100,000 upon signing the June 5, 1995 engagement
letter; (ii) an initial financial advisory progress fee of $1,000,000 upon
execution of the Merger Agreement; and (iii) a second financial advisory
progress fee of $1,000,000 upon PSCo shareholder approval of the Merger
Agreement. In addition, PSCo has agreed to pay Barr Devlin a transaction fee
based on the aggregate consideration to be received by SPS and holders of SPS
Common Stock in connection with the Transaction on the consummation of the
Transaction, ranging from 0.45 percent of such aggregate consideration (for a
transaction with an aggregate consideration of $1,000,000,000) to 0.41 percent
of such aggregate consideration (for a transaction with an aggregate
consideration of $2,000,000,000). All retainer fees payable during the term of
the engagement and all financial advisory progress fees would be credited
against any transaction fee payable to Barr Devlin. PSCo has agreed to
reimburse Barr Devlin for its out-of-pocket expenses, including fees and
expenses of legal counsel and other advisors engaged with the consent of PSCo,
and to indemnify Barr Devlin against certain liabilities, including liabilities
under the federal securities laws, relating to or arising out of its engagement.
-40-
<PAGE>
Pursuant to the engagement letter between SPS and Dillon Read, SPS has
paid Dillon Read the following amounts: $200,000 upon the execution of the
engagement letter , $450,000 upon the rendering of Dillon Read's fairness
opinion to the SPS Board, $200,000 upon the affirmative vote of SPS shareholders
in favor of the Transaction, and $100,000 on April 30, 1996, and $100,000 every
six months thereafter until the Transaction is consummated or Dillon Read's
engagement has been terminated. SPS has also agreed to pay Dillon Read a fee
upon consummation of the Transaction equal to 0.37 percent of the aggregate
amount of consideration received by SPS's common shareholders, less the $850,000
and the $100,000 semi-annual payments mentioned above which will have previously
been paid. SPS has agreed to reimburse Dillon Read for its out-of-pocket
expenses, including fees and expenses of legal counsel and other advisors
engaged with the consent of SPS, and to indemnify Dillon Read against certain
liabilities, including liabilities under the federal securities laws, relating
to or arising out of its engagement.
The investment banking fees of PSCo and SPS reflect the competition of
the marketplace, in which investment banking firms actively compete with each
other to act as financial advisors to merger partners.
d. SECTION 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the
Transaction will unduly complicate NCE's capital structure or will be
detrimental to the public interest, the interests of investors or consumers, or
the proper functioning of NCE's system.
Capital structure: The corporate capital structure of NCE after the
Transaction will not be unduly complicated and will be substantially similar to
capital structures approved by the Commission in other orders. See, e.g.,
CINergy, HCAR No. 26146 (Oct. 21, 1994); Centerior Energy Corp., HCAR No. 24073
(April 29, 1986); Midwest Resources, et al., HCAR No. 25159 (Sept. 26, 1990);
Entergy Corp., HCAR No. 25952 (Dec. 17, 1993); Northeast Utilities, HCAR
No. 25548 (June 3, 1992).
In the Transaction, the shareholders of PSCo and SPS will receive NCE
Common Stock. NCE will own 100% of the common stock of PSCo and SPS and there
will be no minority common stock interest remaining in either company. Each
share of PSCo and any share of SPS preferred stock outstanding at the time of
the consummation of the Transaction will remain outstanding preferred stock of
PSCo and SPS, respectively. The debt securities of PSCo and SPS outstanding at
the time of the consummation of the Transaction will likewise remain outstanding
without change. The only voting securities of NCE which will be publicly held
after the transaction will be NCE Common Stock. NCE will have the ability to
issue, subject to the approval of the Commission, preferred stock, the terms of
which, including any voting rights, may be set by NCE's Board of Directors as
has been authorized by the Commission with regard to other registered holding
companies. See, e.g., The Columbia Gas System, Inc., HCAR No. 26361 (Aug. 25,
-41-
<PAGE>
1995) (approving restated charter, including preferred stock whose terms,
including voting rights, can be established by the board of directors). NCE
filed a separate Form U-1 Application/Declaration (File No. 70-9005) seeking
authorization to declare a dividend distribution of one right for each share
of NCE common stock, entitling the holder to purchase securities of NCE in
certain events. The only class of voting securities of NCE's direct
non-utility subsidiaries will be common stock. Moreover, with respect to
NCE's second-tier non-utility subsidiaries, in all but one case (NCE will
hold 80.03% of the common stock of Natural Fuels), all issued and outstanding
shares of voting securities will be held by either NC Enterprises or PSCo.
In addition, NC Enterprises will have issued debt to SPS in connection with
its acquisition of the outstanding voting securities of Quixx and UE as more
fully described in Item 3.A.4.ii below.
Set forth below are summaries of the historical capital structure of
PSCo and SPS as of December 31, 1996, and the pro forma consolidated capital
structure of NCE as of that date:
PSCo and SPS Historical Capital Structures*
(dollars in millions)
PSCo SPS
---- ---
Common Stock Equity 1,438 732
Preferred stock not
subject to Mandatory
redemption 140 0
Preferred stock subject
to mandatory redemption 42 0
SPS Obligated Mandatorily
Redeemable Preferred
Securities of Subsidiary
Trust holding solely
Subordinated Debentures
of SPS 0 100
Long-term Debt 1,415 636
Short-term Debt 245 54
------ ------
Total 3,280 1,522
-42-
<PAGE>
NCE Pro Forma Consolidated Capital Structure*
(dollars in millions)
(unaudited)
Common Stock Equity 2,161
Preferred stock not
subject to mandatory
redemption 140
Preferred stock subject
to mandatory redemption 42
SPS Obligated Mandatorily
Redeemable Preferred
Securities of Subsidiary
Trust holding solely
Subordinated Debentures
of SPS 100
Long-Term Debt 2,051
Short-Term Debt 299
------
Total 4,793
* The pro forma consolidated capital structure of NCE has been adjusted
to reflect future nonrecurring charges directly related to the
Transaction, which result in, among other things, the recognition of
additional current liabilities and a reduction in retained earnings.
NCE's pro forma consolidated common equity to total capitalization ratio of 45%
comfortably exceeds the "traditionally acceptable 30% level." Northeast
Utilities, 47 SEC Docket at 1279, 1284 (1990).
Protected interests: As set forth more fully in Item 3.A.2.b.i
(Efficiencies and Economies), Item 3.A.2.b.ii (Integrated Public Utility System)
and elsewhere in this Application/Declaration, the Transaction is expected to
result in substantial cost savings and synergies, and will integrate and improve
the efficiency of the PSCo and SPS utility systems. The Transaction will
therefore be in the public interest and the interests of investors and
consumers, and will not be detrimental to the proper functioning of the
resulting holding company system.
2. SECTION 10(c)
Section 10(c) of the Act provides that, notwithstanding the provisions
of Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of Section 8 or is
detrimental to the carrying out of the provisions of
Section 11(23); or
- -------------------------
(23) By their terms, Sections 8 and 11 only apply to registered holding
companies and are therefore inapplicable at present to NCE, since it is not
now a registered holding company. The following discussion of
(continued...)
-43-
<PAGE>
(2) the acquisition of securities or utility assets of a public
utility or holding company unless the Commission finds that such
acquisition will serve the public interest by tending towards the
economical and the efficient development of an integrated public
utility system . . . .
a. SECTION 10(c)(1)
Section 10(c)(1) requires that an acquisition be lawful under
Section 8. Section 8 prohibits registered holding companies from acquiring,
owning interests in or operating both a gas and an electric utility serving
substantially the same area if state law prohibits it. As discussed below, the
Transaction does not raise any issue under Section 8 or, accordingly, the first
clause of Section 10(c)(1). Indeed, Section 8 indicates that a registered
holding company may own both gas and electric utilities where, as here, the
relevant state utility commissions support such an arrangement.
Section 10(c)(1) also requires that an acquisition not be detrimental
to carrying out the provisions of Section 11. Section 11(a) of the Act requires
the Commission to examine the corporate structure of registered holding
companies to ensure that unnecessary complexities are eliminated and voting
powers are fairly and equitably distributed. As described above, the
Transaction will not result in unnecessary complexities or unfair voting powers.
Although Section 11(b)(1) generally requires a registered holding
company system to limit its operations "to a single integrated public utility
system, and to such other businesses as are reasonably incidental, or
economically necessary or appropriate to the operations of such integrated
public utility system," a combination integrated gas and electric system within
a registered holding company is permissible under Section 8. Additionally,
Section 11(b)(1) provides that "one or more additional integrated public utility
systems" may be retained if, as here, certain criteria are met.
Section 11(b)(2) directs the Commission "to ensure that the corporate structure
or continued existence of any company in the holding company system does not
unduly or unnecessarily complicate the structure, or unfairly or inequitably
distribute voting power among security holders, of such holding company system."
As detailed below, the Transaction will not be detrimental to the
carrying out of the provisions of Section 11.
- -------------------------
(23)(...continued)
Sections 8 and 11 is included only because, under the present transaction
structure, NCE will register as a holding company after consummation of the
Transaction.
-44-
<PAGE>
i. RETENTION OF GAS OPERATIONS
As discussed in Item 3.A.2.VI.b.2, an argument could be made that the
PSCO and Cheyenne gas operations constitute a single integrated utility system
within the meaning of Section 2(a)(29)(B) of the Act. For purposes of this
Application, however, NCE has elected to treat the gas systems as separate
systems and has analyzed the lost economics associated with divestiture for each
company separately in Exhibit J-1 (Analysis of the Economic Impact of a
Divestiture of the Gas Operations of PSCO and its Cheyenne Subsidiary). NCE,
accordingly, requests that the Commission authorize retention of PSCO's gas
system and Cheyenne's gas system as separate systems. NCE's retention of the
gas operations of PSCo and Cheyenne is lawful under Section 8 of the Act and
would not be detrimental to the carrying out of Section 11 of the Act.
Section 8: Section 8 of the Act provides that
[w]henever a State law prohibits, or requires approval or
authorization of, the ownership or operation by a single company of
the utility assets of an electric utility company and a gas utility
company serving substantially the same territory, it shall be unlawful
for a registered holding company, or any subsidiary company
thereof . . . (1) to take any step, WITHOUT THE EXPRESS APPROVAL OF
THE STATE COMMISSION OF SUCH STATE, which results in its having a
direct or indirect interest in an electric utility company and a gas
company serving substantially the same territory; or (2) if it already
has any such interest, to acquire, WITHOUT THE EXPRESS APPROVAL OF THE
STATE COMMISSION, any direct or indirect interest in an electric
utility company or gas utility company serving substantially the same
territory as that served by such companies in which it already has an
interest. (Emphasis added).
On its face, the section indicates that, with the approval of the
relevant state utility commissions, registered holding company systems can
include both electric and gas utility systems. A careful reading of the section
indicates that the thrust of the section is to preclude the use by registered
holding companies of SEPARATE gas and electric utility companies with
overlapping service territories in order to circumvent any state law
restrictions on the ownership of gas and electric assets by the same company.
Thus, two types of combination registered holding companies are implicitly
acceptable under the statute absent such state objection -- a registered holding
company system that includes combination companies and a system that includes
separate gas and electric companies.
NCE believes that a reemphasis by the Commission on Section 8, which
would allow registered combination companies pending state support, is
consistent both with the Act and its policy objectives. Indeed, over time the
Commission has in fact emphasized different aspects of Section 8 and its
interplay with Section 11 --initially allowing registered holding companies to
own both gas and
-45-
<PAGE>
electric systems under Section 8, then focusing on Section 11 as controlling
determinations regarding combination companies, and requiring the second
system to meet a strict interpretation of the requirements set forth in
clauses A, B and C of Section 11(b)(1).
In its early decisions, the Commission adhered to the concept that the
decision as to whether or not to allow combination companies is one that states
should make (although the Commission might have to implement it in certain
cases) and, where such systems were permissible, the role of the Commission was
to ensure that both such systems are integrated as defined in the Act. The
Commission's most notable decision in this line is In the Matter of American
Water Works and Electric Company, Incorporated, 2 SEC 972 (1937). In this case,
the Commission approved the applicant's voluntary reorganization plan under
Section 11(e) of the Act and permitted the newly reorganized registered holding
company to retain its electric and its gas operations, specifically noting that
while the Act does not contain a definition of single integrated utility in the
context of a combination company:
We believe, however, that it is proper to regard such a combined
property as a single integrated system, provided that all of the
electric properties are integrated and all of the properties, both gas
and electric, are in fairly close geographic proximity and are so
related that substantial economies may be effectuated by their
coordination under common control. The question of public policy as
to the common ownership of gas and electric facilities in the same
territory is apparently left by the statute to the decision of the
states.(24)
Thus, since the combination company did not violate state policy, there was no
need for the Commission to exercise jurisdiction to implement state policy.
By the early 1940's, however, the Commission switched its focus to
Section 11 and adopted a narrow interpretation of the standards contained
therein as the controlling factor with regard to combination registered holding
companies.(25) In connection with its
- -------------------------
(24) In the Matter of American Water Works and Electric Company, Incorporated,
2 SEC at 983, n.3
(25) See, e.g., in the Matter of Columbia Gas & Electric Corporation, 8 SEC
443, 463 (1941); In the Matter of United Gas Improvement Company, HCAR No.
2692 (April 15, 1941); Securities and Exchange Commission v. New England
Electric System, 384 U.S. 176 (1966). It should be noted that the Commission
continued to give primacy to state utility commission determinations in
making decisions regarding combination exempt holding companies. See, e.g.,
In the Matter of Northern States Power Company, HCAR No. 12655 (Sept. 16,
1954); Delmarva Power & Light Co., 46 S.E.C. 710 (1976); WPL Holdings, HCAR
No. 24590 (Feb. 26,
(continued...)
-46-
<PAGE>
analysis of combination companies under Section 11, the Commission frequently
noted a policy concern existing at that time which advocated separating the
management of gas and electric utilities based on the belief that the gas
utility business tended to be overlooked by combination company management
who focused on the electric utility business. Therefore, gas utilities would
benefit from having separate management focused entirely on the gas utility
business.(26) However, both the legislative history of the Act and recent
changes in the utility industry indicate that it is a propitious time for the
Commission to reemphasize the provisions of Section 8 of the Act and allow
combination registered holding companies where, as in this case, they are
permitted under relevant state law.
A review of the legislative history of Section 8 clarifies this
intent. In its report, the Senate Committee on Interstate Commerce noted
that the provision in Section 8 concerning combination companies "is
concerned with competition in the field of distribution of gas and electric
energy -- a field which is essentially a question of State policy, but which
becomes a proper subject of Federal action where the extra-State device of a
holding company is used to circumvent state policy." The Report of the
Committee on Interstate Commerce, S. Rep. No. 621 at 31 (1935). In addition,
attached to the above-referenced committee report is the Report of the
National Power Policy Committee on Public-Utility Holding Companies,(27)
which sets forth a recommended policy that: "Unless approval of a State
commission can be obtained the commission should not permit the use of the
holding-company form to combine a gas and electric utility serving the same
territory where local law prohibits their combination in a single entity."
This does not prohibit combination companies where such approvals can be
obtained.
Much more recently, in the 1995 Report, the Division noted "it does
not appear that the SEC's precedent concerning additional systems precludes the
SEC from relaxing its interpretation of Section 11(b)(1)(A)" and "that the
utility industry is evolving toward the creation of one-source energy companies
that will provide their
- -------------------------
(25) (...continued)
1988).
(26) See, e.g., In the Matter of the Philadelphia Company, 28 SEC 35, 48
(1948); In the Matter of the North American Company, 11 SEC 169, 179-80
(1942); In the Matter of Illinois Power Company, HCAR No. 16574 (Jan. 2,
1970).
(27) The National Power Policy Committee was an committee appointed by
President Franklin D. Roosevelt consisting of representatives from various
government departments concerned with power problems and instructed to report
to Congress on the coordination of government policy relating to such
problems. Its members were Harold L. Ickes, Frank R. McNinch, Elwood Mead,
T.W. Norcross, Morris L. Cooke, Robert E. Healy, David E. Lilienthal and
Edward M. Markham.
-47-
<PAGE>
customers with whatever type of energy supply they want, whether electricity
or gas," and recommended that the Commission interpret Section 11(b)(1) of
the Act to allow registered holding companies to hold both gas and electric
operations as long as each affected state utility regulatory commission
approves of the existence of such a company.(28) This change in the industry
whereby, among other things, customers are increasingly seeking the most
economic means of meeting their energy needs, and not simply their gas needs
or their electric needs, is evidenced by the transformation of traditional
utilities into energy service companies as well as the growth of new energy
providers such as marketers, the increase in announced mergers between pure
electric and pure gas utilities, and even the treatment of energy as a
commodity for arbitrage transactions. For example, UtiliCorp United and PG&E
Enterprises have both established energy services subsidiaries to offer,
among other things, gas and electric power to customers nationwide.(29)
Similarly, Panhandle Eastern Corp. has changed its name to PanEnergy Corp. to
"reflect the company's expanding scope of energy services beyond the
traditional interstate natural gas pipeline business,(30) and Enron Corp. and
NGC Corp., which have significant gas and power marketing operations, are
expanding their operations, concluding that "customers in the future will
want energy services, not a specific fuel."(31) Moreover, registered utility
holding companies are currently expanding into the energy services business,
as is evidenced by the fact that Consolidated Natural Gas, Unitil
Corporation, Eastern Utilities Associates, New England Electric System and
Northeast Utilities, each a registered holding company, have been authorized
to offer customers multiple fuel options and related energy services through
subsidiaries.(32) Finally, the recent announcements of proposed mergers and
acquisitions that will result in the combination of electric utilities and
different types of gas companies -- namely, the proposed merger of Brooklyn
Union Gas Co. and Long Island Lighting Co., the proposed merger between Duke
Power Company and PanEnergy Corporation, TECO Energy's proposed acquisition
of Lykes Energy Inc., Enron Corporation's proposed acquisition of Portland
General Corporation, Texas Utilities Company's proposed acquisition of ENSERCH
- -------------------------
(28) 1995 Report at 15-6.
(29) ELECTRIC UTILITY WEEK, May 8, 1995 (regarding UtiliCorp); THE ENERGY
DAILY, August 23, 1996 (regarding PG&E). SEE ALSO BUSINESS WIRE, April 29,
1996 (discussing NorAm Energy Corp.'s plans for nationwide gas and electric
energy services).
(30) Reuters, April 24, 1996.
(31) Inside FERC, February 23, 1996.
(32) Consolidated Natural Gas Company, HCAR No. 26512 (April 30, 1996) (the
"CNG Order"); Unitil Corporation, HCAR No. 26527 (May 31, 1996); Northeast
Utilities, HCAR No. 26554 (Aug. 13, 1996); New England Electric System, HCAR
No. 26520 (May 23, 1996); and Supplemental Order Releasing Jurisdiction For
Certain Retail Electric Marketing Activities, HCAR No. 26519 (May 23, 1996).
-48-
<PAGE>
Corporation, Houston Industries, Inc.'s proposed acquisition of NorAm Energy,
Inc., and the proposed merger between Puget Sound Power & Light Co. and
Washington Natural Gas Co. -- demonstrates that market forces are pushing for
the convergence of electric and gas operations in one corporate entity;
namely, a full service utility company. This trend towards, and the need
for, convergence of the former separate electric utility function and gas
utility function into one energy service company was recently recognized by
the Commission in Consolidated Natural Gas Company, HCAR No. 26512 (April 30,
1996) where the Commission stated: "It appears that the restructuring of the
electric industry now underway will dramatically affect all United States
energy markets as a result of the growing interdependence of natural gas
transmission and electric generation, and the interchangeability of different
forms of energy, particularly gas and electricity." See also UNITIL Corp.
Release No. 35-26527 (May 31, 1996) and SEI Holdings, Inc., supra. Moreover,
the Commission explicitly recognized that "the utility industry is evolving
towards a broadly based energy-related business," marked by "the
interchangeability of different forms of energy, particularly gas and
electricity."(33)
Another important factor in favor of focusing on state commission
determinations regarding combination companies is that one of the primary goals
of Congress in enacting the Act was to simplify the corporate structures of
holding company systems to enable states to regulate the production and
distribution of energy. Section 8 provides that the Act may be used as a tool
to further state policy when state policy prohibits combined electric and gas
operations, and implicitly allows such combination companies where consistent
with state policy. This is consistent with the general policy of the Act that
local regulators are in the best position to assess the needs of their
communities. The Act was never intended to supplant local regulation but,
rather, was intended to create conditions under which local regulation was
possible. Section 21 of the Act, which further codifies this legislative
intent, states: "Nothing in [the Act] shall affect . . . the jurisdiction of
any other commission, board, agency, or officer of . . . any State, or political
subdivision of any State, over any person, security, or contract, insofar as
such jurisdiction does not conflict with any provision of [the Act] . . . ."
The legislative history reveals that Section 21 of the Act was further
intended "to insure the autonomy of state commissions [and] nothing in the [Act]
shall exempt any public utility from obedience to the requirements of state
regulatory law." The Report of the Committee on Interstate Commerce, S. Rep.
No. 621 at 10 (1935). Thus, the Act should not be used as a tool to override
state policy, particularly when the holding company involved is subject to both
state and federal regulation and when the affected state regulatory commissions
have indicated their support for the combined electric and gas operations in one
holding company system.
- -------------------------
(33) CNG Order at 11.
-49-
<PAGE>
Finally, this reemphasis on Section 8 fits within the overall
regulatory scheme of the Act. First, Section 11 of the Act is flexible and
was designed to change as the policy concerns over the regulation of utility
holding companies changed. (34) As discussed below, the utility industry and the
regulation of that industry has changed dramatically in recent years and it
is competitive forces (the very thing that the Act was designed to promote)
that are pushing holding companies to offer alternative forms of energy.
Second, a registered holding company would still be required to demonstrate
that any acquisition or transaction by which it would become a combination
company would not be detrimental to the carrying out of the provisions of
Section 11 of the Act. However, the construction of those provisions should
take into account the fundamental policy of the Act and allow local
regulators to make the major determination with regard to combination
companies.
NCE as a combination company is permissible pursuant to the terms of
Section 8 of the Act and is in the public interest. First, the combination of
electric and gas operations in PSCo and Cheyenne is lawful under all applicable
state laws. NCE will not be using its holding company structure to circumvent
any state regulations. In addition, in its order issued approving of the
Transaction, filed herewith as Exhibit D-3.2, the WPSC -- which has, and will
continue to have, direct jurisdiction over the NCE system's gas operations
located in Wyoming -- indicated its support for NCE as a combination electric
and gas utility company through the retention of Cheyenne's gas operations, and
indicated that it would send a letter to the Commission "urging that it not
order the divestiture of Cheyenne Light's natural gas operations." The WPSC
subsequently sent such letter to the Commission on September 16, 1996, which is
included as Exhibit D-3.3. In the letter the WPSC stated that the evidence in
the record "establish[es] that the retention by Cheyenne Light of its gas
operations was in the public interest." The WPSC further stated that it:
strongly and unambiguously supports the retention of Cheyenne Light's
gas operations within the NCE holding company system following the
consummation of the approved merger. The Wyoming PSC believes that
such retention is in the interest of consumers and investors in
Wyoming. We believe that it is very important to the people of
Wyoming served by Cheyenne Light that this retention be allowed.
Moreover, the CPUC, in its order approving the Transaction (Exhibit D-2.3,
hereto), "recommend[ed] that the SEC not order divestiture of its gas operations
as a condition of the merger."
- ----------------------------
(34) Mississippi Valley Generating Co., 36 SEC 159 (1955) (noting that
Congress intended the concept of integration to be flexible); UNITIL
Corporation, HCAR No 25524 (April 24, 1992) (noting that section 11 contains
a flexible standard designed to accommodate changes in the industry).
-50-
<PAGE>
In addition, the existence of both gas and electric systems in the NCE
holding company system will allow NCE's customers greater choice to meet their
energy needs, especially given the fact that the electric and gas systems
operate in substantially the same territory. Moreover, the prior fear that a
holding company such as NCE would be able to greatly emphasize one form of
energy over the other based on its own agenda has dissipated both because of the
competitive nature of the energy market, which requires utilities to meet
customer demand for energy above all else, and because state regulators will
have sufficient control over, and would be unlikely to approve, a combination
company that attempts to undertake such practices.
Even if the Act were not interpreted as generally permitting
combination gas and electric systems, Section 11 contains additional provisions
that permit the retention by PSCo and Cheyenne of their respective gas systems.
Section 11(b)(1) of the Act permits a registered holding company to control one
or more additional integrated public utility systems -- i.e., gas as well as
electric --if:
(A) each of such additional systems cannot be operated as an
independent system without the loss of substantial economies which can be
secured by the retention of control by such holding company of such system;
(B) all of such additional systems are located in one state,
adjoining states, or a contiguous foreign country; and
(C) the continued combination of such systems under the control of
such holding company is not so large (considering the state of the art and
the area or region affected) as to impair the advantages of localized
management, efficient operation, or the effectiveness of regulation.
In the 1995 Report, the Division recommended that the Commission
"liberalize its interpretation of the "A-B-C" clauses." (35) Historically, as a
"guide" to determining whether lost economies are "substantial" under Section
11(b)(1)(A), under its previous narrow interpretation of this section, the
Commission has given consideration to four ratios, which measure the
projected loss of economies as a percentage of: (1) total gas operating
revenues; (2) total gas expense or "operating revenue deductions"; (3) gross
gas income; and (4) net gas income or net gas utility operating income.
Although the Commission has declined to draw a bright-line numerical test
under Section 11(b)(1)(A), under its previous narrow interpretation of this
Section it indicated that cost increases resulting in a 6.78% loss of
operating revenues, a 9.72% increase in operating revenue deductions, a
25.44% loss of gross income, and a 42.46% loss of net income would afford an
"impressive basis for finding a loss of substantial economies." Engineers
Public Service Co., 12 SEC 41, 59 (1942) (citation omitted).
- ------------------------
(35) 1995 Report at 74.
-51-
<PAGE>
Here, the lost economies that would be experienced if the gas
properties of PSCo and Cheyenne were to be operated on a stand-alone basis meet,
and in most instances, exceed these numbers, without any increase in benefits to
consumers. These lost economies result from the need to replicate services, the
loss of economies of scale, the costs of reorganization, and other factors, and
are described more fully in the Analysis of the Economic Impact of a Divestiture
of the Gas Operations of PSCo and its Cheyenne Subsidiary (the "Divestiture
Study") (Exhibit J-1 hereto).
As set forth in the Divestiture Study, divestiture of the gas
operations of PSCo and Cheyenne into stand-alone companies would result in lost
economies of $43,605,187 for PSCo and $1,682,723 for Cheyenne. These lost
economies compare with gas operating revenues of $677,326,418 for PSCo and
$15,630,080 for Cheyenne; gas operating revenue deductions of $607,599,384 for
PSCo and $13,681,672 for Cheyenne; gas gross income of $69,727,034 for PSCo and
$1,948,408 for Cheyenne; and gas net income of $51,266,520 for PSCo and
$1,530,526 for Cheyenne.
On a percentage basis, the lost economies amount to 6.44% of gas
operating revenue, 7.18% of gas operating revenue deductions, 62.54% of gross
gas income, and 85.06% of net gas income for PSCo, as well as 10.77% of gas
operating revenues, 12.30% of gas operating revenue deductions, 86.36% of
gross gas income, and 109.94% of net gas income for Cheyenne. The percent
losses in net gas income alone that will be suffered by the PSCo and Cheyenne
gas system if operated on a stand-alone basis exceed the 30% loss in the New
England Electric System case that the Commission has described as the highest
loss of net income in any past divestiture order. (36) The percentage loss that
would be suffered by PSCo in gas operating revenue and gross gas income
exceeds the percentage loss in the majority of diversification orders issued
by the Commission in the past. The percentage loss that would be suffered by
Cheyenne in gross gas income also exceeds the percentage loss in the majority
of diversification orders issued by the Commission. The applicable
percentages here and in past cases are summarized in Exhibit J-3.
In order to recover these lost economies the PSCo gas division would
need to increase its revenue from rates by $44,607,669 or 6.62% and the Cheyenne
gas division would need to increase rate revenue by $1,775,439 or 11.38%. These
increases on rate revenues could have a direct and immediate negative impact on
the rates charged to consumers for gas services. In addition, the customers of
the PSCo and Cheyenne gas business who are also customers of their respective
electric utility business will experience a doubling of their postage costs to
pay two separate bills. The total estimated increase in such postage costs is
$3.84 per customer, per year, or $3,580,032 in the aggregate ($3,478,637 for
PSCo's gas customers and $101,395 for Cheyenne's gas customers).
- ------------------------
(36) New England Electric System, 41 SEC 888 (1964), aff'd, 384 U.S. 176 (1966)
and 390 U.S. 207 (1968).
-52-
<PAGE>
Moreover, it should be noted that the divestiture of PSCo's and
Cheyenne's gas business will result in increased labor and postage costs to both
companies' electric system. Specifically, it is estimated that the cost to
PSCo's customers would be approximately $44.9 million, or 3.42% of its electric
revenues, and the cost to Cheyenne's customers would be approximately
$1.0 million, or 2.86% of its electric revenues.
Finally, divestiture of PSCo's and Cheyenne's gas operations would
cause a significant, although difficult to quantify, amount of damage to NCE's
customers, NCE's regulators and NCE's ability to compete in the marketplace.
Such non-quantifiable costs to customers involve the additional expenses of
doing business with two utilities instead of one (i.e., additional telephone
calls for service and billing inquiries, and costs of providing access to meters
and other facilities for two utilities) and costs associated with making the
entities supply information to shareholders and publish the reports required by
the 1934 Act. Similarly, regulatory costs involve additional duties for the
staffs of the CPUC and the WPSC as a result of dealing with an additional
utility. These additional duties would largely be the result of duplicating
existing functions, such as separate requests for approval of financing and rate
case requests. NCE's competitive position in the market would also suffer
because as the utility industry moves toward a complete energy services concept,
competitive companies must be able to offer customers a range of options to meet
their energy needs. Divestiture of gas operations would render NCE unable to
offer its customers a significant and important option, namely gas services, and
could damage NCE's long-term competitive potential.
(B) and (C) clauses: The remaining requirements of Section 11(b)(1)
are met because the gas operations of PSCo are located in adjoining states
(Colorado and Wyoming) and because the continued combination of the gas
operations under NCE is not so large (considering the state of the art and the
area or region affected) as to impair the advantages of localized management,
efficient operation, or the effectiveness of regulation. After the combination,
the gas operations of PSCo and Cheyenne will continue to be the same as it is
today with some 960,000 customers in two states and will, accordingly, remain
the largest gas operation in the region. However, the gas systems are confined
to a relatively small area; sixty-eight percent of PSCo's gas customers are in
the Denver metropolitan area and all of Cheyenne's gas customers are in or
around Cheyenne, Wyoming. Moreover, based on data through December 31, 1995,
and giving effect to the Transaction, these gas assets will represent only
approximately 14.4% of the total utility assets of NCE, whereas the electric
assets will represent approximately 85.6%; utility operating revenues for the
gas operations will represent 21.2% of the total NCE utility revenues as
compared with 78.8% for the electric operations; and customers of the gas
operations will constitute 38.8% of all NCE utility customers
-53-
<PAGE>
while electric operations will represent 61.2%. (37) Moreover, as the Commission
has recognized elsewhere, the determinative consideration is not size alone
or size in an absolute sense, either big or small, but size in relation to
its effect, if any, on localized management, efficient operation and
effective regulation.
From these perspectives, it is clear that the continued combination of
the gas operations under NCE is not too large. With respect to localized
management, management currently is and will remain geographically close to both
gas operations, thereby preserving the advantages of localized management. From
the standpoint of regulatory effectiveness, each gas operation is organized in a
separate corporation by regulatory jurisdiction which facilitates state
regulation. In this connection, the relevant state regulatory authorities have
indicated their support for the retention of the gas system by NCE and thereby
recognized that they can continue to regulate this system effectively. Finally,
as detailed above, the gas operations of PSCo and Cheyenne enjoy substantial
economies as part of the PSCo system, and will realize additional economies as a
result of the Transaction as part of the NCE System. Far from impairing the
advantages of efficient operation, the continued combination of the gas
operations under NCE will facilitate and enhance the efficiency of gas
operations. For further discussion of the requirements of Section 11(b)(1)(C),
see the legal memorandum filed as Exhibit J-2 hereto.
ii. OTHER BUSINESSES
As a result of the Transaction, the non-utility businesses and
interests of PSCo and SPS described in Item 1.B.3. above will become businesses
and interests of NCE. From PSCo, NCE will hold the following non-utility
subsidiaries indirectly through NC Enterprises: e prime, Natural Fuels, and
their respective subsidiaries. NCE will hold the following non-utility
subsidiaries through PSCo: Green & Clear Lakes, 1480 Welton, PSRI, Fuelco, and
the Ditch Companies, and will hold WGI and PSCCC directly. In addition, PSCo
expects to continue to operate certain of its non-utility businesses directly.
Finally, NCE may hold NC International directly; alternatively it may hold NC
International indirectly through NC Enterprises and possibly e prime.
From SPS, NCE will hold the following non-utility subsidiaries and
investments indirectly through NC Enterprises: UE, Quixx and their respective
subsidiaries and investments.
Corporate charts showing the non-utility subsidiaries and investments
of PSCo and SPS are filed as Exhibits E-4 and E-5. A
- --------------------------
(37) The relative sizes of the PSCo and Cheyenne gas operations are shown in
Appendix A (Comparison of PSCo and Cheyenne Gas to Regional Gas Utilities) to
Exhibit J-1 (Analysis of the Economic Impact of a Divestiture of the Gas
Operations of PSCo and Its Cheyenne Subsidiary).
-54-
<PAGE>
corporate chart showing the projected arrangement of these subsidiaries and
investments under NCE is filed as Exhibit E-6.
Standard for retention: Section 11(b)(1) permits a registered
holding company to retain "such other businesses as are reasonably
incidental, or economically necessary or appropriate, to the operations of
[an] integrated public utility system." Under the cases interpreting Section
11, an interest is retainable if (1) there is an operating or functional
relationship between the operations of the utility system and the non-utility
business sought to be retained, and retention is in the public interest, (38) or
if (2) the business evolved out of the system's utility business, the
investment is not significant in relation to the system's total financial
resources, and the investment has the potential to produce benefits for
investors and/or consumers. (39) In addition, the Commission has stated that
"retainable non-utility interests should occupy a clearly subordinate
position to the integrated system constituting the primary business of the
registered holding company." (40) As set forth more fully below, the non-utility
business interests that NCE will hold directly or through PSCo and NC
Enterprises all meet the Commission's standards for retention. Indeed, most
of the non-utility subsidiaries' activities fall within the exemption for
energy-related activities in new Rule 58.
I. DIRECT SUBSIDIARIES OF NCE
WGI: WGI transports gas from the PSCo gas system to Cheyenne. As
discussed previously, this gas pipeline subsidiary ensures access to natural gas
supplies for the gas utility operations of Cheyenne and, thus, is functionally
related to such utility operations. The Commission's decisions recognize the
functional relationship of gas pipelines to the gas utility business and the
retainability of gas transmission interests in connection with gas utility
operations. See, e.g., CNG Transmission Corp., HCAR No. 25239 (Jan. 9, 1991);
Central and South West Corp., HCAR No. 14555 (Dec. 28, 1961). WGI does provide
gas transportation services for three other area gas utilities.
PSCCC: PSCCC engages in financing and factoring of certain of PSCo's
fuel inventories and customer accounts receivable. The Commission has
authorized the acquisition of interests in similar credit companies by
registered holding companies. See Central and South West Corporation, HCAR
No. 23767 (July 19, 1985). After the
- --------------------------
(38) See, e.g., Michigan Consolidated Gas Co., 44 SEC 361, 365 (1970), aff'd,
444 F.2d 913 (D.C. Cir. 1971) (quoting General Public Utilities Corp., 32 SEC
807, 839 (1951)); United Light and Railways Co., 35 SEC 516, 519
(1954).
(39) CSW Credit, Inc., HCAR No. 25995 (1994); Jersey Central Power & Light
Co., HCAR No. 24348 (March 18, 1987).
(40) United Light and Railways Co., 35 SEC at 519.
-55-
<PAGE>
consummation of the Transaction, but following an interim period (see note 2,
supra), PSCCC will become a direct subsidiary of NCE and engage in factoring
and similar transactions with other companies in the NCE holding company
system, including SPS, on the same terms as transactions with PSCo. PSCCC
may also provide factoring services to unaffiliated utilities, although the
provision of such services shall not exceed 50% of PSCCC's factoring
business, unless the Commission otherwise authorizes. PSCCC will limit its
acquisition of such nonaffiliate utility receivables such that for the
preceding twelve-month period the amount of acquired nonaffiliate utility
receivables outstanding as of the end of any calendar month will be less than
the average amount of receivables from NCE associate companies outstanding as
of the end of each calendar month during the preceding twelve-month period.
See Central and South West Corporation, 60 SEC Docket 2658 (Dec. 22, 1995).
NC International: As noted elsewhere in this application, NC
International, which is presently a subsidiary of PSCo, after some interim
period, but no later than September 30, 1997, will become (i) a direct
subsidiary of NCE, (ii) a direct subsidiary of NC Enterprises, or (iii) a
direct subsidiary of e prime which in turn will be a subsidiary of NC
Enterprises. PSCo established NC International to hold its interest in
Yorkshire Electricity Group plc. After the Transaction is consummated,
Yorkshire Electricity Group plc will be qualified as a FUCO under Section 33
of the Act. NC International may seek to acquire interests in or operate
other FUCOs. (41)
II. SUBSIDIARIES AND INVESTMENTS OF NC ENTERPRISES
UE: UE is engaged in a variety of engineering, development, design,
construction, and other related services for non-affiliated customers. UE will
also provide such services to affiliates. Clearly, the engineering,
construction and design of utility plants is functionally related to the core
utility operations of NCE. A utility company must be able to construct or
otherwise acquire additional capacity as needed, and UE has a proven ability to
do so. While UE's principal expertise grew out of the construction of power-
related projects for SPS and it continues to work on power-related projects, UE
does, from time to time, provide engineering and design services for other types
of industrial plant construction. UE is not expected to conduct its business
principally with NCE affiliated companies. For example, for calendar 1996 and
fiscal 1996, revenues derived by UE from sales to associates represented only
33.3% and 30.5%, respectively, of its total revenues. As a non-regulated
subsidiary in the NCE system, UE will be able to compete in the developing
independent, as well as regulated, power markets due to its ability to
- ------------------------
(41) In this connection, prior to or after the Transaction, various interests
that PSCo presently owns directly or indirectly in EWGs may be transferred to
NCE, NC Enterprises, or NC International and may be designated as FUCOs.
Moreover, see note 9, supra.
-56-
<PAGE>
accomplish plant construction quickly and at a competitive price. UE also
currently owns twenty-five electric substation facilities that it leases to
twelve industrial customers of SPS. Revenues from that activity are
approximately $2.5 million per year. The substations were purchased over a
period of years from SPS, and the customers utilize the leased substations to
secure power from SPS under a favorable transmission tariff recognized by Texas
regulators. In order to obtain service under this tariff, the customer must own
or lease its own substation facilities. The customer elects whether to build
its own facility or lease it from UE or some other provider. SPS maintains a
metering point upstream from the substation to record sales to the particular
industrial customer. The delivery and sale of the electric energy to the
industrial customer takes place at transmission level voltage prior to the
energy reaching the UE-owned substation. UE will attempt to renegotiate the
existing leases to make them into capital leases in conformity with generally
accepted accounting principles. UE will also endeavor to ensure that all future
leases of substation equipment are such capital leases. At the end of five
years from the date of the SEC Order, to the extent that there are outstanding
any substation leases that are not such capital leases, NCE commits that those
substations will be sold by UE to SPS at their then net book value, and hereby
requests authority to make such transfers at that time. If any substations are
transferred to SPS, UE personnel may continue to administer the lease
arrangements for SPS for a fee determined in accordance with Section 13 of the
Act and Rules 87 and 90 thereunder. Except with respect to services provided to
EWGs and FUCOs, and except as provided below, all of UE's activities, as well as
the activities of all of UE's subsidiaries, are limited to the United States.
UE will not engage in any activity that would cause it to be a "public utility"
under the Act.
The Commission has authorized registered holding companies to engage in a
number of similar businesses, including engineering, development, construction,
management, and related services. See, e.g., Central and South West Corp., HCAR
No. 26280 (Apr. 26, 1995) (authorizing Central and South West Services
engineering and construction department to provide services to third parties);
Entergy Corporation, HCAR No. 26322 (June 30, 1995) (authorizing Entergy
Enterprises, Inc. to provide development, design, engineering, construction,
maintenance, and management services to domestic and foreign power projects);
New England Electric System, HCAR No. 26017 (Apr. 1, 1994) (authorizing New
England Electric Resources, Inc. to provide consulting services, including
engineering, design, and construction, to nonaffiliates for profit); General
Public Utilities Corp., HCAR No. 25108 (June 26, 1990) (authorizing engineering
and management services by Energy Initiatives, Incorporated). The activities of
UE will be similar to those approved by the Commission and thus, UE is
retainable. In addition, the activities of UE are primarily within the
definition of energy-related activities under Rule 58 and specifically Rule
58(b)(1)(vii), which exempts acquisitions or transactions of energy-related
businesses from the prior approval requirements of Sections 9(a)(1) and 10.
-57-
<PAGE>
In addition to the provision of such services within the United States
and to FUCOs and foreign and domestic EWGs, NCE requests authorization for UE to
provide directly (or indirectly through newly established subsidiaries or joint
ventures) project development, engineering, design, construction and
construction management, pre-operational start-up, testing and commissioning,
operating, fuel management and procurement, maintenance and power plant
overhaul, management and supervision, technical and training, administrative
support, and other similar kinds of managerial and technical services to foreign
developers, operators and owners of power projects, utility systems and
industrial concerns. The Commission has authorized the provision of similar
services to similar foreign entities. See Entergy Corporation, HCAR No. 26322
(authorizing Entergy Enterprises, Inc., to directly or indirectly provide these
services directly or indirectly); The Southern Company, HCAR 26212 (December 30,
1994) (authorizing Southern Electric International, Inc. "to render project
development, engineering, design, construction and construction management,
operating, fuel management, maintenance and power plant overhaul, and other
similar kinds of managerial and technical services to . . . non-affiliated
developers, operators and owners of independent power projects and foreign and
domestic utility systems and industrial concerns"). NCE further requests
authorization for UE to provide such services to foreign power projects that it
may develop on its own or in collaboration with third parties (see Entergy
Corporation, HCAR No. 26322) and authorization for UE to form subsidiaries as
domestic or foreign corporations, partnerships, or other entities to perform
such services. (Id.)
UE's subsidiary, Vista Environmental, performs environmental
consulting services previously described. UE's investment in this business is
related to experience gained in assessment and remediation of environmental
matters for utility facilities. UE, through Vista Environmental, has applied
the learning from the needs of SPS to site assessment, remediation, and
environmental consulting, primarily for municipalities and oil companies. UE's
total investment in Vista Environmental is $175,000. Total revenues annually
for Vista Environmental are $900,000, of which UE's proportionate share is
$675,000. Accordingly, since the business evolved out of the system's utility
operations, the investment is not significant in relation to the system's total
financial resources, and the investment has the potential to produce benefits
for investors and/or consumers as that expertise can be expanded and applied, if
necessary, to NCE system facilities, retention of Vista Environmental is
appropriate pursuant to Section 11(b)(1). The Commission has authorized
registered holding companies to acquire interests in environmental services
subsidiaries in the past (see, e.g., Central and South West Corporation, HCAR
No. 26367 (Sept. 1, 1995)) and Vista's environmental services are energy-related
activities under Rule 58(b)(1)(vii).
UE's wholly owned subsidiary Utility Services performs primarily two
types of services: Maintenance, repair and installation of cooling towers for
power facilities and other industrial users, and resource recovery which is the
collection, processing, and sale of scrap metals that are a byproduct of SPS's
utility operations. In
-58-
<PAGE>
connection with the cooling tower work, Utility Services has developed wood
fabrication capability with respect to cedar components in cooling towers for
power plants. That wood fabrication experience has expanded to the
fabrication of wooden cross arms for utility poles. The scrap metal services
business grew out of the SPS utility operations and currently approximately
99% of the scrap processed comes from SPS. NCE requests, however, should the
opportunity arise, approval for Utility Services to utilize excess capacity
by providing services to non-associate companies. In no event will Utility
Services provide scrap metal recovery services to non-associate companies
such that more than 49% of the revenues derived from this business will be
from non-associates absent further authority from the Commission. The
cooling tower and wood fabrication business also grew out of SPS's utility
operations and the desire to utilize the expertise developed in those
operations more fully and thereby defray the costs of the entire operation in
a way that benefits the entire system. For the years 1991 through 1995
approximately 68% of the cooling tower work was performed for associate
companies. In 1996, that percentage increased to approximately 95%. By
utilizing excess capacity to build cooling towers, that expertise is
available to associate companies as needed, and the fixed costs can be spread
over a wider customer base. With respect to the wood fabrication portion of
that business, again the primary use with respect to wood for cooling towers
is for associate companies, and the ability to utilize the excess capacity
benefits the entire system. The sole customer for the utility pole crossarm
operations is SPS, although NCE requests, should the opportunity arise,
approval for Utility Services to engage in that business for non-associate
companies. In no event shall the cooling tower or wood fabrication services
provided to non-associates exceed 49% of annual revenues of Utility Services
from those businesses absent further authority from the Commission. These
primary businesses are retainable for the same reasons cited above with
respect to UE. Both the cooling tower services and the resource recovery
activities grew out of the utility operations of SPS and retention will
benefit the NCE system. These activities are energy related under Rule
58(b)(1)(vii). Except with respect to services that may in the future be
provided to EWGs or FUCOs, all of the services to be provided by Utility
Services will be provided in the United States. Utility Services does not,
and will not in the future, engage in any activity that would cause it to be
a "public utility" under the Act.
UE's wholly-owned subsidiary, PRC, is in the business of providing
human resource services from a database of names of unaffiliated technical
personnel who are available to provide temporary technical services to various
projects. PRC matches its customers with the desired non-affiliated technical
personnel for a fee. PRC's customers include associate companies (approximately
59% at SPS or PSCo; 80% if all associate companies are included) and other
unrelated industrial companies. Selling these services to non-associates helps
ensure that the services are available to associate companies by allowing PRC to
utilize more fully its capacity and to spread the costs associated with the
services over a wider customer base. Approximately 97.5% of PRC's placements
are with affiliates and
-59-
<PAGE>
companies that will be associate companies after the merger. Total revenues
for the seven months ended March 31, 1997 were $600,710, 94% of which is
attributable to placements with affiliates and companies that will be
associate companies after the merger. In no event shall the services
provided to non-associates exceed 49% of the annual revenues of PRC unless
further authorized by the Commission. Only a minimal additional investment
was required to create such a database, and UE's investment in this company
is immaterial. Furthermore, the development of this database is incidental
to and in connection with the services and expertise UE already provides to
third parties and to affiliates. The Commission has permitted affiliates of
other registered holding companies to operate and market similar database
services. See, e.g., EUA Energy Investment Corporation, HCAR No. 25976
(January 24, 1994); Central and South West Services, Inc., HCAR No. 25132
(August 10, 1990). Thus, the retention of this subsidiary, subject to the
50% test outlined above, should be permitted. Since this database had its
origins in the experience gathered in utility operations of SPS and provides
a benefit to the system, this activity is also covered directly by Rule
58(b)(1)(vii).
Quixx: The primary business of Quixx is investment in QFs, EWGs,
foreign utility companies ("FUCOs") and other energy-related projects. In
connection therewith, Quixx may conduct preliminary development activities
including project due diligence and design; design review; market studies; site
inspection; preparation of bid proposals (including the posting of bid bonds,
cash deposits or similar instruments); application or required permits or
authorizations, acquisition of options on sites and other rights; negotiation
and execution of contractual commitments with owners of existing facilities,
equipment vendors and other project contractors; negotiating of financing
commitments with lenders and co-investors; and other activities required in
preparation for the acquisition or financing of one of the listed entities.
Section 32 of the Act exempts EWGs from the provisions of the Act while
Section 33 of the Act exempts FUCOs from the provisions of the Act, thereby
allowing registered holding companies to obtain interests in such entities.
Moreover, the Commission has authorized the formation and financing of a number
of non-utility subsidiaries of registered holding companies in order to invest
in and hold securities of QFs, FUCOs, and EWGs. See, e.g., The Southern
Company, HCAR No. 26212 (Dec. 30,1994); Entergy Corp., HCAR No. 26322 (June 30,
1995); Northeast Utilities, HCAR No. 25977 (Jan. 24, 1994) (authorizing Charter
Oak Energy and COE Development Corporation); Central and South West Corp., HCAR
No. 26156 (Nov. 3, 1994) (authorizing CSW to form, acquire, finance and own
securities of FUCOs); Central and South West Corporation, HCAR No. 26155
(Nov. 2, 1994) (authorizing investment in a joint venture which will construct,
own and operate QFs and EWGs). In addition, Rule 58 lists the ownership of QFs
as an energy-related activity under Rule 58(b)(1)(viii). Thus, Quixx's
principal operations are retainable under the Act. NCE seeks an order only with
respect to the existing investments of Quixx. Quixx will not acquire interests
in projects unless the acquisition is either approved by the Commission under
the Act, or is exempt from the requirement of prior Commission approval.
-60-
<PAGE>
The following are (or, when constructed, will be) QFs or holding
companies for such entities and are thus retainable under Section 11 as
demonstrated by the Commission's precedent and Rule 58: BCH, Quixx Carolina,
Inc., Quixx WPP94, Inc., Carolina Energy Limited Partnership, Windpower
Partners 1994, L.P., Quixx Linden, L.P., Quixlin Corp., Borger Energy
Associates, L.P., and Quixx Borger Cogen, Inc. The following are (or, when
construed, will be) EWGs or holding companies for such entities and are also
retainable under Section 11 as demonstrated by the Commission precedent:
Quixx Jamaica, Inc., Quixx Jamaica Power, Inc., KES Montego, Inc., KES
Jamaica, L.P.(42), the Mosbacher Companies (which may also invest in FUCOs),
Quixx Mustang Station, Inc. and Denver City Energy Associates, L.P.
Quixx's subsidiary company Vedco Louisville, L.L.C. operates a
facility that generates steam for use at a nearby DuPont manufacturing facility.
The Commission has previously approved the retention or acquisition of similar
businesses. See Cinergy Corp., HCAR No. 8767 (February 20, 1996); The Southern
Company, HCAR No. 26468 (February 2, 1996) (acquisition of energy-related
companies that derive substantially all of their revenue from the production,
conversion, or distribution of steam); Mississippi Power Co., HCAR No. 16791
(July 28, 1970); General Public Utilities Corp., 32 SEC 807, 840-41 (1951)
(retention of steam heating systems in which steam was used to both generate
electricity and was sold to customers for steam heating purposes). Such a
business is reasonably incidental to the operation of an electric utility system
and is therefore retainable. The production, conversion, and distribution of
thermal energy products, including process steam, is also permitted by Rule
58(b)(1)(vi).
In addition to its primary business, Quixx through Quixx Resources and
Quixx WRR, L.P. holds interests in certain water rights in Texas. These water
rights are integrally related to the utility business of SPS in that water is a
scarce commodity in Texas, without which utility generation plants cannot be
constructed or operated. The water rights were originally acquired in
connection with the expected construction of a power generation station that was
not ultimately built. They are currently being held for future use in
connection with the anticipated need for additional generation
- ------------------
(42) KES Jamaica, L.P., is an EWG which is owned by KES Montego, Inc. and
Quixx Jamaica, Inc. Quixx Jamaica Power, Inc. has an agreement in principle
to acquire 100% of the stock of KES Montego, Inc. All of these entities
qualify as EWGs in that their sole business is the ownership or operation of
an EWG. Official EWG status has only been sought and obtained with respect
to KES Jamaica, L.P., the actual generation entity, but could be obtained
with respect to all of these entities if required but actual designation
should not be required since each entity is exclusively in the business of
owning and holding the interest and securities of an exempt entity. See
General Public Utilities, HCAR No. 26457 (January 19, 1996); New England
Electric System, HCAR No. 26504 (April 15, 1996); Northeast Utilities, HCAR
No. 26623 (Dec. 12, 1996).
-61-
<PAGE>
capacity in Texas. See In Re Cites Service Power and Light Company, HCAR No.
4489 (Aug. 18, 1943). Quixx also provides, and seeks authorization to
continue to provide, financing for heat pump acquisitions by SPS customers.
Quixx had loans totaling $8.7 million as of February, 1997. It expects to
finance up to $5 million in each of 1997, 1998, and 1999. The loans are
generally of a 60-month duration with a 13% fixed annual simple interest
rate. This activity is functionally related to the utility business, was
developed in the course of SPS's utility business, and is de minimis in
amount, contributing $1.2 million in income representing interest on heat
pump financing contracts for the twelve months ended August 31, 1996. Rule
48 of the Act contains exemptions from the financing approval requirements
for certain system companies to finance the acquisition of utility appliances
such as water pumps for the customers of the operating utility companies
within the holding company system. Although not directly applicable to
Quixx, this rule does indicate that such activity is permissible for a
registered holding company system and is functionally related to utility
operations. Finally, the Commission has authorized financing and leasing of
utility equipment for customers. See Central and South West Corporation,
HCAR No. 26367 (Sept. 1, 1995); Entergy Corporation , HCAR No. 25718 (Dec.
28, 1992). See also, Consolidated Natural Gas Co., HCAR No. 26234 (Feb. 23,
1995) (authorizing CNG's subsidiary, CNGF, to finance the purchase of certain
gas equipment, including "New Technology Equipment" and "Alternate Fuel
Equipment," by customers who would, in turn, purchase gas from CNG System
subsidiaries).
Amarillo Railcar Services, a division of Quixx is also retainable.
The Commission has authorized electric utility subsidiaries of registered
holding companies to construct, finance, acquire, and operate unit train repair
and maintenance facilities generally where the railcars were used to service the
utility by transporting coal. In the Matter of Southwestern Electric Power
Company (subsidiary of CSW), HCAR Nos. 19643; 19468 (Aug. 9, 1976; April 6,
1976, respectively); In the Matter of Ohio Power Company (subsidiary of American
Electric Power Company), HCAR Nos. 22977; 21886; 21173 (June 17, 1983; Jan. 16,
1981; Aug. 3, 1979, respectively). The operations of Amarillo Railcar are
incidental to, and were developed as a result of, utility operations and
expertise in connection with the transportation of coal and thus appear to be
encompassed within Rule 58(b)(1)(ix). Although a majority of Amarillo Railcar
Services' work involves railcars that transport coal for use by NCE system
utility companies, it is also a general railcar maintenance operation that
provides services to unaffiliated third parties. Amarillo Railcar's net
revenues in the calendar year ended December 31, 1996 and the fiscal year ended
August 31, 1996 were $1,226,000 and $1,288,000, which accounted for only one-
tenth of one percent (both years) of SPS's overall revenues. It is a small
operation that developed from utility operations, incurs very little cost at
this point, and is beneficial to shareholders, and thus is retainable.
Quixx also holds a royalty interest in coal and other minerals
produced from certain properties owned by the Pittsburgh and
-62-
<PAGE>
Midway Coal Mining Company. The Commission has approved of the acquisition
of coal and mineral rights by registered holding companies or their utility
subsidiaries, see, e.g., In the Matter of Indiana and Michigan Electric
Company (subsidiary of American Electric Power Company), HCAR No. 19064 (June
26, 1975), as well as the transfer of such rights between subsidiaries, see,
e.g., The Columbia Gas System, Inc. et al., HCAR No. 24881 (May 5, 1989);
National Fuel Gas Supply Corporation, et al., HCAR No. 24491 (November 4,
1987). Therefore the Commission should not object to the retention of
royalty interests in the coal and mineral production of the Pittsburgh and
Midway Coal Mining Co. These rights were acquired in settlement of
litigation over an acquisition and are de minimis, contributing $316,000 and
$489,000 in revenues from royalty payments on coal for the twelve months
ended December 31, 1996 and December 31, 1995, respectively.
Quixx Power Services, Inc., a wholly-owned subsidiary of Quixx
("QPS"), will operate and maintain generation facilities in various locations,
which will include cogeneration facilities in which Quixx holds an equity
interest. QPS has a contract to operate and maintain the BCH and the Carolina
Energy facilities.(43) QPS will operate the Linden facility, once constructed
and operational, and the KES Jamaica facility. QPS will perform similar
operation and maintenance services for unaffiliated projects. All of the
facilities that QPS provides operations and maintenance services for are QFs,
EWGs or FUCOs. Except with respect to possible future work for EWGs and FUCOs,
QPS's activities are limited to the United States. QPS will not engage in any
activity that would cause it to be a "public utility" under the Act. The
expertise needed to provide such services is listed as an "energy-related"
activity in Rule 58(b)(1)(vii). The services to be provided are consistent with
the type of activities approved in various "consulting services" cases such as
The Southern Company HCAR No. 26132 (July 17, 1981) and American Electric Power
Company, HCAR 22468 (April 21, 1982) (each authorizing the creation of a
consulting subsidiary to render management, technical and training services to
non-affiliated entities). In addition, QPS' activities are de minimis,
accounting for revenues of $712,000 and $609,000 for the twelve months ended
December 31, 1996 and December 31, 1995, respectively.
e prime: e prime is an energy services company that intends to engage
in a broad array of energy-related activities and consumer services. e prime
also has investments in a QF and an EWG, and intends to acquire interests in
other QFs, EWGs, and FUCOs. Because e prime is a start-up company formed in
1995, its activities are in
- ---------------------
(43) Because the BCH facility is not currently being operated and the
maintenance and operations agreement between that project and QPS have been
abrogated, there is no longer a relationship with an associate company at
that project. The Carolina Energy project is on hold, but even if
construction is completed, the owners have determined to replace QPS as the
operations and maintenance provider with an affiliate of one of the other
owners.
-63-
<PAGE>
their preliminary phases. It is anticipated that e prime will further
develop some or all of these activities. The energy-related activities e
prime is developing and engaging in, or intends to develop and engage in,
include: electric and gas brokering and marketing at both the wholesale and,
where authorized by state law, retail levels; energy consulting and project
development services; construction, operation and ownership of electric
generation and gas storage facilities; and construction, operation and
ownership of equipment and facilities to gather and disseminate
energy-related management information. Other consumer service activities e
prime is, or intends to, engage in include information processing,
telecommunications, and other technology-based services. e prime, however,
does not own any facilities or engage in any activities that cause it to be,
nor will it acquire an interest in any facilities or engage in any activities
that will cause it to be, a public utility within the meaning of Section
2(a)(5) of the Act unless authorized by the Commission
At present e prime is considering how to structure its business in
light of regulatory requirements and other legal considerations, and is giving
particular consideration to developing these activities through special-purpose
subsidiaries on a line of business basis. Indeed, substantially all of the
activities of e prime directly, or indirectly through subsidiary companies, will
be energy-related activities under Rule 58 or ETC, EWG, or FUCO activities under
Sections 32, 33, or 34 of the Act. With the exception of its interest in Young
Gas, and possibly e prime Networks (which may or may not be constituted as an
ETC or qualify as an energy-related company under Rule 58), all of e prime's
activities and investments are expected to be exempt under the Act in accordance
with those sections or rules. Thus, all of its ownership interests in electric
facilities are likely to be limited to exempt entities. e prime will not engage
in, nor acquire an interest in, any other businesses which are not exempt unless
approved by further order of the Commission.
The following is a fuller description of e prime's current activities
and the bases on which they may be retained:
Marketing: e prime is currently engaged in purchasing gas and
electricity from, and reselling it to, utility and non-utility companies at
negotiated rates reflecting market conditions. As part of its marketing
activities, e prime intends to employ risk management strategies -- e.g., swaps,
options, and futures contracts -- to enable buyers to hedge against adverse
price changes. Consistent with the requirements of HCAR No. 26667 (at 33),
wherein the Commission adopted Rule 58, e prime will only use hedging tools to
minimize risks associated with contracts for purchase or sale of energy
commodities; it will not use such tools to engage in speculation. e prime has
received approvals and waivers from the FERC to Act as an electric power
marketer. Unless authorized by the FERC, the marketing or brokering of power by
e prime will not involve purchases from and sales to associate companies in the
NCE system. Both power and gas marketing services will be offered to third
parties. Consistent with
-64-
<PAGE>
prior Commission orders -- e.g., Southern Company Services, Inc., HCAR No.
26602 (November 28, 1996) -- e prime will not without separate authorization
from the Commission, engage in marketing and brokering activities outside of
the United States. e prime is currently engaging in electric and gas
marketing directly.(44) However, e prime is presently evaluating whether to
transfer these activities to a special purpose subsidiary, e prime Marketing.
Such transfer will require FERC authorization.
The present and planned marketing activities of e prime are
similar to those the Commission has previously authorized and, therefore, may be
retained consistent with the requirements of the Act. For example, in SEI
Holdings, Inc., HCAR No. 26581 (September 26, 1996), the Commission found it
appropriate under the Act for a subsidiary of a registered holding company to
engage in both retail and wholesale gas and electric marketing activities. See
also Eastern Utilities Associates, HCAR No. 26493 (March 14, 1996), New England
Electric System, HCAR No. 26520 (May 23, 1996); Unitil Corporation, HCAR
No. 26127 (May 30, 1996); New England Electric System, HCAR No. 26520 (May 23,
1996); Northeast Utilities, HCAR No. 26544 (Aug. 13, 1996). Moreover, this
Commission has recently found risk management activities to be permissible under
the Act. American Electric Power Company, Inc., Release No. 26572
(September 13, 1996); The Columbia Gas System, Inc., Release No. 26610
(November 21, 1996). Moreover, "[t]he brokering and marketing of energy
commodities, including but not limited to electricity, natural or manufactured
gas and other combustible fuels," are activities that an energy-related company
may engage in under Rule 58(b)(1)(v). Thus, if e prime transfers the marketing
activities it is presently directly engaging in to e prime Marketing, that
entity will qualify as an energy-related company under Rule 58.
Consulting Services: e prime also provides demand side
management services and intends to provide other consulting services to
commercial and industrial customers. These services include or are expected to
include energy analysis, project management, design and construction, energy
efficient equipment installation and maintenance, facilities management
services, environmental services and compliance, fuel procurement, and other
similar kinds of managerial and technical services. The expertise needed to
provide such services is listed as "energy-related" activities in
Rule 58(b)(1)(i) and (vii). As discussed in detail with regard to the retention
of UE, the Commission has authorized registered holding company subsidiaries to
engage in utility-related consulting services numerous times in the past. See
also, Central and South West Corporation, HCAR No. 26367 (Sept. 1, 1995) and
American Electric Power Company, HCAR No. 26267 (April 5, 1995) (both cases
authorizing the provision of a variety of demand-side management and other
energy management services).
- -----------------------
(44) e prime is also engaging in marketing activities indirectly through Texas
Ohio Gas, which is discussed below.
-65-
<PAGE>
Development, ownership and operation of QFs, EWGs, and FUCOs:
e prime is constructing or owns and operates electric generation, transmission,
and distribution and gas storage facilities, directly or indirectly, and is
continuing to evaluate additional projects. The categories of electric
facilities in which e prime has or may have an interest are QFs, EWGs, and
FUCOs. In connection therewith, e prime may conduct preliminary development
activities including project due diligence and design; design review; market
studies; site inspection; preparation of bid proposals (including the posting of
bid bonds, cash deposits or similar instruments); application or required
permits or authorizations, acquisition of options on sites and other rights;
negotiation and execution of contractual commitments with owners of existing
facilities, equipment vendors and other project contractors; negotiating of
financing commitments with lenders and co-investors; and other activities
required in preparation for the acquisition or financing of one of the listed
entities.(45)
The Commission previously has authorized such activities by companies
in a registered holding company system. See The Southern Company, HCAR
No. 26212 (Dec. 30, 1994). Managerial and technical services provided to such
entities by e prime may include project development, engineering, design,
construction and construction management, operating fuel management, testing,
maintenance and administrative and technical support, all of which, again, have
been previously authorized. See American Electric Power Company, HCAR No. 26267
(April 5, 1995); Entergy Corporation HCAR No. 26322 (June 30, 1995). Moreover,
with respect to e prime's ownership of QFs, Rule 58(b)(1)(viii) identifies
"[t]he development, ownership or operation of 'qualifying facilities,' as
defined under the Public Utility Regulatory Policies Act of 1978, as amended
('PURPA'), and any integrated thermal, steam host, or other necessary facility
constructed, developed, or acquired primarily to enable the qualifying facility
to satisfy the useful thermal output requirements under PURPA," as an energy-
related activity.
e prime presently has interests in one QF and one EWG. e prime
owns a 50% interest in Johnstown Cogeneration, which owns a 3 MW QF located
in Johnstown, Colorado.(46) e prime international has a 25% interest in Kazak
Power Partners Limited, which owns Karaganda II, an EWG located in Topar,
Kazakstan. e prime international also wholly owns e prime operating, which
has entered into a contract to operate Karaganda II, and intends to enter
into other EWG operating arrangements. e prime international, e prime
operating, and Kazak
- -------------------------
(45) Certain of these business opportunities are being developed by ep3, L.P.,
a subsidiary of e prime which is discussed below. It is expected that the
entities owning such facilities will qualify as either EWGs or FUCOs.
(46) The output of this facility is sold to PSCo at an avoided cost rate
established by the CPUC in accordance with PURPA and the FERC's and CPUC's
regulations implementing PURPA.
-66-
<PAGE>
Power Partners Limited have each separately filed with the FERC an
application for determination of EWG status on February 28, 1997. The FERC
issued letter orders granting the requested EWG status for each of the three
entities on April 10, 1997. e prime also established e prime (Belize)
Limited to develop, own, and operate an eligible facility in Belize.
However, it does not appear that e prime will pursue that project, and e
prime (Belize) Limited will probably be dissolved.(47)
After the consummation of the Transaction, NC International may become
a wholly-owned subsidiary of e prime. Alternatively, NC International will
become a direct subsidiary of NC Enterprises or NCE. The activities of NC
International have previously been discussed in Item 3.A.2.a.ii.I. (Direct
Subsidiaries of NCE).
Telecommunications, Information, and Other Technology Based
Services: A potential business expansion by e prime, either directly or
indirectly through one or more subsidiaries, is the provision of
telecommunications, information, and other technology based services to third-
parties and possibly affiliates as well.
In this connection, e prime has established two subsidiaries, e prime
Telecom and e prime Networks. e prime Telecom intends to provide long-haul fiber
capacity using excess capacity on PSCO's fiber system on a wholesale basis to
non-associate companies and engage in other ETC activities. An application for
determination of e prime Telecom's ETC status was filed on March 10, 1997 with
the FCC. Any transfer of assets by PSCo necessary for e prime Telecom to engage
in that business will be done in a manner so as to satisfy the state commission
approval requirements of Section 34(b) of the Act and the Colorado Public
Utilities Law.
e prime Networks was established by e prime to develop and
operate a fixed remote meter reading network to provide meter reading services
to PSCo for electric and gas operations in the Denver metropolitan area.
e prime Networks may also provide such services to other electric and gas
utilities, and perhaps to water utilities as well. This network will consist of
meter reading devices attached to the utility poles of PSCo, and perhaps other
utilities, that will be able to read adapted meters in surrounding sectors. The
Commission has authorized utilities to provide meter reading services to third-
parties in the past, e.g., Central and South West Corporation, HCAR No. 26250
(March 14, 1995); Jersey Central Power & Light Co., HCAR No. 26600 (November 5,
1996); Appalachian Power Company, HCAR No. 26639 (January 2, 1997). e prime
Networks is considering applying for a determination of ETC status.
Alternatively, the provision of meter reading services may be deemed an energy-
related activity under Rule 58(b)(1)(vii).
- ----------------------
(47) As discussed in Item 3.A.2.a.ii.I.(Direct Subsidiaries of NCE), NCE may
realign e prime's present foreign EWG investments so that they are held by
NCE, NC Enterprises, or NC International after the Transaction. Moreover,
these EWGs may be designated as FUCOs.
-67-
<PAGE>
In addition to the above activities, e prime (1) expects to provide
energy management services and sell devices, including computer software and
hardware used for energy management purposes; and (2) may develop or market
other electrotechnologies. e prime expects that these activities would fall
within the scope of Rule 58(b)(1)(i) and (ii).
In the event that e prime in the course of providing these -- or any
other -- products or services uses intellectual property developed by NC
Services, or the NCE system operating companies for utility operations, e prime,
consistent with the formula that the Commission approved in Northeast Utilities,
HCAR No. 25900 (September 30, 1993), will pay NC Services, or the NCE company
that developed the intellectual property for utility purposes, that e prime uses
or licenses: (1) 70% of the revenues from the intellectual property until the
company that developed the intellectual property recovers its programming and
development costs; and (2) 20% of such revenues thereafter. e prime will pay
cost for intellectual property that an NC Services or an NCE system operating
company develops at its request.
Financing: On one past occasion, e prime has engaged in customer
financing. In this instance, e prime purchased and now leases to a customer a
gas-fired air compressor used for making snow. The customer's use of the air
compressor is in conjunction with one of PSCo's CPUC approved DSM programs. The
customer will obtain ownership of the air compressor at the end of the lease.
The outstanding balance of the lease is $324,367. e prime may in the future
wish to engage in other customer financing activities in connection with
services and products that it provides. However, it will not do so unless it
first obtains authorization from the Commission in a separate application or is
otherwise allowed by Commission rule to do so.
Young Gas: As of February 1, 1996 as the result of a
contribution of Young Gas' shares from PSCo, e prime holds all of the
outstanding shares of Young Gas, a limited liability company. Young Gas owns
47.5% interest in a limited partnership that owns a gas storage facility that
stores gas underground primarily for use in PSCo's gas operations. The rates
charged to PSCo for such services by the partnership are determined in
accordance with FERC regulations and are cost-based. The partnership provides
services to third parties at FERC determined rates as well. The Commission has
recognized the functional relationship of gas storage facilities to a holding
company system's gas utility business. In National Fuel Gas Company, HCAR
No. 25437 (Dec. 20, 1991), the Commission authorized the registered holding
company: (1) to acquire a wholly-owned subsidiary to market natural gas and to
assist in transporting and storing natural gas, and (2) to acquire a 50%
interest in a partnership engaged in purchasing, storing, transporting, and
marketing natural gas throughout the United States. See also, Consolidated
Natural Gas Co., HCAR No. 26234 (Feb. 23, 1995) (describing CNG System as
comprised of, inter alia, CNG Energy Services Corporation, which gas marketing
subsidiary "sells gas and related services such as storage . . . to System
[companies]
-68-
<PAGE>
and nonassociates . . ."). Thus, because PSCo is both a gas and an
electric utility, the Commission should find Young Gas to be functionally
related to its utility business.
Texas Ohio Gas and Texas Ohio Pipeline: As of September 4, 1996,
e prime has held all of the outstanding shares of Texas Ohio Gas, a natural gas
marketer at both the retail and wholesale levels. Texas Ohio Gas is also
engaged in an electric retail pilot program in New York. Prior to the
consummation of the Transaction, Texas Ohio Gas expects to seek authorization
from the FERC to market electric power and energy at the wholesale level. As is
the case with e prime's marketing activities, Texas Ohio Gas will not engage in
marketing and brokering activities outside of the United States unless
authorized by the Commission. As discussed with regard to the retention of e
prime, gas and electric marketing activities, including the use of risk
management strategies, are consistent with Commission precedent, and are listed
as an energy-related activity under Rule 58(b)(1)(v).
In connection with its purchase of all outstanding shares of Texas
Ohio Gas, e prime also purchased 100% of the shares of Texas Ohio Pipeline,
which owns a 900 foot FERC regulated interstate gas pipeline linking the
pipelines of Texas Eastern Transmission Corporation and Tennessee Gas Pipeline
Company. This pipeline provides operational flexibility, allowing gas to be
moved from one pipeline to another, that can be used to assist in Texas Ohio
Gas's marketing activities. To elaborate briefly, Texas Ohio Gas, which
presently has the right to use 100% of the capacity of the pipeline owned by
Texas Ohio Pipeline, has various firm market obligations. Because there is an
occasional lack of capacity on the two pipelines that Texas Ohio Pipeline's
pipeline inter-connects, Texas Ohio Gas is able to use Texas Ohio Pipeline to
move gas from one pipeline to another to meet those obligations. The pipeline
will also allow Texas Ohio Gas and other gas transportation customers to respond
to certain market events, which will further assist Texas Ohio Gas's gas
marketing activities. e prime paid $2,000,000 for Texas Ohio Pipeline. As a
consequence, retention of Texas Ohio Pipeline should be allowed. See SEI
Holdings, Inc., HCAR No. 26581 (September 26, 1996) (authorizing the acquisition
or construction of physical assets that are reasonably necessary in the day-to-
day conduct of marketing operations).
ep3: e prime has a 50% partnership interest (20% general
partnership interest, 30% limited partnership interest) in ep3, which was formed
to engage, or invest, in the business of marketing, developing, financing,
constructing, managing, and operating electrical energy transmission,
distribution, or generation facilities -- all of which are expected to qualify
as FUCOs or EWGs -- or providing consulting services related thereto. It is
expected that the primary focus of these activities will be on Latin America and
other emerging foreign markets; no domestic activities are presently
contemplated. The Commission has found these activities to be permissible under
the Act. See, e.g., Northeast Utilities, HCAR No. 25977 (Jan. 24, 1996)
(authorizing Charter Oak Energy and COE
-69-
<PAGE>
Development Corporation); Central and South West Corp., HCAR No. 26156 (Nov.
3, 1994) (authorizing CSW to form, acquire, finance, and own securities of
FUCOs); Central and South West Corporation, HCAR No. 26155 (Nov. 2, 1994)
(investment in a joint venture which will construct, own, and operate QFs and
EWGs).(48)
Natural Fuels: This 83.63% owned subsidiary engages in the
commercialization of compressed natural gas as a motor fuel. Services which
Natural Fuels offers to third parties include conversion of vehicles to
operate on natural gas or propane; construction, ownership, and operation of
compressed natural gas fueling facilities; and the assembly and sale of
compressed natural gas fueling facility equipment.
The Commission previously has authorized other registered holding
companies that own gas utility operating companies to form subsidiaries to
engage in the activities that are carried out by Natural Fuels. In
Consolidated Natural Gas Co., HCAR No. 25615, (Aug. 27, 1992), Consolidated
Natural Gas Company and its wholly-owned subsidiary, CNG Energy Co., sought
authorization for CNG Energy's Natural Gas Vehicle Division to engage in,
inter alia, the following activities: (1) buying and reselling equipment
necessary to transform vehicles from gasoline to natural gas and/or combined
natural gas and gasoline operation ("Conversion Equipment"); (2) installing
and/or maintaining Conversion Equipment on customer vehicles and providing
training on the use, installation and maintenance thereof; (3) designing,
constructing, owning, leasing, selling and/or maintaining refueling stations
or mobile refueling operations for the refueling of natural gas vehicles; and
(4) entering into various joint arrangements with unrelated companies or
individuals to engage in these activities. The retention of Natural Fuels
should thus be authorized. See also, Consolidated Natural Gas Co., HCAR No.
26234 (Feb. 23, 1995) (authorizing CNG's subsidiary, CNGF, to finance the
purchase of certain gas equipment, including "New Technology Equipment" and
"Alternate Fuel Equipment," by customers who would, in turn, purchase gas
from CNG System subsidiaries).
NCE is aware that in Rule 58(b)(1), the Commission specified that
companies engaged in the ownership, operation, sale of compressed natural gas
powered vehicles, and the installation and servicing of refueling equipment
for such vehicles, could only be deemed to be an "energy-related company"
within the meaning of Rule 58 if the securities of such company "are
acquired, directly or indirectly, by a registered holding company whose
public-utility company subsidiaries are primarily gas utility companies."
Thus, Natural Fuels cannot be deemed an energy-related company within the
meaning of Rule 58 since the NCE utility operating companies are primarily
electric utilities.
- --------------------
(48) In connection with PSCo's acquisition of IPC (see note 9, supra), a new
corporation, yet to be named, may be formed. Its activities will be the same
as those currently performed by ep3, and the activities of ep3 may be wound
down. It will initially be held by IPC and by either NC Enterprises, NC
International, or e prime.
-70-
<PAGE>
However, because PSCo and Cheyenne are combination gas and electric
utilities, the Commission should find that the activities of Natural Fuels
are functionally related to their core utility operations and allow them to
be retained on that basis. Natural Fuels' activities will draw on the
experience that PSCo and Cheyenne have developed from their gas utility
operations. For example, the Compressed Natural Gas Fuel ("CNG") sales
business requires the compression, drying, and safe handling of high pressure
natural gas. The compression expertise in the gas utility carries over to
the safe design and operation of the compression equipment used in the CNG
business. The utility experience in delivering natural gas to utility
customers carries over to serving the fleet customer with natural gas. Leak
detection and repair in both businesses is similar in expertise and safety
training. The drying of natural gas in the CNG business is similar to the
utility expertise of dehydration. The overall expertise to design, build,
maintain, and operate a CNG fueling facility is very close to the same
expertise to design, build, operate, and maintain a gas compression plant and
pipeline in the gas utility business.
Moreover, Natural Fuels' business will also expand the market for
natural gas, which will benefit PSCo's and Cheyenne's gas businesses.
NC International: As noted previously, NC Enterprises may directly
hold PSCO's present interest in NC International after the closing of the
Transaction. Alternatively, NCE may hold this interest directly, or NC
Enterprises may hold this interest indirectly through e prime. NC
International's activities have previously been discussed in Item
3.A.2.a.ii.I. (Direct Subsidiaries of NCE).
Additional ETC: As noted in footnote 4, supra, prior to the
closing of the Transaction, PSCo expects to establish a new ETC which will
sell, finance, install, and service satellite receiver dishes and a variety
of ancillary components to enable customers to receive direct broadcast
satellite service. This company will become a direct subsidiary of NC
Enterprises after the closing of the Transaction.
III. SUBSIDIARIES AND OPERATIONS OF PSCO
1480 Welton: 1480 Welton holds certain of PSCo's real estate used
or intended to be used in the utility business of PSCo, is functionally
related to the utility operation of PSCo and is retainable. 1480 Welton does
not hold interests in any other types of properties, nor does it offer
services to non-system companies. The Commission has permitted a number of
registered holding company systems to establish and/or retain real estate
subsidiaries. See, e.g., UNITIL Corporation, HCAR No. 25524 (April 24,
1992) (UNITIL Realty); The Southern Company, HCAR No. 21898 (January 27,
1981) (Alabama Property Co. subsidiary of Alabama Power Co.); America
Electric Power, HCAR No. 7615 (August 2, 1947) (Franklin Real Estate Co. and
Indiana Franklin Realty Co.).
Fuelco: Fuelco was formed to engage in natural gas and oil
exploration and production. The Commission has approved the oil and
-71-
<PAGE>
gas exploration and development activities of New England Energy Incorporated
("NEEI"), the subsidiary of New England Electric System. New England Energy
Incorporated, HCAR No. 23988 (Jan. 13, 1986); New England Energy
Incorporated, HCAR No. 21862 (Dec. 30, 1980). Fuelco's activities are
functionally related to utility operations and is thus retainable. In any
event, Fuelco is now a corporation in dissolution under Colorado law, and
substantially all of Fuelco's assets have been sold.
Green and Clear Lakes and Ditch Companies: Green and Clear Lakes
stores water for use by a PSCo hydroelectric facility, a business that
clearly is functionally related to utility operations. The Ditch Companies
own utility water rights that are also clearly functionally related to
utility operations. Indeed, at the time of the break-up of the Cities Service
holding company system, the Commission noted that the Ditch Companies could
be retained by PSCo under the standards of Section 11(b)(1). In the Matter of
Cities Service Power & Light Company, HCAR No. 4489 (Aug. 18, 1943).
PSRI: PSRI owns certain life insurance policies acquired prior to
1986 on certain PSCo employees and retirees. PSRI does not intend to acquire
any new policies or engage in any other active business. Moreover,
divestiture or the early winding-down of PSRI could have adverse tax
consequences for PSCo. In addition, PSRI accounts for only 1.4% and 1.6% of
PSCo's consolidated revenue in the years ended December 31, 1995 and December
31, 1996, respectively.
Thermal energy business: The thermal energy business of PSCo,
which is located exclusively in its service territory and primarily in the
downtown Denver area, serves 120 customers and has annual revenues of
approximately $6.7 million. PSCo also intends to utilize and market the
capacity and expertise developed in its thermal operations in different
situations such as by offering chilled water services to existing customers,
and providing services to maintain customer's heating and cooling plants.
The thermal business is currently a division of PSCo, but may be moved to a
separate subsidiary, either of NC Enterprises or PSCo.
The retention of this business will further NCE's ability to be an
energy service company providing consumers with all options to meet their
energy needs. Although much of the steam is supplied from boilers at PSCo's
Denver steam plant, the steam system is connected to the Zuni steam electric
generating plant as well, and approximately one-quarter of the steam heating
business requirements are met through steam produced by this electric
generation plant in the course of its ordinary operation. The Commission has
previously approved of the retention of steam heating operations under
Section 11(b)(1). See North American Company, 11 SEC 194 (1942); In the
Matter of the Philadelphia Company, HCAR No. 8242 (June 2, 1948).
Of course, PSCo is aware that the Commission in 1943 in the Cities
Service case found similar operations of PSCo to be non-
-72-
<PAGE>
retainable.(49) That fact, however, is not dispositive here as, unlike at
that time, the system is now connected with a PSCo generation facility and
uses the steam produced by a facility that is also used for electric
generation, and the nature of utility services has changed since that time.
The retention of steam heating operations will allow NCE to offer customers
this additional option to meet their energy needs, thereby allowing NCE to
compete more effectively in the energy-services business. The Commission has
recently found district cooling and heating services to be permissible under
the Act. Cinergy Corp., HCAR No. 26474 (February 20, 1996). Moreover, "[t]he
production, conversion, sale, and distribution of thermal energy products,
such as process steam, heat, hot water, chilled water, air conditioning,
compressed air and similar products" is an enumerated energy-related activity
in Rule 58(b)(1)(vi). Thus, this thermal energy business of PSCo is
reasonably incidental to NCE's utility operations and may be retained.
Commercialization of electro-technologies and intellectual
property: PSCo also markets non-utility products and services developed
through electric utility operations. For example, PSCo currently provides
relay testing services for customers and may lease or sell surge protection
equipment to unaffiliated third parties as well as install, own and operate
photovoltaic cells, and commercialize other electro-technologies that become
available to it. Similarly, PSCo may sell or enter into royalty arrangements
with regard to intellectual property owned or developed by PSCo in its
utility operations.(50) Such commercialization activities are energy related
activities as defined in Rule 58(b)(1)(ii) and, as discussed with regard to e
prime's proposed meter reading services, commercialization of technology
developed in utility operations has been previously authorized by the
Commission (See also American Electric Power Company, HCAR No. 22468 (April
21, 1982) (authorizing sale and licensing of intellectual property developed
by utility system companies)).
Electric and gas vehicle products and services: In addition to the
activities of Natural Fuels, as described above, PSCo is currently engaged in
a program to develop fueling sites for natural gas vehicles. The fueling
units will be owned by PSCo and are typically located at PSCO facilities.
PSCO also has located fueling equipment at certain customer facilities. In
addition, PSCO leases gas compressors, which are used for vehicle fueling
purposes, to certain alternative fuel customers located within its service
territory. NCE through PSCo or another subsidiary may expand its activities
to own, operate, sell, install and service recharging and
- --------------------
(49) The Commission did not require divestiture of the operations in 1943 as
it recognized they were unprofitable and PSCo was unlikely to be able to
divest them.
(50) In the event these arrangements are with affiliates, the royalty payment
provisions set out in Northeast Utilities, HCAR No. 25900 (September 30,
1996), discussed with respect to e prime, will apply.
-73-
<PAGE>
conversion equipment and facilities, and otherwise promote electric powered
vehicles. Such activities relating to electric vehicles are energy-related
under Rule 58(b)(1)(iii) for NCE, as a registered holding company whose
operating companies are primary electric utilities. Moreover, because PSCo
is a combination gas and electric utility, its fueling business for gas
powered vehicles should be retainable for the reasons discussed with respect
to Natural Fuels' activities.
Sale and servicing of electric and gas appliances: PSCo's
appliance service operations provide repair services and warranties to
customers in connection with certain household appliances and may involve the
leasing of certain large appliances (i.e. HVAC system. lighting system,
chillers) to industrial customers. In Mississippi Power & Light Co., HCAR
No. 25140 (August 30, 1990), the Commission authorized Mississippi Power &
Light Co. to market and sell manufacturers' warranties and service agreements
for space conditioning equipment as well as to market, sell, lease, and
finance the acquisition and installation of surge suppressors. PSCO's
activities are similar and are, therefore, retainable. Such activities
should also be retainable for the reason set forth above with respect to
Quixx's financing for heat pump acquisition by SPS customers. Also, by
analogy, Rule 48 provides various exemptions for a public-utility company,
such as PSCo, to provide financing for customer purchases of, including from
such public-utility company engaged in the business of selling, standard
electric and gas appliances. Moreover, "[t]he sale of electric and gas
appliances . . . and the installation and servicing thereof" are
"energy-related" activities under Rule 58(b)(1)(iv).
IV. LEASING OF SPACE BETWEEN AND AMONG
ASSOCIATE COMPANIES
SPS, PSCo, and other associate companies of NCE may, from time to
time, enter into leases of office or other space with other associate
companies. Any such lease will be in accordance with Rules 87, 90, and 91,
except as may be otherwise authorized by the Commission. To the extent
necessary, NCE requests authority from the Commission to enter into the
business of leasing such space between and among associate companies and
third parties. The Commission has permitted the leasing of excess office
space. See, e.g., Central Power and Light Company, HCAR No. 26408 (November
13, 1995); Northeast Utilities, HCAR No. 24908 (June 22, 1989).
V. APPLICABILITY OF THE 15% OF NET
CAPITALIZATION TEST UNDER RULE 58
As detailed above, many of the non-utility activities of NCE and
its affiliates fall within the ambit of newly adopted Rule 58. Rule 58 also
provides (in section (a)(1)(ii)) that investments in non-utility activities
that are exempt under Rule 58 cannot exceed 15% of the consolidated
capitalization of the registered holding company. In its statement
supporting the adoption of the Rule, the Commission stated:
-74-
<PAGE>
The Commission believes that all amounts that have actually been
invested in energy-related companies pursuant to commission order
prior to the date of effectiveness of the Rule should be excluded from
the calculation of aggregate investment under Rule 58. The Commission
also believes it is appropriate to exclude from the calculation all
investments made prior to that date pursuant to available exemptions.
HCAR No. 26667 at 50-51.
Because NCE was not yet a holding company, none of the investments
in non-utility activities that are described herein were pursuant to
Commission order. However, since all of the activities of SPS were outside
the ambit of the Act and since the non-utility investments of PSCo, an exempt
holding company, were exempt under the Act, investments made by SPS and PSCo
prior to the effective date of Rule 58 which will continue as part of the NCE
holdings after consummation of the merger, should not count in the
calculation of the 15% maximum. The same reasoning that led the Commission
to exempt prior investments for registered holding companies, justifies
exempting from the 15% calculation the existing investments of a company
about to be registered. As stated in the Rule, all additional investments
made in those activities subsequent to the adoption of Rule 58 should be
included in the 15% test.(51)
- --------------------
(51) At December 31, 1996, the combined equity investment in non-utility
companies by PSCo and SPS totaled $177,465,000, with total assets of these
non-utility companies amounting to $446,548,000. PSCo's and SPS's respective
portions of this equity investment and total assets were $65,528,000 equity
investment and $318,221,000 total assets by PSCo; and $111,937,000 equity
investment and $128,327,000 total assets by SPS. PSCo's subsidiary PSCCC,
which as of December 31, 1996 had assets of $174,528,000 and a PSCo equity
investment of $20,911,000, accounted for more than half of the December 31,
1996 non-utility assets of PSCo. The combined non-utility companies' equity
investment and total asset numbers above include the following investment and
asset amounts attributable to EWGs and FUCOs:
Equity Investment Assets
PSCo:
EWGs -0- -0-
FUCOs -0- -0-
SPS:
EWGs $9,117,000 $9,117,000
FUCOs -0- -0-
-75-
<PAGE>
b. SECTION 10(c)(2)
The Transaction will tend toward the economical and efficient
development of an integrated public utility system, thereby serving the public
interest, as required by Section 10(c)(2) of the Act.
i. EFFICIENCIES AND ECONOMIES
The Transaction will produce economies and efficiencies more than
sufficient to satisfy the standards of Section 10(c)(2), described above.
Although some of the anticipated economies and efficiencies will be fully
realizable only in the longer term, they are properly considered in
determining whether the standards of Section 10(c)(2) have been met. See
American Electric Power Co., 46 SEC 1299, 1320-1321 (1978). Some potential
benefits cannot be precisely estimated; nevertheless they too are entitled to
be considered: "[S]pecific dollar forecasts of future savings are not
necessarily required; a demonstrated potential for economies will suffice
even when these are not precisely quantifiable." Centerior Energy Corp.,
HCAR No. 24073 (April 29, 1986) (citation omitted).
At the time of the announcement of the Transaction, PSCo and SPS
estimated the nominal dollar net value of synergies from the Transaction to
be approximately $770 million over the first 10-year period from 1997 to
2006. The Transaction is expected to yield several types of presently
quantifiable benefits: (1) capital expenditure savings; (2) production cost
savings; (3) labor cost savings; and (4) administrative and general savings.
The amount of savings estimated at the time of announcement of the
Transaction in each of these categories, on a nominal dollar basis, is
summarized in the table below:
Category Amount
Corporate Programs $ 82.7M
Non-fuel Purchasing Economies 19.1M
Capacity Deferrals* 160.1M
Fuel Savings 163.4M
Labor 389.5M
Less: Pre-merger Initiatives (2.1M)
Less: Costs to Achieve (43.0M)
-------
Net Total Estimated Savings $769.7M
-------
-------
*Net of the estimated cost of building the planned interconnection between
PSCo and SPS. See discussion under "Capacity Deferrals" below.
These expected savings far exceed the savings claimed in a number
of recent acquisitions approved by the Commission. See, e.g., Kansas Power
and Light Co., HCAR No. 25465 (Feb. 5, 1992) (expected savings of $140
million over five years); IE Industries, HCAR
-76-
<PAGE>
No. 25325 (June 3, 1991) (expected savings of $91 million over ten years);
Midwest Resources, HCAR No. 25159 (Sept. 26, 1990) (estimated savings of $25
million over five years). These savings categories are described in greater
detail below.
Corporate Programs: These are savings related to insurance costs,
outside services, shareholder services, advertising and other general and
administrative overheads. The aggregate cost of these items for the
companies on a stand-alone basis is greater than the cost will be to the
combined new company. An example would be the hiring of one outside
professional service (e.g., external auditors, attorneys, and consultants)
instead of two.
Non-Fuel Purchasing Economies: These are the savings which will
result from the new, larger company having greater purchasing power. The
new company will be able to coordinate its purchasing needs, buy in greater
quantity, negotiate with vendors, and receive larger discounts.
Capacity Deferrals: This refers to the savings created by deferring
the construction of additional generating capacity. For these deferrals to
be achieved, the two systems must be integrated via a HVDC interconnection
and transmission line. Because of load diversity (the two systems peak at
different times) the new company's peak load is less than the sum of the
peak loads of the two individual companies. This load diversity requires
less total capacity, allowing the new company to defer generation expansion
and the associated costs to the ratepayer. The amount of projected
capacity deferral savings is net of the estimated incremental merger-
related cost of the HVDC interconnection and transmission line
(approximately $112 million). See Item 3.A.2.b.ii.I for details of the
interconnection and line.
Fuel Savings: These are savings which result from the new, larger
company having greater purchasing power. The new company will be able to
negotiate contracts to procure and transport fuel in larger quantities, and
at much larger discounts than either PSCo or SPS would on a stand-alone
basis. Additionally, once the two systems are directly interconnected, the
new company's operators will be able to dispatch and generate the power in
the most economic manner, as certain plants are more economical than
others.
Labor Cost Savings: PSCo and SPS estimate that a net reduction in
labor costs of at least $389.5 million on a nominal dollar basis can be
achieved as a result of the Transaction through elimination of
approximately 550-600 or more full time equivalent duplicative positions in
certain corporate and administrative functions. This assumes a one-year
period will be required to achieve the personnel reductions.
(less)
-77-
<PAGE>
Pre-Merger Initiatives: The level of employees of both companies
combined compared with the level of employees needed for the new company
indicates that approximately 550-600 or more full-time duplicate positions
be eliminated through the merger process. There is, however, a level of
employee reduction which will occur regardless of the merger. This figure
is a part of the total labor savings amount above, and is removed from the
savings estimates to avoid double counting of savings for forecasting
purposes
Costs to Achieve: This consists of merger costs such as investment
bankers' fees, attorney and accountant fees, and severance and other
employee reduction-related costs. Item 2 provides details of some of these
components and their amounts.
Additional Expected Benefits: In addition to the benefits
described above, there are other benefits which, while presently difficult to
quantify, are nonetheless substantial. These other benefits include
competitive rates and services, increased size and stability, diversification
of service territory, coordination of diversification programs, complementary
operational functions, and complementary management.
- COMPETITIVE RATES AND SERVICES -- NCE will be able to meet the
challenges of the increasingly competitive environment in the utility
industry more effectively than either PSCo or SPS standing alone. The
Transaction will create financial and operational benefits for
customers in the form of lower rates and better service over the long-
term.
- INCREASED SIZE AND STABILITY -- As a larger entity, shareholders will
benefit over the long-term from the NCE's greater financial strength
and financial flexibility. NCE will be better able to take advantage
of future strategic opportunities and to reduce its exposure to
changes in economic conditions in any segment of the business.
- DIVERSIFICATION OF SERVICE TERRITORY -- The combined service
territories of PSCo and SPS will be larger and more geographically
diverse than the independent service territories of each entity,
reducing NCE's exposure to changes in economic, competitive, or
climatic conditions in any given sector of the combined service
territory.
- COORDINATION OF DIVERSIFICATION PROGRAMS -- PSCo and SPS each have
complementary non-regulated subsidiary businesses, and NCE, as a
stronger financial entity, should be able to manage and pursue these
subsidiary businesses more efficiently and effectively as a result of
access to lower-cost capital and efficiencies achievable through
greater size.
- COMPLEMENTARY OPERATIONAL FUNCTIONS -- The combination of PSCo, with
expertise in customer service applications and
-78-
<PAGE>
energy services as well as natural gas utility operations, and SPS,
a low-cost power producer with recognized expertise in engineering
services, wholesale power marketing and utility generation
projects, will allow NCE to offer customers a more complete menu of
service options and a better operational balance.
- COMPLEMENTARY MANAGEMENT -- The managements of PSCo and SPS have
complementary strengths which will provide NCE with a strong and
capable management team, facilitating the merger of similar corporate
cultures and achieving cooperation and coordination in an efficient
manner.
ii. INTEGRATED PUBLIC UTILITY SYSTEM
Reference is made to Item 3.A.2.a. for a discussion of the retention
of both NCE's electric and gas utility businesses. In the Commission's decision
In the Matter of American Water Works and Electric Company, Incorporated, 2 SEC
972 (1937), it was noted that the Act does not contain a definition of a single
integrated utility in the context of a combined company:
We believe, however, that it is proper to regard such a combined
property as a single integrated system, provided that all of the
electric properties are integrated and all of the properties, both gas
and electric, are in fairly close geographic proximity and are so
related that substantial economies may be effectuated by their
coordination under common control.
As is pointed out in Item 3.A.2.a. above, the Transaction meets the requirements
necessary for NCE to remain a combination gas and electric utility holding
company. NCE also meets the standards of Section 2(a)(29)(A) and (B) of the Act
with respect to its electric operations and gas operations.
I. ELECTRIC SYSTEM
As applied to electric utility companies, the term "integrated public
utility system" is defined in Section 2(a)(29)(A) of the Act as:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility
assets, whether owned by one or more electric utility companies, are
physically interconnected or capable of physical interconnection and
which under normal conditions may be economically operated as a single
interconnected and coordinated system confined in its operation to a
single area or region, in one or more states, not so large as to
impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation,
and the effectiveness of regulation.
-79-
<PAGE>
On the basis of this statutory definition, the Commission has established four
standards that must be met before the Commission will find that an integrated
public utility system will result from a proposed acquisition of securities:
(1) the utility assets of the system are physically interconnected or
capable of physical interconnection;
(2) the utility assets, under normal conditions, may be economically
operated as a single interconnected and coordinated system;
(3) the system must be confined in its operations to a single area or
region; and
(4) the system must not be so large as to impair (considering the state of
the art and the area or region affected) the advantages of localized
management, efficient operation, and the effectiveness of regulation.
Environmental Action, Inc. v. Securities and Exch. Comm'n, 895 F.2d 1255, 1263
(9th Cir. 1990) (citing In re Electric Energy, Inc., 38 SEC 658, 668 (1958)).
The Transaction satisfies all four of these requirements. It should be noted
that in the 1995 Report, the Division recommended that the Commission "respond
realistically to the changes in the utility industry and interpret more flexibly
each piece of the integration requirement."(52)
At the moment, PSCo and SPS have the ability to exchange power over a
transmission tie owned by Public Service Company of New Mexico ("PNM"). In the
past, the two companies have exchanged electric energy utilizing these
facilities. Facilitating the current transmission and exchange of power between
the parties is participation by PSCo, SPS and PNM in the WSPP, which provides
for, among other things, the exchange of bulk power.
The Section 2(a)(29) standard will be met in this Transaction,
however, as the NCE system is capable of interconnection through the
construction of a new transmission tie line, construction of which is planned
within five years of the effective time of the Transaction. NEC is committed to
the construction of this transmission tie line. Present plans are to complete
the interconnect by the year 2001. For purposes of estimating merger savings,
PSCo and SPS assumed that the tie line would be approximately 300 miles, running
from near Amarillo, Texas to Southeastern Colorado, and that the tie line
voltage would be 345 KV. They also estimated that the costs associated with
constructing the interconnection line amount to $149 million, of which
$112 million are incremental costs attributable to the Transaction. However,
the actual routing and cost of the tie line has not yet been finally determined.
In conjunction with a settlement of the FERC merger proceeding, SPS and PSCo
have agreed
- -------------------------
(52) 1995 Report at 71.
-80-
<PAGE>
with other utilities to comprehensive procedures for regional planning of the
new transmission interconnection between SPS and PSCo. See Exhibit D-1.4,
hereto. The procedures will allow for the participation of all interested
parties in the identification and evaluation of transmission line
alternatives to connect the PSCo and SPS systems. Following completion of
the line, the PSCo and SPS systems will be operated as a single
interconnected system. The initial open planning meeting, as contemplated in
the settlement agreement, was held on October 3, 1996. Since that time a
study committee has been established among the open study participants (not
simply PSCo and SPS). The study committee has identified alternative routes
to be evaluated.
Since SPS operates in the Eastern Interconnection and is a member
of the SPP and PSCo is in the Western Interconnection and is a member of the
WSCC, the interconnect must include at least one HVDC back-to-back terminal
between the two systems. The HVDC terminal included for purposes of
estimating merger savings to asynchronously connect the two companies was
expected to be rated at 400 MW and allow for capacity and energy transfers
between the two systems.(53) However, it is possible that one or more such
interconnects could be constructed.
This additional interconnect will further the economic operation of
the NCE system by enabling it to achieve additional production-related
synergies. Indeed, the plans for the line's construction are not related to any
requirement of the Act, but rather to the substantial benefits that will accrue
as a result of the line. As recently as 1992, SPS and PSCo discussed connecting
their systems through an HVDC tie and transmission line to facilitate
transactions between their systems. The production-related benefits of the
proposed interconnect were determined in three areas: capacity deferral
savings, joint dispatch savings, and fuel energy savings. The process used to
estimate these savings involved modeling each company's system and determining
its costs on a stand-alone basis and then on a combined basis. The savings were
based on a comparison of the individual system costs to those determined on a
combined basis. The representation of the individual systems was based on each
company's most recent resource plan, modified to account for any major changes
in assumptions since the plan was developed, and the most recent fuel forecasts.
The combined system expansion plan was based on the reduced capacity
requirements of the combined system and accounted for the expected fuel synergy
savings. The development of these costs considered production costs as well as
investment-related costs. Benefits attributed to joint dispatch savings were
developed
- -------------------------
(53) This is exactly the type of asynchronous interconnection approved by
the Commission in connection with a settlement that provided for the
construction by the Central and South West Corporation of two HVDC ties to
interconnect its ERCOT subsidiaries with its Southwest Power Pool
subsidiaries, thereby satisfying the Act's integration requirements. See
Central and South West Corporation, HCAR No. 22439 (April 1, 1982).
-81-
<PAGE>
within the combined system model and coincide with the in-service date of a
new transmission line between the two companies. Overall, it is anticipated
that the electric production-related savings from the merger of PSCo and SPS
will aggregate approximately $270 million (net of the cost of the line). To
achieve this level of savings, the tie-line will need to be constructed.
Additional savings are likely to be realized over time. Additional
information regarding electric production-savings can be found in Exhibit
D-1.2.2. attached hereto.
The Commission has previously indicated that a single integrated
system exists even based solely on a planned, future interconnection,
provided that such physical interconnection is "contemplated or . . .
possible within the reasonably near future" and not just something that
"might occur in the remote future, and whose occurrence has not been
foreshadowed by any facts shown in the record."(54) The benefits to be
derived by the new transmission line are also a factor in determining whether
the system is capable of physical interconnection.(55) The fact that the
Commission has indicated that, absent special circumstances, the "reasonably
near future" mentioned above, should not exceed 10 years,(56) is not an issue
in this case as the parties do have definite plans to construct an
interconnection that will be in service and generating economies within 5
years of the consummation of the Transaction.
In addition, Cheyenne forms a single integrated system with the NCE
system. With regard to electric properties and as set forth above,(57) the
key to a single integrated system is that the utility assets are "physically
interconnected or capable of interconnection."
- -------------------------
(54) In the Matter of the North American Company and Its Subsidiaries, HCAR
No. 4505 (Apr. 15, 1942). See also, In the Matter of Hudson River Power
Corporation, HCAR No. 2415 (Dec. 9, 1940) (integration standard not met where
"the record discloses no definite plan for bringing about any such
interconnection"); In the Matter of Cities Service Power & Light
Corporation, HCAR No. 5256 (Aug. 30, 1944) (integration standard met where
"Derby contemplates the construction of such interconnection facilities").
(55) In one instance, the Commission noted that while "we are not aware of
any plans for undertaking these interconnections in the near future ... [w]e
find ... no occasion to doubt the validity of the estimates of benefits to be
derived therefrom," in its holding that such facilities were considered
capable of interconnection. In the Matter of Cities Service Power & Light
Company, HCAR No. 4489 (Aug. 18, 1943).
(56) See, In the Matter of Union Electric Company, HCAR No. 18368 (Apr. 10,
1974) (holding that in the absence of special circumstances, physical
interconnection that might be built in ten years if economical does not meet
integration requirement).
(57) The issue of Cheyenne's gas properties is discussed under Item
3.A.2.a.i. (Retention of Gas Operations).
-82-
<PAGE>
Historically both Cheyenne and PSCo were part of the Cities Service Power and
Light Company holding company system. When the Commission ordered the
break-up of that system in the mid-1940s, it issued orders organizing the
various systems within the Cities Services system as independent systems. At
that time, the Commission specifically examined the relationship between the
electric utility operations of PSCo and Cheyenne and held that together they
constituted a single integrated system within the meaning of Section 2(a)(29)
of the Act.(58) The Commission noted that the two systems were interconnected
via "a transmission line which functions as an important tie between the
companies although it is owned, not in the system, but by the United States
Bureau of Reclamation."(59) Moreover, although the Commission initially
postponed any finding on the issue of PSCo's retention of combination gas and
electric utility properties, it did examine the PSCo and Cheyenne gas
operations as one unit.(60) PSCo and Cheyenne continue to form such an
integrated system and the addition of NCE as a holding company above these
entities does not alter that fact, nor does the fact that the NCE system will
include SPS utility properties since, as described above, PSCo and SPS will
be interconnected and PSCo and Cheyenne are interconnected. Thus, the entire
system is, or is capable of being, interconnected.
The specific physical interconnection via electric transmission ties
between PSCo and Cheyenne is as follows: 115KV transmission lines owned by WAPA
connect with the Cheyenne system via the Happy Jack, Cheyenne and Archer
substations. WAPA transmission lines also interconnect with PSCo transmission
lines. One of these WAPA owned lines connects PSCo and Cheyenne, running
directly from a WAPA-PSCo interconnection to a WAPA-Cheyenne interconnection.
Indeed, the Applicants believe that this line is the same line referred to in
the Cities Service decision.
It should be noted that Cheyenne was receiving electricity from
PSCo via this line at the time of the Cities Service decision, while today,
as a result of a competitive bid process to supply the Cheyenne system,
Cheyenne currently receives its power requirements to serve its load from a
thirty-party utility, PacifiCorp, in accordance with an agreement that
expires in the year 2000. That fact should not prevent the conclusion that
the PSCo and Cheyenne electric systems constitute a single integrated
electric system within the meaning of Section 2(a)(29). PacifiCorp was
selected as Cheyenne's power supplier in a competitive resource selection
process in which PSCo participated. Had PSCo won the bidding process, it
could have met Cheyenne's power
- -------------------------
(58) Cities Service Power & Light Company And Its Subsidiary Companies
("Cities Service"), HCAR No. 4489 (August 18, 1943) ("We find that the
properties of the Cheyenne company and the Armada company, together with the
main body of the Public Service properties in northern Colorado, form a
single integrated electric utility system").
(59) Id.
(60) Id.
-83-
<PAGE>
requirements. Moreover, Cheyenne's use of competitive resource selection
procedures is consistent with the preferences of the WPSC, as reflected in
the Stipulation and Agreement that Cheyenne reached in the proceeding on the
PSCo and SPS merger, which the WPSC had to approve because it involved a
change of control of Cheyenne. As set forth in section 4(a) thereto:
Unless and until Cheyenne proposes and discusses alternative resource
selection procedures with the Commission, Cheyenne commits that,
following the consummation of the merger of PSCo and SPS, and the
formation of NCE, it will continue to use the resource planning and
bidding techniques and methods it used during its last competitive
electric resource solicitation, which resulted in the selection of
PacifiCorp as Cheyenne's full requirements electricity provider
through December 31, 2000. In this connection, Cheyenne will provide
written notification to and consult with the Commission before
agreeing to engage in joint resource planning with PSCo and SPS.
The Stipulation and Agreement is included as an attachment to Exhibit D-3.2 to
this Application. Moreover, the third-party relationship demonstrates adherence
to a policy the Act is intended to promote: the prevention of affiliate abuse.
That is, Cheyenne has in the past and will in the future choose its power
supplier irrespective of corporate relationships. As a final point, the general
manager of the Cheyenne system has historically reported to the vice president
of electric and gas distribution in PSCo.
Additionally, notwithstanding that Cheyenne currently obtains its
power requirements from PacifiCorp rather than PSCo, Cheyenne and PSCo
coordinate operations in other ways. For example, PSCo currently provides
significant system support services for Cheyenne, including emergency support,
system design, construction and operation, and maintenance activities. PSCo
administers the joint PSCo/Cheyenne transmission tariff on behalf of both
companies. PSCo provides a variety of administrative and general services in
support of Cheyenne, including rate and regulatory support, legal support,
accounting support, and technical assistance. As an example of the services
PSCo provides to Cheyenne, in Cheyenne's last competitive solicitation, certain
departments in PSCo helped Cheyenne evaluate the bids and select PacifiCorp as
its supplier, even though PSCo itself had put in a bid to supply Cheyenne.
The NCE electric system will operate in a single area or region. The
system will operate in six contiguous states in the greater southwest region of
the United States. It should be noted that in the 1995 Report, the Division has
stated that the evaluation of the "single area or region" portion of the
integration requirement "should be made. . . in light of the effect of
technological advances on the ability to transmit electric energy economically
over longer distance, and other developments in the industry, such as brokers
and
-84-
<PAGE>
marketers, that affect the concept of geographic integration."(61) The
1995 Report also recommends primacy be given to "demonstrated economies and
efficiencies to satisfy the integration requirements."(62) As set forth in
Item 3.A.2.b.i, the Transaction will result in economies and efficiencies for
the utilities and, in turn, their customers.
Moreover, the NCE electric system will not be so large as to impair
the advantages of localized management, efficient operations, and the
effectiveness of regulation. After the Transaction, PSCo, SPS and Cheyenne will
maintain their current headquarters as subsidiary headquarters and as local
operating headquarters for the areas they presently serve, while NCE maintains
system headquarters in both Denver (corporate offices) and Amarillo (operating
offices). This structure will preserve all the benefits of localized management
PSCo, SPS, and Cheyenne presently enjoy while simultaneously allowing for the
efficiencies and economies that will derive from their strategic alliance.
Furthermore, as described earlier, the system will facilitate efficient
operation.
Additionally, the NCE system will not impair the effectiveness of
state regulation. PSCo, SPS, and Cheyenne will continue their separate
existence as before, and their utility operations will remain subject to the
same regulatory authorities by which they are presently regulated, namely the
CPUC, WPSC, PUCT, NMPUC, KCC, OCC, and the FERC. PSCo and SPS have worked,
and are continuing to work, closely with the CPUC, WPSC, NMPUC, PUCT, KCC,
and OCC as well as the FERC and the NRC, to ensure they are well informed
about this Transaction, and public hearings have been held by the CPUC,
WPSC, PUCT, NMPUC, and FERC as part of the process of obtaining the required
regulatory approvals for the Transaction. Furthermore, all required state
regulatory approvals (as well as the approval of FERC and the NRC) have been
obtained. Pursuant to the recommendations contained in the 1995 Report, this
last factor is significant as the Division stated therein "when the affected
state and local regulators concur, the [Commission] should interpret the
integration standard flexibly to permit non-traditional systems if the
standards of the Act are otherwise met,"(63) especially since this
Transaction will result in a system similar to the traditional registered
holding company system.
II. GAS UTILITY SYSTEM
As discussed in Item 3.A.2.a.i, NCE seeks retention of the PSCo and
Cheyenne gas systems on a separate system basis, not as a single integrated gas
system. Nevertheless, NCE believes that an argument can be made that the PSCO
and Cheyenne gas systems can be
- -------------------------
(61) 1995 Report at 72-74.
(62) 1995 Report at 73.
(63) 1995 Report at 74.
-85-
<PAGE>
considered a single integrated gas utility system within the meaning of the
Act and consistent with Commission precedent.
To elaborate, the two operations are physically connected by the
WestGas interstate transmission pipeline (owned by WGI) which connects to the
PSCo transmission system at Chalk Bluffs, Colorado near the Colorado-Wyoming
border and runs to Cheyenne, Wyoming. Although PSCo and Cheyenne each maintain
separate gas supply and capacity portfolios that are consistent with the
requirements of their respective systems, they nevertheless, through the WGI
pipeline, derive gas from common sources of supply. PSCo and Cheyenne also
derive gas from common sources through the Colorado Interstate Gas Co.
transmission system, to which both companies are connected. Moreover, their gas
portfolios are managed by a central supply and capacity organization within
PSCo, and their operations will continue to be centralized by NC Services after
the merger. Further, PSCo's and Cheyenne's gas systems are monitored and
operated from the same Gas Load Control Center located in Golden, Colorado. The
operating pressures on both systems can be affected simultaneously by the valve
settings and compression utilized by WGI. In these circumstances, the
Commission could find the PSCo and Cheyenne gas systems to be a single
integrated utility system for purposes of the Act. See MCN Corporation, HCAR
No. 26576 (September 17, 1996) (Commission finding non-contiguous local
distribution companies to be part of an "integrated public utility system"
where, among other things, the local distribution companies were interconnected
through common pipelines and obtained gas from a common source).
3. SECTION 10(f)
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an application
is made under this section unless it appears to the satisfaction of the
Commission that such State laws as may apply in respect to such acquisition
have been complied with, except where the Commission finds that compliance
with such State laws would be detrimental to the carrying out of the
provisions of section 11.
As described in Item 4 of this Application/Declaration, and as evidenced by the
orders issued by the CPUC, WPSC, PUCT, NMPUC, and the KCC all relating to the
Transaction, NCE has complied with all applicable state laws related to the
proposed transaction.
4. OTHER APPLICABLE PROVISIONS -- SECTION 9(a)(1)
NCE is also requesting authorization from the Commission under
Section 9(a)(1) of the Act for the acquisition by it of the voting securities of
NC Services and NC Enterprises as part of the Transaction. Section 9(a)(1) of
the Act requires a registered holding company or any subsidiary thereof to
obtain authorization from the Commission before acquiring "any securities or
utility assets or any other interest in any business." In order to approve an
acquisition
-86-
<PAGE>
under Section 9(a)(1), the Commission must find that such acquisition meets
the standards of Section 10 of the Act, which in turn requires compliance
with Section 8 and 11 of the Act. Although NCE will not become a registered
holding company until consummation of the Transaction and thus Section
9(a)(1) is not applicable to it until that time, because NCE will become
subject to Section 9(a)(1), NCE is requesting the Commission's authorization
for these transactions.
The acquisition by NCE of the common stock of NC Services, making it a
wholly-owned subsidiary of NCE, will allow NCE to create a subsidiary service
company and capture economies of scale from the centralization of administrative
and general services to be provided to system companies. Since the cost of such
services are considered in rate cases, many of the benefits realized as a result
of NC Services will accrue to NCE's ratepayers. Virtually every registered
holding company has a subsidiary service company performing many of the same
functions as NC Services will perform. The acquisition of NC Services is in the
public interest, will not unduly complicate the capital structure of NCE, and
will not cause the NCE system to violate any other provision of the Act. NC
Services' only class of authorized stock will be its common stock, all of which
will be owned by NCE. The operation of NC Services, and the allocation of cost
for its operation, is discussed in detail in Item 3.B below.
NCE is also requesting authorization to acquire all of the issued and
outstanding common stock of NC Enterprises, which will serve as an intermediate
holding company for certain of the system's non-utility subsidiaries and
investments. NCE believes that an intermediate holding company provides a
clearer separation between the system's utility and non-utility operations and
allows for centralization of the operation of the non-utility operations.
Although NC Enterprises will have issued and have outstanding debt to SPS (in
connection with NC Enterprises's acquisition of UE and Quixx) as part of the
Transaction, this should not unduly complicate the NCE system's capital
structure. While NC Enterprises will have a board of directors, appointed
officers and, possibly, employees, it also will receive services from NC
Services. Costs for any work performed for NC Enterprises by NC Services will
be charged to NC Enterprises in accordance with the appropriate allocation
method set forth in the Non-Utility Service Agreement.
NC Enterprises requests authorization under Section 9(a)(1) of the Act
to acquire all of the issued and outstanding common stock of e prime, UE, Quixx,
and Natural Fuels. As discussed in Item 3.A.2.a.ii above, each of these
businesses may be retained by the NCE system under the Act. NCE believes that
the reorganization of these non-utility businesses as subsidiaries of NC
Enterprises instead of as subsidiaries of either PSCo or SPS directly, will be
beneficial to ratepayers by providing a clearer separation between the system's
utility and non-utility operations and by insulating the operating utilities
from the results of operations of these entities. NC Enterprises will directly
acquire the securities of certain current PSCo subsidiaries via an equity
contribution from NCE. In order to maintain the current equity capitalization
of SPS, NC Enterprises will
-87-
<PAGE>
issue debt to SPS in exchange for the securities of UE and Quixx. The
acquisitions of Quixx and UE are proposed to be consummated as sales for debt
in order to preserve the capital structure of SPS and the NMPUC has ordered
such sale at the companies' fair market value, which SPS anticipates will
approximate equity value. The equity of the two subsidiaries at December 31,
1996 and December 31, 1995, respectively, was valued at $111.9 million and
$95.0 million, or approximately 15% and 13% of SPS's equity of $731.8 million
and $727.9 million. Transferring the subsidiaries by payment of a dividend
of their stock would cause a reduction of SPS's equity by this same amount.
This would be viewed negatively from a regulatory and rating agency point of
view. Selling the subsidiaries eliminates this adverse impact on SPS.
The debt issued by NC Enterprises will have a thirty year maturity and
bear interest at a fixed rate. The interest rate will be determined at the time
of issuance based on the then prevailing rate which would be charged by an
unaffiliated third party. Interest only will be paid for the first three years
and thereafter interest and principal will be amortized over the remaining 27
years payable in equal annual installments. NC Enterprises will have the option
to prepay the entire obligation, including accrued and unpaid interest, at any
time without any prepayment premium. The form of note to be used to evidence
the debt of NC Enterprises is attached as Exhibit J-5. NC Enterprises expects
to have sufficient earnings to service the debt based on the expected earnings
of UE and Quixx after the first four years. See Exhibit J-4. Prior thereto, NC
Enterprises will also have available the earnings of its other subsidiaries and
other sources of cash to meet its obligation under the Note. Because NC
Enterprises may be considered to be thinly capitalized for accounting purposes,
it may be necessary for NCE to guarantee this debt in order for the transfer of
the shares by SPS to be considered a sale. NCE accordingly hereby requests
authority to make such guarantee should it become so necessary.
Finally, NCE, NC Enterprises, or e prime, as appropriate, requests
authorization under Section 9(a)(1) of the Act to acquire all of the issued and
outstanding common stock of NC International.
B. INTRA-SYSTEM TRANSACTIONS
The NCE system companies will engage in a variety of affiliate
transactions for the provision of goods, services, and construction. Certain of
these transactions, and in some instances associated exemptions from the
Commission's Rules, are elaborated upon below. The provision of goods,
services, and construction by NCE system companies to other NCE system companies
will be carried out in accordance with the requirements and provisions of Rules
87, 90, and 91 unless otherwise authorized by the Commission by order or rule.
-88-
<PAGE>
1. SERVICES, GOODS, AND ASSETS INVOLVING THE UTILITY
OPERATING COMPANIES
PSCo, SPS, and Cheyenne may provide to one another and other associate
companies services incidental to their utility businesses, including but not
limited to, power plant maintenance overhauls, power plant and storm outage
emergency repairs, and services of personnel with specialized expertise related
to the operation of the utility (i.e., services by an industrial lighting
specialist or waste disposal specialist). These services will be provided in
accordance with Rules 87, 90, and 91. Moreover, in accordance with Rules 87,
90, and 91, certain goods may be provided through a leasing arrangement or
otherwise by one utility operating company to one or more associate companies,
and certain assets may be used by one utility operating company for the benefit
of one or more other associate companies. For instance, PSCo's CIS System will
remain an asset of PSCo following the transaction. While all required system
personnel involved in the operation of the CIS System will be employees of the
service company or external affiliated or unaffiliated contractors and all
charges for service company employees' labor will be subject to the terms of the
Utility Service Agreement, PSCo will charge associate companies for the actual
use of the CIS System in accordance with the Commission's Rules. Likewise,
PSCo, SPS, and Cheyenne may obtain goods, services, and construction from
associated companies in accordance with Rules 87, 90, and 91. Certain of these
transactions are discussed further below.
With respect to affiliate transactions involving PSCo, SPS, and
Cheyenne, the FERC in its Order Establishing Hearing Procedures on the PSCo/SPS
merger, Docket No. EC96-2-000, 75 FERC PARA 61,325 (June 26, 1996), gave PSCo
and SPS the choice of following its affiliate pricing standards or having a
hearing on the issue of whether the proposed merger impairs effective
regulation. The FERC's standards are as follows:
(1) affiliates or associates of a public utility not sell
non-power goods and services to the public utility at a
price above market price; and (2) sales of non-power goods
and services by a public utility to its affiliates or
associates be at the public utility's cost for such goods
and services or market value for such goods and services,
whichever is higher.(64)
As PSCo and SPS explained in a letter responding to the FERC hearing order and
choosing not to have a hearing on this issue:
In making this choice, Applicants note that affiliate
transactions among the member companies of [NCE] will be subject to
the jurisdiction of the [SEC] under [PUCHA] * * * including the
requirements of section 13(b) of PUCHA and the
- -------------------------
(64) This order is included as Exhibit D-1.3.
-89-
<PAGE>
rules and regulations thereunder. Section 13(b) of PUCHA generally
provides that transactions between affiliates in a registered holding
company system be "at cost, fairly or equitably allocated among such
companies." Applicants believe that as a practical matter there should
not be any irreconcilable inconsistency between the application of the
SEC's "at cost" standard and the FERC's policies with respect to
intra-system transactions as applied to Applicants. For example,
while Applicants intend to establish a service company, NC Services,
Inc. ("NC Services"), to provide non-power goods and services to
themselves and other associate companies within the NCE system at
cost-based prices, they anticipate that NC Services will provide only
those goods and services where it can meet or better market prices for
comparable quality goods and services. In other words, they are
anticipating that NC Services "costs" will be at or below the market.
In any event, even if some inconsistency were to develop, Applicants'
agreement to the second option means that the FERC will continue to
have full authority to disallow, for purposes of FERC-jurisdictional
wholesale power and transmission rates, any charge to the extent of
any inconsistency between the SEC "at cost" and FERC "cost or market"
standards.
Based on the above, Applicants will be able to comply with the
requirements of both the FERC and the SEC. (65)
The Applicants will comply with the "at cost" and fair and equitable
allocation of cost requirements of Section 13, including Rules 87, 90, and 91
thereunder, for all services, sale and construction contracts between associate
companies and with the holding company parent unless otherwise permitted by the
Commission by rule or order.
2. NC SERVICES
As described in Item 1.B.1.c.v, NC Services will provide PSCo, SPS,
and Cheyenne, as well as NCE itself, WGI, and certain subsidiaries that support
utility operations, pursuant to the Utility Service Agreement, and non-utility
subsidiaries of the NCE system, and possibly other entities in which NCE has
investments, pursuant to the Non-Utility Service Agreement, with a variety of
administrative, management and support services, including services relating to
engineering, development, design, rehabilitation, maintenance, construction,
electric power planning, transportation, materials management, facilities and
real estate, accounting, budgeting and financial forecasting, finance and
treasury, rates and regulation, legal, internal audit, corporate communications,
environmental, fuel
- -------------------------
(65) That letter is included as Exhibit D-1.4. The FERC in its order
approving the proposed merger indicated that in light of PSCo's and SPS's
response, it "no longer [had] concerns with this issue"
-90-
<PAGE>
procurement, corporate planning, investor relations, human resources,
marketing and customer services, information systems, and general
administrative and executive management services. In accordance with the
service agreements, services provided by NC Services will be directly
assigned, distributed or allocated by activity, project, program, work order,
or other appropriate basis. NC Services will provide these services directly
or may contract with non-utility affiliates, such as UE, for the needed
services. Costs of NC Services will be accumulated in accounts of NC Services
and directly assigned, distributed, and allocated to the appropriate client
company in accordance with the guidelines set forth in the applicable Service
Agreement. SPS and PSCo have developed the system and procedures necessary to
implement the Service Agreements. See form of the "NCE Policies and
Procedures" manual filed with Exhibit B-6, hereto.
NC Services will be staffed by transfer of personnel from PSCo, SPS,
and their subsidiaries. NC Services' accounting and cost allocation methods and
procedures are structured so as to comply with the Commission standards for
service companies in registered holding-company systems. NC Services will use
the "Uniform System of Accounts for Mutual Service Companies and Subsidiary
Service Companies" established by the Commission for service companies of
registered holding-company systems to develop its policies and procedures.
As compensation for services, the Utility Service Agreement provides
for the client companies to: "pay to [NC Services] all costs which reasonably
can be identified and related to particular services performed by [NC Services]
for or on its behalf." Where more than one company is involved in or has
received benefits from a service performed, the Service Agreement provides that
"costs will be directly assigned, distributed or allocated, between or among
such companies on a basis reasonably related to the service performed to the
extent reasonably practicable," in accordance with the methods set forth in
Appendix A to the Service Agreement. Thus, charges for all services provided by
NC Services to affiliated utility companies will be in accordance with Rules 90
and 91 of the Act. The Non-Utility Service Agreement contains provisions
similar to those of the Service Agreement, except as set forth in detail below
in this Item 3.B. The Non-Utility Service Agreement also permits charges for
certain services to be at fair market value to the extent authorized by the
Commission. Thus, except for the requested exceptions discussed below, or as
otherwise approved by the Commission, services provided by NC Services to non-
utility affiliates pursuant to the Non-Utility Service Agreement will also be
charged in accordance with Rules 90 and 91 of the Act.
No change in the organization of NC Services, the type and character
of the companies to be serviced, the methods of allocating costs to associate
companies, or in the scope or character of the services to be rendered subject
to Section 13 of the Act, or any rule, regulation or order thereunder, shall be
made unless and until NC Services shall first have given the SEC written notice
of the proposed change not less than 60 days prior to the proposed effectiveness
of
-91-
<PAGE>
any such change. If, upon the receipt of any such notice, the SEC shall
notify NC Services within the 60-day period that a question exists as to
whether the proposed change is consistent with the provisions of Section 13
of the Act, or of any rule, regulation or order thereunder, then the proposed
change shall not become effective unless and until NC Services shall have
filed with the SEC an appropriate declaration regarding such proposed change
and the SEC shall have permitted such declaration to become effective.
NCE believes that the Service Agreement and the Non-Utility Service
Agreement are structured so as to comply with Section 13 of the Act and the
Commission's rules and regulations thereunder.
Rule 88: Rule 88 provides that "[a] finding by the Commission that a
subsidiary company of a registered holding company . . . is so organized and
conducted, or to be conducted, as to meet the requirements of Section 13(b) of
the Act with respect to reasonable assurance of efficient and economical
performance of services or construction or sale of goods for the benefit of
associate companies, at cost fairly and equitably allocated among them (or as
permitted by Rule 90), will be made only pursuant to a declaration filed with
the Commission on Form U-13-1, as specified" in the instructions for that form,
by such company or the persons proposing to organize it. Notwithstanding the
foregoing language, the Commission has on at least two recent occasions made
findings under Section 13(b) based on information set forth in an Application/
Declaration on Form U-1, without requiring the formal filing of a Form U-13-1.
See CINergy Corp., HCAR No. 26146 (Oct. 21, 1994); UNITIL Corp., HCAR No. 25524
(April 24, 1992). In this Application/Declaration, NCE has submitted
substantially the same applicable information as would have been submitted in a
Form U-13-1.
Accordingly, it is submitted that it is appropriate to find that NC
Services is so organized and its business will be so conducted as to meet the
requirements of Section 13(b), and that the filing of a Form U-13-1 is
unnecessary, or, alternatively, that this Application/Declaration should be
deemed to constitute a filing on Form U-13-1 for purposes of Rule 88.
3. NON-UTILITY SALE OF GOODS AND SERVICES TO EWGS,
FUCOS, AND QFS
Various non-utility companies in the NCE system, namely NC Services,
UE, Utility Services, PRC, QPS, and e prime, e prime Operating, NC
International, and ep3 (or successor company -- see note 48, supra)
(collectively, the "Exempt Companies"), currently are, or will in the future be,
providing services (including operation and maintenance) and selling goods to
associated EWGs and QFs or to entities that will qualify as QFs, EWGs, or FUCOs
following the Transaction. The Applicants request that the Commission permit
the Exempt Companies to continue such transactions without compliance with the
provisions of Section 13(b) and the rules and regulations thereunder.
-92-
<PAGE>
The Commission has previously granted affiliates of registered holding
companies authority to provide goods and services to existing and future EWGs
(i.e., as defined under Section 32 of the Act), QFs (i.e., which meet the
requirements of PURPA and the FERC's regulations thereunder), and FUCOs (i.e.,
as defined under Section 33), without compliance with Section 13 and the rules
and regulations thereunder, that fall within one of the following categories:
1) the project is a FUCO or an EWG that derives no part of its
income, directly or indirectly, from the generation,
transmission, or distribution of electric energy for sale within
the United States;
2) the project is an EWG that sells electricity at market-based
rates which have been approved by the FERC or other appropriate
state public utility commission, provided that the purchaser is
not an Excepted company; (66)
3) the project is a QF that sells electricity exclusively at rates
negotiated at arm's length to one or more industrial or
commercial customers purchasing such electricity for their use
and not for resale, or to an electric utility company other than
an Excepted Company; or
4) the power project is an EWG or a QF that sells electricity at
rates based upon its costs of service, as approved by FERC or any
state public utility commission having jurisdiction, provided
that the purchaser is not an Excepted Company.
Entergy Corporation, HCAR No. 26322 (June 30, 1995). (67)
In the Entergy order, the Commission granted Entergy Enterprises, a
wholly-owned subsidiary of Entergy, authority to provide consulting services to
associate companies, including EWGs, FUCOs, and QFs, and operations and
management services, either directly, or through newly-established subsidiaries
of Entergy or Entergy Enterprises, to associate companies, including EWGs,
FUCOs, or QFs, without complying with the provisions of Section 13(b) and the
rules and regulations thereunder.
- -------------------------
(66) An Excepted Company was defined as any subsidiary whose activities and
operations were primarily related to the domestic sale of electric energy at
retail or at wholesale to affiliates or providing goods and services to such
affiliates.
(67) See also, General Public Utilities Corporation, HCAR No. 26307 (June
14, 1995) and The Southern Company, HCAR No. 26212 (Dec. 30, 1994).
-93-
<PAGE>
Also, in CINergy Corp., Release No. 35-26376 (September 21, 1995), the
Commission authorized CINergy and CINergy Investments, a wholly-owned subsidiary
of CINergy, to acquire securities of new special purpose subsidiaries ("NSPS")
and to make additional investments in existing special purpose subsidiaries
("ESPS"). ESPS and NSPS acquire, own or hold securities of, and provide
services to, FUCOs or EWGs. The Commission also authorized ESPS and NSPS and
CINergy Services to provide administrative, management and support services to
other ESPS and NSPS and their subsidiaries without complying with the provisions
of Section 13(b) and the rules and regulations thereunder. See also General
Public Utilities Corp., Release No. 35-26457 (January 18, 1996) (pending
completion of the record, the Commission reserved jurisdiction over whether
subsidiaries formed to directly or indirectly acquire the securities of EWGs and
FUCOs ("Subsidiary Companies") could sell goods and services to associate
companies without complying with Section 13(b) and the rules and regulations
thereunder); Northeast Utilities, HCAR No. 26623 (December 12, 1996); New
England Electric Systems, HCAR No. 26504 (April 15, 1996)(granting requested
Section 13(b) exception).
The Applicants request that the Commission permit the Exempt Companies
to provide services or sell goods to qualifying cogeneration facilities under
PURPA, EWGs under Section 32 of the Act, and FUCOs under Section 33 of the Act,
described in clauses 1, 2, 3, or 4 above, to the same extent permitted by the
Commission in the above-cited orders.
4. UE
As previously discussed, following consummation of the Transaction, UE
will continue to perform engineering, development, design, construction, and
other related services, as a subsidiary of NC Enterprises. UE will engage in
transactions with affiliated companies, as well as non-affiliated companies, on
the following bases:
a. SERVICES PROVIDED BY UE TO UTILITY ASSOCIATE
COMPANIES.
There are two methods by which UE may provide engineering, procurement,
construction and related services to utility associate companies. UE may
contract directly with NC Services, which will then provide the services to the
utility associate companies. Transactions between NC Services, as well as
between NC Services and the utility affiliates, will be provided in accordance
with Rules 90 and 91. UE may also, from time to time, provide engineering,
procurement and construction services directly to certain utility associate
companies pursuant to contracts with the specific utility. All such
transactions will be conducted in accordance with Rules 90 and 91.
-94-
<PAGE>
b. SERVICES PROVIDED BY UE, OR JOINT VENTURES INVOLVING
UE, TO NON-UTILITY ASSOCIATE COMPANIES.
Consistent with the discussion above, it is contemplated that any
transactions by UE with non-utility associate companies will be conducted as
provided in Rules 87, 90, and 91 except to the extent that transactions on some
other basis are authorized by the Act or the Commission. No services will be
provided by UE at market-based rates to entities or associated companies which
sell electricity to PSCo, SPS, or Cheyenne unless authorized by the Act or the
Commission.
5. SPECIFIC REQUESTS FOR EXEMPTIONS FROM SECTION 13
Other than transactions between associate companies and qualifying
generation facilities under PURPA, EWG's under Section 32 of the Act, and FUCO's
under Section 33 of the Act, or those otherwise permitted by Commission rule,
there are no transactions for which NCE seeks an exemption from the
applicability of the "at cost" requirements under Section 13 except as follows:
a. QPS expects to be hired to provide operations and maintenance
services to the Phillips cogeneration plant to be built in Borger, Texas.
Quixx, in partnership with LS Power, will own this QF. The steam host will be
Phillips petroleum and the power will be sold pursuant to a power sale agreement
with SPS. Quixx and LS power were awarded this project as a result of a bidding
process supervised by an independent bid examiner pursuant to guidelines set out
by the PUCT. The Quixx/LS Power bid was deemed to be the most economic manner
for SPS to satisfy its anticipated power needs over the next few years. The
power purchase contract will be at the rates set forth in the Quixx/LS Power
bid. QPS will act as the operator on behalf of the partnership at a market-
based rate. In addition, UE will be retained by the partnership to engineer and
construct the facility on the basis of a fixed price contract that was the basis
for the bid ultimately accepted by SPS. Except for the fact that the power
under this project will be supplied to a system utility, this project would
otherwise fit under the exemption from Section 13 for services supplied to QFs,
EWGs and FUCOs. For the same reasons that that exemption is appropriate,
deviation from Section 13 is appropriate in this project as well.
The process that resulted in this Project was pursuant to state rules
and Quixx/LS Power were chosen on the basis of supplying the power to the
utility at the most favorable price of all the bidders. Because the power sales
are based on a bid price pursuant to the state sanctioned process, there is no
potential for abuse of the rate paying public in permitting the transaction to
proceed outside of Section 13. The price at which QPS will supply services will
not in any way effect the price that the power will be sold to the utility. The
price that UE will receive to construct the plant will similarly not affect the
cost of electricity to SPS because it is a fixed price contract to provide a
turnkey plant to the owners. Accordingly, none of the reasons underlying the
prohibitions in Section 13 are present in this situation and, in light of the
special circumstances
-95-
<PAGE>
surrounding this project, an exemption pursuant to Section 13(b) should be
granted.
An exemption is further appropriate here because this project has been
in process for the last two years and all the bids were based on this structure
prior to becoming a registered holding company under the Act. Since no
ratepayer interest will be affected by the transactions, it would be
unnecessarily burdensome to the project to have to fashion the project in
another way.
Item 4. REGULATORY APPROVALS
Set forth below is a summary of the regulatory approvals that NCE has
obtained or expects to obtain in connection with the Transaction.
A. ANTITRUST
The HSR Act and the rules and regulations thereunder provide that
certain transactions (including the Transaction) may not be consummated until
certain information has been submitted to the DOJ and FTC and specified HSR Act
waiting period requirements have been satisfied. The HSR Act application was
filed on August 22, 1996. The applicable thirty-day waiting period expired
September 21, 1996.
The expiration of the HSR Act waiting period does not preclude the
Antitrust Division or the FTC from challenging the Transaction on antitrust
grounds; however, Applicant believes that the Transaction will not violate
Federal antitrust laws. If the Transaction is not consummated within twelve
months after the expiration or earlier termination of the initial HSR Act
waiting period, PSCo and SPS would be required to submit new information to the
Antitrust Division and the FTC, and a new HSR Act waiting period would have to
expire or be earlier terminated before the Transaction could be consummated.
B. FEDERAL POWER ACT
Section 203 of the Federal Power Act of 1935, as amended, provides
that no public utility shall sell or otherwise dispose of its jurisdictional
facilities or directly or indirectly merge or consolidate such facilities with
those of any other person or acquire any security of any other public utility,
without first having obtained authorization from the FERC. PSCo and SPS
submitted a joint application for approval of the Transaction to the FERC on
November 9, 1995 (filed as Exhibit D-1.1). PSCo and SPS reached a non-unanimous
agreement with the FERC Trial Staff and various intervenors. (FERC Trial Staff
was not a signatory to the Settlement Agreement, but submitted supporting
comments.) Hearings before a Presiding Administrative Law Judge ("ALJ") to
address the concerns of the one active party that did not sign the Settlement
Agreement were concluded on September 27, 1996. On December 3, 1996, the ALJ
issued Certification of Contested Settlement Agreement (filed as Exhibit D-1.6
hereto). In June 1995, FERC set for hearing limited issues in the
-96-
<PAGE>
proceeding regarding (1) the scope of Applicants' hold harmless provision and
(2) the effect of the merger on competition. On August 30, 1996, SPS and
PSCo filed a joint Settlement Agreement which resolved all issues in the
proceeding raised by the many parties except those raised by the Colorado
Association of Municipal Utilities ("CAMU"). The FERC Staff supported the
Settlement Agreement. Hearings on CAMU's issues were held in September, 1996.
In his certification, the ALJ concluded that the Settlement Agreement
should be certified to the FERC, without an initial decision, because no genuine
issues of disputed material fact were raised by CAMU. The ALJ decided that the
areas of concern raised by CAMU are either premature, legally invalid,
adequately addressed by the Settlement Agreement, or relate to matters of policy
which the FERC may decide through application of its own expertise. The ALJ
determined that the record is sufficient for the FERC to make a reasoned
determination of the Applicants' merger application.
The ALJ concluded that CAMU's concerns regarding the hold-harmless
provision are either premature, beyond the scope of these proceedings, or
adequately addressed by the Settlement Agreement. The ALJ also concluded that
the Applicants and Staff have shown that the merger is not anti-competitive,
and, in fact, may be pro-competitive. Because CAMU did not demonstrate that any
anti-competitive effects will result from the merger, CAMU failed to offer any
genuine disputed issues of material fact for the ALJ to decide. Subsequently,
CAMU withdrew its opposition to the merger, and on March 12, 1997, the FERC
issued its order approving the Transaction in accordance with the settlement. A
copy of the FERC order is filed herewith as Exhibit D-1.7.
C. STATE PUBLIC UTILITY REGULATION
Colorado: PSCo is subject to the CPUC. Pursuant to Rule 55 of the
CPUC's Rules of Practice and Procedure, PSCo filed an application with the CPUC
requesting approval of the Merger Agreement on November 9, 1995. The
application is required to demonstrate, among other things, that the approval
sought is not contrary to the public interest. In addition, the CPUC considered
the rate making treatment associated with the Transaction. PSCo also requested
that the CPUC also indicate that it does not object to the retention of PSCO's
and Cheyenne's Gas System in the NCE structure. On August 23, 1996, the CPUC
issued an oral decision approving the merger. This order was subsequently
confirmed in a decision issued on November 29, 1996, which is included as
Exhibit D-2.3.1, and in a decision on rehearing issued on January 15, 1997,
which is included as Exhibit D-2.3.2.
Wyoming: Cheyenne is subject to the jurisdiction of the WPSC.
Pursuant to Section 37-1-104 of the Wyoming Revised Statutes, any reorganization
of a public utility requires prior approval of the WPSC. The statute defines
reorganization as a transaction which results in a change in the ownership of a
majority of the voting capital stock of a public utility and precludes the WPSC
from
-97-
<PAGE>
approving any reorganization that adversely affects the utility's ability to
serve the public. Pursuant to Section 209 of the WPSC's Rules of Practice
and Procedure, Cheyenne filed an application for approval of the applicable
portions of the Merger Agreement on November 9, 1995 (filed as Exhibit
D-3.1). In addition, the WPSC considered the rate making treatment associated
with the Transaction. Cheyenne also requested that the WPSC also indicate
that it does not object to the retention of Cheyenne's Gas System in the NCE
structure. Ultimately, Cheyenne and the Consumer Advocate Staff of the WPSC
entered into a stipulation and agreement resolving all issues. On May 30,
1996, the WPSC held a hearing on Cheyenne's application, and at the end of it
issued a bench decision approving the application. The WPSC subsequently
confirmed the bench decision in a written order issued on August 16, 1996,
which is included as Exhibit D-3.2. The stipulation and agreement is
attached to that order.
New Mexico: SPS is subject to the jurisdiction of the NMPUC.
Pursuant to the New Mexico Public Utility Act and the NMPUC's Rules of Practice
and Procedure, SPS filed an application with the NMPUC requesting approval of
the Merger Agreement on November 9, 1995 (filed as Exhibit D-4.1). The NMPUC
will approve the consummation of the Transaction if it finds that they are not
unlawful or inconsistent with the public interest and will not interfere with
the provision by SPS of reasonable and proper utility service at fair, just and
reasonable rates. In addition, the NMPUC will consider the rate making
treatment associated with the Transaction. Hearings were concluded on
August 22, 1996. Though no settlement was reached, no party opposed the merger.
On November 15, 1996, a hearing examiner filed a recommended decision (included
as Exhibit D-4.2) that the merger is in the public interest if certain
conditions are met and SPS has substantially agreed to many of these conditions.
On January 28, 1997, the NMPUC issued an order approving the Transaction. The
order is filed herewith as Exhibit D-4.3.
Texas: While SPS is not required under Texas law to obtain the
approval of the PUCT to merge with PSCo, SPS must report the Transaction to the
PUCT under Section 1.251 of the Public Utility Regulatory Act of 1995. SPS
submitted such report to the PUCT on November 9, 1995 and requested that the
transaction be found to be in the public interest (filed as Exhibit D-5.1). A
finding that the Transaction is not in the public interest does not prohibit the
consummation of the SPS Merger. However, if the PUCT makes such a finding it is
required to take the effect of the merger into consideration in future
ratemaking proceedings and adjust the effect of the Transaction to the extent it
unreasonably affects rates or services. Rate treatment resulting from a finding
that the Transaction was not in the public interest could materially and
adversely affect SPS. SPS reached a non-unanimous agreement of the merger with
nine of ten intervenors including the PUCT staff. The settlement provides for
the resolution of all outstanding issues, including a finding of the merger
being consistent with the public interest and commencement of the regulatory
plan, as modified by the settlement. The settlement was submitted to the PUC,
and hearings were concluded on August 14, 1996. On November 4, 1996, an
Administrative Law Judge of the PUCT issued a
-98-
<PAGE>
Proposal for Decision and a Proposed Order finding that the PUCT should
approve the merger with the conditions agreed to in the settlement. That
order was revised on December 5, 1996. The Proposed Order and revisions
thereto are included as Exhibits D-5.2.1 (with the settlement attached
thereto) and D-5.2.2.
On February 14, 1997, the PUCT issued an order finding the merger to
be in the public interest. This order does, however, contain a provision that
allows 15 days from the date of the last Federal or state regulatory approval
for intervenors to seek to reopen the proceeding in Texas if they can
demonstrate that "one or more of the orders issued by other regulatory
authorities materially and detrimentally denies SPS' Texas retail ratepayers the
benefits of the NUS that are incorporated in this Order. . . ." (Texas order at
51.) Unless such a request is made within the 15 days, the Texas order of the
PUCT will automatically become effective. (Id.) If there is an attempt to
reopen the proceeding, any additional inquiry will be limited to the effect, if
any, of the impact of the later regulatory orders. (Id.)
All state filings of public interest and approvals, and all federal
approvals, other than that of this Commission, have been obtained. None of
these findings or approvals in the opinion of NCE have materially and
detrimentally denied the SPS Texas retail ratepayers of the benefit of the NUS
that are incorporated in the Texas order. Accordingly, Applicant is prepared to
close the Transaction upon the receipt of the Commission's order. Although it
is possible that an intervenor could seek to reopen the Texas proceedings, the
Commission should issue its order on the basis that the existing order of the
PUCT is final. Should the Commission not so conclude, the same rule should be
applied here as was applied in Entergy, Inc., 55 SEC Docket 2035, 2044 n. 68,
and 2051 (Commission Order approving merger conditioned on the receipt by the
Commission of a final order from the PUCT approving the transaction). A copy of
the PUCT's order is filed herewith as Exhibit D-5.3.
Kansas: SPS is subject to the jurisdiction of the KCC, pursuant to
the Kansas Public Utility Act. On November 9, 1995, SPS filed an application
with the KCC requesting authority for the issuance of common stock by SPS to NCE
pursuant to the Merger Agreement (filed as Exhibit D-6.1). The application is
required to describe the purposes for which the common stock is to be issued and
state that such issuance is necessary and required and will be sold for such
purposes. The KCC issued its order granting the requested authority to SPS on
November 28, 1995 (included as Exhibit D-6.2). Subsequently, on December 3,
1996, the KCC issued an order (included as Exhibit D-6.3) approving a rate
jurisdictional agreement among NCE, SPS, and the KCC Staff in connection with
the merger.
NCE is also be subject to the KCC pursuant to the Kansas Holding
Companies Act ("KHCA"). The KHCA states that no foreign holding company shall
acquire control of a Kansas public utility without first entering into an
agreement to keep the KCC fully informed as to transactions between the utility
and the holding
-99-
<PAGE>
company and to submit to the jurisdiction of the KCC insofar as
such transactions affect the retail rates or charges to be made by the utility.
On November 12, 1996, NCE and SPS entered into a Rate Effect Agreement with the
Director of the KCC in which NCE and SPS agreed that NCE will keep the KCC fully
informed as to the transactions between SPS and NCE which affect the rates of
SPS's Kansas retail customers. The KCC approved the agreement on December 3,
1996.
Oklahoma: SPS is subject to the jurisdiction of the OCC. However, no
approval or authorization of any Oklahoma public regulatory body, including the
OCC, of the Merger Agreement is required.
Item 5. PROCEDURE
The Commission published a notice of the Transaction under Rule 23
dated March 22, 1996. Petitions to intervene were filed by three parties. As
of the date hereof, two of the intervenors have withdrawn their petitions and
the third has filed a notice of non-opposition conditioned on approval of the
Settlement Agreement entered into in the FERC proceedings which has now
occurred. Therefore, there are no intervenors opposing the Transaction in this
proceeding.
NCE requests that the Commission's order be issued as soon as the
rules allow. It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the proposed
Transaction. The Division of Investment Management may assist in the
preparation of the Commission's decision. There should be no waiting period
between the issuance of the Commission's order and the date on which it is to
become effective.
Item 6. EXHIBITS AND FINANCIAL STATEMENTS
A. EXHIBITS
A-1 Restated Certificate of Incorporation of NCE (filed as Annex VIII
to the Registration Statement on Form S-4 on December 13, 1995
(Registration No. 33-64951), and incorporated herein by
reference).
A-2 Restated Bylaws of NCE (filed as Annex IX to the Registration
Statement on Form S-4 on December 13, 1995 (Registration
No. 33-64951), and incorporated herein by reference).
A-3 Restated Articles of Incorporation of PSCo (filed as Exhibit 3(a)
to the PSCo Annual Report on Form 10-K for the year ended
December 31, 1990 (File No 1-3280) and incorporated herein by
reference).
A-4 Restated Articles of Incorporation of SPS (filed as Exhibit 3(i)
to the SPS Form 8-K dated February 26, 1996 (File No. 1-3789) and
incorporated herein by reference).
B-1 Merger Agreement, as amended (filed as Annex I to the
Registration Statement on Form S-4 on December 13,
-100-
<PAGE>
1995 (Registration
No. 33-64951), and incorporated herein by reference).
B-2.1 Form of Service Agreement between NC Services, Inc. and utility
affiliates (filed herewith).
B-2.2 Form of Service Agreement between NC Services, Inc., and Public
Service Company of Colorado (filed herewith; Appendix B thereto
filed herewith on Form SE)
B-3 Form of Service Agreement between NC Services, Inc. and
non-utility affiliates (filed herewith).
B-4 Withdrawn.
B-5 Withdrawn.
B-6 Summary of Procedures for NC Services and Allocation Factors
(filed herewith).
B-7 Withdrawn.
C-1 Registration Statement of NCE on Form S-4 (filed on December 13,
1995 (Registration No 33-64951) and incorporated herein by
reference).
C-2 Joint Proxy Statement and Prospectus (included in Exhibit C-1).
D-1.1 Joint Application of PSCo and SPS before the FERC (previously
filed).
D-1.2.1 Testimony of Dr. Robert Spann to the FERC (filed herewith on Form
SE, replacing previously filed version).
D-1.2.2 Supplemental testimony of Dr. Robert Spann to the FERC (filed
herewith on Form SE).
D-1.2.3 Testimony of Matt P. Harris to the FERC (filed herewith on Form
SE, replacing previously filed version).
D-1.3 FERC order establishing hearing procedures dated June 26, 1996
(filed herewith on form SE).
D-1.4 Letter to FERC in Docket No. EC96-2-000 dated July 10, 1996
(filed herewith on Form SE).
D-1.5 Settlement Agreement with the FERC dated August 30, 1996 (filed
herewith on Form SE).
D-1.6 Certification of Contested Settlement Agreement dated December 3,
1996 (filed herewith on Form SE).
D-1.7 Order of the FERC dated March 12, 1997 (filed herewith on Form
SE).
D-2.1 Application of PSCo before the CPUC (previously filed).
D-2.2.1 Stipulation and Agreement filed with the CPUC on July 8, 1996
(filed herewith on Form SE).
D-2.2.2 Agreement filed with the CPUC on July 8, 1996 (filed herewith on
Form SE).
D-2.2.3 Clarifying Stipulation and Agreement filed with the CPUC on
July 9, 1996 (filed herewith on Form SE).
D-2.3.1 CPUC Order dated November 29, 1996 (filed herewith on Form SE).
D-2.3.2 CPUC Order dated January 15, 1997 (filed herewith on Form SE).
D-3.1 Application of PSCo to the WPSC (previously filed).
-101-
<PAGE>
D-3.2 WPSC Order dated August 16, 1996 (including Stipulation and
Agreement) (filed herewith on Form SE).
D-3.3 WPSC letter to the SEC dated September 16, 1996 (filed herewith
on Form SE).
D-4.1 Application of SPS to the NMPUC (previously filed).
D-4.2 Withdrawn.
D-4.3 NMPUC Order dated January 28, 1997 (filed herewith on Form SE).
D-5.1 Notification of SPS to the PUCT (previously filed).
D-5.2.1 Administrative Law Judge Proposal for Decision and Proposed
Order, PUCT, dated November 4, 1996 (filed herewith on Form SE).
D-5.2.2 Revisions to the Administrative Law Judge Proposal for Decision
and Proposed Order, PUCT, dated December 5, 1996 (filed herewith
on Form SE).
D-5.3 PUCT Finding dated February 14, 1997 (filed herewith on Form SE).
D-6.1 Application of SPS to the KCC (previously filed).
D-6.2 KCC Order and Certificate dated November 28, 1995 (previously
filed).
D-6.3 KCC Order dated December 3, 1996 (filed herewith on Form SE).
E-1 Map of service areas of SPS, PSCo and Cheyenne (previously
filed).
E-2 Map of PSCo and Cheyenne transmission system (previously filed).
E-3 Map of SPS transmission system (previously filed).
E-4 PSCo corporate chart as of May 1, 1997 (filed herewith on Form
SE).
E-5 SPS corporate chart as of May 1, 1997 (filed herewith on Form
SE).
E-6 NCE corporate chart based on PSCo and SPS corporate charts as of
May 1, 1997 (filed herewith on Form SE).
F-1(a) Opinion of counsel Patricia T. Smith (filed herewith).
F-1(b) Opinion of counsel Cahill Gordon (filed herewith).
F-2 Past-tense opinion of counsel (to be filed by amendment).
G-1 Opinion of Barr Devlin & Co Incorporated (filed as Annex II to
the Registration Statement on Form S-4 on December 13, 1995
(Registration No. 33-64951), and incorporated herein by
reference).
G-2 Opinion of Dillon, Read & Co. Inc. (filed as Annex II to the
Registration Statement on Form S-4 on December 13, 1995
(Registration No. 33-64951), and incorporated herein by
reference).
H-1.1 Annual Report of PSCo on Form 10-K for the year ended
December 31, 1995 (filed on February 27, 1996 (File No. 1-3280)
and incorporated herein by reference).
H-1.2 Annual Report of PSCo on Form 10-K for the year ended December
31, 1996 (filed on February 25, 1997 (File 1-3280) and
incorporated herein by reference).
-102-
<PAGE>
H-1.3 Annual Report of PSCo on Form 10-K\A for the year ended
December 31, 1996 (filed on March 27, 1997 (File 1-3280) and
incorporated herein by reference).
H-2 Annual Report of SPS on Form 10-K for the year ended August 31,
1996 (filed on November 25, 1996 (File No 1-3789) and
incorporated herein by reference).
H-3 Statement of PSCo on Form U-3A-2 for the year ended December 31,
1996 (filed on February 28, 1997 and incorporated herein by
reference).
H-4 Amendment to Statement of PSCo on Form U-3A-2 for the year ended
December 31, 1996 (filed on March 10, 1997, and incorporated
herein by reference).
H-5 PSCo Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996 (filed on May 15, 1996) (File No. 1-3280) and
incorporated by reference herein.
H-6 PSCo Quarterly Report on Form 10-Q for the quarter ended June 30,
1996 (Filed on August 9, 1996) (File No. 1-3280) and incorporated
by reference herein.
H-7 PSCo Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 (filed on November 7, 1996) (File No. 1-3280)
and incorporated by reference herein.
H-8 SPS Quarterly Report on Form 10-Q for the quarter ended
November 30, 1996 (File No. 1-3789) and incorporated by reference
herein.
H-9 SPS Quarterly Report on Form 10-Q for the quarter ended
February 28, 1997 (File No. 1-3789) and incorporated by reference
herein.
H-10 Withdrawn.
I-1 Proposed Form of Notice (previously filed).
I-2 Financial Data Schedule (incorporated by reference to the Annual
Report of NCE for the fiscal year ended December 31, 1996).
J-1 Analysis of the Economic Impact of a Divestiture of The Gas
Operations of Public Service Company of Colorado and its
Subsidiaries (previously filed) (Appendix A enclosed herewith).
J-2 Revised Legal Memorandum of LeBoeuf, Lamb, Greene & MacRae,
L.L.P. (previously filed).
J-3 Table of Estimated Losses of Economies in Prior Decisions on
Divestiture and Retention of Gas Operations (previously filed).
J-4 Chart showing budgeted cash flow available from UE and Quixx
(filed herewith).
J-5 Form of NC Enterprises Note (filed herewith).
B. FINANCIAL STATEMENTS
FS-1 NCE Unaudited Pro Forma Condensed Consolidated Balance Sheets as
of December 31, 1996 (incorporated by reference to the Annual
Report on Form 10-K of PSCo for the year ended December 31,
1996).
FS-2 NCE Unaudited Pro Forma Condensed Consolidated Statements of
Income for the year ended December 31,
-103-
<PAGE>
1996 (incorporated by reference to the Annual Report on Form 10-K
of PSCo for the year ended December 31, 1996).
FS-3 SPS Consolidated Balance Sheet as of August 31, 1996 (see Annual
Report of SPS on Form 10-K for the year ended August 31, 1996
(Exhibit H-2 hereto), at p. 23).
FS-4 SPS Consolidated Statements of Earnings for its last three fiscal
years (see Annual Report of SPS on Form 10-K for the year ended
August 31, 1996 (Exhibit H-2 hereto), at p. 26).
FS-7 PSCo Consolidated Balance Sheet as of December 31, 1996 (see
Annual Report of PSCo on Form 10-K for the year ended
December 31, 1996 (Exhibit H-1.2 hereto), at p. 36).
FS-8 PSCo Consolidated Statement of Income for its last three fiscal
years (see Annual Report of PSCo on Form 10-K for the year ended
December 31, 1996 (Exhibit H-1.2 hereto), at p. 38).
Item 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
The Transaction neither involves a "major Federal action" nor
"significantly affects the quality of the human environment" as those terms are
used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C.
Sec. 4321 et seq. The only Federal actions related to the Transaction pertain
to the Commission's declaration of the effectiveness of NCE's Registration
Statement on Form S-4, the expiration of the applicable waiting period under the
HSR Act, FERC approval of the application filed by NCE with the FERC under the
Federal Power Act, and Commission approval of this Application/Declaration.
Consummation of the Transaction will not result in changes in the operations of
PSCo, Cheyenne or SPS that would have any impact on the environment. No Federal
agency is preparing an environmental impact statement with respect to this
matter.
-104-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned company has duly caused this Application/Declaration of
New Century Energies, Inc. to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: May 7, 1997
New Century Energies, Inc.
By: /s/ Richard C. Kelly
--------------------------------
Richard C. Kelly
Executive Vice President,
Chief Financial Officer and
Treasurer
-105-
<PAGE>
FORM OF UTILITY SERVICE AGREEMENT [ALSO APPLICABLE TO AFFILIATES THAT SUPPORT
UTILITY OPERATIONS]
SERVICE AGREEMENT
This Service Agreement is made and entered into this____ day of
____________, by and between ________ ("Client Company") and New Century
Services, Inc. ("Service Company).
WITNESSETH
WHEREAS, the Securities and Exchange Commission ("SEC") has approved and
authorized as meeting the requirements of Section 13(b) of the Public Utility
Holding Company Act of 1935 ("Act") the organization and conduct of the
business of Service Company, in accordance herewith, as a wholly-owned
subsidiary service company of New Century Energies, Inc. ("NCE); and
WHEREAS, Client Company is a utility operating company subsidiary of NCE
and an affiliate of Service Company; and [alternatively: Client Company is an
affiliate of Service Company that provides support services for the utility
operations of the utility operating companies within the NCE system; and]
WHEREAS, Service Company and Client Company have entered into this Service
Agreement whereby Service Company agrees to provide and Client Company agrees
to accept and pay for various services as provided herein at cost, with cost
determined in accordance with applicable rules and regulations under the Act,
which require Service Company to fairly and equitably allocate costs among all
associate companies to which it renders services, including Client Company.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties to this Service Agreement covenant and agree as
follows:
ARTICLE I - SERVICES
Section 1.1 Service Company shall furnish to Client Company, as requested
by Client Company, upon the terms and conditions hereinafter set forth, such of
the services described in Appendix A hereto, at such times, for such periods
and in such manner as Client Company may from time to time request and that
Service Company concludes it is able to perform. Service Company shall also
provide Client Company with such special services, in addition to those
services described in Appendix A hereto, as may be requested by Client Company
and that Service Company concludes it is able to perform. In supplying such
services, Service Company may arrange, where it deems appropriate, for the
services of such experts, consultants, advisers,
1
<PAGE>
and other persons with necessary qualifications as are required for or
pertinent to the provision of such services.
Section 1.2 Client Company shall take from Service Company such of the
services described in Section 1.1, and such additional general or special
services, whether or not now contemplated, as are requested from time to time
by Client Company and that Service Company concludes it is able to perform.
Section 1.3 The services described herein or contemplated to be
performed hereunder shall be directly assigned, distributed or allocated by
activity, project, program, work order or other appropriate basis. Client
Company shall have the right from time to time to amend, alter or rescind any
activity, project, program or work order provided that (i) any such amendment
or alteration that results in a material change in the scope of the services
to be performed or equipment to be provided is agreed to by Service Company,
(ii) the cost for the services covered by the activity, project, program or
work order shall include any expense incurred by Service Company as a direct
result of such amendment, alteration or rescission of the activity, project,
program or work order, and (iii) no amendment, alteration or rescission of an
activity, project, program or work order shall release Client Company from
liability for all costs already incurred by or contracted for by Service
Company pursuant to the activity, project, program or work order, regardless
of whether the services associated with such costs have been completed.
Section 1.4 Service Company shall use its best efforts to maintain a
staff trained and experienced in the design, construction, operation,
maintenance, and management of public utility properties.
ARTICLE II - COMPENSATION
Section 2.1 As compensation for the services to be rendered hereunder,
Client Company shall pay to Service Company all costs which reasonably can be
identified and related to particular services performed by Service Company for
or on its behalf. The methods for assigning or allocating Service Company
costs to Client Company, as well as to other associate companies, are set forth
in Appendix A.
Section 2.2 The methods of assignment, distribution or allocation of
costs described in Appendix A shall be subject to review annually, or more
frequently if appropriate. Such methods of assignment, distribution or
allocation of costs may be modified or changed by Service Company; provided,
however, that no changes will be made to the methods of assignment,
distribution, or allocation set forth herein or in Attachment A hereto unless
first authorized by the SEC in accordance with the procedures specified in
Section 2.3. Service Company shall advise Client Company from time to time of
such changes.
Section 2.3 No change in the organization of NC Services, the type and
character of the companies to be serviced, the methods of allocating costs to
associate companies, or in the scope
2
<PAGE>
or character of the services to be rendered subject to Section 13 of the Act,
or any rule, regulation or order thereunder, shall be made unless and until
NC Services shall first have given the SEC written notice of the proposed
change not less than 60 days prior to the proposed effectiveness of any such
change. If, upon the receipt of any such notice, the SEC shall notify NC
Services within the 60-day period that a question exists as to whether the
proposed change is consistent with the provisions of Section 13 of the Act,
or of any rule, regulation or order thereunder, then the proposed change
shall not become effective unless and until NC Services shall have filed with
the SEC an appropriate declaration regarding such proposed change and the SEC
shall have permitted such declaration to become effective.
Section 2.4 Service Company shall render a monthly statement to Client
Company that shall reflect the billing information necessary to identify the
costs charged for that month. By the twentieth (20th) day of each month,
Client Company shall remit to Service Company all charges billed to it.
Section 2.5 It is the intent of this Service Agreement that the payment
for services rendered by Service Company to Client Company under this Service
Agreement shall cover all the costs of its doing business (less the costs of
services provided to affiliated companies not a party to this Service Agreement
and to other non-affiliated companies, and credits for any miscellaneous
items), including, but not limited to, salaries and wages, office supplies and
expenses, outside services employed, property insurance, injuries and damages,
employee pensions and benefits, miscellaneous general expenses, rents,
maintenance of structures and equipment, depreciation and amortization,
compensation for use of capital as permitted by Rule 91 of the SEC's
regulations under the Act.
ARTICLE III - TERM
Section 3.1 This Service Agreement shall become effective subject to the
receipt of required regulatory approval, and shall continue in force until
terminated by Service Company or Client Company, upon not less than one year's
prior written notice to the other party. This Service Agreement shall also be
subject to termination or modification at any time, without notice, if and to
the extent performance under this Service Agreement may conflict with the Act
or with any rule, regulation or order of the SEC adopted before or after the
date of this Service Agreement.
ARTICLE IV - LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 4.1 In performing the services hereunder, Service Company will
exercise due care to assure that the services are performed in an appropriate
manner, meet the standards and specifications set forth in any applicable
request for service and comply with the applicable standards of law and
regulation. However, failure to meet these obligations shall in no event
subject Service Company to any claims by or liabilities to Client Company other
than to reperform the services and be reimbursed at cost for such
reperformance. Service Company makes no other
3
<PAGE>
warranty with respect to its performance of the services, and Client Company
agrees to accept such services without further warranty of any nature.
Section 4.2 To the fullest extent allowed by law, Client Company shall
and does hereby indemnify and agree to save harmless and defend Service
Company, its agents and employees from liabilities, taxes, losses, obligations,
claims, damages, penalties, causes of action, suits, costs and expenses or
judgments of any nature, on account of, or resulting from the performance and
prosecution of any services performed on behalf of Client Company pursuant to
this Agreement, whether or not the same results or allegedly results from the
claimed or actual negligence or breach of warranty of , or willful conduct by,
Service Company or any of its employees, agents, clients, or contractors or its
or their subcontractors or any combination thereof.
ARTICLE V - MISCELLANEOUS
Section 5.1 All accounts and records of Service Company shall be kept in
accordance with the General Rules and Regulations promulgated by the SEC
pursuant to the Act, in particular, the uniform System of Accounts for Mutual
Service Companies and Subsidiary Service Companies in effect from and after the
date hereof.
Section 5.2 New direct or indirect non-utility subsidiaries of NCE, which
may come into existence after the effective date of this Service Agreement, may
become additional client companies of Service Company and subject to a service
agreement with Service Company. The parties hereto shall make such changes in
the scope and character of the services to be rendered and the method of
assigning, distributing or allocating costs of such services as specified in
Appendix A, subject to the requirements of Section 2.3, as may become necessary
to achieve a fair and equitable assignment, distribution, or allocation of
Service Company costs among all associate companies including the new
subsidiaries.
Section 5.3 Service Company shall permit Client Company access to its
accounts and records, including the basis and computation of allocations.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Service Agreement
to be executed as of the date and year first above written.
NEW CENTURY SERVICES, INC.
BY:
-------------------------------
Name:
Title:
[COMPANY]
BY:
-------------------------------
Name:
Title:
5
<PAGE> Appendix A
DESCRIPTION OF SERVICES TO BE PROVIDED BY NEW CENTURY SERVICES, INC.
AND DETERMINATION OF CHARGES FOR SUCH SERVICES TO THE OPERATING
COMPANIES AND AFFILIATES
DESCRIPTION OF SERVICES PROVIDED
A description of the services provided by NCS is detailed below. Identifiable
costs will be directly assigned or distributed to the Operating Companies or
affiliates. For costs which are for services of a general nature that cannot
be directly assigned or distributed, the method of allocation is described
below for each service provided.
A) ELECTRIC COMMODITY SERVICES - BUSINESS DEVELOPMENT.
Description - Provides administrative support services and business
development opportunities to the Operating Companies electric generation
stations.
Methods of Allocation - The Support of Plant Operations will be allocated
to the Operating Companies based on the Electric kWh Generation Ratio.
B) ENERGY SUPPLY MANAGEMENT AND BULK POWER TRANSPORT
Description - Supervises and coordinates the electric transmission system
control operations and dispatching for the Operating Companies.
Methods of Allocation - The Energy Supply Management and Bulk Power
Transport services will be allocated to the Operating Companies based on
the kWh Sales Ratio.
C) PURCHASED POWER AND ELECTRIC TRADING
Description - Purchases power and provides electric trading services to
the Operating Companies electric generation systems.
Method of Allocation - The Purchased Power and Electric Trading services
will be allocated to the Operating Companies based on the Electric kWh
Purchased Power Ratio.
D) TRANSMISSION, SUBSTATION CONSTRUCTION, MAINTENANCE & OPERATIONS
6
<PAGE>
Description - Provides management services to the Operating Companies
transmission and substation construction, maintenance and operations
areas.
Method of Allocation - Transmission, Substation Construction, Maintenance
and Operations management services will be allocated to the Operating
Companies based on the Transmission and Substation Construction
Expenditures Ratios.
E) TRANSPORTATION.
Description - Oversees the Operating Companies' Fleet Services Group.
Method of Allocation - Transportation will be allocated to the Operating
Companies as well as other affected affiliates of NCS based on the
Employees Ratio.
F) SUPPLY CHAIN
Description - Provides services in connection with the procurement of
materials including the management of materials and supplies inventories.
Method of Allocation - Materials management will be allocated to the
Operating Companies based on an average of the Revenue Ratio and the
Total Construction Expenditures Ratio.
G) FACILITIES AND REAL ESTATE.
Description - Operates and maintains office buildings and service centers.
Procures real estate and administers real estate leases. Administers
contracts to provide security, housekeeping and maintenance services for
such facilities. Procures office furniture and equipment.
Method of Allocation - Facilities and Real Estate services will be
allocated to the Operating Companies as well as affected affiliates based
on the Square Footage Ratio.
H) ACCOUNTING
Description - Maintains the books and records of New Century Energies,
Inc. and its affected affiliates, prepares financial and statistical
reports, prepares tax filings and supervises compliance with the
applicable laws and regulations. Supports the accounting systems.
7
<PAGE>
Method of Allocation - Accounting services will be allocated to the
Operating Companies and affected affiliates based on an average of the
Revenue Ratio, the Total Construction Expenditures Ratio and the Total
Common Equity Ratio, with 20 Percent of Common Equity assigned to New
Century Energies, Inc. Accounting system support services will be
allocated based on the Accounting Transactions Ratio.
I) PAYMENT AND REPORTING
Description - Processes payments to vendors of New Century Energies, Inc.
and its affected affiliates, and prepares statistical reports.
Method of Allocation - Payment and reporting activities will be allocated
to the Operating Companies and affected affiliates based on the Payment
Transaction Ratio.
J) FINANCE AND TREASURY.
Description - Coordinates activities related to securities issuance,
including maintaining relationships with financial institutions, cash
management, investing activities and monitoring the capital markets.
Performs financial and economic analysis.
Method of Allocation - Finance and Treasury activities will be allocated
to the Operating Companies and affected affiliates based on an average of
the Revenue Ratio, the Total Construction Expenditures Ratio and the Total
Common Equity Ratio, with 20 Percent of Common Equity assigned to New
Century Energies, Inc.
K) RATES AND REGULATION.
Description - Determines the Operating Companies' revenue requirements and
rates for electric and gas customers. Coordinates the regulatory
compliance requirements and maintains relationships with the regulatory
bodies.
Method of Allocation - Rates and Regulation services will be allocated to
the Operating Companies based on the Revenue Ratio.
8
<PAGE>
L) LEGAL.
Description - Provides legal services related to labor and employment law,
litigation, contracts, rates and regulation, environmental matters, real
estate and other legal matters.
Method of Allocation - Legal services will be allocated to the Operating
Companies and affected affiliates based on an average of the Payroll
Ratio, the Revenue Ratio and the Total Common Equity Ratio, with 20
Percent of Common Equity assigned to New Century Energies, Inc.
M) INTERNAL AUDIT.
Description - Reviews internal controls and procedures to ensure assets
are safeguarded and transactions are properly authorized and recorded.
Evaluates contract risks.
Methods of Allocation - Internal Auditing services will be allocated to
the Operating Companies and affected affiliates based on the average of
the Revenue Ratio, the Total Construction Expenditures Ratio and the Total
Common Equity Ratio, with 20 Percent of Common Equity assigned to New
Century Energies, Inc.
N) CORPORATE COMMUNICATIONS.
Description - Prepares and disseminates information to employees,
customers, government agencies, communities and the media.
Methods of Allocation - Corporate Communications services will be
allocated to the Operating Companies and affected affiliates based on the
Revenue Ratio, the Employee Ratio and the Total Common Equity Ratio, with
20 Percent of Common Equity assigned to New Century Energies, Inc.
O) ENVIRONMENTAL.
Description - Establishes policies and procedures for compliance with
environmental laws and regulations. Researches emerging environmental
issues and monitors compliance with environmental requirements. Oversees
environmental clean up projects.
9
<PAGE>
Method of Allocation - Environmental services will be allocated to the
Operating Companies and affected affiliates based on the Revenue Ratio.
P) RESOURCE ACQUISITION AND ANALYSIS
Description - Procures coal, natural gas and oil for the Operating
Companies generation facilities. Ensures compliance with price and
quality provisions of fuel contracts and arranges for transportation of
fuel to the desired location. Purchases power and performs electric and
gas trading services.
Method of Allocation - Resource Acquisition and Analysis services will be
allocated to the Operating Companies based on the Electric kWh Generation
Ratio or the Purchased Power Ratio, whichever is appropriate.
Q) CORPORATE PLANNING.
Description - Facilitates preparation of strategic plans, monitors trends
and evaluates business opportunities. Facilitates process improvements.
Prepares budgets and financial forecasts.
Method of Allocation - Strategic Planning services will be allocated to
the Operating Companies and affected affiliates based on the average of
the Revenue Ratio, the Total Assets Ratio and Total Common Equity Ratio,
with 20 Percent of Common Equity assigned to New Century Energies, Inc.
R) INVESTOR RELATIONS.
Description - Provides communications to investors and the financial
community. Coordinates the transfer agent and shareholder record keeping
functions.
Method of Allocation - Investor Relations services will be allocated to
the Operating Companies and affected affiliates based on the average of
the Revenue Ratio, the Total Assets Ratio and the Total Common Equity
Ratio, with 20 Percent of Common Equity assigned to New Century Energies,
Inc.
10
<PAGE>
S) HUMAN RESOURCES.
Description - Establishes and administers policies and supervises
compliance with legal requirements in the areas of employment,
compensation, benefits and employee health, welfare and safety. Processes
payroll and employee benefit payments. Coordinates contract negotiation
and relations with labor unions.
Method of Allocation - Human Resources services will be allocated to the
Operating Companies and affected affiliates based on the Payroll Ratio.
T) CUSTOMER SERVICES.
Description - Performs customer billing, handles customer inquiries and
complaints and provides related customer information services.
Method of Allocation - Customer Services will be allocated based on the
Customers Ratio.
U) INFORMATION SYSTEMS.
Description - Administers the contract for various communications and
electronic data processing services. Such services provided under the
contract include, but are not limited to, development and support of
mainframe computer software applications, procurement and support of
personal computers, operation of a data center and installation and
operation of a communications system.
Method of Allocation - Information Systems will be allocated based on the
Information Systems direct charges.
V) MARKETING SERVICES.
Description - Provides marketing services including market load research
and new product development for Operating Companies and affiliates.
Method of Allocation - Marketing services will be allocated based on the
total Residential, Business, and Large Commercial and Industrial kWh sales
ratio.
W) WHOLESALE AND BULK POWER SALES.
Description - Provides sales and to support to electric wholesale
customers of the Operating Companies.
11
<PAGE>
Method of Allocation - Wholesale Sales will be allocated based on the
Electric Wholesale Sales Ratio.
X) RESIDENTIAL AND BUSINESS SALES.
Description - Provides sales and support to electric residential and
business customers of the Operating Companies.
Method of Allocation - Residential and Business Sales will be allocated
based on the Residential and Commercial Sales Ratio.
Y) CUSTOM ACCOUNT SALES.
Description - Provides sales services to large commercial and industrial
customers of the Operating Companies.
Method of Allocation - Custom Account Sales will be allocated based on the
Large Commercial and Industrial Sales Ratio.
Z) STRATEGIC AND KEY ACCOUNT SALES.
Description - Provides sales and support services to niche markets of the
Operating Companies.
Method of Allocation - Strategic Account Sales will be allocated based on
the total of the Large Commercial and Industrial and the Public Authority
Sales Ratios. Key Account Sales will be allocated based on the Large
Commercial and Industrial Sales Ratio.
AA) COMMUNITY AND ECONOMIC DEVELOPMENT
Description - Provides community support and economic development services
to the service territories of the Operating Companies.
Method of Allocation - Community and Economic Development services will
be allocated based on the Total kWh Sales Ratio.
BB) GAS MARKETING, CONTROL, PLANNING AND SUPPLY.
Description - Provides marketing services to gas transport customers.
Coordinates the planning and support for Gas operations of Public Service
Company of Colorado, Cheyenne Light, Fuel and Power and WestGas Interstate
Company including coordinating the operation of the gas system and well as
the
12
<PAGE>
purchase of gas for the Operating Companies distribution business from
third parties.
Method of Allocation - Gas Marketing, Control, Planning and Supply
services will be allocated based on the Gas Throughput Ratio.
CC) DESIGN ENGINEERING.
Description - Designs and monitors construction of electric transmission
and distribution lines and substations.
Method of Allocation - Design Engineering services will be allocated based
on the Transmission Construction Expenditures Ratio, the Distribution
Construction Ratio, or a ratio based on the sum of the Transmission and
Distribution Construction Expenditures whichever is appropriate.
DD) SUBSTATION ENGINEERING AND SUPPORT.
Description - Provides management support services to the Substation
Engineering and Support organizations of the Operating Companies.
Method of Allocation - Substation Engineering and Support services will
be allocated based on the Substation Construction Expenditures Ratio.
EE) TRANSMISSION ENGINEERING AND RIGHT OF WAY SERVICES.
Description - Provides management support services to the Transmission
Engineering and Right of Way organizations of the Operating Companies.
Method of Allocation - Transmission Engineering and Right of Way services
will be allocated based on the Transmission Construction Expenditures
Ratio.
FF) DISTRIBUTION SUPPORT SERVICES.
Description - Provides planning, benchmarking, activity tracking and
budget support services to the Construction and Operations and
Maintenance Organization.
Method of Allocation - Distribution Support Services will be allocated
based on the Total Customers Ratio.
13
<PAGE>
GG) AVIATION SERVICES.
Description - Provides aviation and travel services to employees.
Method of Allocation - Aviation Services will be allocated to the
appropriate Operating Companies and affiliates based on the Aviation
Department's actual direct charges. (This method will allocate costs
only to those companies who actually use aviation services).
HH) GOVERNMENTAL AFFAIRS.
Description - Lobbies government officials and monitors, reviews and
researches governmental legislation.
Method of Allocation - Governmental Affairs will be allocated based on the
average of the Revenue Ratio, the Employee Ratio, and the Total Common
Equity Ratio, with 20 Percent of Common Equity assigned to New Century
Energies, Inc.
II) PRODUCTION SERVICES.
Description - Provides performance, chemical and water testing and
analysis, technical, and analytical services to the Operating Companies
generation facilities.
Method of Allocation - Production Services will be allocated based on the
kWh Generation Ratio.
JJ) EXECUTIVES.
Description - Provides executive management and general administrative
services.
Method of Allocation - Executive Management Services will be allocated
based on the average of the Revenue Ratio, the Total Assets Ratio and the
Total Common Equity Ratio, with 20 percent of Common Equity assigned to
New Century Energies, Inc.
14
<PAGE>
ALLOCATION RATIOS
The following ratios will be utilized as outlined above.
SALES RATIO - Based on firm kilowatt-hour electric sales (and/or the
equivalent cubic feet of natural gas sales based on a Btu content, where
applicable), excluding inter-system sales, for the immediate preceding
twelve consecutive calendar months, the numerator of which is for an
Operating Company or and affiliate and the denominator of which is for all
Operating Companies and affected affiliate companies . This ratio will be
determined annually, or at such time as may be required due to a
significant change.
RESIDENTIAL SALES RATIO - Based on firm kilowatt-hour electric sales to
residential customers for the immediate preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company or an
affiliate and the denominator of which is for all Operating Companies and
affected affiliate companies . This ratio will be determined annually, or
at such time as may be required due to a significant change.
BUSINESS SALES RATIO - Based on firm kilowatt-hour electric sales to
business customers that purchase less than 250 kilowatts for the immediate
preceding twelve consecutive calendar months, the numerator of which is
for an Operating Company or an affiliate and the denominator of which is
for all Operating Companies and affected affiliate companies . This ratio
will be determined annually, or at such time as may be required due to a
significant change.
LARGE COMMERCIAL & INDUSTRIAL SALES RATIO - Based on firm kilowatt-hour
electric sales to large commercial and industrial customers that purchase
greater than 250 kilowatts for the immediate preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company or an
affiliate and the denominator of which is for all Operating Companies and
affected affiliate companies . This ratio will be determined annually, or
at such time as may be required due to a significant change.
ELECTRIC PEAK LOAD RATIO - Based on the sum of the monthly electric
maximum system demands for the immediately preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company and
the denominator of which is for all Operating Companies. This ratio will
be determined annually, or at such time as may be required due to a
significant change.
15
<PAGE>
CUSTOMERS RATIO - Based on the sum of total electric customers (and/or gas
customers, or residential, business and large commercial and industrial
customers where applicable) at the end of each month for the immediately
proceeding twelve consecutive calendar months, the numerator of which is
for an Operating Company or an affected affiliate company and the
denominator of which is for all Operating Companies and affected affiliate
companies. This ratio will be determined annually, or at such time as may
be required due to a significant change.
EMPLOYEES RATIO - Based on the sum of the number of employees at the end
of each month for the immediately preceding twelve calendar months, the
numerator of which is for an Operating Company or an affected affiliate
company and the denominator of which is for all Operating Companies and
affected affiliate companies. This ratio will be determined annually, or
at such time as may be required due to a significant change.
CONSTRUCTION EXPENDITURES RATIO - Based on construction or capital
expenditures , net of reimbursements, for the immediately preceding twelve
consecutive calendar months, the numerator of which is for an Operating
Company or an affected affiliate company and the denominator of which is
for all Operating Companies and affected affiliate companies. This ratio
will be determined annually, or at such time as may be required due to a
significant change.
TRANSMISSION CONSTRUCTION EXPENDITURES RATIO - Based on transmission
construction or capital expenditures , net of reimbursements, for the
immediately preceding twelve consecutive calendar months, the numerator of
which is for an Operating Company or an affected affiliate company and
the denominator of which is for all Operating Companies and affected
affiliate companies. This ratio will be determined annually, or at such
time as may be required due to a significant change.
DISTRIBUTION CONSTRUCTION EXPENDITURES RATIO - Based on distribution
construction or capital expenditures , net of reimbursements, for the
immediately preceding twelve consecutive calendar months, the numerator of
which is for an Operating Company or an affected affiliate company and
the denominator of which is for all Operating Companies and affected
affiliate companies. This ratio will be determined annually, or at such
time as may be required due to a significant change.
SUBSTATION CONSTRUCTION EXPENDITURES RATIO - Based on substation
construction or capital expenditures , net of reimbursements, for the
immediately preceding twelve consecutive calendar months, the numerator of
which is for an Operating Company or an affected affiliate company and
the denominator of which is for all Operating Companies and affected
affiliate companies. This ratio will
16
<PAGE>
be determined annually, or at such time as may be required due to a
significant change.
TOTAL COMMON EQUITY RATIO, WITH 20 PERCENT OF COMMON EQUITY ASSIGNED TO
NEW CENTURY ENERGIES, INC. - Based on the sum of the common equity at the
end of each month for the immediately preceding twelve calendar months,
the numerator of which is for an Operating Company or an affected
affiliate company and the denominator of which is for all Operating
Companies and affected affiliate companies. This ratio will be determined
annually, or at such time as may be required due to significant changes.
REVENUE RATIO - Based on the sum of the revenue at the end of each month
for the immediately preceding twelve consecutive calendar months, the
numerator of which is for an Operating Company or an affected affiliate
company and the denominator of which is for all Operating Companies and
affected affiliate companies. This ratio will be determined annually, or
at such time as may be required due to significant changes.
WHOLESALE REVENUE RATIO - Based on the sum of the electric wholesale
revenue at the end of each month for the immediately preceding twelve
consecutive calendar months, the numerator of which is for an Operating
Company or an affected affiliate company and the denominator of which is
for all Operating Companies and affected affiliate companies. This ratio
will be determined annually, or at such time as may be required due to
significant changes.
INDUSTRIAL REVENUE RATIO - Based on the sum of the electric industrial
revenue at the end of each month for the immediately preceding twelve
consecutive calendar months, the numerator of which is for an Operating
Company or an affected affiliate company and the denominator of which is
for all Operating Companies and affected affiliate companies. This ratio
will be determined annually, or at such time as may be required due to
significant changes.
PAYROLL RATIO - Based on the sum of the payroll at the end of each month
for the immediately preceding twelve consecutive calendar months, the
numerator of which is for an Operating Company or an affected affiliate
company and the denominator of which is for all Operating Companies and
affected affiliate companies. This ratio will be determined annually, or
at such time as may be required due to significant changes.
ELECTRIC kWh GENERATION - Based on the sum of electric kWh generated
during each month for the immediately preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company and
the denominator of which is for all Operating Companies. This ratio will
be determined annually, or at such time as may be required due to
significant changes.
17
<PAGE>
ELECTRIC kWh PURCHASED POWER RATIO - Based on the sum of electric kWh
purchased power during each month for the immediately preceding twelve
consecutive calendar months, the numerator of which is for an Operating
Company and the denominator of which is for all Operating Companies. This
ratio will be determined annually, or at such time as may be required due
to significant changes.
TOTAL ASSETS RATIO - Based on the total assets at year end for the
preceding year, the numerator of which is for an Operating Company or
affected affiliate company and the denominator of which is for all
Operating Companies and affected affiliate companies. This ratio will be
determined annually, or at such time as may be required due to significant
changes.
COST OF GAS SOLD - Based on the sum of the cost of gas sold at the end of
each month for the immediately preceding twelve consecutive calendar
months, the numerator of which is for an Operating Company or an affected
affiliate company and the denominator of which is for all Operating
Companies and affected affiliate companies. This ratio will be determined
annually, or at such time as may be required due to significant changes.
GAS THROUGHPUT RATIO - Based on the sum of the gas throughput MCF's at the
end of each month for the immediately preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company or an
affected affiliate company and the denominator of which is for all
Operating Companies and affected affiliate companies. This ratio will be
determined annually, or at such time as may be required due to significant
changes.
GAS TRANSPORT MCF - Based on the sum of transported gas MCF's at the end
of each month for the immediately preceding twelve consecutive calendar
months, the numerator of which is for an Operating Company or an affected
affiliate company and the denominator of which is for all Operating
Companies and affected affiliate companies. This ratio will be determined
annually, or at such time as may be required due to significant changes.
PAYMENT TRANSACTION RATIO - Based on the sum of the number of payment
transactions processed during each month for the immediately preceding
twelve consecutive calendar months, the numerator of which is for an
Operating Company or an affected affiliate company and the denominator of
which is for all Operating Companies and affected affiliate companies.
This ratio will be determined annually, or at such time as may be required
due to significant changes.
18
<PAGE>
ACCOUNTING TRANSACTIONS RATIO - Based on the sum of the number of
accounting transactions processed during each month for the immediately
preceding twelve consecutive calendar months , the numerator of which is
for an Operating Company or an affected affiliate company and the
denominator of which is for all Operating Companies and affected affiliate
companies.
19
<PAGE>
FORM OF UTILITY SERVICE AGREEMENT APPLICABLE BETWEEN PUBLIC
SERVICE COMPANY OF COLORADO
SERVICE AGREEMENT
This Service Agreement is made and entered into this _____ day of
___________, by and between Public Service Company of Colorado ("Client
Company") and New Century Services, Inc. ("Service Company).
WITNESSETH
WHEREAS, the Securities and Exchange Commission ("SEC") has approved and
authorized as meeting the requirements of Section 13(b) of the Public Utility
Holding Company Act of 1935 ("Act") the organization and conduct of the
business of Service Company, in accordance herewith, as a wholly-owned
subsidiary service company of New Century Energies, Inc. ("NCE); and
WHEREAS, Client Company is a utility operating company subsidiary of NCE
and an affiliate of Service Company; and
WHEREAS, Service Company and Client Company have entered into this Service
Agreement whereby Service Company agrees to provide and Client Company agrees
to accept and pay for various services as provided herein at cost, with cost
determined in accordance with applicable rules and regulations under the Act,
which require Service Company to fairly and equitably allocate costs among all
associate companies to which it renders services, including Client Company.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties to this Service Agreement covenant and agree as
follows:
ARTICLE I - SERVICES
Section 1.1 Service Company shall furnish to Client Company, as requested
by Client Company, upon the terms and conditions hereinafter set forth, such of
the services described in Appendix A hereto, at such times, for such periods
and in such manner as Client Company may from time to time request and that
Service Company concludes it is able to perform. Service Company shall also
provide Client Company with such special services, in addition to those
services described in Appendix A hereto, as may be requested by Client Company
and that Service Company concludes it is able to perform. In supplying such
services, Service Company may arrange, where it deems appropriate, for the
services of such experts, consultants, advisers, and other persons with
necessary qualifications as are required for or pertinent to the provision of
such services.
1
<PAGE>
Section 1.2 Client Company shall take from Service Company such of the
services described in Section 1.1, and such additional general or special
services, whether or not now contemplated, as are requested from time to time
by Client Company and that Service Company concludes it is able to perform.
Section 1.3 The services described herein or contemplated to be
performed hereunder shall be directly assigned, distributed or allocated by
activity, project, program, work order or other appropriate basis. Client
Company shall have the right from time to time to amend, alter or rescind any
activity, project, program or work order provided that (i) any such amendment
or alteration that results in a material change in the scope of the services
to be performed or equipment to be provided is agreed to by Service Company,
(ii) the cost for the services covered by the activity, project, program or
work order shall include any expense incurred by Service Company as a direct
result of such amendment, alteration or rescission of the activity, project,
program or work order, and (iii) no amendment, alteration or rescission of an
activity, project, program or work order shall release Client Company from
liability for all costs already incurred by or contracted for by Service
Company pursuant to the activity, project, program or work order, regardless
of whether the services associated with such costs have been completed.
Section 1.4 Service Company shall use its best efforts to maintain a
staff trained and experienced in the design, construction, operation,
maintenance, and management of public utility properties.
ARTICLE II - COMPENSATION
Section 2.1 As compensation for the services to be rendered hereunder,
Client Company shall pay to Service Company all costs which reasonably can be
identified and related to particular services performed by Service Company for
or on its behalf. The methods for assigning or allocating Service Company
costs to Client Company, as well as to other associate companies, are set forth
in Appendix A.
Section 2.2 The methods of assignment, distribution or allocation of
costs described in Appendix A shall be subject to review annually, or more
frequently if appropriate. Such methods of assignment, distribution or
allocation of costs may be modified or changed by Service Company; provided,
however, that no changes will be made to the methods of assignment,
distribution, or allocation set forth herein or in Attachment A hereto unless
first authorized by the SEC in accordance with the procedures specified in
Section 2.3. Service Company shall advise Client Company from time to time of
such changes.
Section 2.3 No change in the organization of NC Services, the type and
character of the companies to be serviced, the methods of allocating costs to
associate companies, or in the scope or character of the services to be
rendered subject to Section 13 of the Act, or any rule, regulation or order
thereunder, shall be made unless and until NC Services shall first have given
the SEC
2
<PAGE>
written notice of the proposed change not less than 60 days prior to the
proposed effectiveness of any such change. If, upon the receipt of any such
notice, the SEC shall notify NC Services within the 60-day period that a
question exists as to whether the proposed change is consistent with the
provisions of Section 13 of the Act, or of any rule, regulation or order
thereunder, then the proposed change shall not become effective unless and
until NC Services shall have filed with the SEC an appropriate declaration
regarding such proposed change and the SEC shall have permitted such
declaration to become effective.
Section 2.4 Service Company shall render a monthly statement to Client
Company that shall reflect the billing information necessary to identify the
costs charged for that month. By the twentieth (20th) day of each month,
Client Company shall remit to Service Company all charges billed to it.
Section 2.5 It is the intent of this Service Agreement that the payment
for services rendered by Service Company to Client Company under this Service
Agreement shall cover all the costs of its doing business (less the costs of
services provided to affiliated companies not a party to this Service Agreement
and to other non-affiliated companies, and credits for any miscellaneous
items), including, but not limited to, salaries and wages, office supplies and
expenses, outside services employed, property insurance, injuries and damages,
employee pensions and benefits, miscellaneous general expenses, rents,
maintenance of structures and equipment, depreciation and amortization,
compensation for use of capital as permitted by Rule 91 of the SEC's
regulations under the Act.
ARTICLE III - TERM
Section 3.1 This Service Agreement shall become effective subject to the
receipt of required regulatory approval, and shall continue in force until
terminated by Service Company or Client Company, upon not less than one year's
prior written notice to the other party. This Service Agreement shall also be
subject to termination or modification at any time, without notice, if and to
the extent performance under this Service Agreement may conflict with the Act
or with any rule, regulation or order of the SEC adopted before or after the
date of this Service Agreement.
ARTICLE IV - LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 4.1 In performing the services hereunder, Service Company will
exercise due care to assure that the services are performed in an appropriate
manner, meet the standards and specifications set forth in any applicable
request for service and comply with the applicable standards of law and
regulation. However, failure to meet these obligations shall in no event
subject Service Company to any claims by or liabilities to Client Company other
than to reperform the services and be reimbursed at cost for such
reperformance. Service Company makes no other warranty with respect to its
performance of the services, and Client Company agrees to accept such services
without further warranty of any nature.
3
<PAGE>
Section 4.2 To the fullest extent allowed by law, Client Company shall
and does hereby indemnify and agree to save harmless and defend Service
Company, its agents and employees from liabilities, taxes, losses, obligations,
claims, damages, penalties, causes of action, suits, costs and expenses or
judgments of any nature, on account of, or resulting from the performance and
prosecution of any services performed on behalf of Client Company pursuant to
this Agreement, whether or not the same results or allegedly results from the
claimed or actual negligence or breach of warranty of, or willful conduct by,
Service Company or any of its employees, agents, clients, or contractors or its
or their subcontractors or any combination thereof.
ARTICLE V - MISCELLANEOUS
Section 5.1 All accounts and records of Service Company shall be kept in
accordance with the General Rules and Regulations promulgated by the SEC
pursuant to the Act, in particular, the uniform System of Accounts for Mutual
Service Companies and Subsidiary Service Companies in effect from and after the
date hereof.
Section 5.2 New direct or indirect non-utility subsidiaries of NCE, which
may come into existence after the effective date of this Service Agreement, may
become additional client companies of Service Company and subject to a service
agreement with Service Company. The parties hereto shall make such changes in
the scope and character of the services to be rendered and the method of
assigning, distributing or allocating costs of such services as specified in
Appendix A, subject to the requirements of Section 2.3, as may become necessary
to achieve a fair and equitable assignment, distribution, or allocation of
Service Company costs among all associate companies including the new
subsidiaries.
Section 5.3 Service Company shall permit Client Company access to its
accounts and records, including the basis and computation of allocations.
Section 5.4 Client Company is required to adhere to those procedural
conditions set out in Appendix B hereto, which it agreed to in a proceeding
before the Colorado Public Utilities Commission addressing the merger between
Client Company and Southwestern Public Service Company. Service Company agrees
to the extent necessary to also comply with these conditions or cause other NCE
companies to comply with these conditions.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Service Agreement
to be executed as of the date and year first above written.
NEW CENTURY SERVICES, INC.
BY:
--------------------------------
Name:
Title:
PUBLIC SERVICE COMPANY OF COLORADO
BY:
--------------------------------
Name:
Title:
5
<PAGE>
APPENDIX A
DESCRIPTION OF SERVICES TO BE PROVIDED BY NEW CENTURY SERVICES,
INC. AND DETERMINATION OF CHARGES FOR SUCH SERVICES TO THE
OPERATING COMPANIES AND AFFILIATES
DESCRIPTION OF SERVICES PROVIDED
A description of the services provided by NCS is detailed below. Identifiable
costs will be directly assigned or distributed to the Operating Companies or
affiliates. For costs which are for services of a general nature that cannot
be directly assigned or distributed, the method of allocation is described
below for each service provided.
A) ELECTRIC COMMODITY SERVICES - BUSINESS DEVELOPMENT.
Description - Provides administrative support services and business
development opportunities to the Operating Companies electric generation
stations.
Methods of Allocation - The Support of Plant Operations will be allocated
to the Operating Companies based on the Electric kWh Generation Ratio.
B) ENERGY SUPPLY MANAGEMENT AND BULK POWER TRANSPORT.
Description - Supervises and coordinates the electric transmission system
control operations and dispatching for the Operating Companies.
Methods of Allocation - The Energy Supply Management and Bulk Power
Transport services will be allocated to the Operating Companies based on
the kWh Sales Ratio.
C) PURCHASED POWER AND ELECTRIC TRADING.
Description - Purchases power and provides electric trading services to
the Operating Companies electric generation systems.
Method of Allocation - The Purchased Power and Electric Trading services
will be allocated to the Operating Companies based on the Electric kWh
Purchased Power Ratio.
D) TRANSMISSION, SUBSTATION CONSTRUCTION, MAINTENANCE & OPERATIONS.
6
<PAGE>
Description - Provides management services to the Operating Companies
transmission and substation construction, maintenance and operations
areas.
Method of Allocation - Transmission, Substation Construction, Maintenance
and Operations management services will be allocated to the Operating
Companies based on the Transmission and Substation Construction
Expenditures Ratios.
E) TRANSPORTATION.
Description - Oversees the Operating Companies' Fleet Services Group.
Method of Allocation - Transportation will be allocated to the Operating
Companies as well as other affected affiliates of NCS based on the
Employees Ratio.
F)SUPPLY CHAIN.
Description - Provides services in connection with the procurement of
materials including the management of materials and supplies inventories.
Method of Allocation - Materials management will be allocated to the
Operating Companies based on an average of the Revenue Ratio and the
Total Construction Expenditures Ratio.
G) FACILITIES AND REAL ESTATE.
Description - Operates and maintains office buildings and service centers.
Procures real estate and administers real estate leases. Administers
contracts to provide security, housekeeping and maintenance services for
such facilities. Procures office furniture and equipment.
Method of Allocation - Facilities and Real Estate services will be
allocated to the Operating Companies as well as affected affiliates based
on the Square Footage Ratio.
H) ACCOUNTING.
Description - Maintains the books and records of New Century Energies,
Inc. and its affected affiliates, prepares financial and statistical
reports, prepares tax filings and supervises compliance with the
applicable laws and regulations. Supports the accounting systems.
7
<PAGE>
Method of Allocation - Accounting services will be allocated to the
Operating Companies and affected affiliates based on an average of the
Revenue Ratio, the Total Construction Expenditures Ratio and the Total
Common Equity Ratio, with 20 Percent of Common Equity assigned to New
Century Energies, Inc. Accounting system support services will be
allocated based on the Accounting Transactions Ratio.
I) PAYMENT AND REPORTING.
Description - Processes payments to vendors of New Century Energies, Inc.
and its affected affiliates, and prepares statistical reports.
Method of Allocation - Payment and reporting activities will be allocated
to the Operating Companies and affected affiliates based on the Payment
Transaction Ratio.
J) FINANCE AND TREASURY.
Description - Coordinates activities related to securities issuance,
including maintaining relationships with financial institutions, cash
management, investing activities and monitoring the capital markets.
Performs financial and economic analysis.
Method of Allocation - Finance and Treasury activities will be allocated
to the Operating Companies and affected affiliates based on an average of
the Revenue Ratio, the Total Construction Expenditures Ratio and the Total
Common Equity Ratio, with 20 Percent of Common Equity assigned to New
Century Energies, Inc.
K) RATES AND REGULATION.
Description - Determines the Operating Companies' revenue requirements and
rates for electric and gas customers. Coordinates the regulatory
compliance requirements and maintains relationships with the regulatory
bodies.
Method of Allocation - Rates and Regulation services will be allocated to
the Operating Companies based on the Revenue Ratio.
8
<PAGE>
L) LEGAL.
Description - Provides legal services related to labor and employment law,
litigation, contracts, rates and regulation, environmental matters, real
estate and other legal matters.
Method of Allocation - Legal services will be allocated to the Operating
Companies and affected affiliates based on an average of the Payroll
Ratio, the Revenue Ratio and the Total Common Equity Ratio, with 20
Percent of Common Equity assigned to New Century Energies, Inc.
M) INTERNAL AUDIT.
Description - Reviews internal controls and procedures to ensure assets
are safeguarded and transactions are properly authorized and recorded.
Evaluates contract risks.
Methods of Allocation - Internal Auditing services will be allocated to
the Operating Companies and affected affiliates based on the average of
the Revenue Ratio, the Total Construction Expenditures Ratio and the Total
Common Equity Ratio, with 20 Percent of Common Equity assigned to New
Century Energies, Inc.
N) CORPORATE COMMUNICATIONS.
Description - Prepares and disseminates information to employees,
customers, government agencies, communities and the media.
Methods of Allocation - Corporate Communications services will be
allocated to the Operating Companies and affected affiliates based on the
Revenue Ratio, the Employee Ratio and the Total Common Equity Ratio, with
20 Percent of Common Equity assigned to New Century Energies, Inc.
O) ENVIRONMENTAL.
Description - Establishes policies and procedures for compliance with
environmental laws and regulations. Researches emerging environmental
issues and monitors compliance with environmental requirements. Oversees
environmental clean up projects.
9
<PAGE>
Method of Allocation - Environmental services will be allocated to the
Operating Companies and affected affiliates based on the Revenue Ratio.
P) RESOURCE ACQUISITION AND ANALYSIS.
Description - Procures coal, natural gas and oil for the Operating
Companies generation facilities. Ensures compliance with price and
quality provisions of fuel contracts and arranges for transportation of
fuel to the desired location. Purchases power and performs electric and
gas trading services.
Method of Allocation - Resource Acquisition and Analysis services will be
allocated to the Operating Companies based on the Electric kWh Generation
Ratio or the Purchased Power Ratio, whichever is appropriate.
Q) CORPORATE PLANNING.
Description - Facilitates preparation of strategic plans, monitors trends
and evaluates business opportunities. Facilitates process improvements.
Prepares budgets and financial forecasts.
Method of Allocation - Strategic Planning services will be allocated to
the Operating Companies and affected affiliates based on the average of
the Revenue Ratio, the Total Assets Ratio and Total Common Equity Ratio,
with 20 Percent of Common Equity assigned to New Century Energies, Inc.
R) INVESTOR RELATIONS.
Description - Provides communications to investors and the financial
community. Coordinates the transfer agent and shareholder record keeping
functions.
Method of Allocation - Investor Relations services will be allocated to
the Operating Companies and affected affiliates based on the average of
the Revenue Ratio, the Total Assets Ratio and the Total Common Equity
Ratio, with 20 Percent of Common Equity assigned to New Century Energies,
Inc.
10
<PAGE>
S) HUMAN RESOURCES.
Description - Establishes and administers policies and supervises
compliance with legal requirements in the areas of employment,
compensation, benefits and employee health, welfare and safety. Processes
payroll and employee benefit payments. Coordinates contract negotiation
and relations with labor unions.
Method of Allocation - Human Resources services will be allocated to the
Operating Companies and affected affiliates based on the Payroll Ratio.
T) CUSTOMER SERVICES.
Description - Performs customer billing, handles customer inquiries and
complaints and provides related customer information services.
Method of Allocation - Customer Services will be allocated based on the
Customers Ratio.
U) INFORMATION SYSTEMS.
Description - Administers the contract for various communications and
electronic data processing services. Such services provided under the
contract include, but are not limited to, development and support of
mainframe computer software applications, procurement and support of
personal computers, operation of a data center and installation and
operation of a communications system.
Method of Allocation - Information Systems will be allocated based on the
Information Systems direct charges.
V) MARKETING SERVICES.
Description - Provides marketing services including market load research
and new product development for Operating Companies and affiliates.
Method of Allocation - Marketing services will be allocated based on the
total Residential, Business, and Large Commercial and Industrial kWh sales
ratio.
W) WHOLESALE AND BULK POWER SALES.
Description - Provides sales and to support to electric wholesale
customers of the Operating Companies.
11
<PAGE>
Method of Allocation - Wholesale Sales will be allocated based on the
Electric Wholesale Sales Ratio.
X) RESIDENTIAL AND BUSINESS SALES.
Description - Provides sales and support to electric residential and
business customers of the Operating Companies.
Method of Allocation - Residential and Business Sales will be allocated
based on the Residential and Commercial Sales Ratio.
Y) CUSTOM ACCOUNT SALES.
Description - Provides sales services to large commercial and industrial
customers of the Operating Companies.
Method of Allocation - Custom Account Sales will be allocated based on the
Large Commercial and Industrial Sales Ratio.
Z) STRATEGIC AND KEY ACCOUNT SALES.
Description - Provides sales and support services to niche markets of the
Operating Companies.
Method of Allocation - Strategic Account Sales will be allocated based on
the total of the Large Commercial and Industrial and the Public Authority
Sales Ratios. Key Account Sales will be allocated based on the Large
Commercial and Industrial Sales Ratio.
AA) COMMUNITY AND ECONOMIC DEVELOPMENT.
Description - Provides community support and economic development services
to the service territories of the Operating Companies.
Method of Allocation - Community and Economic Development services will
be allocated based on the Total kWh Sales Ratio.
BB) GAS MARKETING, CONTROL, PLANNING AND SUPPLY.
Description - Provides marketing services to gas transport customers.
Coordinates the planning and support for Gas operations of Public Service
Company of Colorado, Cheyenne Light, Fuel and Power and WestGas Interstate
Company including coordinating the operation of the gas system and well as
the
12
<PAGE>
purchase of gas for the Operating Companies distribution business from
third parties.
Method of Allocation - Gas Marketing, Control, Planning and Supply
services will be allocated based on the Gas Throughput Ratio.
CC) DESIGN ENGINEERING.
Description - Designs and monitors construction of electric transmission
and distribution lines and substations.
Method of Allocation - Design Engineering services will be allocated based
on the Transmission Construction Expenditures Ratio, the Distribution
Construction Ratio, or a ratio based on the sum of the Transmission and
Distribution Construction Expenditures whichever is appropriate.
DD) SUBSTATION ENGINEERING AND SUPPORT.
Description - Provides management support services to the Substation
Engineering and Support organizations of the Operating Companies.
Method of Allocation - Substation Engineering and Support services will
be allocated based on the Substation Construction Expenditures Ratio.
EE) TRANSMISSION ENGINEERING AND RIGHT OF WAY SERVICES.
Description - Provides management support services to the Transmission
Engineering and Right of Way organizations of the Operating Companies.
Method of Allocation - Transmission Engineering and Right of Way services
will be allocated based on the Transmission Construction Expenditures
Ratio.
FF) DISTRIBUTION SUPPORT SERVICES.
Description - Provides planning, benchmarking, activity tracking and
budget support services to the Construction and Operations and
Maintenance Organization.
Method of Allocation - Distribution Support Services will be allocated
based on the Total Customers Ratio.
13
<PAGE>
GG) AVIATION SERVICES.
Description - Provides aviation and travel services to employees.
Method of Allocation - Aviation Services will be allocated to the
appropriate Operating Companies and affiliates based on the Aviation
Department's actual direct charges. (This method will allocate costs
only to those companies who actually use aviation services).
HH) GOVERNMENTAL AFFAIRS.
Description - Lobbies government officials and monitors, reviews and
researches governmental legislation.
Method of Allocation - Governmental Affairs will be allocated based on the
average of the Revenue Ratio, the Employee Ratio, and the Total Common
Equity Ratio, with 20 Percent of Common Equity assigned to New Century
Energies, Inc.
II) PRODUCTION SERVICES.
Description - Provides performance, chemical and water testing and
analysis, technical, and analytical services to the Operating Companies
generation facilities.
Method of Allocation - Production Services will be allocated based on the
kWh Generation Ratio.
JJ) EXECUTIVES.
Description - Provides executive management and general administrative
services.
Method of Allocation - Executive Management Services will be allocated
based on the average of the Revenue Ratio, the Total Assets Ratio and the
Total Common Equity Ratio, with 20 percent of Common Equity assigned to
New Century Energies, Inc.
14
<PAGE>
ALLOCATION RATIOS
The following ratios will be utilized as outlined above.
SALES RATIO - Based on firm kilowatt-hour electric sales (and/or the
equivalent cubic feet of natural gas sales based on a Btu content, where
applicable), excluding inter-system sales, for the immediate preceding
twelve consecutive calendar months, the numerator of which is for an
Operating Company or and affiliate and the denominator of which is for all
Operating Companies and affected affiliate companies. This ratio will be
determined annually, or at such time as may be required due to a
significant change.
RESIDENTIAL SALES RATIO - Based on firm kilowatt-hour electric sales to
residential customers for the immediate preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company or an
affiliate and the denominator of which is for all Operating Companies and
affected affiliate companies. This ratio will be determined annually, or
at such time as may be required due to a significant change.
BUSINESS SALES RATIO - Based on firm kilowatt-hour electric sales to
business customers that purchase less than 250 kilowatts for the immediate
preceding twelve consecutive calendar months, the numerator of which is
for an Operating Company or an affiliate and the denominator of which is
for all Operating Companies and affected affiliate companies. This ratio
will be determined annually, or at such time as may be required due to a
significant change.
LARGE COMMERCIAL & INDUSTRIAL SALES RATIO - Based on firm kilowatt-hour
electric sales to large commercial and industrial customers that purchase
greater than 250 kilowatts for the immediate preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company or an
affiliate and the denominator of which is for all Operating Companies and
affected affiliate companies. This ratio will be determined annually, or
at such time as may be required due to a significant change.
ELECTRIC PEAK LOAD RATIO - Based on the sum of the monthly electric
maximum system demands for the immediately preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company and
the denominator of which is for all Operating Companies. This ratio will
be determined annually, or at such time as may be required due to a
significant change.
15
<PAGE>
CUSTOMERS RATIO - Based on the sum of total electric customers (and/or gas
customers, or residential, business and large commercial and industrial
customers where applicable) at the end of each month for the immediately
proceeding twelve consecutive calendar months, the numerator of which is
for an Operating Company or an affected affiliate company and the
denominator of which is for all Operating Companies and affected affiliate
companies. This ratio will be determined annually, or at such time as may
be required due to a significant change.
EMPLOYEES RATIO - Based on the sum of the number of employees at the end
of each month for the immediately preceding twelve calendar months, the
numerator of which is for an Operating Company or an affected affiliate
company and the denominator of which is for all Operating Companies and
affected affiliate companies. This ratio will be determined annually, or
at such time as may be required due to a significant change.
CONSTRUCTION EXPENDITURES RATIO - Based on construction or capital
expenditures, net of reimbursements, for the immediately preceding twelve
consecutive calendar months, the numerator of which is for an Operating
Company or an affected affiliate company and the denominator of which is
for all Operating Companies and affected affiliate companies. This ratio
will be determined annually, or at such time as may be required due to a
significant change.
TRANSMISSION CONSTRUCTION EXPENDITURES RATIO - Based on transmission
construction or capital expenditures, net of reimbursements, for the
immediately preceding twelve consecutive calendar months, the numerator of
which is for an Operating Company or an affected affiliate company and
the denominator of which is for all Operating Companies and affected
affiliate companies. This ratio will be determined annually, or at such
time as may be required due to a significant change.
DISTRIBUTION CONSTRUCTION EXPENDITURES RATIO - Based on distribution
construction or capital expenditures, net of reimbursements, for the
immediately preceding twelve consecutive calendar months, the numerator of
which is for an Operating Company or an affected affiliate company and
the denominator of which is for all Operating Companies and affected
affiliate companies. This ratio will be determined annually, or at such
time as may be required due to a significant change.
SUBSTATION CONSTRUCTION EXPENDITURES RATIO - Based on substation
construction or capital expenditures, net of reimbursements, for the
immediately preceding twelve consecutive calendar months, the numerator of
which is for an Operating Company or an affected affiliate company and
the denominator of which is for all Operating Companies and affected
affiliate companies. This ratio will be
16
<PAGE>
determined annually, or at such time as may be required due to a
significant change.
TOTAL COMMON EQUITY RATIO, WITH 20 PERCENT OF COMMON EQUITY ASSIGNED TO
NEW CENTURY ENERGIES, INC. - Based on the sum of the common equity at the
end of each month for the immediately preceding twelve calendar months,
the numerator of which is for an Operating Company or an affected
affiliate company and the denominator of which is for all Operating
Companies and affected affiliate companies. This ratio will be determined
annually, or at such time as may be required due to significant changes.
REVENUE RATIO - Based on the sum of the revenue at the end of each month
for the immediately preceding twelve consecutive calendar months, the
numerator of which is for an Operating Company or an affected affiliate
company and the denominator of which is for all Operating Companies and
affected affiliate companies. This ratio will be determined annually, or
at such time as may be required due to significant changes.
WHOLESALE REVENUE RATIO - Based on the sum of the electric wholesale
revenue at the end of each month for the immediately preceding twelve
consecutive calendar months, the numerator of which is for an Operating
Company or an affected affiliate company and the denominator of which is
for all Operating Companies and affected affiliate companies. This ratio
will be determined annually, or at such time as may be required due to
significant changes.
INDUSTRIAL REVENUE RATIO - Based on the sum of the electric industrial
revenue at the end of each month for the immediately preceding twelve
consecutive calendar months, the numerator of which is for an Operating
Company or an affected affiliate company and the denominator of which is
for all Operating Companies and affected affiliate companies. This ratio
will be determined annually, or at such time as may be required due to
significant changes.
PAYROLL RATIO - Based on the sum of the payroll at the end of each month
for the immediately preceding twelve consecutive calendar months, the
numerator of which is for an Operating Company or an affected affiliate
company and the denominator of which is for all Operating Companies and
affected affiliate companies. This ratio will be determined annually, or
at such time as may be required due to significant changes.
ELECTRIC kWh GENERATION - Based on the sum of electric kWh generated
during each month for the immediately preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company and
the denominator of which is for all Operating Companies. This ratio will
be determined annually, or at such time as may be required due to
significant changes.
17
<PAGE>
ELECTRIC kWh PURCHASED POWER RATIO - Based on the sum of electric kWh
purchased power during each month for the immediately preceding twelve
consecutive calendar months, the numerator of which is for an Operating
Company and the denominator of which is for all Operating Companies. This
ratio will be determined annually, or at such time as may be required due
to significant changes.
TOTAL ASSETS RATIO - Based on the total assets at year end for the
preceding year, the numerator of which is for an Operating Company or
affected affiliate company and the denominator of which is for all
Operating Companies and affected affiliate companies. This ratio will be
determined annually, or at such time as may be required due to significant
changes.
COST OF GAS SOLD - Based on the sum of the cost of gas sold at the end of
each month for the immediately preceding twelve consecutive calendar
months, the numerator of which is for an Operating Company or an affected
affiliate company and the denominator of which is for all Operating
Companies and affected affiliate companies. This ratio will be determined
annually, or at such time as may be required due to significant changes.
GAS THROUGHPUT RATIO - Based on the sum of the gas throughput MCF's at the
end of each month for the immediately preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company or an
affected affiliate company and the denominator of which is for all
Operating Companies and affected affiliate companies. This ratio will be
determined annually, or at such time as may be required due to significant
changes.
GAS TRANSPORT MCF - Based on the sum of transported gas MCF's at the end
of each month for the immediately preceding twelve consecutive calendar
months, the numerator of which is for an Operating Company or an affected
affiliate company and the denominator of which is for all Operating
Companies and affected affiliate companies. This ratio will be determined
annually, or at such time as may be required due to significant changes.
PAYMENT TRANSACTION RATIO - Based on the sum of the number of payment
transactions processed during each month for the immediately preceding
twelve consecutive calendar months, the numerator of which is for an
Operating Company or an affected affiliate company and the denominator of
which is for all Operating Companies and affected affiliate companies.
This ratio will be determined annually, or at such time as may be required
due to significant changes.
18
<PAGE>
ACCOUNTING TRANSACTIONS RATIO - Based on the sum of the number of
accounting transactions processed during each month for the immediately
preceding twelve consecutive calendar months , the numerator of which is
for an Operating Company or an affected affiliate company and the
denominator of which is for all Operating Companies and affected affiliate
companies.
19
<PAGE>
FORM OF NON-UTILITY SERVICE AGREEMENT
SERVICE AGREEMENT
This Service Agreement is made and entered into this____ day of
____________, by and between ________ ("Client Company") and New Century
Services, Inc. ("Service Company").
WITNESSETH
WHEREAS, the Securities and Exchange Commission ("SEC") has approved and
authorized as meeting the requirements of Section 13(b) of the Public Utility
Holding Company Act of 1935 ("Act") the organization and conduct of the
business of Service Company, in accordance herewith, as a wholly-owned
subsidiary service company of New Century Energies, Inc. ("NCE"); and
WHEREAS, Client Company is an associate company in the NCE system and an
affiliate of Service Company that provides goods, construction, and services
to non-affiliated entities on a non-regulated basis; and
WHEREAS, Service Company and Client Company have entered into this
Service Agreement whereby Service Company agrees to provide and Client
Company agrees to accept and pay for various services as provided herein at
no less than cost, with cost determined in accordance with applicable rules
and regulations under the Act, which require Service Company to fairly and
equitably allocate costs among all associate companies to which it renders
services, including Client Company.
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties to this Service Agreement covenant
and agree as follows:
ARTICLE I - SERVICES
Section 1.1 Service Company shall furnish to client Company, as
requested by Client Company, upon the terms and conditions hereinafter set
forth, such of the services described in Appendix A hereto, at such times,
for such periods and in such manner as Client Company may from time to time
request and that Service Company concludes it is able to perform. Service
Company shall also provide Client Company with such special services, in
addition to those services described in Appendix A hereto, as may be
requested by Client Company and that Service Company concludes it is able to
perform. In supplying such services, Service Company may arrange, where it
deems appropriate, for the services of such experts, consultants, advisers,
and other persons with necessary qualifications as are required for or
pertinent to the provision of such services.
Section 1.2 Client Company shall take from Service Company such of the
<PAGE>
services described in Section 1.1, and such additional general or special
services, whether or not now contemplated, as are requested from time to time
by Client Company and that Service Company concludes it is able to perform.
Section 1.3 The services described herein or contemplated to be
performed hereunder shall be directly assigned, distributed or allocated by
activity, project, program, work order or other appropriate basis. Client
Company shall have the right from time to time to amend, alter or rescind any
activity, project, program or work order provided that (i) any such amendment
or alteration that results in a material change in the scope of the services
to be performed or equipment to be provided is agreed to by Service Company,
(ii) the cost for the services covered by the activity, project, program or
work order shall include any expense incurred by Service Company as a direct
result of such amendment, alteration or rescission of the activity, project,
program or work order, and (iii) no amendment, alteration or rescission of an
activity, project, program or work order shall release Client Company from
liability for all costs already incurred by or contracted for by Service
Company pursuant to the activity, project, program or work order, regardless
of whether the services associated with such costs have been completed
Section 1.4 Service Company shall use its best efforts to maintain a
staff trained and experienced in providing the services described herein or
contemplated to be performed hereunder.
ARTICLE II - COMPENSATION
Section 2.1 As compensation for the services to be rendered
hereunder, Client Company shall pay to Service Company charges for services
that are to be no less than cost (except as may otherwise be permitted by the
SEC), insofar as costs can reasonably be identified and related by Service
Company to its performance of particular services for or on behalf of Client
Company. The methods for assigning or allocating Service Company costs to
Client Company, as well as to other associate companies, are set forth in
Appendix A.
Section 2.2 The methods of assignment, distribution or allocation of
costs described in Appendix A shall be subject to review annually, or more
frequently if appropriate. Such methods of assignment, distribution or
allocation of costs may be modified or changed by Service Company; provided,
however, that no changes will be made to the methods of assignment,
distribution, or allocation set forth herein or in Attachment A hereto unless
first authorized by the SEC in accordance with the procedures specified in
Section 2.3. Service Company shall advise Client Company from time to time
of such changes.
Section 2.3 No change in the organization of NC Services, the type
and character of the companies to be serviced, the methods of allocating
costs to associate companies, or in the scope or character of the services to
be rendered subject to Section 13 of the Act, or any rule, regulation, or
order thereunder, shall be made unless and until
<PAGE>
NC Services shall first have given the SEC written notice of the proposed
change not less than 60 days prior to the proposed effectiveness of any such
change. If, upon the receipt of any such notice, the SEC shall notify NC
Services within the 60-day period that a question exists as to whether the
proposed change is consistent with the provisions of Section 13 of the Act,
or of any rule, regulation, or order thereunder, then the proposed change
shall not become effective unless and until NC Services shall have filed with
the SEC an appropriate declaration regarding such proposed change and the SEC
shall have permitted such declaration to become effective.
Section 2.4 Service Company shall render a monthly statement to
Client Company that shall reflect the billing information necessary to
identify the costs charged for that month. By the twentieth (20th) day of
each month, Client Company shall remit to Service Company all charges billed
to it.
Section 2.5 It is the intent of this Service Agreement that the
payment for services rendered by Service Company to Client Company under this
Service Agreement shall cover all the costs of its doing business (less the
costs of services provided to affiliated companies not a party to this
Service Agreement and to other non-affiliated companies, and credits for any
miscellaneous items), including, but not limited to, salaries and wages,
office supplies and expenses, outside services employed, property insurance,
injuries and damages, employee pensions and benefits, miscellaneous general
expenses, rents, maintenance of structures and equipment, depreciation and
amortization, profit and compensation for use of capital as permitted by Rule
91 of the SEC's regulations under the Act.
ARTICLE III - TERM
Section 3.1 This Service Agreement shall become effective subject to
the receipt of required regulatory approval, and shall continue in force
until terminated by Service Company or Client Company, upon not less than one
year's prior written notice to the other party. This Service Agreement shall
also be subject to termination or modification at any time, without notice,
if and to the extent performance under this Service Agreement may conflict
with the Act or with any rule, regulation or order of the SEC adopted before
or after the date of this Service Agreement.
ARTICLE IV - LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 4.1 In performing the services hereunder, Service Company
will exercise due care to assure that the services are performed in an
appropriate manner, meet the standards and specifications set forth in any
applicable request for service and comply with the applicable standards of
law and regulation. However, failure to meet these obligations shall in no
event subject Service Company to any claims by or liabilities to Client
Company other than to reperform the services and be reimbursed at cost for
such reperformance. Service Company makes no other warranty with respect to
its performance of the services, and Client Company agrees to accept such
services without
<PAGE>
further warranty of any nature.
Section 4.2 To the fullest extent allowed by law, Client Company
shall and does hereby indemnify and agree to save harmless and defend Service
Company, its agents and employees from liabilities, taxes, losses,
obligations, claims, damages, penalties, causes of action, suits, costs and
expenses or judgments of any nature, on account of, or resulting from the
performance and prosecution of any services performed on behalf of Client
Company pursuant to this Agreement, whether or not the same results or
allegedly results from the claimed or actual negligence or breach of warranty
of , or willful conduct by, Service Company or any of its employees, agents,
clients, or contractors or its or their subcontractors or any combination
thereof.
ARTICLE V - MISCELLANEOUS
Section 5.1 All accounts and records of Service Company shall be kept
in accordance with the General Rules and Regulations promulgated by the Sec
pursuant to the Act, in particular, the uniform System of Accounts for Mutual
Service Companies and Subsidiary Service Companies in effect from and after
the date hereof.
Section 5.2 New direct or indirect non-utility subsidiaries of NCE,
which may come into existence after the effective date of this Service
Agreement, may become additional client companies of Service Company and
subject to a service agreement with Service Company. The parties hereto
shall make such changes in the scope and character of the services to be
rendered and the method of assigning, distributing or allocating costs of
such services as specified in Appendix A, subject to the requirements of
Section 2.3, as may become necessary to achieve a fair and equitable
assignment, distribution, or allocation of Service Company costs among all
associate companies including the new subsidiaries.
Section 5.3 Service Company shall permit Client Company access to its
accounts and records, including the basis and computation of allocations.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Service Agreement
to be executed as of the date and year first above written.
NEW CENTURY SERVICES, INC.
BY:
-------------------------------
Name:
Title:
[COMPANY]
BY:
-------------------------------
Name:
Title:
<PAGE>
APPENDIX A
DESCRIPTION OF SERVICES TO BE PROVIDED BY NEW CENTURY SERVICES, INC.
AND DETERMINATION OF CHARGES FOR SUCH SERVICES TO
THE OPERATING COMPANIES AND AFFILIATES
DESCRIPTION OF SERVICES PROVIDED
A description of the services provided by NCS is detailed below. Identifiable
costs will be directly assigned or distributed to the Operating Companies or
affiliates. For costs which are for services of a general nature that cannot
be directly assigned or distributed, the method of allocation is described
below for each service provided.
A) ELECTRIC COMMODITY SERVICES - BUSINESS DEVELOPMENT.
Description - Provides administrative support services and business
development opportunities to the Operating Companies electric generation
stations.
Methods of Allocation - The Support of Plant Operations will be
allocated to the Operating Companies based on the Electric kWh
Generation Ratio.
B) ENERGY SUPPLY MANAGEMENT AND BULK POWER TRANSPORT.
Description - Supervises and coordinates the electric transmission
system control operations and dispatching for the Operating Companies.
Methods of Allocation - The Energy Supply Management and Bulk Power
Transport services will be allocated to the Operating Companies based on
the kWh Sales Ratio.
C) PURCHASED POWER AND ELECTRIC TRADING.
Description - Purchases power and provides electric trading services to
the Operating Companies electric generation systems.
Method of Allocation - The Purchased Power and Electric Trading services
will be allocated to the Operating Companies based on the Electric kWh
Purchased Power Ratio.
D) TRANSMISSION, SUBSTATION CONSTRUCTION, MAINTENANCE & OPERATIONS.
<PAGE>
Description - Provides management services to the Operating Companies
transmission and substation construction, maintenance and operations
areas.
Method of Allocation - Transmission, Substation Construction,
Maintenance and Operations management services will be allocated to the
Operating Companies based on the Transmission and Substation
Construction Expenditures Ratios.
E) TRANSPORTATION.
Description - Oversees the Operating Companies' Fleet Services Group.
Method of Allocation - Transportation will be allocated to the Operating
Companies as well as other affected affiliates of NCS based on the
Employees Ratio.
F) SUPPLY CHAIN.
Description - Provides services in connection with the procurement of
materials including the management of materials and supplies
inventories.
Method of Allocation - Materials management will be allocated to the
Operating Companies based on an average of the Revenue Ratio and the
Total Construction Expenditures Ratio.
G) FACILITIES AND REAL ESTATE.
Description - Operates and maintains office buildings and service
centers. Procures real estate and administers real estate leases.
Administers contracts to provide security, housekeeping and
maintenance services for such facilities. Procures office furniture
and equipment.
Method of Allocation - Facilities and Real Estate services will be
allocated to the Operating Companies as well as affected affiliates
based on the Square Footage Ratio.
H) ACCOUNTING.
Description - Maintains the books and records of New Century Energies,
Inc. and its affected affiliates, prepares financial and statistical
reports, prepares tax filings and supervises compliance with the
applicable laws and regulations. Supports the accounting systems.
<PAGE>
Method of Allocation - Accounting services will be allocated to the
Operating Companies and affected affiliates based on an average of the
Revenue Ratio, the Total Construction Expenditures Ratio and the Total
Common Equity Ratio, with 20 Percent of Common Equity assigned to New
Century Energies, Inc. Accounting system support services will be
allocated based on the Accounting Transactions Ratio.
I) PAYMENT AND REPORTING.
Description - Processes payments to vendors of New Century Energies,
Inc. and its affected affiliates, and prepares statistical reports.
Method of Allocation - Payment and reporting activities will be
allocated to the Operating Companies and affected affiliates based on
the Payment Transaction Ratio.
J) FINANCE AND TREASURY.
Description - Coordinates activities related to securities issuance,
including maintaining relationships with financial institutions, cash
management, investing activities and monitoring the capital markets.
Performs financial and economic analysis.
Method of Allocation - Finance and Treasury activities will be allocated
to the Operating Companies and affected affiliates based on an average
of the Revenue Ratio, the Total Construction Expenditures Ratio and the
Total Common Equity Ratio, with 20 Percent of Common Equity assigned to
New Century Energies, Inc.
K) RATES AND REGULATION.
Description - Determines the Operating Companies' revenue requirements
and rates for electric and gas customers. Coordinates the regulatory
compliance requirements and maintains relationships with the regulatory
bodies.
Method of Allocation - Rates and Regulation services will be allocated
to the Operating Companies based on the Revenue Ratio.
<PAGE>
L) LEGAL.
Description - Provides legal services related to labor and employment
law, litigation, contracts, rates and regulation, environmental matters,
real estate and other legal matters.
Method of Allocation - Legal services will be allocated to the Operating
Companies and affected affiliates based on an average of the Payroll
Ratio, the Revenue Ratio and the Total Common Equity Ratio, with 20
Percent of Common Equity assigned to New Century Energies, Inc.
M) INTERNAL AUDIT.
Description - Reviews internal controls and procedures to ensure assets
are safeguarded and transactions are properly authorized and recorded.
Evaluates contract risks.
Methods of Allocation - Internal Auditing services will be allocated to
the Operating Companies and affected affiliates based on the average of
the Revenue Ratio, the Total Construction Expenditures Ratio and the
Total Common Equity Ratio, with 20 Percent of Common Equity assigned
to New Century Energies, Inc.
N) CORPORATE COMMUNICATIONS.
Description - Prepares and disseminates information to employees,
customers, government agencies, communities and the media.
Methods of Allocation - Corporate Communications services will be
allocated to the Operating Companies and affected affiliates based on
the Revenue Ratio, the Employee Ratio and the Total Common Equity Ratio,
with 20 Percent of Common Equity assigned to New Century Energies, Inc.
O) ENVIRONMENTAL.
Description - Establishes policies and procedures for compliance with
environmental laws and regulations. Researches emerging environmental
issues and monitors compliance with environmental requirements.
Oversees environmental clean up projects.
<PAGE>
Method of Allocation - Environmental services will be allocated to the
Operating Companies and affected affiliates based on the Revenue Ratio.
P) RESOURCE ACQUISITION AND ANALYSIS.
Description - Procures coal, natural gas and oil for the Operating
Companies generation facilities. Ensures compliance with price and
quality provisions of fuel contracts and arranges for transportation of
fuel to the desired location. Purchases power and performs electric
and gas trading services.
Method of Allocation - Resource Acquisition and Analysis services will
be allocated to the Operating Companies based on the Electric kWh
Generation Ratio or the Purchased Power Ratio, whichever is appropriate.
Q) CORPORATE PLANNING.
Description - Facilitates preparation of strategic plans, monitors
trends and evaluates business opportunities. Facilitates process
improvements. Prepares budgets and financial forecasts.
Method of Allocation - Strategic Planning services will be allocated to
the Operating Companies and affected affiliates based on the average of
the Revenue Ratio, the Total Assets Ratio and Total Common Equity Ratio,
with 20 Percent of Common Equity assigned to New Century Energies, Inc.
R) INVESTOR RELATIONS.
Description - Provides communications to investors and the financial
community. Coordinates the transfer agent and shareholder record
keeping functions.
Method of Allocation - Investor Relations services will be allocated to
the Operating Companies and affected affiliates based on the average of
the Revenue Ratio, the Total Assets Ratio and the Total Common Equity
Ratio, with 20 Percent of Common Equity assigned to New Century
Energies, Inc.
<PAGE>
S) HUMAN RESOURCES.
Description - Establishes and administers policies and supervises
compliance with legal requirements in the areas of employment,
compensation, benefits and employee health, welfare and safety.
Processes payroll and employee benefit payments. Coordinates contract
negotiation and relations with labor unions.
Method of Allocation - Human Resources services will be allocated to the
Operating Companies and affected affiliates based on the Payroll Ratio.
T) CUSTOMER SERVICES.
Description - Performs customer billing, handles customer inquiries and
complaints and provides related customer information services.
Method of Allocation - Customer Services will be allocated based on the
Customers Ratio.
U) INFORMATION SYSTEMS.
Description - Administers the contract for various communications and
electronic data processing services. Such services provided under the
contract include, but are not limited to, development and support of
mainframe computer software applications, procurement and support of
personal computers, operation of a data center and installation and
operation of a communications system.
Method of Allocation - Information Systems will be allocated based on
the Information Systems direct charges.
V) MARKETING SERVICES.
Description - Provides marketing services including market load research
and new product development for Operating Companies and affiliates.
Method of Allocation - Marketing services will be allocated based on the
total Residential, Business, and Large Commercial and Industrial kWh
sales ratio.
W) WHOLESALE AND BULK POWER SALES.
Description - Provides sales and to support to electric wholesale
customers of the Operating Companies.
<PAGE>
Method of Allocation - Wholesale Sales will be allocated based on the
Electric Wholesale Sales Ratio.
X) RESIDENTIAL AND BUSINESS SALES.
Description - Provides sales and support to electric residential and
business customers of the Operating Companies.
Method of Allocation - Residential and Business Sales will be allocated
based on the Residential and Commercial Sales Ratio.
Y) CUSTOM ACCOUNT SALES.
Description - Provides sales services to large commercial and industrial
customers of the Operating Companies.
Method of Allocation - Custom Account Sales will be allocated based on
the Large Commercial and Industrial Sales Ratio.
Z) STRATEGIC AND KEY ACCOUNT SALES.
Description - Provides sales and support services to niche markets of
the Operating Companies.
Method of Allocation - Strategic Account Sales will be allocated based
on the total of the Large Commercial and Industrial and the Public
Authority Sales Ratios. Key Account Sales will be allocated based on
the Large Commercial and Industrial Sales Ratio.
AA) COMMUNITY AND ECONOMIC DEVELOPMENT.
Description - Provides community support and economic development
services to the service territories of the Operating Companies.
Method of Allocation - Community and Economic Development services will
be allocated based on the Total kWh Sales Ratio.
BB) GAS MARKETING, CONTROL, PLANNING AND SUPPLY.
Description - Provides marketing services to gas transport customers.
Coordinates the planning and support for Gas operations of Public
Service Company of Colorado, Cheyenne Light, Fuel and Power and WestGas
Interstate Company including coordinating the operation of the
<PAGE>
gas system and well as the purchase of gas for the Operating Companies
distribution business from third parties.
Method of Allocation - Gas Marketing, Control, Planning and Supply
services will be allocated based on the Gas Throughput Ratio.
CC) DESIGN ENGINEERING.
Description - Designs and monitors construction of electric transmission
and distribution lines and substations.
Method of Allocation - Design Engineering services will be allocated
based on the Transmission Construction Expenditures Ratio, the
Distribution Construction Ratio, or a ratio based on the sum of the
Transmission and Distribution Construction Expenditures whichever
is appropriate.
DD) SUBSTATION ENGINEERING AND SUPPORT.
Description - Provides management support services to the Substation
Engineering and Support organizations of the Operating Companies.
Method of Allocation - Substation Engineering and Support services will
be allocated based on the Substation Construction Expenditures Ratio.
EE) TRANSMISSION ENGINEERING AND RIGHT OF WAY SERVICES.
Description - Provides management support services to the Transmission
Engineering and Right of Way organizations of the Operating Companies.
Method of Allocation - Transmission Engineering and Right of Way
services will be allocated based on the Transmission Construction
Expenditures Ratio.
FF) DISTRIBUTION SUPPORT SERVICES.
Description - Provides planning, benchmarking, activity tracking and
budget support services to the Construction and Operations and
Maintenance Organization.
Method of Allocation - Distribution Support Services will be allocated
based on the Total Customers Ratio.
<PAGE>
GG) AVIATION SERVICES.
Description - Provides aviation and travel services to employees.
Method of Allocation - Aviation Services will be allocated to the
appropriate Operating Companies and affiliates based on the Aviation
Department's actual direct charges. (This method will allocate costs
only to those companies who actually use aviation services).
HH) GOVERNMENTAL AFFAIRS.
Description - Lobbies government officials and monitors, reviews and
researches governmental legislation.
Method of Allocation - Governmental Affairs will be allocated based on
the average of the Revenue Ratio, the Employee Ratio, and the Total
Common Equity Ratio, with 20 Percent of Common Equity assigned to New
Century Energies, Inc.
II) PRODUCTION SERVICES.
Description - Provides performance, chemical and water testing and
analysis, technical, and analytical services to the Operating Companies
generation facilities.
Method of Allocation - Production Services will be allocated based on
the kWh Generation Ratio.
JJ) EXECUTIVES.
Description - Provides executive management and general administrative
services.
Method of Allocation - Executive Management Services will be allocated
based on the average of the Revenue Ratio, the Total Assets Ratio and
the Total Common Equity Ratio, with 20 percent of Common Equity assigned
to New Century Energies, Inc.
<PAGE>
ALLOCATION RATIOS
The following ratios will be utilized as outlined above.
SALES RATIO - Based on firm kilowatt-hour electric sales (and/or the
equivalent cubic feet of natural gas sales based on a Btu content, where
applicable), excluding inter-system sales, for the immediate preceding
twelve consecutive calendar months, the numerator of which is for an
Operating Company or and affiliate and the denominator of which is for all
Operating Companies and affected affiliate companies. This ratio will be
determined annually, or at such time as may be required due to a
significant change.
RESIDENTIAL SALES RATIO - Based on firm kilowatt-hour electric sales to
residential customers for the immediate preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company or an
affiliate and the denominator of which is for all Operating Companies and
affected affiliate companies. This ratio will be determined annually, or
at such time as may be required due to a significant change.
BUSINESS SALES RATIO - Based on firm kilowatt-hour electric sales to
business customers that purchase less than 250 kilowatts for the immediate
preceding twelve consecutive calendar months, the numerator of which is
for an Operating Company or an affiliate and the denominator of which is
for all Operating Companies and affected affiliate companies. This ratio
will be determined annually, or at such time as may be required due to a
significant change.
LARGE COMMERCIAL & INDUSTRIAL SALES RATIO - Based on firm kilowatt-hour
electric sales to large commercial and industrial customers that purchase
greater than 250 kilowatts for the immediate preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company or an
affiliate and the denominator of which is for all Operating Companies and
affected affiliate companies. This ratio will be determined annually, or
at such time as may be required due to a significant change.
ELECTRIC PEAK LOAD RATIO - Based on the sum of the monthly electric
maximum system demands for the immediately preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company and
the denominator of which is for all Operating Companies. This ratio will
be determined annually, or at such time as may be required due to a
significant change.
<PAGE>
CUSTOMERS RATIO - Based on the sum of total electric customers (and/or gas
customers, or residential, business and large commercial and industrial
customers where applicable) at the end of each month for the immediately
proceeding twelve consecutive calendar months, the numerator of which is
for an Operating Company or an affected affiliate company and the
denominator of which is for all Operating Companies and affected affiliate
companies. This ratio will be determined annually, or at such time as may
be required due to a significant change.
EMPLOYEES RATIO - Based on the sum of the number of employees at the end
of each month for the immediately preceding twelve calendar months, the
numerator of which is for an Operating Company or an affected affiliate
company and the denominator of which is for all Operating Companies and
affected affiliate companies. This ratio will be determined annually, or
at such time as may be required due to a significant change.
CONSTRUCTION EXPENDITURES RATIO - Based on construction or capital
expenditures, net of reimbursements, for the immediately preceding twelve
consecutive calendar months, the numerator of which is for an Operating
Company or an affected affiliate company and the denominator of which is
for all Operating Companies and affected affiliate companies. This ratio
will be determined annually, or at such time as may be required due to a
significant change.
TRANSMISSION CONSTRUCTION EXPENDITURES RATIO - Based on transmission
construction or capital expenditures, net of reimbursements, for the
immediately preceding twelve consecutive calendar months, the numerator of
which is for an Operating Company or an affected affiliate company and
the denominator of which is for all Operating Companies and affected
affiliate companies. This ratio will be determined annually, or at such
time as may be required due to a significant change.
DISTRIBUTION CONSTRUCTION EXPENDITURES RATIO - Based on distribution
construction or capital expenditures, net of reimbursements, for the
immediately preceding twelve consecutive calendar months, the numerator of
which is for an Operating Company or an affected affiliate company and
the denominator of which is for all Operating Companies and affected
affiliate companies. This ratio will be determined annually, or at such
time as may be required due to a significant change.
SUBSTATION CONSTRUCTION EXPENDITURES RATIO - Based on substation
construction or capital expenditures, net of reimbursements, for the
immediately preceding twelve consecutive calendar months, the numerator of
which is for an Operating Company or an affected affiliate company and
the denominator of which is for all Operating Companies
<PAGE>
and affected affiliate companies. This ratio will be determined annually,
or at such time as may be required due to a significant change.
TOTAL COMMON EQUITY RATIO, WITH 20 PERCENT OF COMMON EQUITY ASSIGNED TO
NEW CENTURY ENERGIES, INC. - Based on the sum of the common equity at the
end of each month for the immediately preceding twelve calendar months,
the numerator of which is for an Operating Company or an affected
affiliate company and the denominator of which is for all Operating
Companies and affected affiliate companies. This ratio will be determined
annually, or at such time as may be required due to significant changes.
REVENUE RATIO - Based on the sum of the revenue at the end of each month
for the immediately preceding twelve consecutive calendar months, the
numerator of which is for an Operating Company or an affected affiliate
company and the denominator of which is for all Operating Companies and
affected affiliate companies. This ratio will be determined annually, or
at such time as may be required due to significant changes.
WHOLESALE REVENUE RATIO - Based on the sum of the electric wholesale
revenue at the end of each month for the immediately preceding twelve
consecutive calendar months, the numerator of which is for an Operating
Company or an affected affiliate company and the denominator of which is
for all Operating Companies and affected affiliate companies. This ratio
will be determined annually, or at such time as may be required due to
significant changes.
INDUSTRIAL REVENUE RATIO - Based on the sum of the electric industrial
revenue at the end of each month for the immediately preceding twelve
consecutive calendar months, the numerator of which is for an Operating
Company or an affected affiliate company and the denominator of which is
for all Operating Companies and affected affiliate companies. This ratio
will be determined annually, or at such time as may be required due to
significant changes.
PAYROLL RATIO - Based on the sum of the payroll at the end of each month
for the immediately preceding twelve consecutive calendar months, the
numerator of which is for an Operating Company or an affected affiliate
company and the denominator of which is for all Operating Companies and
affected affiliate companies. This ratio will be determined annually, or
at such time as may be required due to significant changes.
ELECTRIC kWh GENERATION - Based on the sum of electric kWh generated
during each month for the immediately preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company
<PAGE>
and the denominator of which is for all Operating Companies. This ratio
will be determined annually, or at such time as may be required due to
significant changes.
ELECTRIC kWh PURCHASED POWER RATIO - Based on the sum of electric kWh
purchased power during each month for the immediately preceding twelve
consecutive calendar months, the numerator of which is for an Operating
Company and the denominator of which is for all Operating Companies. This
ratio will be determined annually, or at such time as may be required due
to significant changes.
TOTAL ASSETS RATIO - Based on the total assets at year end for the
preceding year, the numerator of which is for an Operating Company or
affected affiliate company and the denominator of which is for all
Operating Companies and affected affiliate companies. This ratio will be
determined annually, or at such time as may be required due to significant
changes.
COST OF GAS SOLD - Based on the sum of the cost of gas sold at the end of
each month for the immediately preceding twelve consecutive calendar
months, the numerator of which is for an Operating Company or an affected
affiliate company and the denominator of which is for all Operating
Companies and affected affiliate companies. This ratio will be determined
annually, or at such time as may be required due to significant changes.
GAS THROUGHPUT RATIO - Based on the sum of the gas throughput MCF's at the
end of each month for the immediately preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company or an
affected affiliate company and the denominator of which is for all
Operating Companies and affected affiliate companies. This ratio will be
determined annually, or at such time as may be required due to significant
changes.
GAS TRANSPORT MCF - Based on the sum of transported gas MCF's at the end
of each month for the immediately preceding twelve consecutive calendar
months, the numerator of which is for an Operating Company or an affected
affiliate company and the denominator of which is for all Operating
Companies and affected affiliate companies. This ratio will be determined
annually, or at such time as may be required due to significant changes.
PAYMENT TRANSACTION RATIO - Based on the sum of the number of payment
transactions processed during each month for the immediately preceding
twelve consecutive calendar months, the numerator of which is for an
<PAGE>
Operating Company or an affected affiliate company and the denominator of
which is for all Operating Companies and affected affiliate companies.
This ratio will be determined annually, or at such time as may be required
due to significant changes.
ACCOUNTING TRANSACTIONS RATIO - Based on the sum of the number of
accounting transactions processed during each month for the immediately
preceding twelve consecutive calendar months, the numerator of which is
for an Operating Company or an affected affiliate company and the
denominator of which is for all Operating Companies and affected affiliate
companies.
<PAGE>
Exhibit B-6
NEW CENTURY SERVICES, INC.
POLICIES AND PROCEDURES
MARCH 1997
<PAGE>
NEW CENTURY SERVICES, INC.
POLICIES AND PROCEDURES
TABLE OF CONTENTS
INTRODUCTION........................................1
ACCOUNTING PROCEDURES...............................2
SERVICE REQUEST AND APPROVAL........................4
SERVICE REQUEST FORM................................5
SERVICE REQUEST GUIDELINES..........................8
MONITORING AND CONTROL..............................8
ALLOCATION FACTORS UPDATE...........................9
TIME REPORTING......................................9
BILLING AND REVIEW.................................10
DISPUTE RESOLUTION.................................11
INTERNAL AUDIT CONTROL.............................12
BUDGETING..........................................12
EVALUATION AND MEASUREMENT.........................13
<PAGE>
INTRODUCTION
New Century Services ("NCS") will provide Public Service Company of
Colorado ("PSCo"), Southwestern Public Service Company ("SPS"), Cheyenne
Light, Fuel and Power Company ("Cheyenne") (collectively referred to as the
"Operating Companies"), and other affiliates of the New Century Energies
system with a variety of administrative, management, engineering,
construction, and support services. NCS will be subject to the rules and
regulations of the Securities and Exchange Commission ("SEC") pursuant to the
Public Utility Holding Company Act of 1935, as amended ("PUCHA"), and, in
particular, Section 13 thereof.
NCS will provide such services in accordance with service agreements
which will be entered into with the Operating Companies and affiliates. The
service agreements will be administered in accordance with PUHCA and the
SEC's regulations thereunder. NCS will establish a work order system, which
utilizes work orders (referred to as "Service IDs"), for the purpose of
charging costs to the appropriate Operating Company and/or affiliates. The
use of Service IDs will allow NCS to supply accounting records and
information to the Operating Companies and affiliates in enough detail to
allow them to record and report their costs in accordance with the Federal
Energy Regulatory Commission ("FERC") Uniform System of Accounts.
The major objective of NCS is to consolidate support services in order
to provide those services to the Operating Companies and affiliates of New
Century Energies, Inc. ("NCE") more effectively and efficiently than each
company could provide for itself. To achieve this end, NCS will strive to
become cost competitive and focus on providing value added services to all
customers. As part of this effort, NCS will use Benchmarking to
1
<PAGE>
gauge the cost effectiveness and competitiveness of its operations and strive
to continuously improve processes. The service providers of NCS will be
given 18 months from the effective date of the merger to become cost
competitive. If, after that period, the NCS customer believes its needs and
requirements are not being satisfied, the customer will have a choice to
look elsewhere on a service-by-service basis. This includes looking at
external sources. However, it will be up to the Operating Company and/or
affiliate that desires to pursue alternate sources, to prepare a business
case establishing evidence that it will be more cost effective and efficient
to use an external source.
ACCOUNTING PROCEDURES
NCS will utilize Service IDs for the purpose of allocating costs to the
appropriate Operating Company and/or affiliates. A Service ID will be
established and recorded with each NCS transaction as it is the Service ID
which dictates how the costs are to be allocated between the Operating
Companies and affiliates. In summary, NCS will use the following six types
of Service IDs:
DIRECT SERVICE ID - A Direct Service ID will be used when the service
being provided is performed for a specific Operating Company or affiliate.
The Operating Company or affiliate specified will be charged 100% of the
costs. For example, if NCS Tax Services is providing tax services such as
tax return preparation or tax advisory services directly to SPS, 100% of
the costs to provide those services will be billed to SPS using the 100%
direct charge Service ID for Tax Services.
DISTRIBUTED SERVICE ID - A Distributed Service ID will be used for
specific services that will be distributed to two or more Operating
Companies or affiliates. An
2
<PAGE>
example of when to use a Distributed Service ID is if Tax Services
prepares the consolidated federal income tax return for all NCS
companies. The NCS costs to prepare the tax return will be
distributed to all of the companies using a Distributed Service ID which
will specify the appropriate allocation factor. Please refer to
Attachment 1 which defines the allocation factors that may be used.
INDIRECT SERVICE ID - An Indirect Service ID will be used to charge costs
which are of a general nature and cannot be specifically identified to an
Operating Company or affiliate. The allocation to the Operating Companies
and affiliates will be based on the allocation factors described in the
NCS Service Agreements. For example, an Indirect Service ID will be used
for those costs of Tax Services that cannot be specifically identified to
a particular task or company, such as attending departmental meetings or
classes and performing administrative type tasks. The Indirect Service ID
for Tax Services will be used to allocate these general costs to all the
Operating Companies and affiliates that benefit from services provided by
the Tax Services Department.
LABOR OVERHEAD SERVICE ID - The Labor Overhead Service ID will be used to
charge overhead costs associated with labor, such as pension and benefits,
workers compensation, and payroll taxes. The Labor Overhead costs will be
charged to the Operating Companies and affiliates based on the NCS labor
costs that were charged.
A&G OVERHEAD SERVICE ID - The A&G Overhead Service ID will include, but
not be limited to, property insurance, rent, depreciation, property
taxes, etc. These
3
<PAGE>
overhead costs will also be charged to the Operating Companies and
affiliates based on the NCS labor costs that were charged.
CONSTRUCTION OVERHEAD SERVICE ID - The Construction Overhead Service ID
will be used to accumulate overhead costs to be charged to capital
projects on the books of the Operating Companies and/or affiliates, such
as engineering and supervision overheads, and continuing property record
overheads.
The Service ID, along with certain segments of NCS's account number, will
provide the detailed information necessary to bill the Operating Companies and
affiliates. Certain segments of the account number used to record the
transaction will provide information such as the NCS unit performing the work,
the Operating Company and/or affiliate being charged and the type of activity
being performed.
NCS POLICIES AND PROCEDURES
SERVICE REQUEST AND APPROVAL PROCEDURES
Each functional department of NCS will be assigned a minimum of one
Direct and one Indirect Service ID by NCS Accounting. The Direct Service ID
will be used when performing specific routine services for one Operating
Company or affiliate. The SEC requires that, whenever feasible, NCS costs
should be directly charged to the Operating Companies or affiliates. These
services will be reviewed and agreed upon with the Operating Companies and
affiliates at the beginning of each calendar year. Examples of routine
services include the monthly closing of the financial accounting and budgeting
systems, preparing financial reports, and preparing a financial forecast. An
Indirect Service ID will be used to allocate those costs that cannot be
directly assigned. Again,
4
<PAGE>
these types of costs, which will be incurred by NCS, will be reviewed and
approved by the affected Operating Companies and affiliates at the beginning
of each year.
Distributed Service Ids will be assigned on a case-by-case basis depending
upon the special service or project provided by NCS.
All activities performed by NCS for the Operating Companies and affiliates
must have a completed Service Request form. For routine services provided and
indirect costs charged, a Service Request form will be completed at the
beginning of each year. For the performance of non-routine, or special
services, a Service Request form will be initiated by the Operating Companies
and affiliates or by NCS. Examples of non-routine, or special services include
requests to prepare rate case testimony, special securities financings and
special studies or analyses. The method of cost allocation will be determined
on a case-by-case basis consistent with the nature of the work performed.
Approvals are required by the organization that is requesting the work, the NCS
service provider and the Service ID Administrator in the Accounting
Organization.
SERVICE REQUEST FORM
The following describes the information required to complete the Service
Request Form. Please refer to Attachment 2 for a draft of the Service Request
Form.
Service ID Name To be assigned by NCS Accounting.
Service ID Number To be assigned by NCS Accounting.
Allocation Basis To be assigned by the Customer, Service
Provider and NCS Accounting.
Allocation Factor (%) To be calculated by NCS Accounting.
Start Date Date work is to be started. To be based on
5
<PAGE>
agreement between the customer and the service
provider.
Change Date Date scope of work is to be modified. To be
agreed upon by customer and service provider.
Scheduled Completion Date work is scheduled to be completed based
on agreement between the customer and the service
provider.
Corporate Input Number (PSCo) PSCo Corporate Input Number if using the
Walker system.
Account Number (SPS) SPS Account Number if using the SPS
accounting system.
Customer Manager requesting the service and who will
be charged for the service.
Contact Person Name of individual to contact for additional
information.
Phone Number Phone number of contact person.
Date Date service request initiated.
Description of Service to Description of the type of service to be
be performed performed and any other additional information
necessary to explain the request.
Estimated Costs The service provider will estimate the cost
prior to approval of the request .
APPROVALS:
Customer The manager that is paying for the service
is required to approve the work.
Service Provider The service provider must also approve the
request.
NCS Accounting The NCS Service ID Administrator must
authorize the request.
CORPORATE INPUT NUMBER (PSCo)
Responsibility Center (RC) The customer's RC if it is a direct charge.
The service provider's RC if it is a distributed
charge.
6
<PAGE>
Account Number The customer's account number that should
be charged for the expense/capital.
Type of Resource (TOR) NCS type of resource (i.e. labor, supplies).
Performing Center (PF) The service provider's responsibility center.
Subsystem Code/Job The service ID number (assigned by NCS
Accounting) for distributed charges. Job number
or left blank for direct charges.
Activity Code Activity code of service provider (if
applicable).
Function/Program Defined by customer (if applicable).
ACCOUNT NUMBER (SPS)
Company Code The Company that is being charged for the
service.
FERC The account number on the customer's books
to be charged.
Point Account number suffix.
Cost Class Type of resource for the service provided.
RCN The customer's responsibility center if it
is a direct charge or the NCS service provider's
responsibility center if it is a distributed
charge.
Project Service ID number.
Work Order The performing center (NCS service provider's
responsibility center).
Unit/MR Activity code of NCS service provider (if
applicable).
7
<PAGE>
SERVICE REQUEST GUIDELINES
A request for a new Service ID may be appropriate when a new
service or project is identified. However, the cost of the new service or
project may be able to be captured in an existing Service ID. The following
guidelines should be used in determining when a new Service ID is appropriate.
1. No existing Service ID uses the billing method that is most
appropriate for the new service or project.
2. No existing Service ID distributes costs to the desired Operating
Companies and affiliates for this new service or project
3. One or two above, PLUS the total estimated annual cost of the new
service or project is greater than $25,000.
4. There is a specific regulatory requirement to allocate costs in a
specific manner regardless of amount for the new service or project
MONITORING AND CONTROL
The NCS Service ID Administrator in NCS Accounting is responsible for
reviewing, monitoring and maintaining the Service ID system. The
Administrator also authorizes new Service IDs and ensures that the allocation
factors are proper, accurate and kept up to date including ensuring that the
revision process is in accordance with the SEC regulations. Additionally, the
Service ID Administrator will be responsible for coordinating the monthly
billing process as described in the Billing Policies and Procedures.
8
<PAGE>
SERVICE ID ALLOCATION FACTORS UPDATE AND REVISIONS
The NCS Service ID Administrator in NCS Accounting will have the primary
responsibility for ensuring that the Service ID allocation factors are
proper, accurate and kept up to date. All allocation factors utilized must
be approved by the SEC.
To the greatest extent possible, the allocation factors will be based on
cost drivers specifically applicable to the service being provided. NCS
Accounting will decide on the appropriate allocation factors for the
indirect Service ID's. NCS Accounting, the customer and the service provider
together will decide on the proper allocation factor(s) for the distributed
SID's.
The NCS Service ID Administrator will be responsible for evaluating new
allocation methodologies and determining if SEC approval is required. The
NCS Administrator will coordinate SEC approval efforts, if necessary, with
the Legal Department.
TIME REPORTING
Every employee of New Century Services, Inc. (NCS) must keep track of
their time in order to bill the Operating Companies and affiliates
accurately. The following guidelines are provided to ensure accurate and
efficient time keeping.
- A customized time tracking form for your area can be obtained from
the NCS Accounting Service ID Administrator.
- Employees should keep track of their time in one hour increments. *
- It is recommended that time be entered by the time keeper daily
and at the very minimum on a weekly basis. In either case, time
must be entered by the payroll cut off dates.
9
<PAGE>
- The employee's manager will approve the time report weekly. Each
weekly time sheet will be signed by the manager.
*Please note that if you are repeatedly spending less than an hour on a
particular activity for the week, and total time spent for the week will be
one hour or more, then record time spent on that activity for the week rather
than by the day. For example, if you work 20 minutes per day for one week on
a special project for PSCo, then you would record 2 hours for that activity
for that week.
BILLING AND REVIEW
Each Operating Company and affiliate will receive a monthly bill
detailing the work performed by NCS. Each bill or invoice will contain the
following information:
- Company
- Type of service provided by function and activity (i.e., accounting,
close the books)
- Direct Charges
- Indirect Charges
- Account number charged
- Service ID number
- Amount
Detailed information such as time sheets, unit being charged and the
unit performing the work will be available upon request.
The Service ID Administrator in NCS Accounting is responsible for
establishing and administering the NCS Service IDs and billing policies and
procedures. Please refer
10
<PAGE>
to the "Service ID Allocation Factors Update and Revision Procedures" for
additional detail.
After the Service IDs are processed and transactions are posted to NCS,
initial billings are generated. The Service ID Administrator reviews the
initial billings for errors at this time. The Service ID Administrator will
also verify that the Service ID 's have the correct allocators. Any material
discrepancies identified will be corrected prior to the generation of the
final financial statements. After the final financial statements are
generated, the Service ID Administrator will reconcile the billings to the
NCS general ledger. If an error is found after the final statements are
generated, the correction will be made the following month.
Upon receipt of the billing, budget analysts for the Operating Companies
and affiliates, with assistance from the NCS Service ID Administrator, will
review and reconcile the billing. Any discrepancies found at this time are
discussed with the Service ID Administrator and corrections are made to the
subsequent month's bill.
DISPUTE RESOLUTION PROCEDURE
In the event there is a dispute between the Operating Company and/or
affiliate and a NCS service provider regarding a billing methodology and/or
amount, representatives from the Operating Company and/or affiliate receiving
service and the NCS service provider along with the NCS Service ID
Administrator will meet to discuss the issues. Depending upon the magnitude
of the dispute, the Business Controls Coordinator may also assist in the
dispute resolution discussions. If a resolution cannot be reached among
these parties, the issue will be referred to each parties' executive
management for final resolution.
11
<PAGE>
INTERNAL AUDIT CONTROL
NCS' Internal Audit department will conduct periodic reviews of its
operating methods as well as computer systems to ensure that the services
provided are authorized, documented and accurately recorded in NCS' books
and records. The Internal Audit department will also conduct reviews of the
Service ID cost allocation methods to ensure that such methods comply with
those approved by the SEC.
The Internal Audit Manager establishes audits to be performed, and how
the audits are to be carried out, with the NCE Internal Audit Committee. For
normal subordinate-superior relationships, and to ensure that the Internal
Audit department's review is objective and its findings are adequately
addressed, the manager of the Internal Audit Department will report directly
to the Chairman and CEO of NCE.
BUDGETING
After the transition phase (approximately 6 months after the effective
date of the merger), budgeting for NCS will be a joint effort between NCS and
the Operating Companies and affiliates. All managers of NCS will be
responsible for preparing annual budgets in order to provide budget information
to the Operating Companies and affiliates. Services to be provided to the
Operating Companies and affiliates will be identified and agreed upon and cost
estimates will be prepared annually. These estimates will be approved by the
Operating Companies and affiliates as previously noted. Budget variance
reports will be generated each month and NCS will have the primary
responsibility for analyzing and explaining cost variances. NCS will be
accountable for costs for services
12
<PAGE>
that are considered governance activities. NCS and the affiliate companies
will jointly be accountable for the cost of discretionary services.
EVALUATION AND MEASUREMENT
In order to encourage NCS to operate efficiently and cost effectively,
and provide high quality service, NCS will initiate bench marking activities
and a customer review process. The process will support a customer-oriented
service philosophy by measuring success based upon customer satisfaction.
It will allow for customer input into the volume and value of the products
and services provided by NCS. Comprehensive reviews will be part of the
annual budget development process. The initial vehicle used for this process
will be the annual completion of the Service Request Agreements between the
service provider and the customer. This agreement will describe the product
or service provided, the level of service expected and the expected costs to
provide that service or product.
In addition to the review process with customers, NCS will perform bench
marking activities to continue to improve the effectiveness of services
offered to the Operating Companies and affiliates and to ensure that the
services offered are cost competitive.
13
<PAGE>
ATTACHMENT 1
DESCRIPTION OF SERVICES TO BE PROVIDED BY NEW CENTURY
SERVICES, INC. AND DETERMINATION OF CHARGES FOR SUCH
SERVICES TO THE OPERATING COMPANIES AND AFFILIATES
DESCRIPTION OF SERVICES PROVIDED
A description of the services provided by NCS is detailed below.
Identifiable costs will be directly assigned or distributed to the Operating
Companies or affiliates. For costs which are for services of a general
nature that cannot be directly assigned or distributed, the method of
allocation is described below for each service provided.
A) ELECTRIC COMMODITY SERVICES - BUSINESS DEVELOPMENT.
Description - Provides administrative support services and business
development opportunities to the Operating Companies electric generation
stations.
Methods of Allocation - The Support of Plant Operations will be allocated
to the Operating Companies based on the Electric kWh Generation Ratio.
B) ENERGY SUPPLY MANAGEMENT AND BULK POWER TRANSPORT
Description - Supervises and coordinates the electric transmission system
control operations and dispatching for the Operating Companies.
Methods of Allocation - The Energy Supply Management and Bulk Power
Transport services will be allocated to the Operating Companies based on
the kWh Sales Ratio.
C) PURCHASED POWER AND ELECTRIC TRADING
Description - Purchases power and provides electric trading services to
the Operating Companies electric generation systems.
Method of Allocation - The Purchased Power and Electric Trading services
will be allocated to the Operating Companies based on the Electric kWh
Purchased Power Ratio.
D) TRANSMISSION, SUBSTATION CONSTRUCTION, MAINTENANCE & OPERATIONS
14
<PAGE>
Description - Provides management services to the Operating Companies
transmission and substation construction, maintenance and operations
areas.
Method of Allocation - Transmission, Substation Construction, Maintenance
and Operations management services will be allocated to the Operating
Companies based on the Transmission and Substation Construction
Expenditures Ratios.
E) TRANSPORTATION.
Description - Oversees the Operating Companies' Fleet Services Group.
Method of Allocation - Transportation will be allocated to the Operating
Companies as well as other affected affiliates of NCS based on the
Employees Ratio.
F) SUPPLY CHAIN
Description - Provides services in connection with the procurement of
materials including the management of materials and supplies inventories.
Method of Allocation - Materials management will be allocated to the
Operating Companies based on an average of the Revenue Ratio and the
Total Construction Expenditures Ratio.
G) FACILITIES AND REAL ESTATE.
Description - Operates and maintains office buildings and service centers.
Procures real estate and administers real estate leases. Administers
contracts to provide security, housekeeping and maintenance services for
such facilities. Procures office furniture and equipment.
Method of Allocation - Facilities and Real Estate services will be
allocated to the Operating Companies as well as affected affiliates based
on the Square Footage Ratio.
H) ACCOUNTING
Description - Maintains the books and records of New Century Energies,
Inc. and its affected affiliates, prepares financial and statistical
reports, prepares tax filings and supervises compliance with the
applicable laws and regulations. Supports the accounting systems.
15
<PAGE>
Method of Allocation - Accounting services will be allocated to the
Operating Companies and affected affiliates based on an average of the
Revenue Ratio, the Total Construction Expenditures Ratio and the Total
Common Equity Ratio, with 20 Percent of Common Equity assigned to New
Century Energies, Inc. Accounting system support services will be
allocated based on the Accounting Transactions Ratio.
I) PAYMENT AND REPORTING
Description - Processes payments to vendors of New Century Energies, Inc.
and its affected affiliates, and prepares statistical reports.
Method of Allocation - Payment and reporting activities will be allocated
to the Operating Companies and affected affiliates based on the Payment
Transaction Ratio.
J) FINANCE AND TREASURY.
Description - Coordinates activities related to securities issuance,
including maintaining relationships with financial institutions, cash
management, investing activities and monitoring the capital markets.
Performs financial and economic analysis.
Method of Allocation - Finance and Treasury activities will be allocated
to the Operating Companies and affected affiliates based on an average of
the Revenue Ratio, the Total Construction Expenditures Ratio and the Total
Common Equity Ratio, with 20 Percent of Common Equity assigned to New
Century Energies, Inc.
K) RATES AND REGULATION.
Description - Determines the Operating Companies' revenue requirements and
rates for electric and gas customers. Coordinates the regulatory
compliance requirements and maintains relationships with the regulatory
bodies.
Method of Allocation - Rates and Regulation services will be allocated
to the Operating Companies based on the Revenue Ratio.
16
<PAGE>
L) LEGAL.
Description - Provides legal services related to labor and employment law,
litigation, contracts, rates and regulation, environmental matters, real
estate and other legal matters.
Method of Allocation - Legal services will be allocated to the Operating
Companies and affected affiliates based on an average of the Payroll
Ratio, the Revenue Ratio and the Total Common Equity Ratio, with 20
Percent of Common Equity assigned to New Century Energies, Inc.
M) INTERNAL AUDIT.
Description - Reviews internal controls and procedures to ensure assets
are safeguarded and transactions are properly authorized and
recorded. Evaluates contract risks.
Methods of Allocation - Internal Auditing services will be allocated to
the Operating Companies and affected affiliates based on the average of
the Revenue Ratio, the Total Construction Expenditures Ratio and the Total
Common Equity Ratio, with 20 Percent of Common Equity assigned to New
Century Energies, Inc.
N) CORPORATE COMMUNICATIONS.
Description - Prepares and disseminates information to employees,
customers, government agencies, communities and the media.
Methods of Allocation - Corporate Communications services will be
allocated to the Operating Companies and affected affiliates based on the
Revenue Ratio, the Employee Ratio and the Total Common Equity Ratio, with
20 Percent of Common Equity assigned to New Century Energies, Inc.
O) ENVIRONMENTAL.
Description - Establishes policies and procedures for compliance with
environmental laws and regulations. Researches emerging environmental
issues and monitors compliance with environmental requirements. Oversees
environmental clean up projects.
17
<PAGE>
Method of Allocation - Environmental services will be allocated to the
Operating Companies and affected affiliates based on the Revenue Ratio.
P) RESOURCE ACQUISITION AND ANALYSIS
Description - Procures coal, natural gas and oil for the Operating
Companies generation facilities. Ensures compliance with price and
quality provisions of fuel contracts and arranges for transportation of
fuel to the desired location. Purchases power and performs electric and
gas trading services.
Method of Allocation - Resource Acquisition and Analysis services will be
allocated to the Operating Companies based on the Electric kWh Generation
Ratio or the Purchased Power Ratio, whichever is appropriate.
Q) CORPORATE PLANNING.
Description - Facilitates preparation of strategic plans, monitors trends
and evaluates business opportunities. Facilitates process improvements.
Prepares budgets and financial forecasts.
Method of Allocation - Strategic Planning services will be allocated to
the Operating Companies and affected affiliates based on the average of
the Revenue Ratio, the Total Assets Ratio and Total Common Equity Ratio,
with 20 Percent of Common Equity assigned to New Century Energies, Inc.
R) INVESTOR RELATIONS.
Description - Provides communications to investors and the financial
community. Coordinates the transfer agent and shareholder record keeping
functions.
Method of Allocation - Investor Relations services will be allocated to
the Operating Companies and affected affiliates based on the average of
the Revenue Ratio, the Total Assets Ratio and the Total Common Equity
Ratio, with 20 Percent of Common Equity assigned to New Century Energies,
Inc.
18
<PAGE>
S) HUMAN RESOURCES.
Description - Establishes and administers policies and supervises
compliance with legal requirements in the areas of employment,
compensation, benefits and employee health, welfare and safety.
Processes payroll and employee benefit payments. Coordinates contract
negotiation and relations with labor unions.
Method of Allocation - Human Resources services will be allocated to the
Operating Companies and affected affiliates based on the Payroll Ratio.
T) CUSTOMER SERVICES.
Description - Performs customer billing, handles customer inquiries and
complaints and provides related customer information services.
Method of Allocation - Customer Services will be allocated based on the
Customers Ratio.
U) INFORMATION SYSTEMS.
Description - Administers the contract for various communications and
electronic data processing services. Such services provided under the
contract include, but are not limited to, development and support of
mainframe computer software applications, procurement and support of
personal computers, operation of a data center and installation and
operation of a communications system.
Method of Allocation - Information Systems will be allocated based on the
Information Systems direct charges.
V) MARKETING SERVICES.
Description - Provides marketing services including market load research
and new product development for Operating Companies and affiliates.
Method of Allocation - Marketing services will be allocated based on the
total Residential, Business, and Large Commercial and Industrial kWh sales
ratio.
W) WHOLESALE AND BULK POWER SALES.
Description - Provides sales and to support to electric wholesale
customers of the Operating Companies.
19
<PAGE>
Method of Allocation - Wholesale Sales will be allocated based on the
Electric Wholesale Sales Ratio.
X) RESIDENTIAL AND BUSINESS SALES.
Description - Provides sales and support to electric residential and
business customers of the Operating Companies.
Method of Allocation - Residential and Business Sales will be allocated
based on the Residential and Commercial Sales Ratio.
Y) CUSTOM ACCOUNT SALES.
Description - Provides sales services to large commercial and industrial
customers of the Operating Companies.
Method of Allocation - Custom Account Sales will be allocated based on the
Large Commercial and Industrial Sales Ratio.
Z) STRATEGIC AND KEY ACCOUNT SALES.
Description - Provides sales and support services to niche markets of the
Operating Companies.
Method of Allocation - Strategic Account Sales will be allocated based on
the total of the Large Commercial and Industrial and the Public Authority
Sales Ratios. Key Account Sales will be allocated based on the Large
Commercial and Industrial Sales Ratio.
AA) COMMUNITY AND ECONOMIC DEVELOPMENT
Description - Provides community support and economic development services
to the service territories of the Operating Companies.
Method of Allocation - Community and Economic Development services will
be allocated based on the Total kWh Sales Ratio.
BB) GAS MARKETING, CONTROL, PLANNING AND SUPPLY.
Description - Provides marketing services to gas transport customers.
Coordinates the planning and support for Gas operations of Public Service
Company of Colorado, Cheyenne Light, Fuel and Power and WestGas Interstate
Company including coordinating the operation of the
20
<PAGE>
gas system and well as the purchase of gas for the Operating Companies
distribution business from third parties.
Method of Allocation - Gas Marketing, Control, Planning and Supply
services will be allocated based on the Gas Throughput Ratio.
CC) DESIGN ENGINEERING.
Description - Designs and monitors construction of electric transmission
and distribution lines and substations.
Method of Allocation - Design Engineering services will be allocated based
on the Transmission Construction Expenditures Ratio, the Distribution
Construction Ratio, or a ratio based on the sum of the Transmission and
Distribution Construction Expenditures whichever is appropriate.
DD) SUBSTATION ENGINEERING AND SUPPORT.
Description - Provides management support services to the Substation
Engineering and Support organizations of the Operating Companies.
Method of Allocation - Substation Engineering and Support services will
be allocated based on the Substation Construction Expenditures Ratio.
EE) TRANSMISSION ENGINEERING AND RIGHT OF WAY SERVICES.
Description - Provides management support services to the Transmission
Engineering and Right of Way organizations of the Operating Companies.
Method of Allocation - Transmission Engineering and Right of Way services
will be allocated based on the Transmission Construction Expenditures
Ratio.
FF) DISTRIBUTION SUPPORT SERVICES.
Description - Provides planning, benchmarking, activity tracking and
budget support services to the Construction and Operations and
Maintenance Organization.
Method of Allocation - Distribution Support Services will be allocated
based on the Total Customers Ratio.
21
<PAGE>
GG) AVIATION SERVICES.
Description - Provides aviation and travel services to employees.
Method of Allocation - Aviation Services will be allocated to the
appropriate Operating Companies and affiliates based on the Aviation
Department's actual direct charges. (This method will allocate costs
only to those companies who actually use aviation services).
HH) GOVERNMENTAL AFFAIRS.
Description - Lobbies government officials and monitors, reviews and
researches governmental legislation.
Method of Allocation - Governmental Affairs will be allocated based on the
average of the Revenue Ratio, the Employee Ratio, and the Total Common
Equity Ratio, with 20 Percent of Common Equity assigned to New Century
Energies, Inc.
II) PRODUCTION SERVICES.
Description - Provides performance, chemical and water testing and
analysis, technical, and analytical services to the Operating Companies
generation facilities.
Method of Allocation - Production Services will be allocated based on the
kWh Generation Ratio.
JJ) EXECUTIVES.
Description - Provides executive management and general administrative
services.
Method of Allocation - Executive Management Services will be allocated
based on the average of the Revenue Ratio, the Total Assets Ratio and the
Total Common Equity Ratio, with 20 percent of Common Equity assigned to
New Century Energies, Inc.
22
<PAGE>
ALLOCATION RATIOS
The following ratios will be utilized as outlined above.
SALES RATIO - Based on firm kilowatt-hour electric sales (and/or the
equivalent cubic feet of natural gas sales based on a Btu content, where
applicable), excluding inter-system sales, for the immediate preceding
twelve consecutive calendar months, the numerator of which is for an
Operating Company or and affiliate and the denominator of which is for all
Operating Companies and affected affiliate companies . This ratio will be
determined annually, or at such time as may be required due to a
significant change.
RESIDENTIAL SALES RATIO - Based on firm kilowatt-hour electric sales to
residential customers for the immediate preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company or an
affiliate and the denominator of which is for all Operating Companies and
affected affiliate companies . This ratio will be determined annually, or
at such time as may be required due to a significant change.
BUSINESS SALES RATIO - Based on firm kilowatt-hour electric sales to
business customers that purchase less than 250 kilowatts for the immediate
preceding twelve consecutive calendar months, the numerator of which is
for an Operating Company or an affiliate and the denominator of which is
for all Operating Companies and affected affiliate companies . This ratio
will be determined annually, or at such time as may be required due to a
significant change.
LARGE COMMERCIAL & INDUSTRIAL SALES RATIO - Based on firm kilowatt-hour
electric sales to large commercial and industrial customers that purchase
greater than 250 kilowatts for the immediate preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company or an
affiliate and the denominator of which is for all Operating Companies and
affected affiliate companies . This ratio will be determined annually, or
at such time as may be required due to a significant change.
ELECTRIC PEAK LOAD RATIO - Based on the sum of the monthly electric
maximum system demands for the immediately preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company and
the denominator of which is for all Operating Companies. This ratio will
be determined annually, or at such time as may be required due to a
significant change.
23
<PAGE>
CUSTOMERS RATIO - Based on the sum of total electric customers (and/or gas
customers, or residential, business and large commercial and industrial
customers where applicable) at the end of each month for the immediately
proceeding twelve consecutive calendar months, the numerator of which is
for an Operating Company or an affected affiliate company and the
denominator of which is for all Operating Companies and affected affiliate
companies. This ratio will be determined annually, or at such time as may
be required due to a significant change.
EMPLOYEES RATIO - Based on the sum of the number of employees at the end
of each month for the immediately preceding twelve calendar months, the
numerator of which is for an Operating Company or an affected affiliate
company and the denominator of which is for all Operating Companies and
affected affiliate companies. This ratio will be determined annually, or
at such time as may be required due to a significant change.
CONSTRUCTION EXPENDITURES RATIO - Based on construction or capital
expenditures, net of reimbursements, for the immediately preceding twelve
consecutive calendar months, the numerator of which is for an Operating
Company or an affected affiliate company and the denominator of which is
for all Operating Companies and affected affiliate companies. This ratio
will be determined annually, or at such time as may be required due to a
significant change.
TRANSMISSION CONSTRUCTION EXPENDITURES RATIO - Based on transmission
construction or capital expenditures, net of reimbursements, for the
immediately preceding twelve consecutive calendar months, the numerator of
which is for an Operating Company or an affected affiliate company and
the denominator of which is for all Operating Companies and affected
affiliate companies. This ratio will be determined annually, or at such
time as may be required due to a significant change.
DISTRIBUTION CONSTRUCTION EXPENDITURES RATIO - Based on distribution
construction or capital expenditures, net of reimbursements, for the
immediately preceding twelve consecutive calendar months, the numerator of
which is for an Operating Company or an affected affiliate company and
the denominator of which is for all Operating Companies and affected
affiliate companies. This ratio will be determined annually, or at such
time as may be required due to a significant change.
SUBSTATION CONSTRUCTION EXPENDITURES RATIO - Based on substation
construction or capital expenditures, net of reimbursements, for the
immediately preceding twelve consecutive calendar months, the numerator of
which is for an Operating Company or an affected affiliate company and
the denominator of which is for all Operating Companies
24
<PAGE>
and affected affiliate companies. This ratio will be determined annually,
or at such time as may be required due to a significant change.
TOTAL COMMON EQUITY RATIO, WITH 20 PERCENT OF COMMON EQUITY ASSIGNED TO
NEW CENTURY ENERGIES, INC. - Based on the sum of the common equity at the
end of each month for the immediately preceding twelve calendar months,
the numerator of which is for an Operating Company or an affected
affiliate company and the denominator of which is for all Operating
Companies and affected affiliate companies. This ratio will be determined
annually, or at such time as may be required due to significant changes.
REVENUE RATIO - Based on the sum of the revenue at the end of each month
for the immediately preceding twelve consecutive calendar months, the
numerator of which is for an Operating Company or an affected affiliate
company and the denominator of which is for all Operating Companies and
affected affiliate companies. This ratio will be determined annually, or
at such time as may be required due to significant changes.
WHOLESALE REVENUE RATIO - Based on the sum of the electric wholesale
revenue at the end of each month for the immediately preceding twelve
consecutive calendar months, the numerator of which is for an Operating
Company or an affected affiliate company and the denominator of which is
for all Operating Companies and affected affiliate companies. This ratio
will be determined annually, or at such time as may be required due to
significant changes.
INDUSTRIAL REVENUE RATIO - Based on the sum of the electric industrial
revenue at the end of each month for the immediately preceding twelve
consecutive calendar months, the numerator of which is for an Operating
Company or an affected affiliate company and the denominator of which is
for all Operating Companies and affected affiliate companies. This ratio
will be determined annually, or at such time as may be required due to
significant changes.
PAYROLL RATIO - Based on the sum of the payroll at the end of each month
for the immediately preceding twelve consecutive calendar months, the
numerator of which is for an Operating Company or an affected affiliate
company and the denominator of which is for all Operating Companies and
affected affiliate companies. This ratio will be determined annually, or
at such time as may be required due to significant changes.
ELECTRIC kWh GENERATION - Based on the sum of electric kWh generated
during each month for the immediately preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company
25
<PAGE>
and the denominator of which is for all Operating Companies. This ratio
will be determined annually, or at such time as may be required due to
significant changes.
ELECTRIC kWh PURCHASED POWER RATIO - Based on the sum of electric kWh
purchased power during each month for the immediately preceding twelve
consecutive calendar months, the numerator of which is for an Operating
Company and the denominator of which is for all Operating Companies. This
ratio will be determined annually, or at such time as may be required due
to significant changes.
TOTAL ASSETS RATIO - Based on the total assets at year end for the
preceding year, the numerator of which is for an Operating Company or
affected affiliate company and the denominator of which is for all
Operating Companies and affected affiliate companies. This ratio will be
determined annually, or at such time as may be required due to significant
changes.
COST OF GAS SOLD - Based on the sum of the cost of gas sold at the end of
each month for the immediately preceding twelve consecutive calendar
months, the numerator of which is for an Operating Company or an affected
affiliate company and the denominator of which is for all Operating
Companies and affected affiliate companies. This ratio will be determined
annually, or at such time as may be required due to significant changes.
GAS THROUGHPUT RATIO - Based on the sum of the gas throughput MCF's at the
end of each month for the immediately preceding twelve consecutive
calendar months, the numerator of which is for an Operating Company or an
affected affiliate company and the denominator of which is for all
Operating Companies and affected affiliate companies. This ratio will be
determined annually, or at such time as may be required due to significant
changes.
GAS TRANSPORT MCF - Based on the sum of transported gas MCF's at the end
of each month for the immediately preceding twelve consecutive calendar
months, the numerator of which is for an Operating Company or an affected
affiliate company and the denominator of which is for all Operating
Companies and affected affiliate companies. This ratio will be determined
annually, or at such time as may be required due to significant changes.
PAYMENT TRANSACTION RATIO - Based on the sum of the number of payment
transactions processed during each month for the immediately preceding
twelve consecutive calendar months, the numerator of which is for an
26
<PAGE>
Operating Company or an affected affiliate company and the denominator of
which is for all Operating Companies and affected affiliate companies.
This ratio will be determined annually, or at such time as may be required
due to significant changes.
ACCOUNTING TRANSACTIONS RATIO - Based on the sum of the number of
accounting transactions processed during each month for the immediately
preceding twelve consecutive calendar months , the numerator of which is
for an Operating Company or an affected affiliate company and the
denominator of which is for all Operating Companies and affected affiliate
companies.
27
<PAGE>
EXHIBIT F-1 (a)
Public Service Company of Colorado
1225 Seventeenth Street
Denver, Colorado 80202
May 6, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: New Century Energies, Inc.
Form U-1 Application-Declaration
(File No. 70-8787)
Dear Sirs:
I refer to the Form U-1 Application-Declaration, as amended (the
"Application"), under the Public Utility Holding Company Act of 1935, as
amended (the "Act"), filed with the Securities and Exchange Commission (the
"Commission") by New Century Energies, Inc. ("NCE"), a Delaware corporation.
Capitalized terms used in this letter without definition have the meanings
ascribed to such terms in the Application.
The Application seeks authorization and approval for a number of
transactions, including:
(i) the acquisition by NCE of all of the issued and outstanding common
stock of Public Service Company of Colorado ("PSCo") by means of
the merger of PSCo and PSCo Merger Corp., of Southwestern Public
Service Company ("SPS") by means of the merger of SPS and SPS
Merger Corp., of Cheyenne Light, Fuel and Power Company ("Cheyenne")
by the declaration of a dividend of all the outstanding common
stock of Cheyenne by PSCo to NCE, of PS Colorado Credit Corporation
("PSCCC") by declaration of a dividend of all PSCCC's outstanding
common stock by PSCo to NCE and of West Gas Interstate, Inc. ("WGI")
by the declaration of a dividend of all WGI's outstanding common
stock by PSCo to NCE;
<PAGE>
(ii) the acquisition of NCE of all of the issued and outstanding common
stock of New Century Services, Inc. ("NC Services"), the Utility
Service Agreement and the Non-Utility Service Agreement as a basis
for NC Services to comply with Section 13 of the Act and the
Commission's rules thereunder;
(iii) the establishment by NCE of a new subsidiary, NC Enterprises,
Inc. ("NC Enterprises"), to serve as a holding company for certain
of the NCE system's non-utility interests, and the acquisition by NC
Enterprises of the stock and other voting equity of such non-utility
interests including (a) certain subsidiaries of PSCo by the
declaration of a dividend of their stock by PSCo to NCE and a
subsequent capital contribution by NCE to NC Enterprises and (b) all
the subsidiaries of SPS through the sale by SPS of all of their
outstanding common stock to NC Enterprises in exchange for debt; and
(iv) the issuance of NCE Common Stock to the shareholders of PSCo and SPS
in connection with the mergers described in clause (i) above
((i) through (iv) collectively, the "Transactions").
I have acted as counsel for NCE and PSCo in connection with the
Application and, as such counsel, I am familiar with the corporate
proceedings taken by NCE, PSCo, PSCo Merger Corp., NC Services and NC
Enterprises in connection with the Transactions as described in the
Application.
I am familiar with or have reviewed those corporate records of
NCE, PSCo, PSCo Merger Corp., NC Services and NC Enterprises, certificates of
public officials, certificates of officers and representatives of NCE, PSCo,
PSCo Merger Corp., NC Services and NC Enterprises, and other documents as I
have deemed necessary to review as a basis for the opinions hereinafter
expressed. In such review, I have assumed the genuineness of all signatures
and the authenticity of all documents submitted to me as originals and the
conformity with the originals of all documents submitted to me as copies. As
to various questions of fact material to such opinions I have, when relevant
facts were not independently established, relied upon certificates of
officers of NCE, PSCo, PSCo Merger Corp., NC Services and NC Enterprises and
other appropriate persons and statements contained in the Application and the
exhibits thereto.
The opinions expressed below in respect of the Transactions
described in the Application are subject to the following further assumptions
and conditions:
a. The Transactions shall have been duly authorized and approved,
to the extent required by the governing corporate documents and
applicable state laws, by the Boards of Director and
shareholders of NCE, PSCo, PSCo Merger Corp., SPS, SPS Merger
Corp., NC Services and NC Enterprises and subsidiaries thereof.
b. All required approvals, authorizations, consents, certificates,
and orders of, and all filings and registrations with, all
applicable federal and state commissions and regulatory
authorities with respect to the Transactions shall have been
obtained or made, as the case may be, and shall remain in effect
(including the approval and authorization of the Commission
under the Act, the Federal Energy Regulatory Commission under
the Federal Power Act, as amended, and the rules and regulations
thereunder and the Public Utilities Commission of the State of
Colorado, the Public Service Commission of the State of
2
<PAGE>
Wyoming, the Public Utility Commission of the State of Texas,
the New Mexico Public Utility Commission and the Kansas
Corporation Commission under the applicable laws of the States
of Colorado, Wyoming, Texas, New Mexico and Kansas), and the
Transactions shall have been accomplished in accordance with all
such approvals, authorizations, consents, certificates, orders,
filings and registrations.
c. The Commission shall have duly entered an appropriate order or
orders with respect to the Transactions as described in the
Application granting and permitting the Application to become
effective under the Act and the rules and regulations
thereunder.
d. Registration statements with respect to the shares of NCE Common
Stock to be issued in connection with the Transactions shall
have become effective pursuant to the Securities Act of 1933, as
amended; no stop order shall have been entered with respect
thereto; and the issuance of shares of NCE Common Stock in
connection with the Transactions shall have been consummated in
compliance with the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
e. The solicitation of proxies from the stockholders of PSCo and
SPS with respect to the Transactions shall have been made in
accordance with the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder.
f. The applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules
and regulations thereunder shall have expired.
g. With respect to those Transactions occurring after NCE shall
have become subject to registration pursuant to Section 5 of the
Act and the rules of the Commission thereunder, NCE shall have
duly registered with the Commission as a holding company
pursuant to Section 5 of the Act and the rules of the Commission
thereunder.
h. The merger of PSCo Merger Corp. with and into PSCo, the merger
of SPS Merger Corp. with and into SPS, the dividend of shares by
PSCo of certain of its subsidiaries to NCE and the
distributions, capital contributions, sales and issuances of
debt that may be effected in connection with the establishment
of NC Enterprises as a holding company for certain non-utility
companies of the NCE system shall have been approved by the
respective Boards of Directors and stockholders of the
constituent corporations thereto; instruments of merger shall
have been duly and validly filed with the Secretary of State (or
other appropriate officer) of each applicable state, and such
other corporate formalities as are required by the laws of such
states for the consummation of the Transactions shall have been
taken; and such mergers shall have become effective in
accordance with the laws of the states of incorporation of the
constituent corporations thereto.
3
<PAGE>
i. The parties shall have obtained all consents, waivers and
releases, if any, required for the Transactions under all
applicable governing corporate documents, contracts, agreements,
debt instruments, indentures, franchises, licenses and permits.
j. No act or event other than as described herein shall have
occurred subsequent to the date hereof which would change the
opinions expressed above.
k. The consummation of the Transactions shall be conducted in a
manner satisfactory to me, including the receipt in satisfactory
form of such opinions of other counsel qualified to practice in
jurisdictions pertaining to the Transactions in which I am not
admitted to practice, as I may deem appropriate.
Based upon the foregoing, and subject to the assumptions and
conditions set forth herein, and having regard to legal considerations which I
deem relevant, I am of the opinion that, in the event that the proposed
Transactions are consummated in accordance with the Application:
1. The laws of the States of Colorado and Wyoming applicable to the
proposed Transactions will have been complied with.
2. Each of NCE, NC Services, and NC Enterprises is validly
organized and duly existing under the laws of the State of
Delaware; PSCo is validly organized and duly existing under the
laws of the State of Colorado; following the filing of an
appropriate instrument of incorporation, PSCo Merger Corp. is
validly organized and duly existing under the laws of the State
of Colorado; Cheyenne is validly organized and duly existing
under the laws of the State of Wyoming; and each non-utility
company whose securities will be acquired by NCE or NC
Enterprises from PSCo or its subsidiaries is validly organized
and duly existing under the laws of the respective state of
incorporation.
3. The shares of NCE Common Stock to be issued in connection with
the proposed Transactions will be validly issued, fully paid and
nonassessable, and the holders thereof will be entitled to the
rights and privileges appertaining thereto set forth in the
Restated Certificate of Incorporation of NCE. The shares of
common stock of PSCo to be issued to NCE in connection with the
merger of PSCo Merger Corp. with and into PSCo will be validly
issued, fully paid and nonassessable, and NCE, as the holder
thereof, will be entitled to the rights and privileges
appertaining thereto set forth in the Certificate of
Incorporation of PSCo. The shares of common stock of NC
Enterprises held by NCE and the shares of common stock of NC
Services to be acquired by NCE are or will be validly issued,
fully paid and non-assessable, and NCE, as the holder thereof,
will be entitled to the rights and privileges appertaining
thereto set forth in the instrument of incorporation of each of
NC Enterprises and NC Services. The shares of common stock to
be acquired by NC Enterprises from PSCo or its subsidiaries as a
holding company for certain non-utility subsidiary companies of
the NCE System will be
4
<PAGE>
validly issued, fully paid and nonassessable, and NC Enterprises
or NCE, as the case may be, as the respective holders thereof
will be entitled to the rights and privileges appertaining
thereto set forth in the respective charters and other governing
documents of such companies.
4. NCE will legally acquire (a) the shares of common stock of PSCo
that will be issued to NCE in connection with the merger of PSCo
Merger Corp. with and into PSCo, (b) the shares of common stock
of Cheyenne by means of a dividend by PSCo of all of the stock
of Cheyenne to NCE, (c) the shares of stock of West Gas
Interstate, Inc. and PSCCC by means of a dividend by PSCo of all
of their stock to NCE, and (d) the shares of NC Services that
will be issued to NCE in connection with the Transactions, as
the case may be. NCE has legally acquired the shares of common
stock of NC Enterprises, and NC Enterprises will legally acquire
the shares of stock of the subsidiary companies of PSCo or its
subsidiaries for which it will serve as a holding company.
5. The consummation of the proposed Transactions will not violate
the legal rights of the holders of any securities issued by NCE
or PSCo or its subsidiaries.
I have acted as counsel for NCE and PSCo in connection with the
Application and, accordingly, this opinion is limited to actions taken by NCE,
PSCo (and its subsidiaries prior to the Transactions), PSCo Merger Corp., NC
Services, and NC Enterprises in connection with the Transactions as described
in the Application. With respect to compliance with all other applicable state
laws, the corporate proceedings of any other parties to the Transactions,
including the issuance, sale, or acquisition of securities by such parties, or
the absence of the violation of the legal rights of the holders of securities
of such parties, I refer to the opinion of Cahill Gordon & Reindel filed
concurrently herewith.
I hereby consent to the use of this opinion as an exhibit to the
Application.
Very truly yours,
/s/ Patricia T. Smith
----------------------------------
Patricia T. Smith
5
<PAGE>
EXHIBIT F-1(b)
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
May 6, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: New Century Energies, Inc.
Form U-1 Application-Declaration
(File No. 70-8787)
Dear Sirs:
We refer to the Form U-1 Application-Declaration, as amended (the
"Application"), under the Public Utility Holding Company Act of 1935, as
amended (the "Act"), filed with the Securities and Exchange Commission (the
"Commission") by New Century Energies, Inc. ("NCE"), a Delaware corporation.
Capitalized terms used in this letter without definition have the meanings
ascribed to such terms in the Application.
The Application seeks authorization and approval for a number of
transactions, including:
(i) the acquisition by NCE of all of the issued and outstanding
common stock of Public Service Company of Colorado ("PSCo") by means of the
merger of PSCo and PSCo Merger Corp., of Southwestern Public Service
Company ("SPS) by means of the merger of SPS and SPS Merger Corp., of
Cheyenne Light, Fuel and Power Company ("Cheyenne") by the declaration of
a dividend of all the outstanding common stock of Cheyenne by PSCo to NCE,
of PS Colorado Credit Corporation ("PSCCC") by the declaration of a
dividend of all PSCCC's outstanding common stock by PSCo to NCE and of
West Gas Interstate, Inc. ("WGI") by the declaration of a dividend of all
WGI's outstanding common stock by PSCo to NCE;
(ii) the acquisition by NCE of all of the issued and outstanding common
stock of New Century Services, Inc. ("NC Services"), the Utility Service
Agreement and the Non-Utility Service Agreement as a basis for NC Services
<PAGE>
-2-
to comply with Section 13 of the Act and the Commission's rules thereunder;
(iii) the establishment by NCE of a new subsidiary, NC Enterprises, Inc.
("NC Enterprises"), to serve as a holding company for certain of the NCE
system's non-utility interests, and the acquisition by NC Enterprises of
the stock and other voting equity of such non-utility interests including
(a) certain subsidiaries of PSCo by the declaration of a dividend of their
stock by PSCo to NCE and a subsequent capital contribution by NCE to NC
Enterprises and (b) all the subsidiaries of SPS through the sale by SPS of
all of their outstanding common stock to NC Enterprises in exchange for
debt; and
(iv) the issuance of NCE Common Stock to the shareholders of PSCo and
SPS in connection with the mergers described in clause (i) above;
((i) through (iv) collectively, the "Transactions").
We have acted as special counsel for NCE and SPS in connection with
the Application and, as such counsel, we are familiar with the corporate
proceedings taken by NCE, SPS, SPS Merger Corp., NC Services and NC Enterprises
in connection with the Transactions as described in the Application.
We have examined originals, or copies certified to our satisfaction,
of such corporate records of NCE, SPS, SPS Merger Corp., NC Services and NC
Enterprises, certificates of public officials, certificates of officers and
representatives of NCE, SPS, SPS Merger Corp., NC Services and NC Enterprises,
and other documents as we have deemed necessary to examine as a basis for the
opinions hereinafter expressed. In such examination we have assumed the
genuineness of all signatures and the authenticity of all documents submitted
to us as originals and the conformity with the originals of all documents
submitted to us as copies. As to various questions of fact material to such
opinions we have, when relevant facts were not independently established,
relied upon certificates of officers of NCE, SPS, SPS Merger Corp., NC Services
and NC Enterprises and other appropriate persons and statements contained in
the Application and the exhibits thereto.
The opinions expressed below in respect of the Transactions described
in the Application are subject to the following further assumptions and
conditions:
<PAGE>
-3-
a. The Transactions shall have been duly authorized and approved,
to the extent required by the governing corporate documents and applicable
state laws, by the Boards of Directors and shareholders of NCE, PSCo, PSCo
Merger Corp., SPS, SPS Merger Corp., NC Services and NC Enterprises and
subsidiaries thereof.
b. All required approvals, authorizations, consents, certificates,
and orders of, and all filings and registrations with, all applicable
federal and state commissions and regulatory authorities with respect to
the Transactions shall have been obtained or made, as the case may be, and
shall remain in effect (including the approval and authorization of the
Commission under the Act, the Federal Energy Regulatory Commission under
the Federal Power Act, as amended, and the rules and regulations
thereunder and the Public Utilities Commission of the State of Colorado,
the Public Service Commission of the State of Wyoming, the Public Utility
Commission of the State of Texas, the New Mexico Public Utility Commission
and the Kansas Corporation Commission under the applicable laws of the
States of Colorado, Wyoming, Texas, New Mexico and Kansas), and the
Transactions shall have been accomplished in accordance with all such
approvals, authorizations, consents, certificates, orders, filings and
registrations.
c. The Commission shall have duly entered an appropriate order or
orders with respect to the Transactions as described in the Application
granting and permitting the Application to become effective under the Act
and the rules and regulations thereunder.
d. Registration statements with respect to the shares of NCE Common
Stock to be issued in connection with the Transactions shall have become
effective pursuant to the Securities Act of 1933, as amended; no stop
order shall have been entered with respect thereto; and the issuance of
shares of NCE Common Stock in connection with the Transactions shall have
been consummated in compliance with the Securities Act of 1933, as
amended, and the rules and regulations thereunder.
e. The solicitation of proxies from the stockholders of PSCo and
SPS with respect to the Transactions shall have been made in accordance
with the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder.
<PAGE>
-4-
f. The applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and
regulations thereunder shall have expired.
g. With respect to those Transactions occurring after NCE shall
have become subject to registration pursuant to Section 5 of the Act and
the rules of the Commission thereunder, NCE shall have duly registered
with the Commission as a holding company pursuant to Section 5 of the Act
and the rules of the Commission thereunder.
h. The merger of PSCo Merger Corp. with and into PSCo, the merger
of SPS Merger Corp. with and into SPS, the dividend of shares by PSCo of
certain of its subsidiaries to NCE and the distributions, capital
contributions, sales and issuances of debt that may be effected in
connection with the establishment of NC Enterprises as a holding company
for certain non-utility companies of the NCE system shall have been
approved by the respective Boards of Directors and stockholders of the
constituent corporations thereto; instruments of merger shall have been
duly and validly filed with the Secretary of State (or other appropriate
officer) of each applicable state, and such other corporate formalities as
are required by the laws of such states for the consummation of the
Transactions shall have been taken; and such mergers shall have become
effective in accordance with the laws of the states of incorporation of the
constituent corporations thereto.
i. SPS Merger Corp. shall have been incorporated under the laws of
the State of New Mexico.
j. The parties shall have obtained all consents, waivers and
releases, if any, required for the Transactions under all applicable
governing corporate documents, contracts, agreements, debt instruments,
indentures, franchises, licenses and permits.
k. No act or event other than as described herein shall have
occurred subsequent to the date hereof which would change the opinions
expressed above.
l. The consummation of the Transactions shall be conducted with our
involvement and all legal matters incident thereto shall be satisfactory
to us, including the receipt in satisfactory form of such opinions of
other counsel, qualified to practice in jurisdictions pertaining
<PAGE>
-5-
to the Transactions in which we are not admitted to practice, as we may
deem appropriate.
Based upon the foregoing, and subject to the assumptions and
conditions set forth herein, and having regard to legal considerations which we
deem relevant, we are of the opinion that, in the event that the proposed
Transactions are consummated in accordance with the Application:
1. The laws of the states of New Mexico, Texas and Kansas applicable
to the proposed Transactions will have been complied with.
2. Each of NCE, NC Services and NC Enterprises is validly organized
and duly existing under the laws of the State of Delaware; SPS is validly
organized and duly existing under the laws of the State of New Mexico;
following the filing of an appropriate instrument of incorporation, SPS
Merger Corp. will be validly organized and duly existing under the laws
of the State of New Mexico; and each non-utility company whose securities
will be acquired by NC Enterprises from SPS is validly organized and duly
existing under the laws of the respective state of incorporation.
3. The shares of NCE Common Stock to be issued in connection with the
proposed Transactions will be validly issued, fully paid and nonassessable,
and the holders thereof will be entitled to the rights and privileges
appertaining thereto set forth in the Restated Certificate of
Incorporation of NCE. The shares of common stock of SPS to be issued to
NCE in connection with the merger of SPS Merger Corp. with and into SPS
will be validly issued, fully paid and nonassessable, and NCE, as the
holder thereof, entitled to the rights and privileges appertaining thereto
set forth in the Restated Articles of Incorporation of SPS. The shares of
common stock of NC Enterprises and NC Services to be issued to NCE in
connection with the establishment of NC Enterprises and NC Services as
subsidiaries of NCE, respectively, will be validly issued, fully paid and
nonassessable, and NCE, as the holder thereof, will be entitled to the
rights and privileges appertaining thereto set forth in the instrument of
incorporation of each of NC Enterprises and NC Services. The shares of
common stock to be acquired by NC Enterprises from SPS as a holding
company for certain non-utility subsidiary companies of the NCE system
will be validly issued, fully paid and nonassessable, and NC Enterprises,
as
<PAGE>
-6-
the holder thereof, will be entitled to the rights and privileges
appertaining thereto set forth in the respective charters and other
governing documents of such companies.
4. NCE will legally acquire (a) the shares of common stock of SPS
that will be issued to NCE in connection with the merger of SPS Merger
Corp. with and into SPS, and (b) the shares of NC Enterprises and NC
Services that will be issued to NCE in connection with the Transactions.
NC Enterprises will legally acquire the shares of stock of the subsidiary
companies of SPS for which it will serve as a holding company.
5. The consummation of the proposed Transactions will not violate the
legal rights of the holders of any securities issued by NCE, NC Services,
NC Enterprises or SPS or its subsidiaries.
We have acted as special counsel for NCE and SPS in connection with
the Application and, accordingly, this opinion is limited to actions taken by
NCE, SPS (and its subsidiaries prior to the Transactions), SPS Merger Corp., NC
Services and NC Enterprises in connection with the Transactions as described in
the Application. With respect to compliance with all other applicable state
laws, the corporate proceedings of any other parties to the Transactions,
including the issuance, sale or acquisition of securities by such parties, or
the absence of the violation of the legal rights of the holders of securities
of such parties, we refer to the opinion of William M. Dudley filed
concurrently herewith.
We hereby consent to the use of this opinion as an exhibit to the
Application.
Very truly yours,
/s/ Cahill Gordon & Reindel
<PAGE>
Exhibit J-4
BUDGETED CASHFLOW AVAILABLE FROM U.E. AND QUIXX
<TABLE>
<CAPTION>
Quixx UEC Total Cash
Budgeted Budgeted Budgeted Loan Excess/ Cumulative
Cashflow Cashflow Cashflow Payment (Deficit) Cash Excess
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 $ 3,708,000 $ 2,113,000 $ 5,821,000 $ 9,633,241 $(3,812,241) $(3,812,241)
- ---------------------------------------------------------------------------------------------------
1998 7,784,000 1,634,000 9,418,000 9,633,241 (215,241) (4,027,482)
- ---------------------------------------------------------------------------------------------------
1999 8,678,000 2,049,000 10,727,000 9,633,241 1,093,759 (2,933,723)
- ---------------------------------------------------------------------------------------------------
2000 10,426,000 2,339,000 12,765,000 11,011,769 1,753,231 (1,180,492)
- ---------------------------------------------------------------------------------------------------
2001 10,604,000 2,544,000 13,148,000 11,011,769 2,136,231 955,739
- ---------------------------------------------------------------------------------------------------
</TABLE>
ASSUMPTIONS: 8% interest, 3 years interest only, 27 year amortization
30 year total time to maturity
<PAGE>
1. Exhibit J-5
FORM OF PROMISSORY NOTE
FOR VALUE RECEIVED, NEW CENTURY ENTERPRISES, INC., a Delaware
corporation ("NC Enterprises"), hereby promises to pay to the order of
Southwestern Public Service Company ("SPS") in lawful money of the United
States of America in immediately available funds, the principal amount of
U.S. Dollars ($ ) as set forth below.
NC Enterprises also promises to pay interest in like money on the
unpaid principal amount hereof from the date hereof until paid at a rate per
annum of %.
Principal and interest payments shall be made on each of each year
commencing in the amounts as set forth in Annex I hereto.
NC Enterprises may prepay all or any part of the principal amount of
this Note (together with interest accrued through the date of such payment on
the principal amount pre-paid) from time to time and at any time without
penalty or premium.
SPS may, at its option, declare the unpaid balance of this Note,
together with interest accrued thereon, to be immediately due and payable,
whereupon this Note shall become immediately due and payable, upon the failure
of NC Enterprises to make any payments hereunder when due.
NC Enterprises hereby waives presentment, protest or notice of any
kind in connection with this Note.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF DELAWARE.
NEW CENTURY ENTERPRISES, INC.
By:
--------------------------------
<PAGE>
ANNEX I
DEBT SCHEDULE
- --------------------------------------------------------------------------------
Beginning Loan Interest Principal Ending
Principal Payment Payment Payment Principal
- --------------------------------------------------------------------------------
1997 $120,415,511 $ 9,633,241 $ 9,633,241 $ -0- $120,415,511
- --------------------------------------------------------------------------------
1998 120,415,511 9,633,241 9,633,241 -0- 120,415,511
- --------------------------------------------------------------------------------
1999 120,415,511 9,633,241 9,633,241 -0- 120,415,511
- --------------------------------------------------------------------------------
2000 120,415,511 11,011,769 9,633,241 1,378,528 119,036,983
- --------------------------------------------------------------------------------
2001 119,036,983 11,011,769 9,522,959 1,488,811 117,548,172
- --------------------------------------------------------------------------------
2002 117,548,172 11,011,769 9,403,854 1,607,915 115,940,257
- --------------------------------------------------------------------------------
2003 115,940,257 11,011,769 9,275,221 1,736,549 114,203,708
- --------------------------------------------------------------------------------
2004 114,203,708 11,011,769 9,136,297 1,875,473 112,328,235
- --------------------------------------------------------------------------------
2005 112,328,235 11,011,769 8,986,259 2,025,510 110,302,725
- --------------------------------------------------------------------------------
2006 110,302,725 11,011,769 8,824,218 2,187,551 108,115,174
- --------------------------------------------------------------------------------
2007 108,115,174 11,011,769 8,649,214 2,362,555 105,752,618
- --------------------------------------------------------------------------------
2008 105,752,618 11,011,769 8,460,209 2,551,560 103,201,058
- --------------------------------------------------------------------------------
2009 103,201,058 11,011,769 8,256,085 2,755,685 100,445,374
- --------------------------------------------------------------------------------
2010 100,445,374 11,011,769 8,035,630 2,976,139 97,469,235
- --------------------------------------------------------------------------------
2011 97,469,235 11,011,769 7,797,539 3,214,230 94,255,004
- --------------------------------------------------------------------------------
2012 94,255,004 11,011,769 7,540,400 3,471,369 90,783,635
- --------------------------------------------------------------------------------
2013 90,783,635 11,011,769 7,262,691 3,749,078 87,034,557
- --------------------------------------------------------------------------------
2014 87,034,557 11,011,769 6,962,765 4,049,005 82,985,552
- --------------------------------------------------------------------------------
2015 82,985,552 11,011,769 6,638,844 4,372,925 78,612,627
- --------------------------------------------------------------------------------
2016 78,612,627 11,011,769 6,289,010 4,722,759 73,889,868
- --------------------------------------------------------------------------------
2017 73,889,868 11,011,769 5,911,189 5,100,580 68,789,288
- --------------------------------------------------------------------------------
2018 68,789,288 11,011,769 5,503,143 5,508,626 63,280,662
- --------------------------------------------------------------------------------
2019 63,280,662 11,011,769 5,062,453 5,949,316 57,331,346
- --------------------------------------------------------------------------------
2020 57,331,346 11,011,769 4,586,508 6,425,262 50,906,084
- --------------------------------------------------------------------------------
2021 50,906,084 11,011,769 4,072,487 6,939,283 43,966,802
- --------------------------------------------------------------------------------
2022 43,966,802 11,011,769 3,517,344 7,494,425 36,472,376
- --------------------------------------------------------------------------------
2023 36,472,376 11,011,769 2,917,790 8,093,979 28,378,397
- --------------------------------------------------------------------------------
2024 28,378,397 11,011,769 2,270,272 8,741,497 19,636,900
- --------------------------------------------------------------------------------
2025 19,636,900 11,011,769 1,570,952 9,440,817 10,196,083
- --------------------------------------------------------------------------------
2026 10,196,083 11,011,769 815,687 10,196,083 -0-
- --------------------------------------------------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> OPUR1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 0
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 200
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 200
<COMMON> 200
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 0
<TOTAL-COMMON-STOCKHOLDERS-EQ> 200
0
0
<LONG-TERM-DEBT-NET> 0
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 0
<TOT-CAPITALIZATION-AND-LIAB> 200
<GROSS-OPERATING-REVENUE> 0
<INCOME-TAX-EXPENSE> 0
<OTHER-OPERATING-EXPENSES> 0
<TOTAL-OPERATING-EXPENSES> 0
<OPERATING-INCOME-LOSS> 0
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 0
<TOTAL-INTEREST-EXPENSE> 0
<NET-INCOME> 0
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 0
<EPS-PRIMARY> 0.000
<EPS-DILUTED> 0.000
</TABLE>
