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As filed on July 29, 1998
File No.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM U-1 APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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New Century Energies, Inc.
1225 Seventeenth Street
Denver, CO 80202-5534
(Names of companies filing this statement
and addresses of principal executive offices)
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New Century Energies, Inc.
(Name of top registered holding company parent)
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Teresa S. Madden, Controller
New Century Energies, Inc.
1225 Seventeenth Street
Denver, Colorado 80202-5534
(Name and address of agent for service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application/Declaration to:
William M. Dudley, Esq. William T. Baker, Jr., Esq.
New Century Services, Inc. Reid & Priest LLP
1225 Seventeenth Street 40 West 57th Street
Denver, Colorado 80202-5534 New York, New York 10019-4097
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TABLE OF CONTENTS
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TABLE OF CONTENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION. . . . . . . . . . . . . . . . . 1
A. BACKGROUND: PRIOR ORDERS . . . . . . . . . . . . . . . . . . . . . . . . 1
1. File No. 70-8787 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. File No. 70-9007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
B. PROPOSED MODIFICATIONS TO PRIOR ORDERS; APPLICABILITY OF PROPOSED
TRANSACTIONS TO PENDING AND FUTURE NCE FINANCING APPLICATIONS. . . . . . . . 3
C. EXISTING INTERESTS IN COMPANIES THAT ARE OR WILL BECOME FUCOS AND EWGS. . 4
1. FUCOs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
a. Yorkshire Electricity . . . . . . . . . . . . . . . . . . . . . . . 4
b. IPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2. EWGs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
a. Quixx EWGs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
i. Jamaica Project. . . . . . . . . . . . . . . . . . . . . . . . . 6
ii. Mustang Station . . . . . . . . . . . . . . . . . . . . . . . . 6
b. Central Piedra Buena. . . . . . . . . . . . . . . . . . . . . . . . 7
D. RISK PROFILE OF NCE'S INVESTMENTS IN FUCOS AND EWGS . . . . . . . . . . . 7
1. The Project Review Process . . . . . . . . . . . . . . . . . . . . . . 7
2. Risk Mitigation of FUCOs and EWGs. . . . . . . . . . . . . . . . . . . 9
a. Operating risks . . . . . . . . . . . . . . . . . . . . . . . . . . 9
b. Construction risks. . . . . . . . . . . . . . . . . . . . . . . . . 9
c. Commercial risks. . . . . . . . . . . . . . . . . . . . . . . . . .10
d. Financial risks . . . . . . . . . . . . . . . . . . . . . . . . . .10
e. Interest rate risk. . . . . . . . . . . . . . . . . . . . . . . . .11
f. Foreign currency exchange risk. . . . . . . . . . . . . . . . . . .11
g. Legal risks . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
h. Country risks . . . . . . . . . . . . . . . . . . . . . . . . . . .12
i. Portfolio diversification . . . . . . . . . . . . . . . . . . . . .12
3. Case Study: Yorkshire Electricity . . . . . . . . . . . . . . . . . .13
E. POTENTIAL INVESTMENTS IN ADDITIONAL EXEMPT PROJECTS . . . . . . . . . . .14
ITEM 2. FEES, COMMISSIONS, AND EXPENSES. . . . . . . . . . . . . . . . . . .16
ITEM 3. APPLICABLE STATUTORY PROVISIONS. . . . . . . . . . . . . . . . . . .16
A. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . .16
B. COMPLIANCE WITH RULE 53(c). . . . . . . . . . . . . . . . . . . . . . . .16
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1. The Proposed Transactions Will Not Have a Substantial Adverse Impact
Upon the Financial Integrity of the NCE System. . . . . . . . . . . . . .17
a. Key financial ratios/benchmarks . . . . . . . . . . . . . . . . . .17
i. Capitalization ratios. . . . . . . . . . . . . . . . . . . . . .17
ii. Consolidated retained earnings. . . . . . . . . . . . . . . . .19
iii. Rule 53(b) factors . . . . . . . . . . . . . . . . . . . . . .19
iv. Other indicators. . . . . . . . . . . . . . . . . . . . . . . .19
b. Market assessment of NCE. . . . . . . . . . . . . . . . . . . . . .20
i. Assessment of growth and earnings. . . . . . . . . . . . . . . .20
ii. Dividend Payout Ratio . . . . . . . . . . . . . . . . . . . . .20
2. The Proposed Transactions Will Not Have an Adverse Impact on Any
Utility Subsidiary of NCE, or its Customers, or on the Ability of NCE's
State Public Utility Commissions to Protect Such Customers. . . . . . . .21
a. Insulation from risk. . . . . . . . . . . . . . . . . . . . . . . .21
b. NCE Operating Company financial integrity . . . . . . . . . . . . .22
i. Debt/equity ratios . . . . . . . . . . . . . . . . . . . . . . .22
ii. Earnings coverages. . . . . . . . . . . . . . . . . . . . . . .22
iii. Security ratings . . . . . . . . . . . . . . . . . . . . . . .23
c. NCE Operating Companies' capital needs. . . . . . . . . . . . . . .24
d. Adequacy of State Commission oversight. . . . . . . . . . . . . . .24
C. Compliance with Rule 54 . . . . . . . . . . . . . . . . . . . . . . . . .26
ITEM 4. REGULATORY APPROVAL. . . . . . . . . . . . . . . . . . . . . . . . .27
ITEM 5. PROCEDURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . .27
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS. . . . . . . . . . . . . . .28
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
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Item 1. DESCRIPTION OF PROPOSED TRANSACTION
New Century Energies, Inc. ("NCE"), a registered holding company under the
Public Utility Holding Company Act of 1935 ("Act"), is a combination electric
and gas utility holding company, engaged through its utility subsidiaries in the
generation, transmission, distribution, and sale of electric energy to
approximately 1.6 million customers in portions of the states of Colorado,
Texas, New Mexico, Wyoming, Oklahoma, and Kansas, and the transmission,
distribution, sale, and transportation of natural gas to approximately 1.0
million customers in the states of Colorado and Wyoming. The utility operating
companies of NCE, each of which are wholly-owned, are Public Service Company of
Colorado ("PSCo"), Southwestern Public Service Company ("SPS"), and Cheyenne
Light, Fuel and Power Company ("Cheyenne") (each individually an "NCE Operating
Company" and collectively the "NCE Operating Companies"). NCE also has a number
of direct and indirect non-utility subsidiaries.
In this Application/Declaration, NCE requests that the Commission exempt it
from the requirements of Rule 53(a)(1), with respect to the investing by NCE of
proceeds from its financings and the issuance of its guarantees authorized by
the Commission in File No. 70-9007, by allowing NCE to have an aggregate
investment in exempt wholesale generators ("EWGs") and foreign utility companies
("FUCOs"), as calculated in accordance with Rule 53(a)(1)(i), in an amount up to
NCE's consolidated retained earnings, as determined in accordance with Rule 53
(a)(1)(ii).(1)
A. BACKGROUND: PRIOR ORDERS
1. FILE NO. 70-8787
By order (HCAR No. 26748) issued in File No. 70-8787 (the "Merger File") on
August 1, 1997 (the "Merger Order"), the Commission approved of the combination
of PSCo and SPS through the formation of NCE (the "Merger"). The Commission
also approved various related transactions, including NCE's retention of the
following subsidiaries:
- NC Enterprises, Inc. ("NC Enterprises"). NC Enterprises, which is
wholly-owned by NCE, is an intermediate holding company formed to hold
the non-regulated subsidiaries within the NCE system, including New
Century International, Inc., Quixx Corporation, and e prime, inc.(2)
- New Century International ("NCI"). NCI, formerly a subsidiary of
PSCo, is wholly-owned by NC Enterprises. NCI owns a 50% interest in
Yorkshire Power Group
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(1) The terms "exempt wholesale generator" ("EWG") and "foreign utility
company" ("FUCO") are defined, respectively, in Sections 32(a) and 33(a) of the
Act.
(2) In the Merger File, NCE listed NC Enterprises as one of three alternative
NCE companies that would hold the NCE system's interest in NCI. In File No.
70-9193, NCE, PSCo, and NC Enterprises clarified NCE's intention that NC
Enterprises would directly hold NCI, and obtained the Commission's authorization
to transfer NCI from PSCo to NC Enterprises through a sale. Such sale was at
net book value, and NC Enterprises issued a note to PSCo as consideration for
the securities of NCI. SEE HCAR No. 26871 (May 14, 1998).
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Limited ("YPG"), which through a wholly-owned subsidiary, Yorkshire
Holdings plc, owns Yorkshire Electricity Group plc ("Yorkshire
Electricity"), a regional electric company operating in the United
Kingdom. NCI also owns a minority interest in Independent Power
Corporation plc ("IPC"), a British company that is in the business of
developing, owning, and operating foreign electric generating plants.
- Quixx Corporation ("Quixx"). Quixx, formerly a subsidiary of SPS and
now a wholly-owned subsidiary of NC Enterprises, organizes and
finances subsidiaries to invest in EWGs, FUCOs, qualifying facilities
("QFs") under the Public Utility Regulatory Policies Act ("PURPA"),
and other energy-related projects. In connection therewith, Quixx
engages in a variety of project development activities. In the Merger
U-1, NCE indicated that Quixx would not acquire an interest in any new
project unless the acquisition was either approved by the Commission
or was exempt from the requirement of obtaining such approval.
- e prime, inc. ("e prime"). e prime, a wholly-owned subsidiary of NC
Enterprises, directly and through subsidiaries provides a variety of
energy services, and through subsidiaries, owns interests in EWGs and
one QF. e prime was formerly a subsidiary of PSCo, and is now held by
NC Enterprises.
For convenience, NCI, Quixx, e prime, and NC Enterprises will each be referred
to herein as an "NCE Company" and collectively as the "NCE Companies."
2. FILE NO. 70-9007
By order dated August 1, 1997 (HCAR No. 26750) (the "Financing Order"), the
Commission authorized, among other things, (i) external financings by NCE, its
utility operating company subsidiaries, and certain of its non-utility
subsidiaries (the "External Financings"), and (ii) intrasystem financing
arrangements, including guarantees, between NCE and its subsidiaries and between
NCE subsidiaries. The External Financings included (i) the issuance by NCE of
common stock, par value $1.00 per share, for an aggregate offering price of up
to $535 million (exclusive of common stock issued for benefit plans and dividend
reinvestment plans), and (ii) short-term debt aggregating not more than $100
million outstanding at any one time, which limit is to increase by an additional
$125 million in the event that PS Colorado Credit Corporation ("PSCCC"),
presently a subsidiary of PSCo, becomes a direct subsidiary of NCE. NCE also
obtained authorization to enter into guarantees, obtain letters of credit, enter
into expense agreements, or otherwise provide credit support for the obligations
of its system companies (the "Guarantees"), in an aggregate principal amount not
to exceed $300 million outstanding at any one time. The authorizations in the
Financing Order, including those identified above, are generally to extend
through December 31, 1999.
The Commission in the Financing Order authorized NCE to invest proceeds
from its financings in, and to guarantee the obligations of, EWGs and FUCOs.
This authorization, however, only applies where NCE satisfies the safe harbor
established in Rule 53(a)(1) - I.E.,
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where NCE's aggregate investment in EWGs and FUCOs does not exceed 50% of NCE's
retained earnings.
By post-effective amendment in File No. 70-9007, NCE requested
authorization to, among other things, increase the two External Financing limits
to the following: (i) $745 million for common stock issuances by NCE (exclusive
of common stock issued for benefit plans and dividend reinvestment plans), and
(ii) $200 million for short-term debt issuances and sales with the retention of
the $125 million increase in the event that PSCCC becomes a direct subsidiary of
NCE. By order dated May 14, 1998 (HCAR No. 26872), the Commission approved
these requested authorizations.
Concurrent with the filing of this Application/Declaration, NCE will file a
post-effective amendment in File No. 70-9007 to raise certain of its financing
limits.
B. PROPOSED MODIFICATIONS TO PRIOR ORDERS; APPLICABILITY OF PROPOSED
TRANSACTIONS TO PENDING AND FUTURE NCE FINANCING APPLICATIONS
As of December 31, 1997, NCE's aggregate investment in EWGs and FUCOs, PRO
FORMA to include NCE's initial investments in Yorkshire Electricity and IPC, was
approximately $364.4 million, and its average consolidated retained earnings
were approximately $715.6 million. NCE's aggregate investment, including
Yorkshire Electricity and IPC, PRO FORMA, would be slightly in excess of the 50%
limit in Rule 53(a)(1).(3) On the other hand, if NCE had authority to make
aggregate investments in EWGs and FUCOs in an amount equal to 100% of its
consolidated retained earnings using proceeds from its external financings or
other credit-supported arrangements, as of December 31, 1997, NCE could have
invested an additional $351.2 million.
NCE believes that, at this stage of the restructuring of the electric
industry both in this country and abroad, it is critical that it have the
flexibility to increase its aggregate investment in new EWGs and FUCOs in order
to create maximum shareholder value. Domestically, a number of utilities are
divesting generation assets, creating expansion opportunities outside of the NCE
Operating Companies' service territories. In this connection, NCE has made a
strategic decision to seek to expand the scope and size of its commodity
services business.(4) The achievement of this goal would be facilitated by NCE
having greater flexibility to purchase generating assets outside of the NCE
Operating Companies' service territories. Because of the integration
requirements of the Act, the generating assets that NCE may seek to acquire
would likely need to be qualified as EWGs, potentially triggering the
limitations of Rule 53. Outside of the United States, investment opportunities
exist due to privatizations being pursued by various foreign governments as well
as an expanding need for electricity in emerging markets. Any "utility assets"
that the NCE Companies seek to acquire outside of the United States may need to
be qualified either as EWGs or FUCOs.(5)
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(3) The ratio of NCE's aggregate investment to its consolidated retained
earnings equals 50.9%. The event that caused the NCE system to exceed 50% of
consolidated retained earnings was the imposition of a U.K. government-mandated
windfall tax on Yorkshire Electricity, which is discussed below, not a new
investment.
(4) NCE's commodity services business consists of both generation assets and
energy marketing operations.
(5) Alternatively, NCE might obtain an exception under Section 3(b) of the Act
for a foreign utility company.
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Thus, in view of the unavailability of financing capacity under the Rule
53(a)(1) limitation to make additional investments in EWGs and FUCOs requiring
NCE financing funds or other NCE financial support, NCE requests that the
Commission issue an order pursuant to Rule 53(c) under the Act exempting NCE
from the requirements of Rule 53(a)(1), with respect to the investment by NCE of
the proceeds of the External Financings and the Guarantees authorized by the
Commission in File No. 70-9007, as those authorizations may be extended and/or
expanded in the future. Said exemption will allow NCE to have an aggregate
investment in EWGs and FUCOs, as calculated in accordance with Rule 53(a)(1)(i),
in an amount up to NCE's consolidated retained earnings, as determined in
accordance with Rule 53 (a)(1)(ii). As demonstrated in this
Application/Declaration, NCE satisfies the applicable standards under the Act
for removal of the 50% limitation.
C. EXISTING INTERESTS IN COMPANIES THAT ARE OR WILL BECOME FUCOS AND EWGS
1. FUCOS
a. YORKSHIRE ELECTRICITY
NCE indirectly owns 50% of Yorkshire Electricity, a regional
electricity company serving approximately 2.1 million customers in England.
Yorkshire Electricity's distribution territory covers approximately 4,180 square
miles of northeast England. It was one of the twelve regional electricity
companies created in 1990 by the British government as part of the privatization
of the electric utility industry in England and Wales. Yorkshire Electricity is
primarily a distribution and supply company, purchasing most of its electricity
requirements from third-party generators.
PSCo, through its then wholly-owned subsidiary NCI, acquired NCE's
present interest in Yorkshire Electricity prior to the consummation of the
Merger in a 50-50 joint venture transaction with AEP Resources, Inc. ("AEP
Resources"), a subsidiary of American Electric Power Company, Inc. ("AEP"), for
an aggregate purchase price of approximately $2.4 billion. To accomplish this
acquisition through a tender offer, PSCo and AEP Resources established Yorkshire
Holdings plc ("Yorkshire Holdings"), a U.K. company. Yorkshire Holdings' sole
shareholder is Yorkshire Power Group Limited ("YPG"), also a U.K. company.
Through NCI, PSCo originally owned, and NCE through NC Enterprises now owns, 50%
of YPG, and AEP Resources owns the remaining 50%.
The purchase price for the outstanding shares of Yorkshire
Electricity was financed (a) by bank loans made to YPG (pre-Merger), which
have been substantially refinanced in part through the sale of medium- and
long-term debt (post-Merger), and (b) through equity contributions made by
PSCo (through its then wholly-owned subsidiary NCI) and AEP Resources. Debt
issued by YPG has not been guaranteed by, nor is otherwise recourse to, NCE
and/or PSCo or any other NCE Operating Company. YPG's success in obtaining
investment-grade non-recourse financing for its investment in Yorkshire
Electricity indicates that the market assesses the overall quality of that
investment favorably.
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At the time of acquisition, NCI invested $362.4 million for 50% of the
equity of YPG. PSCo funded its equity investment in YPG primarily through $250
million of publicly issued secured medium-term notes with varying maturities and
drawings of approximately $110 million on its short-term lines of credit
pursuant to its short-term credit agreement with Bank of America, as agent.
With the exception of the loss associated with a windfall tax in
1997,(6) Yorkshire Electricity has made, and NCE anticipates that Yorkshire
Electricity will continue to make, a positive contribution to NCE's earnings per
share. Ongoing operations of Yorkshire Electricity positively impacted NCE's
1997 earnings by approximately $25.4 million after borrowing costs and income
taxes, or $0.24 per average share of common stock outstanding. In fact, NCE
believes that it and its partner, AEP Resources, can through the sharing of best
practices improve Yorkshire Electricity's already strong performance. Moreover,
in addition to providing NCE with a relatively stable source of income in the
future, NCE believes that there are lessons for it to learn, which can be
applied to the operations of the NCE Operating Companies, from the approaches
that Yorkshire Electricity takes in response to the deregulation of the electric
utility industry occurring in the U.K.
Prior to the announcement of the intention of Yorkshire Holdings to
offer to acquire the outstanding shares of Yorkshire Electricity, Standard &
Poor's and Moody's Investors Service rated the senior unsecured debt of
Yorkshire Electricity AA and Aa3, respectively. As expected, after the
announcement of the takeover bid, both rating agencies placed these ratings on
review for possible downgrade. On October 1, 1997, Standard & Poor's issued
revised ratings for Yorkshire Electricity of BBB+ and on October 6, 1997,
Moody's issued revised ratings for Yorkshire Electricity of Baa1. Standard &
Poor's indicated that the downgrade reflected the impact of higher financial
leverage on Yorkshire Electricity's future debt-servicing capacity.(7)
b. IPC
NCE, through NCI, owns a 22% interest in IPC, a company organized
under the laws of the United Kingdom. As discussed in the Merger File, NCI
obtained this interest prior to
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(6) In the general election held in the United Kingdom on May 1, 1997, as was
expected, the Labour Party won control of the government with a considerable
majority. Prior to the general election, the Labour Party had announced, and
PSCo was aware, that if elected, the Labour Party would impose a windfall tax on
certain industries in the United Kingdom, including certain privatized business
entities. On July 2, 1997, the one-time windfall tax was introduced in the
Labour Party's Budget and on July 31, 1997, it became law. The windfall tax was
intended to effect a recovery of funds by the government due to the purported
undervaluing of the companies subject to the tax when they were privatized by
the government via public stock offerings in 1990. The windfall tax liability
for Yorkshire Electricity was approximately 135 million pounds sterling ($221
million). The tax is payable in two equal installments: the first installment
was paid in December 1997, and the second installment is due in December 1998.
Yorkshire had sufficient cash to pay the first installment without the need for
additional long-term borrowings or equity contributions from NCE, and NCE
believes that Yorkshire Electricity will likewise have sufficient cash to pay
the second installment without additional long-term borrowings or equity
contributions by NCE. NCE's $110.6 million share of the windfall tax was
recorded as an extraordinary item in NCE's consolidated condensed statement of
income included in NCE's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997.
(7) The Commission took cognizance of the downgrade of Yorkshire Electricity in
File No. 70-9021, wherein it authorized American Electric Power Company, Inc. to
make investments in EWGs and FUCOs up to 100% of its retained earnings. SEE
HCAR No. 26864 (April 27, 1998) at 4 n. 10. The present ratings of both
Yorkshire Electricity and YPG are set out in Exhibit H-2.
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the merger of PSCo and SPS. Formed in 1995, IPC is engaged in the business of
developing, owning, and operating independent generation projects outside of the
U.S., primarily in Latin America and Central Asia. IPC's primary focus to date
has been on purchasing interests in and operating existing projects. IPC,
through a subsidiary, previously owned a 50% interest in the Karaganda GRES 2
Power Plant, a 608 MW coal-fired facility in central Kazakstan, which it sold
last year.(8)
2. EWGS
a. QUIXX EWGS
i. JAMAICA PROJECT
Quixx Jamaica, Inc. owns a 99% limited partnership interest in
KES Jamaica, L.P., an EWG which owns a 42.3 MW oil-fired combustion turbine
generating plant located in Montego Bay, Jamaica, W.I. (the "Jamaica Project"),
which sold electricity to Jamaica Public Service ("JPS") under an agreement that
expired on December 31, 1997. The remaining 1% general partnership interest is
owned by KES Montego, Inc. Quixx Jamaica, Inc. and KES Montego are wholly-owned
subsidiaries of Quixx. Quixx acquired its interest in Quixx Jamaica in 1994,
and its interest in KES Montego in 1997. In connection with the expiration of
the power sales agreement to JPS, Quixx is in the process of winding up its
activities with respect to the Jamaica Project. Quixx's original investment
with respect to the Jamaica Project was approximately $10.8 million.
ii. MUSTANG STATION
Quixx indirectly owns 50% of the general and limited partnership
interests in Denver City Energy Associates, L.P. ("Denver City"), an EWG that
will own a 50% interest in a 488 MW gas-fired combined cycle facility - Mustang
Station - under construction near Denver City, Texas. Mustang Station is
scheduled to be placed into commercial operation in late spring of 1999. Quixx
and LS Power, LLC (its unaffiliated partner in Denver City) jointly developed
this project and arranged for its financing. Funding for construction of Mustang
Station is being provided to Denver City by a group of banks, which is
non-recourse to NCE and the NCE Operating Companies.
When the plant is complete, Golden Spread Electric Cooperative,
Inc. will purchase an undivided 50% interest in the plant and will purchase the
electricity produced therein for use by its member cooperatives in the South
Plains and Panhandle of Texas and in the Oklahoma Panhandle. Mustang Station
will be brought on line in two phases: 288 MW from two combustion turbines
expected to be in service in late spring, 1999; and approximately 200 MW from
steam generation in the winter of 2000.
- --------------------
(8) e prime, through a subsidiary, also previously owned a 25% interest in this
facility, which it had qualified as an EWG. e prime's interest was sold with
IPC's.
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b. CENTRAL PIEDRA BUENA
By virtue of its ownership in IPC, NCI acquired a 22% ownership
interest in Independent Power International Ltd. ("IPI") for no additional
investment.(9) IPI was established under the laws of the Jersey Islands by the
owners of IPC. IPI owns a 39% interest in Central Piedra Buena, a 620 MW
gas-fired plant in Bakia Blanca, Argentina, that is in operation. IPI's
acquisition was financed through a loan by IPC.
In addition, e prime currently owns two EWGs, e prime projects
international, inc. ("EPI") and e prime operating, inc. ("EPO"). EPI wholly
owns EPO; it does not carry on any independent operations. EPO is an EWG by
virtue of its agreement to operate Central Piedra Buena.
D. RISK PROFILE OF NCE'S INVESTMENTS IN FUCOS AND EWGS
Earlier this year, NCE adopted a comprehensive new Business Growth &
Development Process to evaluate all new business opportunities, including
potential investments in EWGs and FUCOs. Investments in EWGs and other
independent power production facilities, particularly foreign projects, and
FUCOs involve a variety of risks that historically have not been present in the
traditional, regulated, electric utility industry in this country. The NCE
Business Growth & Development Process, which reflects PSCo and SPS pre-Merger
best practices, including in particular those utilized by PSCo in acquiring its
interest in Yorkshire Electricity, identifies and addresses (I.E., limit and/or
mitigate) these risks as they relate to both domestic and, more significantly,
foreign projects. The following is a discussion of these procedures and risks.
1. THE PROJECT REVIEW PROCESS
Every potential EWG (both domestic and foreign) and FUCO investment
opportunity (in this Section I.D., each a "Project") considered by NCE or any
one of the NCE Companies is subjected to several stages of formal review to
ensure both the alignment of the Project with NCE strategic objectives and the
appropriate assessment of both the risks and rewards for the Project. This
process is documented in NCE's Business Growth & Development Process, which
applies to the review of all new business opportunities, not simply to Projects.
The Business Growth & Development Process includes a detailed framework for each
phase of the Project development cycle. This process has been reviewed and
approved by NCE's executive management and has been reviewed with NCE's Board of
Directors and the board's Finance and Audit Committees.
Initially, at the conceptual stage in the assessment of a proposed Project,
an NCE Company, in conjunction with the Business Growth & Development staff,
must make a preliminary determination as to whether the Project is consistent
with NCE's strategic objectives and whether the Project's risk and rewards ratio
will be acceptable. If deemed to be consistent with NCE's strategic objectives
and the initial evaluation of the Project's risks and rewards ratio is
acceptable, then the same parties are responsible for the preparation of a
business concept document for the Project. The business concept
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(9) Each of the owners of IPC owns IPI in proportion to their holdings in
IPC.
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document must address at a minimum the description of the business, the
strategic fit with NCE objectives, a preliminary market assessment, a
description of the Project's competition, initial financial analysis,
critical success factors, risks, and exit strategies. Upon the completion of
the business concept document, the NCE Strategy Council, comprised of top
executives of NCE, must review it and make a determination that the Project
is consistent with NCE's corporate strategic objectives, and, given the
identified risks, has the requisite earnings potential to merit further
review and development of a business case.
After NCE Strategy Council approval of the business concept, the NCE
Company sponsoring the Project, with the assistance of the Business Growth &
Development staff, will develop a comprehensive business case for the Project.
This business case, along with the results of the due diligence and risk
assessment process performed in connection with the development of the business
case, is to form the basis upon which the NCE Strategy Council and the NCE board
of directors and/or its Finance Committee will approve of the proposed
investment in the Project. The business case is to be a comprehensive
identification and analysis of the strategic, market, operational, and financial
components of the Project. In addition to an assessment of the Project, it will
also include the identification of an exit strategy and identify initial Project
implementation steps. Its scope will be driven by the size, complexity, and
risk associated with the Project.
As noted above, during the business case development phase of the Project
review process, NCE will perform detailed Project due diligence and risk
assessment using cross-functional Project Teams to identify and assess the major
technical, financial, commercial, legal/regulatory, and political risks
associated with a particular Project, as well as potential mitigating factors.
Those on the Project Team are responsible for conducting or assuring the
adequacy of due diligence on a Project; they will work in conjunction with
appropriate advisors - E.G., engineers, accountants, attorneys, investment
bankers - in evaluating a Project. The Project Teams will be comprised of
personnel of the particular NCE Company sponsoring the Project and supporting
personnel. Such supporting personnel may include outside consultants, as well
as personnel from New Century Services, Inc. ("NCS"), NCE's service company
subsidiary, or Utility Engineering Company ("UE"), an affiliate engaged in a
variety of engineering, development, design, construction, and other related
services for both affiliates and non-affiliates.
Upon completion of the business case, a summary of the findings as well as
a recommendation on whether, and if so, how to proceed will be presented to the
NCE Strategy Council. Upon approval by the NCE Strategy Council, the investment
will be assessed against pre-approved board investment criteria to determine the
level of additional approvals, if any, that may be required. Depending on the
magnitude of the investment in a Project, Finance Committee and full board
approval may be necessary.
The above process applies to all new NCE businesses including both foreign
and domestic Projects. Due to the special risks associated with foreign
Projects, additional factors are considered. Before any NCE company makes any
investment in a foreign country, the business case must include an analysis of
country risk, which will be presented to and reviewed by the NCE Strategy
Council. The analysis includes a review of the political and economic stability
of the particular country, the
8
<PAGE>
government's commitment to private power, the extent to which there is a free
market economy, the extent to which there is a developed local banking
system, the legal and regulatory framework for private investment in electric
or gas facilities, the local business support for long-term investment of
private capital, currency conversion and repatriation, and the potential for
future partial sales of the investment interest to other investors. (10)
2. RISK MITIGATION OF FUCOS AND EWGS
For all new Projects, as NCE expands its business in the future, NCE will
carefully and systematically evaluate the potential risks of a Project in
connection with the development of the business case before NCE or NCE Company
funds are committed. The risks evaluated include those discussed below.
At the outset, NCE would note that the various risks identified below
relating to Projects generally and foreign Projects in particular can be
mitigated in appropriate cases through partnering with other entities.
Moreover, partnering may enable an NCE Company to spread development costs as
well as risks, and to draw upon the resources and experience of others, in
determining what Projects to pursue. As an example of this approach, PSCo
partnered with AEP Resources when it evaluated the acquisition of Yorkshire
Electricity, as has been discussed above.
a. OPERATING RISKS
NCE limits Project development efforts to technologies/industries with
which it has existing competencies such as electric generation and the
transmission and distribution of electricity and gas. Due diligence review of
operating assumptions relating to a Project, including those relating to fuel
supply and environmental effects, will be carried out by NCE Company, NCS, and
UE personnel with experience in the technology being evaluated, supplemented as
appropriate by the use of outside technical consultants. Where possible, the
risk of changes in the price of fuel will be passed through to the purchaser of
electricity under the negotiated terms of a long-term power sales agreement.
Other operating risks may, as appropriate, be mitigated by equipment warranties
and by casualty, business interruption, and other forms of insurance. Further,
operating risk may be mitigated in some instances by an NCE Company's direct
participation in the administration and operation of a Project; such direct
involvement may enhance NCE's ability to identify and address developing and
existing problems on a timely basis.
b. CONSTRUCTION RISKS
- ------------------------
(10) As a final observation, NCE would note that its Project review process
may in many cases be replicated by the lenders who agree to provide
construction or permanent debt financing on a non-recourse basis for a
Project, since repayment of that debt will depend solely upon the success of
a Project. Project debt maturities are commonly long-term, meaning that the
lenders' exposure to the risks of a Project extends for many years after
closing or completion of construction. Project debt documents customarily
require the establishment of plant overhaul or utility system maintenance,
debt service and other funded reserves, all of which are designed to preserve
the asset and protect the financial performance of the Project against
interruptions in revenues and other contingencies.
9
<PAGE>
As will be discussed below, in the foreign sector, NCE expects to
focus on existing Projects as opposed to greenfield Projects. As a consequence,
construction risks will not be a significant issue for most foreign Projects
that NCE pursues.
To the extent issues regarding construction risks arise, such risks
are commonly mitigated by fixed-price contracts with milestones and performance
guarantees (E.G., guaranteed heat rates and availability factors), backed by
appropriate levels of liquidated damages. The creditworthiness and track record
of the construction contractor is an important consideration in this regard. In
those cases where an NCE Company may serve as its own general construction
contractor, it will look to pre-negotiated cost and damage provisions from
sub-contractors, including, without limitation, equipment vendors, to protect
against performance shortfalls, cost overruns and schedule delays.
c. COMMERCIAL RISKS
In competitive power markets electricity prices are determined by the
economic laws of supply and demand. Accordingly, an NCE Company will conduct
extensive investigations of the electricity markets in which Projects operate,
either foreign or domestic. With respect to an EWG, an NCE Company will seek to
ensure that the EWG will be capable of providing electricity at competitive
rates in a non-regulated environment. An NCE Company will also assess the
underlying economic parameters in specific markets to assure that there will be
sufficient demand for the output of the EWG. In the past, most independent
power projects have relied on or have had the ability to arrange a power
purchase sales agreement for the entire output of a facility with a single power
purchaser, normally the local utility company. Such commitments minimize the
risk of variation in revenues, assuming that a facility meets expected
operations. However, in the future it will likely not be possible to rely
heavily on these types of agreements. Moreover, even where there is or where it
is possible to arrange such a commitment, an NCE Company may make an assessment
of the creditworthiness of the power purchaser over the life of the Project and
may seek to have a contingency plan in the event of defaults. Moreover, an NCE
Company will analyze the commitment to determine how it may be affected by
operations, changes in regulatory law or other legal requirements, or other
factors.
d. FINANCIAL RISKS
An NCE Company will seek to mitigate the financial risks of Projects
in a variety of ways. Generally, it will seek to secure the maximum amount of
permanent debt financing for Projects that is available at reasonable cost and
that is, by its express terms, non-recourse to NCE. This means that the
non-recourse debt of each Project will be secured solely by its assets and
revenues, and creditors have no ability to seek repayment upon default from NCE.
This method of financing ensures that NCE's or an NCE Company's exposure to any
Project is limited to the amount of its equity commitment, and that the NCE
Operating Companies would bear no risk of a Project's failure or financial
distress.(11)
- --------------------------
(11) However, from time to time in the future, NCE may agree to provide
Guarantees in connection with Project financings.
10
<PAGE>
In addition to the expected non-recourse nature of most Project debt
financing, Project debt is carefully structured to meet, or match, the
characteristics of the particular Project. For example, when the value of a
Project depends on a long-term, fixed-price, power purchase agreement, the
Project debt may be designed to be of a similar term, with scheduled debt
payments covered by fixed charges (usually the capacity payment component in the
contract). On the other hand, where there is no long-term, fixed source of
revenue, the percentage of non-recourse debt financing should be smaller, so
that financial risk is not increased by excessive debt levels.
e. INTEREST RATE RISK
A specific financing risk is the potential variability of interest
rates. Interest rate variability can be addressed, in part, by borrowing on a
fixed-rate basis or by purchasing financial instruments that fix or cap variable
interest rates. The effects of interest rate volatility can be mitigated
principally through two strategies: hedging and diversifying. Hedging
techniques that NCE may utilize would limit the impact that rising interest
rates have on floating rate debt instruments. Diversification implies that
liabilities will be spread among short- and long-term debt instruments, as well
as fixed and floating interest obligations.
f. FOREIGN CURRENCY EXCHANGE RISK
There are several ways in which NCE or an NCE Company may address the
foreign currency exchange risk element, depending on the status of the target
country. Initially, an NCE Company will seek to develop or acquire Projects
where there is free convertibility of the local currency into U.S. dollars. In
countries that do not have a history of stability in the management of their
exchange policy, NCE may require that part or all of the revenue from a Project
be payable in or indexed to hard currency (almost invariably U.S. dollars).
Back-up guarantees or other undertakings by the central government may be
available to ensure that the U.S. dollar payments due under a power purchase
agreement are actually made available by the central bank or ministry of
finance.
In other cases (YPG for example), some or all of the non-recourse
Project debt may be borrowed in the same currency as the Project's revenues,
thereby ensuring a match between debt service obligations and operating income.
Where available, long-term currency swaps would provide a further hedging option
for the equity component of the investment.
g. LEGAL RISKS
Legal risks will be addressed by careful review of any investment by
legal counsel, including local and international counsel where foreign Projects
are concerned. Such legal reviews address regulatory and permitting risks,
environmental risks, the adequacy and enforceability of guarantees or other
contractual undertakings of third parties, the status of title to utility
property, and the obligations inherent in the financing arrangements.
11
<PAGE>
h. COUNTRY RISKS
In addition to the specific risks mentioned above, investment outside
the United States can entail country-specific risks related to political or
economic performance. As indicated above, NCE thoroughly evaluates country risk
before committing to invest in any foreign Project, and attempts to mitigate
this risk through a number of measures. Most important, the country review
process described above ensures that the political and economic stability of any
country has been reviewed at several levels up to and, depending on the level of
investment, including NCE's Board of Directors before any investment occurs.
The country analysis also focuses specifically on the country's energy sector
and on the government's support for private ownership in that sector.
In some instances, an NCE Company will consider partnering with local
entities who are experienced in doing business in the host country to mitigate
risk. Local partners can in some situations reduce the risk of future
expropriation or unfair regulatory treatment. Another mitigating factor is the
participation of official or multilateral agencies in a Project. When funds for
the Project are supplied by government-sponsored export credit agencies or other
governments or institutions such as the World Bank through its International
Finance Corporation affiliate, the host country has strong incentives not to
take actions which would harm the Project's viability.
Political risk may be addressed through political risk insurance
obtained from the Overseas Private Investment Corporation, a United States
agency, or the Multilateral Investment Guaranty Agency, a World Bank affiliate,
or in the commercial insurance market. Political risk insurance is available to
insure the project debt or the return of an investor's equity. One can also
insure against outright expropriation, acts of civil violence, or even
"creeping" nationalization brought about by punitive regulation. An NCE Company
will analyze the perceived risk and its costs and compare that with the cost of
obtaining such insurance and, when such costs associated with such risks exceed
the costs of insurance coverage, the NCE Company will attempt to procure such
insurance.
i. PORTFOLIO DIVERSIFICATION
NCE recognizes that the risk inherent in any investment cannot be
eliminated entirely, even by the most careful approach to Project development.
However, NCE believes that diversification of both the type and location of
Projects can mitigate risk. Accordingly, the NCE Companies will evaluate
opportunities across countries and regions of the world. On the other hand, NCE
may balance its diversification strategy with another goal - I.E., to develop
regional expertise.
In the foreign sector, while it is possible that NCE may invest in
greenfield projects, the NCE Companies expect to target acquisitions of
generating Projects that are already in operation, either from existing private
owners or through privatizations. These acquisitions reduce the risk of NCE's
overall business by producing near-term earnings without significant development
or construction risk. Moreover, NCE believes that it can, through the expertise
and resources of the NCE Companies and other system companies, improve the
operations of many existing generating Projects that are available.
12
<PAGE>
3. CASE STUDY: YORKSHIRE ELECTRICITY
NCE's Business Growth & Development Process was developed post-Merger and
after the acquisition of NCE's 50% indirect interest in Yorkshire Electricity.
Nevertheless, that acquisition and the processes employed in connection with
that acquisition served as a foundation for the development of the NCE Business
Growth & Development Process, and illustrates the risk analysis outlined above.
In assessing the commercial and operating risks of acquiring its interest
in Yorkshire Electricity, PSCo was influenced by a number of factors, including
Yorkshire Electricity's successful operating history since privatization and its
strong competitive position. The transaction presented no significant
construction risk since Yorkshire Electricity is an established company with
operational utility facilities. Through detailed review of past financial and
operational documentation, and through inquiry and other research performed in
the U.K., PSCo determined that the general performance of Yorkshire
Electricity's management was strong. PSCo, along with its partner AEP
Resources, engaged in a substantial due diligence effort prior to the
acquisition of Yorkshire Electricity. It employed financial and operational
personnel as well as retaining U.S. and U.K. financial, legal, and accounting
advisors. It concluded that all relevant risks were adequately mitigated.
Moreover, in evaluating this opportunity, PSCo partnered with an entity having
substantial size and resources, namely AEP Resources, a subsidiary of AEP.
Yorkshire Electricity supplies and distributes electricity to 2.1 million
customers in England. Yorkshire Electricity has been licensed under the
Electricity Act to distribute and supply electricity in an authorized area. The
U.K. Office of Electricity Regulations ("OFFER") regulates Yorkshire Electricity
and other regional electric companies.
The distribution of electricity is Yorkshire Electricity's core business
and provides approximately 75% of its profitability. Regulation of the
distribution business is subject to an annual rate cap formula based on changes
in inflation less an efficiency factor. Regulatory review and reset of the
formula is scheduled for 2000. The formula provides a partial price hedge
against increased expenses and so helps reduce operating risk. Efficiency gains
and cost reductions below the rate cap formula benefit Yorkshire Electricity's
owners.
The supply business in the United Kingdom currently is subject to
competition for loads in excess of 100 kW. The business is scheduled to become
competitive for all loads in 1998. Yorkshire Electricity currently has one of
the lowest supply prices in the United Kingdom. Yorkshire Electricity purchases
electricity in the wholesale market for its supply business and uses hedge
contracts to minimize exposure to fluctuating electric prices. Yorkshire
Electricity's policy is to hedge its forecasted load substantially by entering
into hedging contracts with individual generators. This approach mitigates
operating risk on the supply side.
Financial risk was a key area of focus for PSCo in acquiring Yorkshire
Electricity. First, over 70% of the acquisition price was funded with
non-recourse debt. YPG borrowed approximately 1 billion UK pounds (US $1.5
billion) through a non-recourse loan and revolving facility. PSCo's financial
risk was thus limited to its equity investment of approximately $362.4 million.
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<PAGE>
Although the acquisition was initially funded with variable rate debt by
YPG, PSCo, and AEP Resources expected that 70%-80% of the debt would be
refinanced with fixed-rate medium- and long-term debt after a short period. In
anticipation of that refinancing, YPG fixed the interest rate on 60% of the bank
facility through interest rate swaps. A substantial portion of such refinancing
has subsequently taken place.
Foreign currency risk may continue to be minimized by borrowing in pounds
sterling or, if in U.S. Dollars, hedging the conversion rate. For example, the
original YPG credit facility was denominated in pounds, and when that facility
was partially refinanced in 1998, a portion of the new security issuances was
denominated in pounds. In addition, when PSCo made its commitment to invest in
YPG, it hedged the conversion rate.
Legal risks were deemed minimal because NCE did not believe that the United
Kingdom presented any country specific political risks due to its established
legal and regulatory framework.(12)
E. POTENTIAL INVESTMENTS IN ADDITIONAL EXEMPT PROJECTS
NCE intends to make substantial investments in EWGs (both domestic and
foreign) and FUCOs and other independent power projects primarily for the
following reasons:
1. NCE has developed a strategy which requires it to expand the commodity
services portion of its business. The commodity services business includes the
generation and marketing of electricity. NCE has concluded that to remain
competitive in the rapidly evolving electric commodity markets, it must increase
the size and scale of its commodity services business in order to gain the
economies to defray the necessary, but significant, infrastructure costs.
Moreover, NCE believes that this focus on the commodity services business is
consistent with its demonstrated strengths in owning and operating electric
generating plants on a low-cost basis. In addition, in order to expand its
electricity marketing business, NCE believes that it will be necessary to
acquire additional physical assets outside of the NCE Operating Companies'
existing service territory to support its marketing position. The assets that
it acquires outside of the service territories of the NCE Operating Companies
but within the United States may need to be qualified as EWGs, and as such will
be subject to the Rule 53 investment limitations.
2. Investments in EWGs and FUCOs will enable NCE to continue to expand
its business despite uncertain growth prospects in the service territories of
the NCE Operating Companies. Present projections indicate that the NCE
Operating Companies will continue to fund their operations and their
construction expenditures primarily from internal sources of cash and from sales
of securities and other borrowings for the next three years.(13) Thus,
acquisitions of EWGs and FUCOs present NCE with the
- -------------------------
(12) At the time of the acquisition of Yorkshire Electricity, Public Service
and AEP Resources were aware of the likelihood that the Windfall Tax would be
imposed, and factored the imposition of that tax into its financial modeling for
the acquisition.
(13) By order issued in File No. 70-9193 (HCAR No. 26871), the Commission
authorized PSCo to sell its interest in NCI to NC Enterprises in exchange for a
note issued by NC Enterprises. Such sale was at NCI's book
14
<PAGE>
opportunity to continue to grow through reinvestment of retained earnings in an
industry sector in which NCE has about a century of experience, while at the
same time diversifying overall asset risk.
3. NCE's intended portfolio will be diversified by region and operating
assets and will therefore have an increased potential for revenue growth and be
less susceptible to adverse effects from any one particular market. NCE
believes that its investments in EWGs and FUCOs will give NCE a larger and more
diversified base for raising equity capital for future growth and expansion.
Investments in EWGs and FUCOs will thus help NCE remain competitive as
competition increases in the United States electric utility industry. Such
investments in EWGs and FUCOs will not have a negative effect on NCE's ability
to make any additional equity investments in the NCE Operating Companies that
may be required in the future.
4. Outside of the United States, NCE has and will likely purposely pursue
investments in utility systems in geographical regions, such as the United
Kingdom, which have moved much further than the United States towards
deregulation and full competition in both wholesale and retail electricity
markets. NCE believes that the creation and maintenance of value for its
shareholders will depend on the NCE Operating Companies' ability to continue to
successfully operate their core business in the United States as that business
becomes subject to increasing competition. NCE believes the experience it
develops in markets that are already largely deregulated will ultimately help
the long-term success of its core business. NCE expects that the lessons
learned from these markets will provide NCE with insights about the market
structures that produce efficient and equitable results for consumers and
shareholders. These insights, in turn, will assist NCE and the NCE Operating
Companies to effectively shape and respond to the restructuring of the electric
industry in the United States.
5. The actual use of the expanded investment authority cannot be
determined at this time. Although the potential opportunities for EWG and FUCO
investment are numerous, until the authority is received, firm commitments
cannot be made to acquire or develop any specific Project that requires
NCE-parent financing. Even with the ability to increase its aggregate
investment to 100% of retained earnings, NCE will necessarily have to be
selective in its investment choices. At this time, NCE is considering both
domestic and foreign Projects. As noted above, selected Projects will have been
thoroughly evaluated using NCE's Business Growth and Development process.
Obviously, if NCE acquires a larger FUCO or foreign EWG, it will have less
capacity under its permissible aggregate investment to purchase domestic EWGs.
- --------------------------------------------------------------------------------
value - approximately $289.8 million as of December 31, 1997. The note has a
twenty-year maturity, although it may be prepaid with no prepayment penalty.
As indicated in NCE's Application/Declaration in File No. 70-9193, NC
Enterprises plans to prepay the note through a capital contribution to be made
by NCE upon the anticipated sale of common stock in 1998 and 1999. NCE expects
that upon the sale of common stock for which authorization was granted by the
Commission in File No. 70-9007 (HCAR No. 26872), it will make the contemplated
capital contribution to NC Enterprises to enable NC Enterprises to prepay the
note to PSCo.
15
<PAGE>
Item 2. FEES, COMMISSIONS, AND EXPENSES
The fees, commissions, and expenses incurred or to be incurred in
connection with the transactions proposed herein are estimated to be $25,000
(for legal fees and expenses).
Item 3. APPLICABLE STATUTORY PROVISIONS
A. GENERAL PROVISIONS
Sections 32 and 33 of the Act and Rules 53 and 54 of the Commission's rules
thereunder are or may be applicable to the proposed transactions.
Rule 53 provides that, if each of the conditions of paragraph (a) thereof
is met, and none of the conditions of paragraph (b) thereof is applicable, then
the Commission may not make certain adverse findings under Sections 7 and 12 of
the 1935 Act in determining whether to approve a proposal by a registered
holding company to issue securities in order to finance an investment in any EWG
or to guarantee the securities of any EWG. Giving effect to the proposals
contained herein, NCE will satisfy all of the conditions of Rule 53(a) except
for clause (1) thereof, since NCE is proposing herein that NCE's aggregate
investment may exceed 50% of NCE's consolidated retained earnings. None of the
conditions specified in Rule 53(b) is applicable.
B. COMPLIANCE WITH RULE 53(c)
Rule 53(c) states that, in connection with a proposal to issue and sell
securities to finance an investment in any EWG, or to guarantee the securities
of any EWG, a registered holding company that is unable to satisfy the
requirements of paragraph (a) or (b) of Rule 53 must "affirmatively demonstrate"
that such proposal:
- will not have a substantial adverse impact upon the financial
integrity of the registered holding company system; and
- will not have an adverse impact on any utility subsidiary of the
registered holding company, or its customers, or on the ability of
State commissions to protect such subsidiary or customers.
Initially, NCE would note that the Commission has performed an analysis of
the requirements of Rule 53(c) with respect to applications/declarations filed
by The Southern Company ("Southern") in File No. 70-8725, by Central and South
West Corporation ("CSW") in File No. 70-8809, by GPU, Inc. ("GPU") in File No.
70-8593, Cinergy Corporation ("Cinergy") in File No. 70-9011, and AEP in File
No. 70-9021. In these applications/declarations, Southern, CSW, GPU, Cinergy,
and AEP sought almost identical authority to the authority sought by the NCE
hereunder, namely relief from the safe-harbor requirements of Rule 53(a)(1) to
allow NCE to have an aggregate investment of up to 100% of consolidated retained
earnings. The Commission granted such authority by issuing its orders making
such applications/declarations effective on April 1, 1996 (HCAR No. 26501) (the
"Southern Order"),
16
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January 24, 1997 (HCAR No. 26653) (the "CSW Order"), November 17, 1997 (HCAR No.
26779) (the "GPU Order"), March 23, 1998 (HCAR No. 26848) (the "Cinergy Order"),
and April 27, 1998 (HCAR No. 26864) (the "AEP Order") (collectively, the "100%
Orders"). In those orders, the Commission found that Southern, CSW, GPU,
Cinergy, and AEP had demonstrated successfully, through the use of certain
financial indicators, that investing in EWGs and FUCOs in an amount not to
exceed their consolidated retained earnings would not have a substantial adverse
impact on the financial integrity of their systems. A comparison with NCE of
those financial indicators used by Southern, CSW, GPU, Cinergy, and AEP,
considering the size and market position of NCE relative to Southern, CSW, GPU,
Cinergy, and AEP, demonstrates that the financial integrity of NCE is
substantially similar to the financial integrity of those holding company
systems. Thus, this Application/Declaration, which seeks substantially the same
authority as granted in the 100% Orders, is consistent with the rationale of,
and the conclusions reached by the Commission in, those orders.
NCE addresses each of the requirements of Rule 53(c) as follows:
1. The Proposed Transactions Will Not Have a Substantial Adverse Impact
Upon the Financial Integrity of the NCE System
------------------------------------------------------------------
The use of proceeds from the issuance of debt and equity securities of NCE
to make aggregate investments in EWGs and FUCOs, and the issuance of, or
provision for, Guarantees in connection therewith by NCE, in amounts of up to
NCE's consolidated retained earnings will not have a "substantial adverse
impact" on the financial integrity of the NCE System.
The lack of any "substantial adverse impact" on NCE's financial integrity
as a result of increased levels of investments in EWGs and FUCOs can be
demonstrated in several ways, including the analysis of historic trends in NCE's
consolidated capitalization ratios and retained earnings and the market view of
NCE's securities. Consideration of these and other relevant factors supports
the conclusion that the issuance of securities and Guarantees by NCE to finance
investments in EWGs and FUCOs exceeding the 50% consolidated retained earnings
limitation in Rule 53(a)(1) will not have any "substantial adverse impact" on
the financial integrity of NCE.
a. KEY FINANCIAL RATIOS/BENCHMARKS
i. CAPITALIZATION RATIOS
Aggregate investments in EWGs and FUCOs (as defined in Rule
53(a)) in amounts up to 100% of NCE's consolidated retained earnings ($715.6
million as of December 31, 1997) would still represent a relatively small
commitment of NCE capital for a company the size of NCE, based on various key
financial ratios at December 31, 1997. For example, investments of this amount
would be equal to only 15.5% of NCE's total consolidated capitalization ($4.6
billion), 12.9% of consolidated net utility plant ($5.5 billion), 9.8% of total
consolidated assets ($7.3 billion), and 13.5% of the market value of NCE's
outstanding common stock ($5.3 billion) as of December 31, 1997. The following
chart shows how these compare to the same percentages for Southern, CSW, GPU,
Cinergy, and AEP, as reflected in each system's respective 100% Orders.
17
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<TABLE>
<CAPTION>
----------------------------------------------------------------
Investments in EWGs and FUCOs (assuming equal to 100% of
consolidated retained earnings) as a percentage of:
- --------------------------------------------------------------------------------
Company Consolidated Consolidated Total Market Value of
Capitalization Net Utility Consoli- Outstanding Common
Plant dated Assets Stock
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Southern 16.3% 15.4% 11% 20.4%
- --------------------------------------------------------------------------------
CSW 23% 23% 14% 31%
- --------------------------------------------------------------------------------
GPU 24.9% 34.2% 19.4% 49.8%
- --------------------------------------------------------------------------------
Cinergy 16% 16% 11% 19%
- --------------------------------------------------------------------------------
AEP 16% 13.8% 9.8% 18.5%
- --------------------------------------------------------------------------------
Average of above 19.2% 20.5% 13% 27.7%
- --------------------------------------------------------------------------------
NCE 15.5% 12.9% 9.8% 13.5%
- --------------------------------------------------------------------------------
</TABLE>
This comparison verifies that an aggregate investment of 100% of NCE's
consolidated retained earnings would involve a relatively small commitment of
capital for a company of NCE's size. Moreover, in every category, the NCE
percentage is either lower than (except in one instance where it is equal to)
the applicable percentage for the other registered systems that have 100%
Orders.
NCE's credit rating is currently BBB+ by Standard & Poor's, Baa1
by Moody's, and A- by Duff & Phelps. NCE's consolidated capitalization and
interest coverage ratios for 1997 (PRO FORMA since the Merger was only completed
in August of 1997 and also to make adjustment to eliminate the effects of the
U.K. Windfall Tax, which was accounted for as an extraordinary item) are within
industry ranges set by independent debt rating agencies for BBB rated companies,
as shown below:
NCE CONSOLIDATED 1997 DEBT TO CAPITALIZATION AND INTEREST COVERAGE RATIOS
(EXCLUDING NON-RECOURSE PROJECT DEBT) FOR THE YEAR ENDED DECEMBER 31, 1997*
Total Debt/Capital 50.8%
Pre-Tax Interest Coverage 3.1x
Funds from Operations Interest Coverage 2.7x(14)
1997 AVERAGE INDUSTRY RATIOS FOR BBB RATED INVESTOR-OWNED UTILITIES**
Total Debt/Capital 49.7%
Pre-Tax Interest Coverage 2.6x
- --------------------------
(14) The FFO to Interest coverage ratio was negatively impacted by the lag
in recovery of increased gas costs in late 1996 and early 1997. When taken
into account, NCE's FFO to Interest coverage ratio would be within the
industry range for BBB rated utilities.
18
<PAGE>
Funds from Operations Interest Coverage 3.3x
* Consistent with rating agency treatment, mandatorily redeemable
preferred securities are not included in debt and related interest
coverage ratios.
** Standard & Poor's Utility Financial Statistics (Nov. 1997).
NCE's PRO FORMA consolidated capitalization ratios as of December
31, 1997 were 49.2% equity (including mandatorily redeemable preferred
securities and common and preferred equity) and 50.8% debt (including
approximately $590 million of short-term debt). No non-recourse debt of the NCE
Companies' EWGs and FUCOs is consolidated for financial reporting purposes.
This ratio continues to be within industry ranges set by independent debt rating
agencies for BBB rated companies.
ii. CONSOLIDATED RETAINED EARNINGS
Again, using PRO FORMA numbers (since the Merger was only
completed in August of 1997 and to make adjustments for the effects of the U.K.
Windfall Tax), NCE's consolidated retained earnings have grown on average almost
6.7% per year over the previous three years. Consolidated retained earnings
increased $63 million during 1995, a 9.6% increase; by $53 million during 1996,
a 7.4% increase; and decreased by $3 million during 1997 (the year in which the
Merger was completed), a 0.5% decrease.(15)
Although it is not possible to compare on a pure apples-to-apples
basis, NCE's average annual retained earnings growth rate is within the range of
growth rates for those other systems that have obtained 100% Orders.
iii. RULE 53(B) FACTORS
With respect to the relevant financial benchmarks specifically
contemplated by Rule 53(b), none is applicable: (1) there has been no
bankruptcy of an NCE associate company (Rule 53(b)(1)); (2) NCE's average
consolidated retained earnings for the four most recent quarterly periods have
not decreased by 10% from the average for the preceding four quarterly periods
(Rule 53(b)(2)); and (3) in the previous fiscal year, NCE did not report
operating losses attributable to its direct or indirect investments in EWGs and
FUCOs that exceeded an amount equal to 5% of consolidated retained earnings
(Rule 53(b)(3)).
NCE undertakes to notify the Commission by filing a
post-effective amendment in this proceeding in the event that any of the
circumstances described in Rule 53(b) arise during the authorization period.
iv. OTHER INDICATORS
- --------------------------
(15) NCE's 1997 retained earnings growth was negatively impacted by certain
non-recurring expenses, including the recognition of merger and business
integration costs incurred during 1997. Additionally, interest charges and
preferred dividends increased primarily due to interest on borrowings utilized
to finance capital expenditures and the April 1997 investment in Yorkshire
Electricity.
19
<PAGE>
Other financial indicators show the financial strength of NCE.
For example, on a PRO FORMA basis to reflect both the Merger and to eliminate
the effect of the U.K. Windfall Tax on Yorkshire Electricity in 1997, NCE's
earnings per share and return on equity were $2.64 and 12.8%, respectively, for
the year ended 1996 and $2.50 and 11.6%, respectively, for the year ended 1997.
b. MARKET ASSESSMENT OF NCE
i. ASSESSMENT OF GROWTH AND EARNINGS
The market's assessment of NCE's future growth and earnings also
compares favorably to other electric utility issuers (again using PRO FORMA
figures). This can be shown by comparison of NCE's price-earnings and
market-to-book ratios, as compared to industry averages. These measures
indicate investor confidence in NCE.
<TABLE>
<CAPTION>
1997
P/E Ratio: ----
---------
<S> <C>
NCE 19.2
Electric Industry* 15.9
Market-to-Book Ratio:
--------------------
NCE 215%
Electric Industry* 175%
</TABLE>
* 1997 industry average taken from Regulatory Research Associates, Inc.
- Utility Focus 1/6/98 Table II.
An average to above average price/earnings and market-to-book
ratios were noted as indicators of favorable market assessments in all of the
100% Orders.
ii. DIVIDEND PAYOUT RATIO
NCE's indicated dividend rate at December 31, 1997 was $2.32 per
share. When calculated against NCE's pro forma earnings per share of $2.50 for
1997, the payout ratio is above the electric utility average. This relatively
high payout ratio is attributed in part to the recognition of merger and
business integration costs, which negatively impacted NCE's PRO FORMA earnings
per share.
<TABLE>
<CAPTION>
1997
----
<S> <C>
NCE Payout Ratio % 93*
Electric Industry % 82**
</TABLE>
* Restated to eliminate the extraordinary loss from the windfall tax on
Yorkshire Electricity.
20
<PAGE>
** Standard & Poor's Utility Financial Statistics (November 1997).
2. The Proposed Transactions Will Not Have an Adverse Impact on Any
Utility Subsidiary of NCE, or its Customers, or on the Ability of
NCE's State Public Utility Commissions to Protect Such Customers
----------------------------------------------------------------------
NCE's and the NCE Companies' request in this Application/Declaration to
raise NCE's investment limits in EWGs and FUCOs to 100% of consolidated retained
earnings will not have an "adverse impact" on any of NCE's Operating Companies,
their respective customers, or on the ability of the six State commissions
having jurisdiction over the NCE Operating Companies to protect such NCE
Operating Companies or such customers.
The conclusion that the NCE Operating Companies and their customers will
not be adversely impacted by increased levels of investment by NCE in Projects
is well supported by (i) the insulation of the NCE Operating Companies and their
customers from potential direct adverse effects of investments in EWGs and
FUCOs; (ii) analyses of the NCE Operating Companies' financial integrity
(including ability of the NCE Operating Companies to issue senior securities);
and (iii) the proven effectiveness of state commission oversight together with
the affirmation by the state commissions of Colorado, Kansas, Oklahoma, New
Mexico, Texas, and Wyoming that they have authority and jurisdiction, and will
exercise such authority, to protect ratepayers in their respective states from
any adverse impact.
a. INSULATION FROM RISK
All of NCE's investments in EWGs and FUCOs are, and in the future will
remain, segregated from the NCE Operating Companies. While all of the NCE
Companies' present investments in EWGs and FUCOs originally were direct or
indirect investments of PSCo and SPS, in File No. 70-8787 (approving the Merger)
and File No. 70-9193 (approving the transfer of NCI from PSCo to NC
Enterprises), NCE has obtained the authority to segregate existing investments
in EWGs and FUCOs from the NCE Operating Companies. Thus, the NCE Operating
Companies are, and are currently expected in the future to remain, insulated
from the direct effects of investments by NCE and the NCE Companies in EWGs and
FUCOs. Any losses that may be incurred by such EWGs and FUCOs would have no
effect on domestic rates of any NCE Operating Company (because of the
Applicants' undertaking not to seek recovery in rates). NCE represents that it
will not seek recovery through higher rates to the NCE Operating Companies'
utility customers in order to compensate NCE for any possible losses that it or
the NCE Companies may sustain on investments in EWGs and FUCOs or for any
inadequate returns on such investments.
Moreover, to the extent that there may be indirect impacts on the NCE
Operating Companies from NCE EWG and FUCO investments through effects on NCE's
capital costs, the state commissions regulating the NCE Operating Companies can
set the cost of capital for electric utilities by comparison with selected
groups of domestic utilities, which may exclude any utilities with adverse
impacts due to EWGs and FUCOs. Therefore, the states have the authority and the
mechanism to
21
<PAGE>
prevent any adverse effects on the cost of capital due to investments in EWGs
and FUCOs from being passed on to ratepayers.
NCE has complied and will continue to comply with the requirements of
Rule 53(a)(3) regarding the limitation on the use of NCE Operating Company
employees in connection with providing services to EWGs and FUCOs. Increased
levels of investment in EWGs and FUCOs are not anticipated to have any impact on
utilization of NCE Operating Company employees. The NCE Operating Companies
have not and will not increase staffing levels to support the operations of EWGs
and FUCOs. NCE and the NCE Companies expect that project development,
management, and home office support functions for EWGs and FUCOs will largely be
performed by NCS and by outside consultants (E.G., engineers, investment
advisors, accountants, and attorneys) engaged by an NCE Company. It is expected
that UE will also be called upon to provide such consulting services.
Accordingly, the NCE Companies' need for the support of personnel provided by
the NCE Operating Companies has been, and is expected to continue to be, modest.
Finally, NCE has complied and will continue to comply with the other
conditions of Rule 53(a) providing specific protections to customers of the NCE
Operating Companies and their state commissions, in particular, the requirements
of Rule 53(a)(1) regarding the preparation and making available of books and
records and financial reports regarding EWGs and FUCOs, and the requirements of
Rule 53(a)(4) regarding filing of copies of applications and reports with other
regulatory commissions.
b. NCE OPERATING COMPANY FINANCIAL INTEGRITY
The NCE Operating Companies are in excellent financial health, as
indicated by such factors as debt/equity ratios of the NCE Operating Companies,
earnings coverages, and security ratings.
i. DEBT/EQUITY RATIOS
Debt (including short-term debt) ratios of the two major NCE
Operating Companies are consistent with the industry range for A-rated electric
utilities. The current industry average for A-rated electric utilities is
approximately 48%.(16)
<TABLE>
<CAPTION>
DEBT AS % OF CAPITALIZATION 1995 1996 1997
--------------------------- ---- ---- ----
<S> <C> <C> <C>
PSCo 51% 51% 50%*
SPS 42% 49% 49%
</TABLE>
* Restated to eliminate effect of U.K. Windfall Tax.
ii. EARNINGS COVERAGES
- ------------------------------
(16) Standard & Poor's Utility Financial Statistics (Nov. 1997).
22
<PAGE>
The major NCE Operating Companies' ability to issue debt and
equity securities in the future depends upon their financial strength at the
time such securities are issued. To the degree they issue senior secured debt,
they must comply with certain coverage requirements designated in their mortgage
bond indentures. December 31, 1997 indenture earnings coverages for the NCE
Operating Companies were approximately 4.9 for SPS and PSCo, in each case well
above the required coverages of 2x and 2.5x, respectively. Accordingly, the NCE
Operating Companies should have more than adequate earnings coverages for
financing requirements in the foreseeable future.
iii. SECURITY RATINGS
The NCE Operating Companies' coverages have generally been within
the A and BBB ranges set by the major rating agencies in recent years. The NCE
Operating Companies continue to show adequate financial statistics as measured
by the rating agencies.
<TABLE>
<CAPTION>
DEBT RATINGS (as of 12/31)
------------
S&P RATING: 1995 1996 1997 CURRENT
---------- ---- ---- ---- -------
<S> <C> <C> <C> <C>
PSCo BBB+ A- A A
SPS AA AA A A
CLFP BBB BBB BBB BBB
MOODY'S RATING: 1995 1996 1997 CURRENT
-------------- ---- ---- ---- -------
PSCo Baa1 A3 A3 A3
SPS Aa2 Aa2 Aa2 Aa2
CLFP N/A N/A N/A N/A
DUFF & PHELPS RATING: 1995 1996 1997 CURRENT
-------------------- ---- ---- ---- -------
PSCo N/A N/A N/A A
SPS AA AA AA AA
CLFP N/A N/A N/A N/A
</TABLE>
PREFERRED STOCK RATINGS
SPS has no outstanding traditional preferred stock and PSCo has issued
a call notice to redeem all of its outstanding traditional preferred
stock as of June 10, 1998.
In addition, the rating agencies consider the NCE Operating
Companies as having relatively favorable competitive positions, with Standard &
Poor's ranking PSCo "average" and
23
<PAGE>
SPS "reasonably strong" business position. See Standard & Poor's Utility Credit
Report, May, 1997. Additionally, Standard & Poor's recently (4/14/98) affirmed
the ratings of both of the major NCE Operating Companies, and revised its
outlook on PSCo to positive from stable. SPS's outlook from Standard & Poor's
remains stable.(17)
NCE does not believe that investments made in EWGs and FUCOs have
negatively affected the first mortgage bond ratings of its NCE Operating
Companies, PSCo and SPS. Upon announcement of the acquisition of Yorkshire
Electricity, the credit ratings of PSCo were affirmed by Moody's and Standard &
Poor's. None of the ratings of the NCE Operating Companies has been downgraded
as a result of investments in an EWG or FUCO.
c. NCE OPERATING COMPANIES' CAPITAL NEEDS
Additional investments in EWGs and FUCOs will not have any negative
impact on the NCE Operating Companies' ability to fund operations and growth.
As indicated above, present projections indicate that the NCE Operating
Companies will continue to fund their operations and their construction
expenditures primarily from internal sources of cash and from sales of
securities and other borrowings for the next three years. Moreover, there is
ongoing evidence that the NCE Operating Companies can access capital markets as
needed.
NCE Operating Companies - Construction Expenditures: actual
(1995-1997) and projected (1998) expenditures, including Allowance for Funds
Used During Construction ($ million):
<TABLE>
<CAPTION>
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C>
380 455 475 536
Percent internally generated:
1995 1996 1997(18) 1998
---- ---- ---- ----
85% 54% 21% 76%
</TABLE>
d. ADEQUACY OF STATE COMMISSION OVERSIGHT
In the opinion of NCE and the NCE Companies, the six state commissions
having jurisdiction over the NCE Operating Companies, namely Colorado, Kansas,
Oklahoma, New Mexico, Texas, and Wyoming (collectively, "State Commissions") are
able to protect utility customers within their respective states. The State
Commissions have not raised objections to NCE's current
- ------------------------
(17) The rating agencies do no formal rating of CLFP.
(18) 1997 was an unusual year in that cash from operations was negatively
impacted by the lag in recovery of increased gas costs in late 1996 and early
1997. In the meantime, the operating companies access to capital markets have
not been impacted and, in fact, PSCo was able to successfully access capital
markets as evidenced by it's recent (April & May 1998) issuance of $250 million
of First Collateral Trust Bonds and $194 million of trust originated preferred
securities.
24
<PAGE>
investments in EWGs or FUCOs.(19) To provide the Commission with added
assurances, representatives of NCE and the applicable NCE Operating Company have
met with each of the State Commissions having jurisdiction over the NCE
Operating Companies and requested each to provide the Commission with a letter
certifying that such State Commission has jurisdiction over certain NCE
Operating Companies and that such State Commission can protect ratepayers from
any adverse effect or costs that might result from NCE's investments in EWGs and
FUCOs. Additionally, with respect to certain State Commissions, the NCE
Operating Companies will, among other things, have to comply with certain
reporting requirements and covenant that such investments in EWGs will not
result in any obligation by the NCE Operating Companies. The NCE Operating
Companies have been subjected to numerous audits by the Federal Energy
Regulatory Commission. Such audits have not raised any issue relative to
affiliate transactions generally.
NCE would further note that the settlement agreements that the now NCE
Operating Companies entered into in connection with the obtaining of regulatory
approval for the Merger provide additional assurance that the NCE Operating
Companies and their customers will not be harmed by NCE's and the NCE Operating
Companies' investments in EWGs and FUCOs. Specific examples of added
protections resulting from the settlements are as follows:
i. The Colorado Public Utilities Commission ("Colorado
Commission"), in its order approving a settlement agreement, created additional
reporting requirements for cost assignments and allocation methodologies used
for charges made by NCS to PSCo and also required PSCo to report annually all
inter-affiliate and parent transactions. The Colorado Commission last year also
adopted affiliate transaction rules that will apply to any transactions between
PSCo and any NCE Company, including those relating to support services by PSCo
for EWGs and FUCOs.
ii. The New Mexico Public Utility Commission ("New Mexico
Commission") adopted the Recommended Decision of a Hearing Examiner which found,
among other things, that SPS would have the burden of proof for five years that
the cost of capital had not been adversely affected by the Merger and that any
negative effect would be borne by the shareholders, that prior approval of the
New Mexico Commission was required for SPS to loan funds to, assume liabilities
of, or purchase securities of affiliated interests, and that the New Mexico
Commission shall have access to the books, records, accounts or documents, of
SPS's affiliates.
iii. The Public Utilities Commission of Texas, in adopting the
terms of the Non-Unanimous Stipulation, ordered that no party would be
precluded from asserting that SPS's cost of capital had been adversely affected
by the Merger and that any adverse affect would be borne by the shareholders
unless offset by merger savings.
iv. The Public Service Commission of Wyoming ("Wyoming
Commission") in adopting the terms of the Stipulation and Agreement stated that
NCE's commitments contained in the Stipulation were sufficient protection for
Wyoming ratepayers to warrant approving
- --------------------------
(19) Section 33(c)(2) provides that the State commissions may make
recommendations to the Commission regarding a registered holding company's
relationship to FUCOs, and that the Commission shall "reasonably and fully
consider" such recommendations.
25
<PAGE>
the merger. These included a commitment by NCE to not assert preemption by the
SEC as a defense in the event that the Wyoming Commission wished to evaluate or
disallow in retail rates the costs of goods and services that Cheyenne Light,
Fuel and Power obtains from NCS and the commitment to provide an annual analysis
of the results of cost assignment and allocation methodologies.
Finally, as noted above, the State Commissions will have authority to make
adjustments in an NCE Operating Company's cost of capital to take into account
any negative effect from NCE's and the NCE Companies' investments in EWGs and
FUCOs.
For all of these reasons, the State Commissions will have adequate
authority to protect NCE Operating Company ratepayers from any adverse effect
associated with NCE and NCE Company investments in EWGs and FUCOs.
C. COMPLIANCE WITH RULE 54
Rule 54 provides that the Commission, in determining whether to approve the
issue or sale of a security by a registered holding company for purposes other
than the acquisition of an EWG or FUCO, or other transactions by such registered
holding company or its subsidiary other than with respect to EWGs and FUCOs,
shall not consider the effect of the capitalization or earnings of any
subsidiary which is an EWG or FUCO upon the registered holding company system if
the provisions of Rule 53(a), (b) and (c) are satisfied. If the transactions
contemplated hereby are consummated and NCE's aggregate investment in EWGs and
FUCOs exceeds 50% of its consolidated retained earnings, the provisions of Rule
53(a) will not be satisfied. However, to enable the Commission to monitor the
impact of the transactions for which authority is sought hereby, NCE proposes to
report the following additional information in the quarterly Rule 24
certificates it is filing in accordance with the Financing Order:
1. A Rule 53(a) computation - that is a calculation of the ratio of NCE's
aggregate investment in EWGs and FUCOs to NCE's average consolidated retained
earnings (both as determined in accordance with Rule 53(a));
2. A statement of aggregate investment as a percentage of the following:
total capitalization, net utility plant, total consolidated assets, and market
value of common equity, all as of the end of that quarter;
3. Consolidated capitalization ratios as of the end of that quarter;
4. The market-to-book ratio of NCE's common stock at the end of that
quarter;
5. An analysis of the growth in consolidated retained earnings, which
segregates total earnings growth attributable to EWGs and FUCOs from that
attributable to other NCE subsidiaries; and
26
<PAGE>
6. A statement of revenues and net income of each NCE Company for the
twelve months ended as of the end of that quarter.
This information is the same as that required by the Commission with
respect to the other registered systems that have obtained 100% Orders. The
Applicants believe that such reporting requirements will assist the Commission
in its determinations concerning the effect of EWGs and FUCOs on other
transactions for which NCE and other system companies will require Commission
authorization.
Item 4. REGULATORY APPROVAL
The issuance and sale of securities by NCE and the use of the proceeds
thereof to acquire or guarantee the securities of any EWG or FUCO are not
subject to the jurisdiction of any state commission or of any federal commission
other than this Commission. NCE has complied with the requirements of Rule
53(a)(4) by submitting a copy of this Application-Declaration to the public
utility commissions in Colorado, Kansas, Oklahoma, New Mexico, Texas, and
Wyoming. As noted above, NCE and the NCE Operating Companies have discussed the
request for further investment authority set forth in this
Application/Declaration with each of the six State Commissions having
jurisdiction over the NCE Operating Companies.
Item 5. PROCEDURE
NCE requests, pursuant to Rule 23(c) of the Rules and Regulations of the
Commission, that the Commission's order granting, and permitting this
Application/Declaration to become effective be issued forthwith. NCE waives any
recommended decision by a hearing officer of or by any other responsible officer
of the Commission and waives the 30-day waiting period between the issuance of
the Commission's order and the date it is to become effective, since NCE desires
that the Commission's order, when issued, become effective immediately. NCE
consents to the Office of Public Utility Regulation assisting in the preparation
of the Commission's decision and/or order in this matter, unless the Office
opposes the matter covered by this Application/Declaration.
Item 6. EXHIBITS AND FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EXHIBITS
--------
<S> <C>
Exhibit F Opinion of Counsel (to be filed by amendment)
Exhibit G Financial Data Schedule of New Century Energies, Inc.
Exhibit H-1 Ratings of Yorkshire Electricity and YPG
Exhibit H-2 Proposed Form of Federal Register Notice
FINANCIAL STATEMENTS
--------------------
FS-1 NCE Consolidated Financial Statements as of December 31,
1997 (incorporated by reference to the Annual Report on Form
10-K of NCE for the fiscal year ended December 31, 1997
(File No. 1-12927))
</TABLE>
27
<PAGE>
Item 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
None of the matters that are the subject of the Application/Declaration
involve a "major federal action" nor do they "significantly affect the quality
of the human environment" as those terms are used in section 102(2)(C) of the
National Environmental Policy Act. The transaction that is the subject of this
Application/Declaration will not result in changes in the operation of the
Applicants/Declarants that will have an impact on the environment. The
Applicants/Declarants are not aware of any federal agency that has prepared or
is preparing an environmental impact statement with respect to the transactions
that are the subject of this Application/Declaration.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, as amended, the undersigned company has duly caused this
Application/Declaration to be signed on its behalf by the undersigned thereunto
duly authorized.
NEW CENTURY ENERGIES, INC.
By: /s/ Richard C. Kelly
---------------------------------------
Name: Richard C. Kelly
Title: Executive Vice President and
Chief Financial Officer of
New Century Energies, Inc.
Date: July 29, 1998
28
<PAGE>
Exhibit H-1
RATINGS OF
YORKSHIRE POWER GROUP
AND
YORKSHIRE ELECTRICITY GROUP plc
AS OF MAY 12, 1998
<TABLE>
----------------------------------------------------------
Moodys S&P Duff & Phelps Fitch IBCA
Short Long Short Long Short Long Short Long
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YPG Baa2 A-2 BBB+ BBB+
----------------------------------------------------------------
YPG P-2 Baa1 A-2 BBB+ D-2 BBB+ F-1 A
----------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit H-2
PROPOSED FORM OF FEDERAL REGISTER NOTICE
New Century Energies, Inc. ("NCE"), a registered holding company, of 1225
Seventeenth Street, Denver, Colorado, 80202-5534, has filed an
application/declaration under sections 32 and 33 of the Public Utility Holding
Company Act of 1935 ("Act") and rules 53 and 54 thereunder.
NCE, through indirect subsidiary companies, is engaged in the ownership and
development of exempt wholesale generators ("EWGs"), as defined in section 32
of the Act, and foreign utility companies ("FUCOs"), as defined in section 33
of the Act.
NCE is authorized by Commission orders(1) to finance these activities through
the issuance and sale of debt and equity securities and through the issuance
of guarantees relative to the obligations of certain subsidiary companies,
provided that the sum of the guarantees and the net proceeds of common stock
sales and borrowings used for this purpose, together with NCE's aggregate
investment in all EWGs and FUCOs, shall not exceed 50% of NCE's consolidated
retained earnings.
NCE requests that the Commission exempt it from the requirements of rule
53(a)(1), with respect to the investing by NCE of proceeds from its
financings and the issuance of its guarantees authorized by the Commission in
File No. 70-9007, by allowing NCE to have an aggregate investment in EWGs and
FUCOs, as calculated in accordance with rule 53(a)(1)(i), in an amount up to
NCE's consolidated retained earnings, as determined in accordance with rule
53(a)(1)(ii).
As of December 31, 1997, NCE's aggregate investment in EWGs and FUCOs, PRO
FORMA to include its initial investments in certain of its subsidiaries,(2)
was approximately $364.4 million, and its average consolidated retained
earnings were approximately $715.6 million. If NCE had authority to make
aggregate investments in EWGs and FUCOs in an amount equal to 100% of its
consolidated retained earnings using proceeds from its external financings or
other credit-supported arrangements, as of December 31, 1997, NCE could have
invested an additional $351.2 million.
For the Commission, by the Division of Investment Management, pursuant to
delegated authority.
- --------------------
(1) HCAR No. 26750 (August 1, 1997) and HCAR No. 26872 (May 14, 1998), both
issued in File No. 70-9007.
(2) Specifically, Yorkshire Electricity Group plc and Independent Power
Corporation plc, both British companies.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> OPUR1
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NEW
CENTURY ENERGIES, INC. CONSOLIDATED CONDENSED BALANCE SHEET AS OF MARCH 31,
1998 AND CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 5,600,940
<OTHER-PROPERTY-AND-INVEST> 365,200
<TOTAL-CURRENT-ASSETS> 741,222
<TOTAL-DEFERRED-CHARGES> 582,531
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 7,289,893
<COMMON> 111,240
<CAPITAL-SURPLUS-PAID-IN> 1,604,912
<RETAINED-EARNINGS> 680,667
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,396,819
139,253
140,002
<LONG-TERM-DEBT-NET> 1,947,652
<SHORT-TERM-NOTES> 305,261
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 303,500
<LONG-TERM-DEBT-CURRENT-PORT> 202,562
2,576
<CAPITAL-LEASE-OBLIGATIONS> 38,531
<LEASES-CURRENT> 4,924
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,808,813
<TOT-CAPITALIZATION-AND-LIAB> 7,289,893
<GROSS-OPERATING-REVENUE> 939,504
<INCOME-TAX-EXPENSE> 47,119
<OTHER-OPERATING-EXPENSES> 757,667
<TOTAL-OPERATING-EXPENSES> 757,667
<OPERATING-INCOME-LOSS> 181,837
<OTHER-INCOME-NET> 784
<INCOME-BEFORE-INTEREST-EXPEN> 182,621
<TOTAL-INTEREST-EXPENSE> 49,353
<NET-INCOME> 86,149
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 64,538
<TOTAL-INTEREST-ON-BONDS> 40,473
<CASH-FLOW-OPERATIONS> 207,832
<EPS-PRIMARY> 0.78
<EPS-DILUTED> 0.78
</TABLE>
