File No. 70-
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM U-1
APPLICATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Emera Incorporated
P.O. Box 910
Halifax, Nova Scotia
Canada
B3J2W5
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Not applicable
(Name of top registered holding company parent of
each applicant or declarant)
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Richard J. Smith
Corporate Secretary and General Counsel
Emera Inc.
P.O. Box 910
Halifax, Nova Scotia
Canada
B3J2W5
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The Commission is requested to send copies of all notices, orders and
communications in connection with this application to:
Joanne C. Rutkowski David Falck
Markian M.K. Melnyk Winthrop, Stimpson, Putman & Roberts
LeBoeuf, Lamb, Greene & MacRae, L.L.P. 1 Battery Park Plaza
1875 Connecticut Avenue, N.W. New York, N.Y. 10004-1490
Washington, D.C. 20009
TABLE OF CONTENTS
Item 1. Description of Proposed Transactions
A. Introduction
B. Description of the Companies
1. Emera Inc.
2. Bangor Hydro-Electric Company
C. The Proposed Transaction
D. Utility Regulation
1. Divestiture of Generation Assets
2. Divestiture of Rights to Capacity and Energy
3. Standard Offer Service
4. BHE's Ongoing Electric Utility Function
Item 2. Fees, Commissions and Expenses
Item 3. Applicable Statutory Provisions
A. Applicable Provisions
B. Legal Analysis
1. Section 10(b)(1)
a. Interlocking Relationships
b. Concentration of Control
2. Section 10(b)(2)
3. Section 10(b)(3)
4. Section 10(c)(1)
5. Section 10(c)(2)
6. Section 10(f)
7. Section 3(a)(5)
a. Section 3(a)(5) is available to Foreign Organized Companies.
b. Emera complies with all standards under Section 3(a)(5).
c. Emera is essentially foreign and essentially engaged in utility
operations and related business.
d. The US utility operations will be small in both a relative
and absolute sense.
e. The proposed exemption will not be detrimental to the protected
interests.
Item 4. Regulatory Approvals
1) Antitrust
2) FERC
3) State Regulation
Item 5. Procedure
Item 6. Exhibits and Financial Statements
A. Exhibits
B. Financial Statements
Item 7. Information as to Environmental Effects
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS
A. Introduction.
Emera Incorporated ("Emera") is seeking approval under the Public Utility
Holding Company Act of 1935 (the "1935 Act" or "Act") in connection with its
acquisition of the outstanding voting securities of Bangor Hydro-Electric
Company ("BHE") and its public-utility subsidiary companies (the "Merger"). In
addition, Emera requests an order under Section 3(a)(5) of the Act exempting
Emera and its subsidiaries as such from all the provisions of the Act, except
Section 9(a)(2).
B. Description of the Companies
1. Emera
Emera is a corporation that was formed under the laws of the Province of
Nova Scotia, Canada in 1998. Emera is the parent of Nova Scotia Power Inc.
("NSPI"), a Canadian electric utility company that owns and operates a
vertically integrated electric utility system in Nova Scotia. NSPI serves
440,000 customers in Nova Scotia with 2,183 MW of generating capacity,
approximately 5,200 km of transmission lines, 24,000 km of distribution lines,
associated substations and other facilities. NSPI has no retail gas distribution
facilities.
NSPI's electric generation, transmission and distribution facilities are
located exclusively within Nova Scotia. The transmission assets are used
primarily to transmit power within Nova Scotia and, on a limited basis, to
transmit power for sale to customers in New Brunswick and beyond./1/
In 1999, NSPI generated 10,668 GWh of electricity and purchased 411 GWh of
the amount generated or purchased, 10,882 GWh was consumed in the province of
Nova Scotia and 75 GWh were exported using the international lines of New
Brunswick Power Corporation ("NB Power"). NB Power's principal interconnection
with the US is with the transmission facilities of Maine Electric Power Company,
Inc. ("MEPCO"), in which BHE has a minority interest. At present, NSPI is not
authorized to transmit power and energy within the U.S., and accordingly, all
purchasers of energy from NSPI purchase the energy within Canada for export by
the purchaser across the international border for transmission via ISO-New
England facilities. In connection with the proposed Merger, Emera has undertaken
that NSPI will qualify for exemption as a foreign utility company or "FUCO"
within the meaning of Section 33 of the Act.
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1 Under permits issued by Canada's National Energy Board ("NEB"), NSPI may
export energy over any international power line originating in New
Brunswick or Quebec. NSPI's permits expire on July 9, 2008. The permits
authorize a total of 1200 GWh of energy export in any 12 month period.
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For the twelve months ending June 30, 2000, Emera had revenues of
approximately $810 million and NSPI had operating revenues of approximately $864
million. As of June 30, 2000, Emera and NSPI had assets of approximately CDN
$2.9 billion and $2.8 billion, respectively. Emera owns a number of non-utility
subsidiaries that are described in Exhibit K-2.
2. BHE
BHE is a public utility and holding company currently exempt by order under
Section 3(a)(1) of the 1935 Act./2/ BHE holds a 14.2% equity interest in MEPCO,
a Maine utility that owns and operates electric transmission facilities from
Wiscasset, Maine to the Maine-New Brunswick border. MEPCO is owned jointly by
Central Maine Power Company ("CMP") (78.3%), BHE (14.2%) and Maine Public
Service Company (7.5%). In addition, BHE owns a 50% general partnership interest
in Chester SVC through BHE's wholly-owned subsidiary Bangor Var Co., Inc.
Chester SVC is a single-purpose financing entity formed to own a static var
compensator, which is electrical equipment that supports the New England Power
Pool (NEPOOL)/Hydro Quebec Phase II transmission line.
BHE provides the transmission and distribution system for the delivery of
electricity to approximately 107,000 Maine customers. For the twelve months
ending September 30, 2000, BHE had approximately $190 million of utility
operating revenues./3/ As of September 30, 2000 BHE had approximately $502
million in utility assets. BHE owns a number of non-utility subsidiaries that
are described in Exhibit K-2.
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2 Bangor Hydro-Electric Company, Holding Co. Act Release No. 2704 (Oct. 25,
1999). BHE obtained that order in connection with its acquisition of a 50%
interest in Bangor Gas Company LLC ("Bangor Gas"), a start up natural gas
system in the Bangor area that the company was developing with Sempra
Energy ("Sempra"). BHE has since sold its interest in Bangor Gas to Sempra.
Prior to the issuance of the 1999 order, BHE was exempt under Rule 2.
3 As explained infra, under Maine's electric restructuring law, BHE exited
the power supply aspect of its traditional utility function as of March 1,
2000. Nonetheless, BHE's revenues for the twelve months ending September
30, 2000 continue to include revenue associated with power supply because
(1) BHE had responsibility for power supply until March 1, 2000, so until
then BHE's revenues were derived in part from regulated rates that included
the costs associated with power supply, and (2) since March 1, 2000, under
the direction of the Maine Public Utilities Commission ("MPUC"), BHE has
been acquiring the power supply to fulfill the MPUC's obligation to provide
for "standard offer service", for which the MPUC sets the rate charged to
customers. Year to date revenues at September 30 associated with providing
the power supply for the standard offer service were approximately $46
million.
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C. The Proposed Transaction
Pursuant to an Agreement and Plan of Merger entered into on June 29, 2000,
between Emera and BHE ("Merger Agreement"),/4/ Emera will acquire all of BHE's
common shares for $26.50 per share./5/ The total value of consideration that BHE
shareholders will receive in the Merger, based on the number of shares of BHE
common stock outstanding on September 15, 2000 (7,363,424), is approximately
$195 million. BHE will retain its name and continue to serve its customers
pursuant to the terms of its existing contracts and state and federal
requirements. Neither BHE nor Emera will modify or terminate any existing
customer contracts as a result of this transaction.
The Merger offers substantial benefits to both parties' shareholders and
customers. The Merger will allow BHE to become part of a larger organization
with greater resources, yet retain its name and identity, continue its historic
record of community involvement and support, and continue to promote economic
development in the regions it serves. The price to be paid by Emera for each
share of BHE's common stock represents a substantial premium above the value of
the stock at the time the Merger was announced./6/ Thus, the proposed
transaction will benefit BHE's shareholders, customers, and employees, as well
as the communities in which they work and live.
With respect to Emera, this transaction will allow it to continue its
strategy of expanding its operations beyond its Nova Scotia base while
capitalizing on its experience and expertise in operating electric utility
companies.
Pursuant to the terms of the Merger Agreement, Merger Sub, a to-be-formed
Emera subsidiary incorporated in the U.S., will merge with and into BHE, with
BHE surviving (the "Surviving Corporation"). The Merger, which has been approved
by BHE's shareholders and Board of Directors, is expected to occur as soon as
all of the conditions to the consummation of the Merger are met or waived. The
Merger Parties plan to consummate the Merger in early spring of 2001.
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4 The Merger Agreement is incorporated by reference as Exhibit B-1 to this
application. In this agreement, Emera is identified by its old name, NS
Power Holdings Incorporated.
5 All amounts are given in U.S. dollars, unless otherwise stated.
6 The closing price of BHE's common stock on June 29, 2000, the day prior to
the Merger announcement, was $15.13 per share.
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Under the terms of the Merger Agreement, (i) each outstanding share of
common stock of Merger Sub will be converted into one share of common stock of
the Surviving Corporation, (ii) each outstanding share of preferred stock of BHE
(the "BHE Preferred Stock") will remain outstanding as one share of preferred
stock of the Surviving Corporation, and (iii) each outstanding share of common
stock of BHE (the "BHE Common Stock") other than Dissenting Shares (as defined
in the Merger Agreement) or shares owned by BHE as treasury shares, or by Emera,
if any, will be converted into the right to receive $26.50 in cash (the "Per
Share Amount"), as such amount may be adjusted in accordance with the Merger
Agreement (the "Merger Consideration"). Holders of BHE's warrants outstanding at
the effective time of the Merger will thereafter be entitled to receive, upon
exercise of each warrant, the Merger Consideration less the exercise price. If
the closing of the Merger does not occur on or prior to June 29, 2001, and all
conditions to closing have been satisfied or are capable of being satisfied
except for the receipt by Emera of (A) the necessary authorizations from the
Commission under the 1935 Act, or (B) any other necessary governmental approvals
to be obtained by Emera, then the Per Share Amount shall be increased by an
amount equal to $0.003 for each day after such date up to and including the day
which is one day prior to the closing of the Merger.
D. Utility Regulation
The State of Maine has been a leader in electric industry restructuring. As
described below, restructuring has required BHE to exit the former utility
function of the provision of power supply for retail consumption. The
restructuring law has required BHE to divest, to the extent practicable, its
generation and power supply assets. Thus, under retail choice, which was
implemented on March 1, 2000, BHE has largely exited the power supply
business./7/ Because restructuring has profoundly affected the way BHE
historically operated, the economic effects of restructuring must be an integral
part of determining the size of BHE's operations, both in a relative and
absolute sense.
1. Divestiture of Generation Assets
In 1997, legislation was enacted to restructure Maine's electric
industry./8/ The Maine Restructuring Act states that "[b]eginning on March 1,
2000, all consumers of electricity have the right to purchase generation
services directly from competitive electric providers."/9/ The act required each
investor-owned electric utility in Maine to divest all generation assets and
generation-related businesses activities on or before March 1, 2000, other than
any:
A. Contract with a qualifying facility, contract with a party other
than a qualifying facility or affiliated interest entered into solely
for the purpose of restructuring a contract with a qualifying facility
or contract with a demand-side management or conservation provider,
broker or host;/10/
B. Ownership interest in a nuclear power plant;/11/
C. Ownership interest in a facility located outside the United
States;/12/ or
D. Ownership interest in a generation asset that the commission
determines is necessary for the utility to perform its obligations as
a transmission and distribution utility in an efficient manner./13/
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7 As a transitional measure, however, pursuant to MPUC orders, BHE will
provide standard offer service until March 1, 2001.
8 "An Act to Restructure the State's Electric Industry," Pub. Law, ch. 316,
35-A M.R.S.A. 3201, et seq. (May 29, 1997) ("Maine Restructuring Act").
9 35-A M.R.S.A. 3202(1).
10 The "qualifying facility" exemption recognizes that Maine's utilities have
ongoing contracts with nonutility generators entered into under the
requirements of the Public Utility Regulatory Policies Act of 1978 and
Maine's Small Power Production Act, 35-A M.R.S.A. 3301 et seq. (1999)
(repealed effective March 1, 2000), which are not intended to be affected
by the Maine Restructuring Act. The utilities are instead required to
periodically auction the power supply entitlement under the contracts.
11 This exemption recognizes the difficulties associated with divesting
nuclear power plant interests. BHE's only interest in a nuclear power plant
is its 7% ownership interest in Maine Yankee Atomic Power Company's nuclear
plant in Wiscasset, Maine, which has permanently ceased operations and is
being decommissioned.
12 BHE has no facilities located outside the U.S.
13 As discussed infra, BHE has retained ownership of certain diesel-fired
generators under this exception. 35-A M.R.S.A 3204(1).
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The MPUC required each investor-owned electric utility to submit a plan to
accomplish the required divestiture, which the MPUC reviewed for consistency
with the Maine Restructuring Act and issued an order approving or modifying the
plan./14/ Each investor-owned electric utility was then required to divest its
generation assets in accordance with the MPUC's order and was prohibited from
owning or having a financial interest in or otherwise controlling generation or
generation-related assets, except as otherwise permitted by the Maine
Restructuring Act, on or after March 1, 2000./15/
Consistent with this requirement, BHE submitted a plan for divesting its
generation assets to the MPUC on February 9, 1998. On June 17, 1998, the MPUC
approved the plan./16/ Following its approved divestiture plan, BHE engaged in
an open bidding process to select a purchaser of its generation assets. BHE
selected PP&L Global, Inc. ("PP&L Global"), which purchased the majority of
BHE's generating assets. Specifically, BHE sold to PP&L Global: (1) BHE's
wholly-owned hydro units/17/ and the expansion rights to those assets; (2) BHE's
subsidiary's (Penobscot Hydro Company, Inc.'s ("PHC")) ownership interest in the
partnership known as Bangor-Pacific Hydro Associates, which owns the West
Enfield Project; (3) BHE's ownership interest in Wyman Unit No. 4 (8.33% of 51.7
MW); (4) BHE's right, title and interest, subject to a memorandum of
understanding, in the work in progress relating to the potential development of
a new 345-kV tie-line to New Brunswick; (5) BHE's rights in the Hydro-Quebec
Agreemen and Transmission Support Agreements; and (6) BHE's Basin Mills
development rights. As part of the sale, BHE also reassigned its 100 MW firm
transmission reservation over MEPCO to PP&L Global./18/ By August 27, 1999, the
various asset sales to PP&L Global were complete.
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14 Id.
15 Id.; 35-A M.R.S.A. 3204(5).
16 Re Bangor Hydro-Elec. Co., No. 98-114 (Me. P.U.C. June 17, 1998).
17 Ellsworth Hydro Project, Howland Hydro Project, Medway Hydro Project.,
Milford Hydro Project, Orono Hydro Project, Stillwater Hydro Project, and
Veazie Hydro Project.
18 On March 15, 1999, the Federal Energy Regulatory Commission ("FERC")
approved the transfer to PP&L Global of FERC jurisdictional facilities.
Bangor Hydro Elec. Co., 86 FERC 61,281, clarified, 87 FERC 61,057 (1999).
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After the asset sale, BHE retained 21 MW of diesel-fired internal
combustion units. These facilities consist of 11 units located at BHE's Bar
Harbor, Eastport, and Medway plants. BHE was not required to divest its
ownership in its units at Bar Harbor and Eastport pursuant to 35-A M.R.S.A.
3204(1) of the Maine Restructuring Act. The MPUC found that "BHE's ownership of
its diesel-fired generating units in Bar Harbor and Eastport are necessary for
BHE to perform its obligations as a transmission and distribution utility in an
efficient manner." The Bar Harbor and Eastport units involve 12 MW in total./19/
The MPUC extended the deadline for divestiture of BHE's diesel-fired generating
units in Medway until March 1, 2003. The MPUC found that "extending the
divestiture deadline for those units for three years is likely to improve their
sale value."/20/
2. Divestiture of Rights to Capacity and Energy
The Maine Restructuring Act directed the MPUC to develop rules requiring
each investor-owned electric utility after February 28, 2000 to sell rights to
capacity and energy from all generation assets and generation-related
businesses, including purchased power contracts that are not divested pursuant
to the general divestiture requirement./21/ An investor-owned electric utility
may keep those rights to capacity and energy that the MPUC determines are
necessary for the efficient performance of utility transmission and distribution
obligations./22/ The MPUC established rules requiring the sale of remaining
capacity and energy from generation assets and generation-related business./23/
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19 Re Bangor Hydro-Elec. Co., No. 98-820 (Me. P.U.C. Feb. 3, 1999).
20 Id.
21 35-A M.R.S.A. 3204(4).
22 Id.
23 Code Me. R. 65-407, Chapter 307.
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On July 16, 1999, the MPUC approved BHE's proposal to sell 38 MW of its
entitlements to generating capacity and associated energy, under existing power
purchase contracts between BHE and six individual qualifying facilities./24/ The
six contracts reflect all of BHE's rights to capacity and energy remaining at
the commencement of retail choice, except for: (1) the output of BHE's 21 MW of
diesel-fired units,/25/ and (2) 6 MW of capacity and associated energy from the
Penobscot Energy Recovery Company ("PERC") that is committed to be sold under a
pre-existing agreement to UNITIL Power Corporation ("UNITIL")./26/
After evaluating the bids received, BHE selected, and the MPUC approved,
Morgan Stanley Capital Group, Inc. ("Morgan Stanley") as the winning bidder. On
December 3, 1999, the MPUC approved BHE's selection of Morgan Stanley./27/
Pursuant to the contract approved by the MPUC, Morgan Stanley has purchased the
38 MW of entitlements from BHE for a two-year period starting March 1, 2000.
Subsequent auctions will take place to establish purchasers after this initial
period.
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24 Re Bangor Hydro-Elec. Co., No. 99-284 (Me. P.U.C. July 16, 1999). The
entitlements sold include 16 MW from BHE's contract with PERC, the entire
output of the 19.1 MW entitlement in the West Enfield hydro-electric
facility, and BHE's entitlement to the output of four small, less than 1 MW
hydro-electric projects (Green Lake Hydro, Sebec Hydro, Milo Hydro, and
Pumpkin Hill Hydro).
25 The MPUC's finding that the Bar Harbor and Eastport diesels were necessary
for transmission and distribution efficiency exempts the output from these
units from the Chapter 307 bid process. Re Bangor Hydro-Elec. Co., No.
99-602 (Me. P.U.C. Dec. 1, 1999). The MPUC authorized BHE to exclude the
output of the Medway diesels from the Chapter 307 bid process. Id.
26 The MPUC authorized BHE to retain the UNITIL contract concluding that
allowing BHE to retain the contract to continue to meet its contractual
obligation and to receive the associated revenues will likely provide a
greater stranded cost reduction than if BHE divested the contract.
27 Re Bangor Hydro-Elec. Co., No. 99-284 (Me. P.U.C. Dec. 3, 1999).
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3. Standard Offer Service
Under the Maine Restructuring Act, all consumers of electricity may
purchase generation services directly from competitive electricity providers
beginning March 1, 2000./28/ Because not all consumers would want or be able to
obtain generation services from the competitive market, the Maine Restructuring
Act required that "when retail access begins, the Commission shall ensure that
standard-offer service is available to all consumers of electricity."/29/
Accordingly, the MPUC has established the terms and conditions for standard
offer service as well as the bid process used by the MPUC to select standard
offer service providers./30/
On August 2, 1999, the MPUC commenced the bidding for the provision of
standard offer service and received proposals in response to its Request for
Bids ("RFB"). However, the MPUC rejected the bids received for BHE's service
territory because they were not in conformance with the MPUC's rules for
standard offer service and the RFB or they were unreasonably high./31/
The MPUC initiated a second round of bids for standard offer service for
BHE's service territory and again rejected all bids submitted in response to the
solicitation./32/ The MPUC then directed BHE to provide standard offer service
"through wholesale arrangements with suppliers or from the spot market until the
Commission acts in the future to designate standard offer providers."/33/
The MPUC set the standard offer service price and required BHE to procure
wholesale power to provide standard offer service until March 1, 2001./34/ On
February 29, 2000, the MPUC authorized BHE to enter into a one-year wholesale
power supply contract with a supplier BHE chose through an offer of
solicitation./35/ This contract with NB Power provides 60 percent of BHE's
standard offer load requirements. The remainder is obtained through short-term
purchases from the NEPOOL market.
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28 35-A M.R.S.A. 3202(1).
29 35-A M.R.S.A. 3212.
30 35-A M.R.S.A. 3212(2). Code Me. R. 65-407, Chapter 301.
31 Re Bangor Hydro-Elec. Co., No. 99-111 (Me. P.U.C. Oct. 25, 1999).
32 Re Bangor Hydro-Elec. Co., No. 99-111 (Me. P.U.C. Dec. 3, 1999).
33 Id.
34 Id.
35 Re Bangor Hydro-Elec. Co., No. 99-111 (Me. P.U.C. Feb. 29, 2000).
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The MPUC requires BHE, as the standard service provider, to submit monthly
reports of its standard offer costs and collections. Throughout the year, the
MPUC reviews BHE's purchases for standard offer service and, where appropriate,
it increases or decreases the standard offer service prices for customers in
BHE's service territory to cover projected shortfalls or eliminate
surpluses./36/
Pursuant to the Restructuring Act and Chapter 301, the MPUC is in the
process of soliciting and evaluating bids for standard offer providers for the
period beginning March 1, 2001./37/
4. BHE's Ongoing Electric Utility Function
Following the divestiture activities described above, BHE now continues in
its historic function of the provision of all of the attributes of electric
utility service other than power supply as a regulated monopoly in the area it
serves. Its rates are regulated by the FERC and the MPUC. BHE may be required by
the MPUC from time to time to acquire power to fulfill the MPUC's obligation to
provide standard offer power supply service. When it does so, the MPUC sets the
price for standard offer service at a level sufficient to cover the cost of such
power supply, and provides for a reconciliation after the fact for under or over
recoveries.
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36 Re Bangor Hydro-Elec. Co., No. 99-111 (Me. P.U.C. Feb 29, 2000); Re Bangor
Hydro-Elec. Co., No. 99-111 (Me. P.U.C. June 15, 2000); Re Bangor
Hydro-Elec. Co., No. 99-111 (Me. P.U.C. June 23, 2000); Re Bangor
Hydro-Elec. Co., No. 99-111 (Me. P.U.C. July 20, 2000); Re Bangor
Hydro-Elec. Co., No. 99-111 (Me. P.U.C. Aug. 17, 2000); Re Bangor
Hydro-Elec. Co., No. 99-111 (Me. P.U.C. Sept. 21, 2000).
37 35-A M.R.S.A 3212; Code Me. R. 65-407, Chapter 301; see also Re Public
Utils. Comm., No. 2000-808 (Me. P.U.C. Oct. 2, 2000) (Order delegating to
the MPUC Director of Technical Analysis the authority to decide various
matters relating to the solicitation and selection of standard offer
service providers).
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ITEM 2. FEES, COMMISSIONS AND EXPENSES.
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, in connection with the Merger are estimated to be approximately $7
million.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
A. Applicable Provisions
The acquisition by Emera of the voting securities of BHE and the BHE
public-utility subsidiary companies is subject to Sections 9 and 10 of the Act.
Upon completion of the Merger, Emera will qualify for an order of exemption
under Section 3(a)(5).
B. Legal Analysis
As previously stated, prior to the closing of the Merger Emera will file
for FUCO exemption for its principal subsidiary, NSPI. NSPI is a vertically
integrated utility serving approximately 440,000 customers in Nova Scotia with
assets of CDN $2,800 million. NSPI neither owns nor operates utility facilities
located in the U.S. and derives none of its income from the generation,
transmission or distribution of electricity for sale, or retail gas
distribution, within the U.S. Emera has no other utility subsidiaries. Under
Section 33(a)(1) of the Act, a FUCO is generally exempt from all the provisions
of the Act and is not considered a public utility company under the Act.
Accordingly, NSPI will not be a public utility subsidiary of Emera for purposes
of Section 9 & 10 analysis.
Section 9(a)(2) makes it unlawful, without approval of the Commission under
Section 10, "for any person to acquire directly or indirectly any security of
any public utility company if such person is an affiliate ... of such company
and of any other public utility or holding company, or will by virtue of such
acquisition become such an affiliate." As a result of the Merger, Emera would
become an affiliate of BHE, MEPCO and Chester SVC. The statutory standards to be
considered by the Commission in evaluating the Merger are set forth in Section
10 of the Act. As explained more fully below, the Merger complies with all of
the applicable provisions of Section 10 and should be approved. Upon completion
of the Merger, Emera will qualify for exemption under Section 3(a)(5) of the
Act.
1. Section 10(b)(1)
Section 10(b)(1) precludes approval of an acquisition that "will tend
towards interlocking relations or the concentration of control of public utility
companies, of a kind or to an extent detrimental to the public interest or the
interests of investors or consumers."
a. Interlocking Relationships.
By its nature, any acquisition results in new links between theretofore
unrelated companies./38/ Interlocking boards are typical of wholly-owned
subsidiaries and necessary to integrate the BHE companies into the Emera system.
The interlocks, therefore, will be in the public interest and the interests of
investors and consumers, and thus not prohibited by Section 10(b)(1).
b. Concentration of Control.
Section 10(b)(1) is intended to avoid "an excess of concentration and
bigness" while preserving the "opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations" afforded by the
coordination of local utilities into an integrated system./39/ In applying
Section 10(b)(1) to utility acquisitions, the Commission must determine whether
the acquisition will create "the type of structures and combinations at which
the Act was specifically directed."/40/ As explained more fully in the
application of BHE to the FERC under Section 203 of the Federal Power Act, the
proposed Merger will not have any adverse effect on competition, rates or the
effectiveness of federal or state regulation./41/ Specifically, the proposed
Merger cannot and will not harm competition in wholesale power markets because:
* NSPI and BHE do not sell into common markets
* NSPI does not own or control any generation in the NEPOOL, the only
market in which BHE sells power.
* All of NSPI's generation is located in Nova Scotia and there is virtually
no available transfer capability ("ATC") between Nova Scotia and BHE.
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38 Cf. Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990),
as modified, Holding Co. Act Release No. 25273 (March 15, 1991), aff'd sub
nom. City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992) (stating that
interlocking relationships are necessary to integrate two merging
entities).
39 American Electric Power Co., 46 S.E.C. 1299, 1309 (1978).
40 Vermont Yankee Nuclear Corp., 43 S.E.C. 693, 700 (1968).
41 A copy of the FERC application is attached as Exhibit D-2.
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BHE also possesses no market power over transmission because it transferred
operational control of its higher voltage transmission facilities to ISO New
England, Inc. ("ISO-NE") in 1997 and now offers service over its lower voltage
facilities pursuant to a FERC accepted open access transmission tariff.
Other regulators will also consider the competitive effect of the proposed
Merger./42/ In addition to the application to the FERC under Section 203 of the
Federal Power Act, notification and report forms will be filed with the
Antitrust Division of the Department of Justice and the Federal Trade Commission
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C.
1311 et seq.
For these reasons, the Merger will not "tend toward interlocking relations
or the concentration of control" of public utility companies, of a kind or to
the extent detrimental to the public interest or the interests of investors or
customers within the meaning of Section 10(b)(1).
2. Section 10(b)(2)
Section 10(b)(2) requires the Commission to determine whether the
consideration Emera is giving for BHE is reasonable and whether it bears a fair
relation to investment in and earning capacity of the utility assets being
acquired. The determination of the acquiror of BHE was made as a result of a
competitive bidding process conducted by an investment banking firm. The firm
contacted numerous parties to determine interest, and conducted due diligence
with companies that had submitted indications of interest. BHE's board then
accepted definitive proposals from two remaining companies at the conclusion of
the due diligence process. The resulting price and terms and conditions for the
acquisition are the product of arms'-length negotiations between the buyer and
seller. In light of this evidence, Emera believes that the consideration for the
acquisition bears a fair relationship to the sums invested in and the earning
capacity of the BHE utility assets.
------------------
42 See, e.g., Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21,
1990) (finding that "antitrust ramifications of an acquisition must be
considered in light of the fact that public utilities are regulated
monopolies and that federal and state administrative agencies regulate the
rates charged consumers").
------------------
Further, Emera believes that the estimated fees and expenses in this matter
bear a fair relation to the value of BHE and the strategic benefits to be
achieved by the Merger and, further, that the fees and expenses are fair and
reasonable./43/
3. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether a proposed
acquisition will unduly complicate the acquirer's capital structure or will be
detrimental to the public interest or the interest of investors or consumers or
the proper functioning of the resulting system.
The proposed Merger will not unduly complicate the capital structure of
Emera or its public-utility subsidiaries. The proposed Merger does not involve
the creation of any minority interests nor will the existing senior debt and
senior equity securities of Emera be affected by the Merger. Post-Merger, Emera
and BHE will continue to have common stock equity of at least 30% of total
capitalization as generally required by the Commission./44/
Section 10(b)(3) also directs the Commission to consider whether an
acquisition will be detrimental to the public interest or the interest of
investors or consumers, or the proper functioning of the resulting holding
company system. The acquisition of BHE will not be detrimental to the protected
interests or to the proper functioning of the resulting holding company system.
The BHE board of directors determined that BHE's small size, and the possibility
of further shrinkage of its revenue base as additional aspects of its business
become subject to competition, would make it increasingly difficult to maintain
regulated rates at reasonable levels and attract capital on reasonable terms.
BHE's board of directors believes that Emera and its principal subsidiary, NSPI,
represent a good fit for BHE. NSPI serves a geographical area like BHE's, and
its management has experience operating a utility with challenges similar to
those faced by BHE. In turn, BHE's management and employees have experience
doing business with Canadian utility companies. The BHE board of directors also
believes that the Merger will provide future benefits to BHE's customers and
employees as the best practices of both firms are shared and implemented.
Perhaps more importantly, the MPUC, the agency that is most directly responsible
for the protection of Maine utility consumers, must approve the Merger.
------------------
43 See Northeast Utilities, Holding Co. Act Release No. 25548 (June 3, 1992),
modified on other grounds, Holding Co. Act Release No. 25550 (June 4, 1992)
(noting that fees and expenses must bear a fair relation to the value of
the company to be acquired and the benefits to be achieved in connection
with the acquisition). The total estimated fees and expenses of $7 million
represent approximately 3.6% of the value of the consideration Emera will
pay for BHE, and are consistent with percentages previously approved by the
Commission. See, e.g., Entergy Corp., Holding Co. Act Release No. 25952
(Dec. 17, 1993) (fees and expenses represented approximately 1.7% of the
value of the consideration paid to the shareholders of Gulf States
Utilities); Northeast Utilities, Holding Co. Act Release No. 25548 (June 3,
1992) (approximately 2% of the value of the assets to be acquired).
44 See, e.g., National Grid Group plc, Holding Co. Act Release No. 27154
(March 15, 2000). Emera provides projected debt ratios in Exhibit J-2.
------------------
4. Section 10(c)(1)
Under this section, the Commission cannot approve "an acquisition of
securities, or of any other interest, which is unlawful under the provisions of
Section 8 or is detrimental to the carrying out of the provisions of Section
11." Section 8, which governs the combination of electric and gas operations,
does not apply to the instant transaction. Section 11, which again is directed
to registered rather than exempt holding companies, stands for the principle
that a registered holding company should be generally limited to a single
integrated public-utility system. In connection with its previous order, the
Commission concluded that BHE's existing utility operations constitute a single,
integrated electric-utility system within the meaning of the Act./45/ The
proposed Merger will impose a new holding company structure over the existing
BHE system; it will not affect the integration of that system./46/
5. Section 10(c)(2)
The standards of Section 10(c)(2) are satisfied because the Merger will
tend toward the economical and efficient development of an integrated public
utility system, thereby serving the public interest, as required by that section
of the Act.
The Commission has previously found that a transaction such as the instant
one, involving the imposition of a new holding company over an existing
integrated system, results in financial and organizational benefits for the
utility system./47/
------------------
45 Bangor Hydro-Electric Company, Holding Co. Act Release No. 2704 (Oct. 25,
1999).
46 Supra at 12.
47 WPL Holdings, Inc., Holding Co. Act Release No. 25377 (Sept. 18, 1991); see
also Chevron Corp., Holding Co. Act Release No. 27122 (Dec. 27, 1999);
Roanoke Gas Co., Holding Co. Act Release No. 26996 (April 1, 1999); BEC
Energy, Holding Co. Act Release No. 26874 (May 15, 1998); Western
Resources, Inc., Holding Co. Act Release No. 26783 (Nov. 24, 1997).
------------------
The Merger will result in significant financial benefits for shareholders,
rate payers and the community in general. As a result of the Merger, BHE will be
in a position to achieve synergies typically associated with a merger of two
similar businesses. For example, cost of capital and risks will be reduced as a
result of BHE's affiliation with a larger and more diversified company. In terms
of future rates, Emera has committed to freeze BHE's total PUC jurisdictional
revenue requirement until MPUC consideration and approval of an alternative rate
plan.
Emera plays a vital role in the economy of Nova Scotia as does BHE in
Maine. Both companies serve a very similar customer base, including substantial
service to the pulp and paper industry. Emera understands the importance of this
industry to the economy of the region as a whole and is committed to providing
reliable power at fair rates that allow the industry to continue to operate on a
competitive basis with other pulp and paper producers around the world. Emera
and BHE also serve other common customer groups and Emera will continue its
commitment to these customers in its operation of the combined entity after the
Merger.
In addition, the Merger will help ensure continuity of the high quality of
customer service. The Merger will permit BHE access to management resources
available from Emera, a company with historic success in the delivery of
services. Emera and BHE will share best practices learned from their extensive
experience in operating their respective utility systems.
The Merger will provide substantial benefits to the communities within and
outside of BHE's service area. After the Merger, BHE will maintain its community
involvement and charitable contributions at the pre-Merger level. Seventy-seven
Maine municipalities, approximately 15% of the communities in the State, will
benefit as a result of the 825,000 outstanding warrants held by those
municipalities through the Municipal Review Committee, Inc., in conjunction with
BHE's involvement with PERC. The increased value in market price of the warrants
will result in an incremental value of approximately $9.1 million, a substantial
profit for the municipalities.
On October 24, 2000, BHE shareholders approved the Merger, which will
result in a cash payment to shareholders of $26.50 per share. The closing price
of BHE on June 29, 2000, the day before the Merger announcement, was $15.13 per
share. Because BHE shareholders are protected by the purchase of their shares at
a premium and their voting rights, it is clear that the Merger will be
beneficial to shareholders.
Although some of the anticipated benefits are strategic and will be fully
realizable only in the longer term, they are properly considered in determining
whether the standards of Section 10(c)(2) are met./48/ The Commission has
recognized that potential benefits are entitled to be considered, regardless of
whether they can be precisely estimated: "[S]pecific dollar forecasts of future
savings are not necessarily required; a demonstrated potential for economies
will suffice even where these are not precisely quantifiable."/49/
6. Section 10(f)
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an application
is made under this section unless it appears to the satisfaction of the
Commission that such State laws as may apply in respect to such acquisition
have been complied with, except where the Commission finds that compliance
with such State laws would be detrimental to carrying out the provisions of
section 11.
The MPUC is the sole state regulator with jurisdiction over the Merger. As
explained in Item 4, below, Emera and BHE have applied for the necessary
approval under Maine law.
7. Section 3(a)(5)
Following the Merger, Emera will be a holding company within the meaning of
Section 2(a)(7) of the Act. As such it will be required to register with the
Commission, and comply with the various requirements for registered holding
companies, unless it is able to qualify for exemption.
------------------
48 National Grid Group plc, supra; see American Electric Power Co., 46 S.E.C.
1299, 1320-1321 (1978).
49 Centerior Energy Corp., Holding Co. Act Release No. 24073 (April 29, 1986)
(citation omitted). See also Energy East Corporation, Holding Co. Act
Release No. 26976 (Feb. 12, 1999) (authorizing acquisition based on
strategic benefits and potential, but unquantifiable, savings).
------------------
Section 3 of the Act provides that the Commission upon application "shall"
by order exempt any person from the provisions of the Act if such person meets
the requirements for any exemption contained in Sections 3(a) and if the
exemption is not detrimental to the public interest or the interest of investors
or consumers. Of interest here, Section 3(a)(5) of the Act provides an exemption
where a holding company "is not, and derives no material part of its income,
directly or indirectly, from any one or more subsidiary companies which are, a
company or companies the principal business of which within the United States is
that of a public utility company." For the reasons that follow, Emera requests
and is entitled to an order under Section 3(a)(5) of the Act exempting Emera and
its subsidiaries as such from all the provisions of the Act, except Section
9(a)(2).
a. Section 3(a)(5) is available to Foreign Organized Companies.
Emera is a Canadian corporation organized under the laws of Nova Scotia. In
its 1994 Gaz Metropolitain decision, the Commission stated that "[t]he Act
contains no prohibition against foreign holding companies as such," in finding
that a Canadian holding company was entitled to an exemption under Section
3(a)(5) following its acquisition of a Vermont gas utility./50/ That case
involved the acquisition of Vermont Gas Systems Inc. ("VGS"), a Vermont gas
utility, by a subsidiary of Gaz Metropolitain, Inc., a Quebec limited
partnership that operated a gas distribution utility in Quebec. Rejecting the
staff's contention that Section 3(a)(5) was not intended to allow foreign
companies to control domestic utilities, the Commission stated that:
Congress intended that a holding company system whose operations were
essentially foreign should not be denied an exemption because of minor
domestic utility operations. We have stated that, in order for a system to
qualify, its domestic utility operations must "account for no material part
of the holding company's income" and be "small in size." In our view, a
foreign holding company that meets these standards may qualify for a
Section 3(a)(5) exemption even though it controls the domestic utility
company.
Indeed, in the National Grid decision, the Commission cited the Gaz
Metropolitain decision for the proposition that an exemption under Section
3(a)(5) was available to foreign holding companies./51/ The difficult and novel
question before the Commission in National Grid was, instead, whether "a foreign
holding company could make an acquisition that would require it to register
under the Act."
------------------
50 Gaz Metropolitain, Inc., Holding Co. Act Release No. 26170 (November 23,
1994) ("Gaz Metropolitain"). For the fiscal year ended September 30, 1992,
Vermont Gas Systems Inc. ("VGS") had revenues of about $38 million and net
income of about $2.8 million. At fiscal year end, its total assets were
about $34.3 million, with net utility plant of about $29.8 million. In
contrast, for the same period, Gaz Metropolitain, Inc. ("GMLP") had
consolidated revenues of approximately CDN $1.1 billion and consolidated
assets of CDN $1.3 billion.
------------------
The Gaz Metropolitain and National Grid decisions provide useful guidance
as to the standards for exempt and registered foreign utility holding companies.
The exempt foreign holding company has utility operations that are small in both
a relative and absolute sense and that are confined to a single state./52/
National Grid, in contrast, has operations in five New England states and has
recently announced the proposed acquisition of Niagara Mohawk Holdings, Inc., a
large New York utility holding company./53/ There is a further consideration
that argues for exemption on the facts of this matter. Here, as in Gaz
Metropolitain, the proposed transaction will unite Canadian and U.S. utilities.
As the Commission in Gaz Metropolitain noted, the U.S. and Canada enjoy a unique
relationship. Both countries have a long history of friendship and cooperation
evidenced by, among other things, the North American Free Trade Agreement
("NAFTA") and the NAFTA Implementation Act (Pub. L. 103-182, 107 Stat. 2057-2225
(1993)), which were "designed to remove barriers to trade and enhance investment
opportunities between the United States and Canada."/54/
------------------
51 National Grid Group plc, Holding Co. Act Release No. 27154 (March 15,
2000).
52 Cf. AES Corp, Holding Co. Act Release No. 27063 (August 20, 1999) (utility
operations confined to Illinois).
53 See National Grid Group plc, Holding Co. Act Release No. 27154 (March 15,
2000); National Grid USA, Holding Co. Act Release No. 27166 (April 14,
2000); and the Niagara Mohawk website describing the pending merger with
National Grid as a $3 billion transaction that would form the ninth largest
electric utility in the United States and create a U.S. business equal in
size to National Grid's U.K. business (available at
http://www.nimo.com/merger.html).
54 Gaz Metropolitain at 15. In Gaz Metropolitain, the Commission found that
the combination of the Canadian and Vermont gas operations resulted in a
single integrated gas utility system. While Emera could acquire a firm
contract path to interconnect the Canadian and US electric operations, it
is not necessary to do so because NSPI intends to conduct its affairs so as
to qualify for exemption as a FUCO. Thus, although the transaction will
require prior approval under Sections 9 and 10, the question of integration
will be confined to the BHE utility operations, which the Commission has
previously found to be an integrated electric utility system. Section
10(c)(2) of the Act is satisfied because BHE is currently an integrated
electric utility system and will remain so after the Merger. Because here,
as in Gaz Metropolitain, the transaction will result in a single,
integrated public-utility system, the Emera-BHE Merger falls comfortably
within the Gaz Metropolitain precedent.
------------------
b. Emera complies with all standards under Section 3(a)(5).
In last summer's AES decision, the Commission granted an exemption under
Section 3(a)(5) to a U.S. independent power producer that acquired an Illinois
electric and gas utility company. In that matter, the Commission stated that a
request for exemption under Section 3(a)(5) raised three issues:
First, it is necessary to examine the significance of the utility
operations that AES will acquire to determine if they are small in a
relative sense (i.e., not material). Second, we must consider whether
they are small in an absolute sense. Finally, we must consider whether
a company such as AES, that is not an essentially foreign
public-utility holding company, can qualify for the exemption. We
examine these issues in the context of the abuses that the Act was
intended to address.
The first and second issues, concerning the relative and absolute size of
BHE's utility operations, are discussed below. The third issue should be easily
addressed because NSPI's history as a one-time Canadian Crown corporation and
its Nova Scotia-focused operations demonstrate that it is essentially a Canadian
company.
c. Emera is essentially foreign and essentially engaged in
utility operations and related businesses.
In Gaz Metropolitain and in AES, the Commission departed from earlier cases
that had held that, in order to qualify for an exemption under Section 3(a)(5),
an applicant must be a U.S. holding company with "essentially foreign utility
operations."/55/ In AES, the Commission explained:
. . . we do not, however, believe that it is necessary to limit the
section 3(a)(5) exemption to an U.S. holding company whose operations
are essentially foreign to achieve the policy objectives of the Act.
On the facts of this matter, a grant of exemption is consistent with
the underlying rationale of the exemption and the Act's legislative
history (including subsequent amendments to the Act). Following the
acquisition of CILCO, AES will be a U.S. holding company that is
essentially engaged in utility businesses that Congress has determined
should not be subject to regulation under the Act. Just as Congress
determined that the public interest does not require regulation of
public-utility holding companies whose utility operations are
essentially foreign, except for a small domestic utility, the public
interest does not require regulation of a U.S. holding company whose
utility operations are exclusively exempt, except for a small domestic
utility.
Emera is both "essentially foreign" as in the case of Gaz Metropolitain and
"essentially engaged in utility businesses that Congress has determined should
not be subject to regulation under the Act," as in the case of AES./56/
------------------
55 See AES, citing Cities Service Co., 8 S.E.C. 318 (1940) and Electric Bond
and Share Co., 33 S.E.C. 21 (1952).
------------------
d. The US utility operations will be small in both a relative and
absolute sense.
To qualify under Section 3(a)(5), Emera may not derive, directly or
indirectly, a material part of its income from one or more subsidiary companies
the principal business of which within the U.S. is that of a public utility
company. Historically, the Commission has required that the utility operations
be both small in a relative sense (i.e., not material), and small in an
"absolute" sense./57/
Concerning materiality, the Commission can consider a variety of measures
in determining what is a material part of income. In practice, however, the
Commission has generally relied on a comparison of gross revenues (the
"gross-to-gross" test)./58/ In its 1999 NIPSCO order, the Commission approved
the use of "net operating revenues" also referred to as "operating margin,"
(which net out the cost of purchased gas and fuel for generation) to avoid
distortion when a company that was predominantly electric acquired a company
that was exclusively gas./59/ In NIPSCO, the Commission found that an
out-of-state utility subsidiary which contributed the following percentages of
the consolidated holding company figures would not be material for purposes of
Section 3(a)(1):
Measure NIPSCO Range of Values
Gross Operating Revenues 16.0-16.2%
Operating Margin 10.8-11.2%
Utility Operating Income 7.1-8.7%
Thereafter, in AES, the Commission noted that an adjustment to gross revenues
was appropriate because "one of the companies in this matter is subject to rate
regulation and the other largely is not."/60/ There the Commission found a
subsidiary that contributed 12.8% of the holding company's gross revenues and
10.4% of net operating revenues was not material for purposes of exemption under
Section 3(a)(5)./61/
------------------
56 NSPI is the primary electric utility in Nova Scotia, with over 95% of the
generation, transmission and distribution in the province. Emera's electric
utility revenues from NSPI in 1999 accounted for CDN $790.2 million out of
total consolidated revenues of CDN $ 824.6.
57 AES, supra.
58 Id.
59 NIPSCO Industries, Inc., Holding Co. Act Release No. 26973 (Feb. 10, 1999).
The Commission, in NIPSCO, explained that: "Under such circumstances, where
there is a combination of gas and electric operations, the netting out of
fuel costs is often necessary to avoid overstating the size, and therefore
materiality, of the acquired company. This is because pass-through costs
represent a much larger part of revenues in the gas business than in the
electric business."
60 The order explains that: "As a result, a larger portion of CILCO's revenues
represent pass-throughs of fuel cost, while a larger portion of AES's
revenues represent a mark-up over fuel costs, or profit. . . . Because
AES's revenues include a much larger profit component, if the pass-throughs
are not netted out from both companies, CILCO's revenues relative to the
size of AES's revenues may be overstated."
61 Similarly, in NIPSCO, a utility's contribution to net operating revenues of
10.8% to 11.2% was not material in the context of a request for exemption
under Section 3(a)(1).
------------------
In this matter, a holding company with vertically integrated utility
operations (NSPI) is acquiring a disaggregated "wires" utility (BHE). As in
NIPSCO and AES, a strict application of the "gross to gross" test would provide
a distorted picture of the relationship between the holding company and the U.S.
utility. Among other things, although BHE has divested its generation, the
company's gross revenues still reflect certain energy costs related to the
recovery of stranded costs associated with BHE's historical operations. We
explain the nature of these "legacy" or "transition" costs below./62/
------------------
62 The BHE revenues discussed herein are presented on a consolidated basis.
MEPCO is accounted for under the equity method and consequently it
contributes nothing to BHE's consolidated revenues. Dividends received from
MEPCO, which in 1999 were approximately $199,000, are applied to offset
BHE's expenses and, consequently, they benefit BHE's ratepayers. BHE's
revenues from Chester SVC were zero for the same period.
------------------
As explained previously, in 1997, the State of Maine implemented the
Restructuring Act to bring retail competition to the sale of electricity. BHE
was required to divest its generation under the Restructuring Act and it
completed that process in 1999. Retail competition commenced in Maine in March,
2000, and BHE now functions as a transmission and distribution electric utility
in this new regulatory paradigm. Nevertheless, BHE continues to have costs
related to its divested generation assets and power supply contracts that are
recovered in rates. These costs fall into two categories.
First, BHE has a regulatory asset that represents the cost BHE incurred in
connection with the buy out of above-market power supply contracts and other
unamortized generation-related costs, principally from PURPA qualifying
facilities. The MPUC has allowed for a five to six year recovery in rates for
most of these costs. The recovery for these costs appears in BHE's annual
revenues and is labeled "Regulatory Asset Recovery" in the financial projections
in Exhibit FS-5. When this regulatory asset is fully amortized, BHE will no
longer receive these revenues. The regulatory asset is a remnant of BHE's
previous structure under the old regulatory scheme. As such, the revenue stream
associated with the asset has no relevance to the current and future business of
BHE as a utility.
BHE also has a second category of costs that are described as "Purchased
Power Recovery" on the financial projections in Exhibit FS-5. These costs relate
to all the residual power supply contracts that BHE did not buy out because it
was not economically justifiable. Since BHE cannot be a supplier of electricity
under Maine law, BHE periodically auctions the rights to the power under the
contracts to third parties. The difference between the auction proceeds and
BHE's costs under the power supply contracts, i.e., BHE's net residual costs, is
labeled Purchased Power Recovery and is collected from BHE's ratepayers. The
revenue from Purchased Power Recovery will continue for the term of the
remaining power supply contracts as long as BHE's biennial auctions result in
proceeds to BHE that are less than the contract cost./63/
As with the Regulatory Asset Recovery, the Purchased Power Recovery relates
to power supply which BHE procured under the prior regulatory scheme when it was
a vertically integrated utility. These are charges that do not reflect BHE's
ongoing utility operations. Accordingly, it would be a distortion to include
BHE's revenues attributable to Purchased Power and Regulatory Asset Recovery in
a materiality analysis under Section 3(a)(5) because they do not reflect the
revenues that BHE earns from the service that it is currently authorized to
provide to its customers.
------------------
63 If future auctions provide proceeds in excess of BHE's costs, the excess
would reduce BHE's revenue, i.e., reduce customer rates.
------------------
Before the Restructuring Act, BHE's revenues were attributable to revenues
from (i) transmission and distribution, (ii) fixed obligations for generation
and power supply based on prior and ongoing commitments (which
post-restructuring, became "stranded" costs), and (iii) fuel and market-based
purchased power variable costs. Revenues were roughly divided in thirds between
the categories. After BHE's divestiture and commencing March 1, 2000 when retail
competition began in Maine, revenue recovery for fuel and purchased power
variable costs has been eliminated since BHE no longer owns generating assets or
provides generation-related service. Revenues from generation and supply have
also been eliminated and replaced by steadily decreasing revenues from
Regulatory Asset and Purchased Power Recovery. Absent stranded costs, which will
eventually be recovered, BHE's revenues immediately following restructuring
would be a mere one-third of their pre-divestiture levels. This definite trend
and dramatic change in BHE's utility business should be recognized by the
Commission in its application of the standards of Section 3(a)(5) of the
Act./64/
If the Regulatory Asset Recovery and Purchased Power Recovery are backed
out of BHE's revenues, the company would contribute 9.8% of the combined
entity's revenues in year one, 9.1% in year three and only 9.3% by year
five./65/ Consequently, BHE will not contribute a material amount of Emera's
revenues, consistent with Commission precedent.
The Commission in the past has imposed an additional condition that the
utility operations of holding companies exempt under Section 3(a)(3) or 3(a)(5)
be "small in an absolute as well as a relative sense."/66/ The limitation was
imposed in early cases to address the situation in which "any public utility
holding company could insulate itself from the Act by acquiring and holding the
stocks of companies doing some business other than that of a retail utility
business."/67/ The Commission in AES stated that: "This approach is intended to
ensure that the exemption is not available to a company with a large utility
business and a total business that is predominantly nonutility in nature just
because the nonutility holdings dwarf the utility operations."
------------------
64 As noted supra at 12, in the first year following restructuring, BHE has
been required by the MPUC to acquire power in connection with the provision
of standard offer service on a full cost reimbursement basis. Under the
Restructuring Act, the MPUC is generally expected to source this power from
third-party providers through a competitive bidding process.
65 On a gross-to-gross basis, BHE would contribute 15.0% of the combined
entity's revenues in year one, 13.8% in year three and only 12.8% by year
five.
66 Electric Bond and Share Co., 33 S.E.C. 21 (1952), quoting Standard Oil Co.,
10 S.E.C. 1122, 1129 (1942).
67 Id.
------------------
BHE is small in an absolute sense. As of and for the year ended December
31, 1999, BHE had approximately 107,000 customers, total assets of $544 million,
gross utility revenues of $198 million and net income of $18.3 million. In
comparison, as of and for the year ended December 31, 1998, CILCORP, the utility
acquired by AES, had approximately 253,000 customers, total assets of $1,024
million, gross utility revenues of $532 million and net income of $41 million.
Although BHE is larger than the utility acquired in Gaz Metropolitain,/68/ like
VGS and CILCO, BHE operates only in one state and is subject to effective state
regulation. The utilities that the Commission found to be impermissibly large in
the past, Cities Service and Electric Bond and Share, both had extensive
operations in multiple states and represented significant portions of the
regional and national utility markets. In contrast, BHE serves only 15% of the
Maine electricity market and 1.6% of the New England market, measured on the
basis of total kilowatt-hour sales (i.e., the amount of electricity consumed in
the respective regions in 1999).
------------------
68 At the time of the Gaz Metropolitain decision, VGS served 24,600 customers,
had $34.3 million in assets, revenues of $38 million and net income of $2.8
million.
------------------
e. The proposed exemption will not be detrimental to the
protected interests.
As noted above, notwithstanding an applicant's compliance with the
objective requirements of Section 3(a)(1), the Commission can deny or condition
an exemption, "insofar as [the Commission] finds the exemption detrimental to
the public interest or the interest of investors or consumers." In assessing
this standard, the Commission has traditionally focused on the presence of state
regulation on the theory that federal intervention is unnecessary when state
control is adequate./69/ The proposed Merger will not have an adverse effect on
BHE's existing utility operations, or on the way that rates are regulated by the
MPUC or the ability of that commission to effectively regulate the operations of
the BHE utilities.
Chapter 6 of the 1995 report on The Regulation of Public-Utility Holding
Companies (the "1995 Report") discusses the background and administration of the
Act's exemptive provisions and explains that: "Congress subjected holding
companies to the requirements of the Act because meaningful state regulation of
their abuses was often obstructed by their control of subsidiaries in several
states and by the constitutional doctrines limiting state economic
regulation."/70/ The legislative history makes clear that exemptions from
registration are available where the holding company is susceptible to effective
state regulation or is otherwise not the type of company at which the Act was
directed./71/ Both of those factors are present in this matter.
The proposed transaction will require the approval of the MPUC. In matters
involving exempt holding companies, the SEC has traditionally given great
deference to the views of the affected state regulators. In NIPSCO, for example,
the Commission noted that: "Each of Bay State's and Northern's regulators made
the finding aware of the fact that, if we approved the application, Bay State
and Northern would be owned by an out-of-state holding company exempt from
registration under the Act. The Commission has given weight to a state's
judgment concerning its ability to exercise effective regulatory control."/72/
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69 See, e.g., KU Energy Corp., Holding Co. Act Release No. 25409 (Nov. 13,
1991); CIPSCO Inc., Holding Co. Act Release No. 25212 (Sept. 18, 1990).
70 1995 Report at 109, note 4.
71 See Sen. Rep. No. 621, 74th Cong., 1st Sess. (1935).
72 The NIPSCO order cited Wisconsin Energy Corp., Holding Co. Act Release No.
24267 (Dec. 18, 1996) ("the judgment of a state's legislature and public
service commission as to what will benefit their constituents is entitled
to considerable deference when not in conflict with the policies of the
Act"); Northern States Power Co., 36 S.E.C. 1, 8 (1954) ("The considered
conclusion of the local authorities, deriving their power from specific
State legislation, should be given great weight in determining whether the
public interest would in fact be adversely affected . . . ."), cited with
approval in Houston Industries, Inc., Holding Co. Act Release No. 26744
(July 24, 1997).
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Further, exemption of Emera will not give rise to any of the evils that the
Act was intended to address. Emera is a publicly held company subject to
continuous reporting requirements under the Canadian securities laws. A
transaction that links companies in a narrowly defined geographic area does not
create a problem of "scatteration" for purposes of the Act. Further, there is
nothing in the history of Emera or BHE to suggest that the holding company
structure will be used to evade state and local regulation, or that regulation
under the Act is needed to supplement state regulation in order to prevent
detriment to the interests protected by the Act.
Finally, the Commission always has the authority under the "unless and
except" clause to condition or deny an exemption that it finds to be detrimental
to the protected interests. This point is well-illustrated by the Commission's
decisions denying orders of exemption in Cities Service and Electric Bond and
Share, even though those companies met the objective requirements for exemption.
As the Commission explained in AES:
In those cases, there was both an attempt to evade section 3(a)(3) . . .
and a history, and future likelihood, of abuses the Act was intended to
prevent. In each of these cases, the Commission determined that the
applicant was essentially the type of company at which the purposes of the
Act were directed and noted that the exemption would have been denied under
the unless and except clause, even if the applicant had satisfied all the
objective criteria for exemption.
Section 3(c) of the Act further provides:
Whenever the Commission, on its own motion, or upon application by the
holding company or any subsidiary company thereof exempted by any order
issued under subsection (a), or by the subsidiary company exempted by any
order issued under subsection (b), finds that the circumstances which gave
rise to the issuance of such order no longer exist, the Commission shall by
order revoke such order.
Should Emera's Section 3(a)(5) exemption become contrary to the protected
interests under the Act at any time in the future, the Commission could withdraw
the exemption and cause Emera to divest BHE or register under the Act.
ITEM 4. REGULATORY APPROVALS.
Set forth below is a summary of the regulatory approvals that will be
obtained in connection with the acquisition.
(1) Antitrust
The acquisition is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, and the rules and regulations thereunder,
which provide that certain acquisition transactions may not be consummated until
certain information has been furnished to the Antitrust Division of the
Department of Justice and the Federal Trade Commission, and until certain
waiting periods have been terminated or have expired.
(2) Federal Energy Regulatory Commission
Under Section 203 of the Federal Power Act, the FERC has jurisdiction when
a public utility sells or otherwise disposes of facilities that are subject to
its jurisdiction. A disposition is deemed made when there is a change in control
of the public utility that owns the facilities. For this reason, the prior
approval of the FERC is required to complete the Merger.
(3) Committee on Foreign Investment in the United States
Section 721 of the Defense Production Act of 1950 authorizes the Committee
on Foreign Investment in the United States to suspend or prohibit any merger,
acquisition or takeover, by or with a foreign person, of a person engaged in
interstate commerce in the United States when, in the Committee's view, the
foreign interest exercising control over that person might take action that
threatens to impair the national security.
(4) State Regulatory Approval
Under Maine law, the approval of the MPUC is required for the indirect
transfer of control of BHE resulting from the Merger, under a standard that
requires a finding that the Merger is consistent with the interests of BHE's
customers and investors. In addition, in rendering a decision, the MPUC must
find that it can continue to adequately regulate the reorganized utility. Under
Maine law, once an application for approval is filed, the MPUC must act
definitively within 180 days of the date of filing. Emera and BHE filed a joint
petition with the MPUC on August 4, 2000. The applicants expect the MPUC's order
to be issued by February 1, 2001.
ITEM 5. PROCEDURE.
The Commission is respectfully requested to issue and publish not later
than January 30, 2001 the requisite notice under Rule 23 with respect to the
filing of this Application, such notice to specify a date not later than
February 25, 2001 by which comments may be entered and a date not later than
March 31, 2001 as the date after which an order of the Commission granting and
permitting this Application to become effective may be entered by the
Commission.
Emera believes that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the Merger.
The Division of Investment Management may assist in the preparation of the
Commission's decision. There should be no waiting period between the issuance of
the Commission's order and the date on which it is to become effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
Exhibits
A-1 Memorandum of Association of Emera (to be filed by amendment).
A-2 Articles of Association of Emera (to be filed by amendment).
A-3 Articles of Incorporation of BHE (to be filed by amendment).
A-4 By-Laws of BHE (to be filed by amendment).
B-1 Agreement and Plan of Merger (incorporated by reference to SEC File No.
001-10922, filed September 18, 2000).
C-1 Definitive Proxy Statement relating to the special meeting of shareholders
of BHE to approve the Merger with Emera (incorporated by reference to SEC
File No. 001-10922, filed September 18, 2000).
D-1 Petition to the Maine Public Utilities Commission, filed on August 4, 2000,
together with testimony and exhibits (to be filed by amendment).
D-2 Application to FERC together with testimony and exhibits (to be filed in
paper format under cover of Form SE).
D-3 FERC Order approving the Merger (to be filed by amendment).
E-1 Organization Chart of the combined Emera/BHE system post-Merger (to be
filed in paper format under cover of Form SE).
E-2 Map of proposed combined service territory (to be filed in paper format
under cover of Form SE).
F-1 Opinion of counsel of Emera (to be filed by amendment).
F-2 Past tense opinion of counsel (to be filed by amendment).
G-1 Emera's 1999 Annual Report (to be filed by amendment).
G-2 BHE's Annual Report on Form 10-K for the fiscal year ended December 31,
1999 (incorporated by reference to SEC File No. 001-10922, filed March 30,
2000, and amended April 28, 2000).
H-1 Proposed Form of Notice.
K-1 Non-utility Subsidiaries of Emera and BHE (to be filed by amendment).
K-2 Comparison of size of BHE on a Local, Regional and National basis (to be
filed by amendment).
Financial Statements
FS-1 Balance sheet and income statement of Emera consolidated for the year ended
December 31, 1999 (incorporated by reference to Exhibit G-1).
FS-2 Balance sheet and income statement of BHE consolidated for the year ended
December 31, 1999 and for the quarters ended March 31, 2000 and June 30,
2000 (incorporated by reference to SEC File No. 001-10922, on Form 10-K for
the year-end report filed March 30, 2000 and amended April 28, 2000, and on
Forms 10-Q for the quarterly statements filed May 12, 2000 and August 10,
2000, respectively).
FS-3 Balance sheet and income statement of BHE consolidated for the years ended
December 31, 1998 and December 31, 1997 (incorporated by reference to SEC
File No. 001-10922, on Form 10-K for the year end reports filed March 30,
1999 and March 27, 1998, respectively).
FS-4 Pro-forma financial statements (to be filed by amendment).
FS-5 Financial projections (confidential treatment requested under Rule 104).
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
The Merger neither involves a "major federal action" nor "significantly
affects the quality of the human environment" as those terms are used in Section
102(2)(C) of the National Environmental Policy Act, 42 U.S.C. Sec. 4321 et seq.
No federal agency is preparing an environmental impact statement with respect to
this matter.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned company has duly caused this Application to be signed on
its behalf by the undersigned thereunto duly authorized. The signature of the
applicants, through the undersigned, is restricted to the information contained
in this Application which is pertinent to the instant Application.
Date: November 6, 2000 /s/ Richard J. Smith
______________________
Richard J. Smith
Corporate Secretary and General Counsel
Emera Incorporated
Exhibit Index
H-1 Proposed Form of Notice.
