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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 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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NORTHERN STATES POWER COMPANY
414 NICOLLET MALL
MINNEAPOLIS, MINNESOTA 55401
(Name of company filing this statement
and address of principal executive offices)
None
(Name of top registered holding company parent)
JOHN P. MOORE, JR.
CORPORATE SECRETARY
414 NICOLLET MALL
MINNEAPOLIS, MINNESOTA 55401
(Name and addresses of agents for service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application-Declaration to:
PETER D. CLARKE
GARDNER, CARTON & DOUGLAS
321 NORTH CLARK STREET, SUITE 3400
CHICAGO, ILLINOIS 60610
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TABLE OF CONTENTS
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Item 1. Description of Proposed Transaction............................... 1
A. Introduction......................................................... 1
1. General Request and Overview of Transaction........................ 1
B. Description of the Parties to the Transaction........................ 2
1. General Description................................................ 2
(a) NSP............................................................. 2
(b) BMG............................................................. 4
2. Description of Energy Sales and Facilities......................... 5
(a) NSP and NSP-W................................................... 5
(i) Energy Sales.................................................. 5
(ii) Electric Generating Facilities............................... 5
(iii) Electric Transmission and Other Facilities.................. 6
(iv) Fuel Sources................................................. 7
(v) Gas Facilities................................................ 7
(b) BMG............................................................. 8
3. Gas Coordination................................................... 8
4. Non-Utility Interests of NSP, NSP-W and BMG........................ 9
(a) NSP and NSP-W................................................... 9
(b) BMG............................................................. 9
C. Description of Transaction and Statement as to Consideration......... 10
1. Background......................................................... 10
2. Merger Agreement................................................... 11
3. Management of NSP following the Transaction........................ 11
4. Related Agreements................................................. 11
Item 2. Fees, Commissions and Expenses.................................... 12
Item 3. Applicable Statutory Provisions................................... 12
A. Section 10(b)........................................................ 13
1. Section 10(b)(1)................................................... 13
2. Section 10(b)(2)................................................... 14
3. Section 10(b)(3)................................................... 15
B. Section 10(c)........................................................ 16
1. Section 10(c)(1)................................................... 16
(a) Compliance With Section 8....................................... 16
(b) No Detriment to the Carrying Out of Section 11.................. 16
2. Section 10 (c)(2).................................................. 18
(a) Efficiencies and Economies...................................... 18
(b) Integrated Public Utility System................................ 19
(i) Electrical System............................................. 19
(ii) Gas Utility System........................................... 21
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C. Section 10(f)........................................................ 23
D. Section 3(a)(2)...................................................... 24
Item 4. Regulatory Approvals.............................................. 25
A. Antitrust............................................................ 25
B. State Public Utility Regulation...................................... 25
Item 5. Procedure......................................................... 26
Item 6. Exhibits and Financial Statements................................. 27
A. Exhibits............................................................. 27
B. Financial Statements................................................. 28
Item 7. Information as to Environmental Effects........................... 28
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
A. Introduction
This Application-Declaration relates to the proposed merger (the "Merger")
of Black Mountain Gas Company, an Arizona corporation ("BMG"), into Northern
States Power Company, a Minnesota corporation ("NSP"), with NSP as the survivor,
and following the Merger, the separation (the "Spin-off") of BMG into a
wholly-owned, first-tier subsidiary of NSP (the Merger and the Spin-off are
collectively referred to as the "Transaction"). NSP is currently a
public-utility company and an exempt holding company pursuant to Section 3(a)(2)
of the Public Utility Holding Company Act of 1935 (the "Act") and owns all of
the common stock of Northern States Power Company, a Wisconsin corporation
("NSP-W"), which is also a public-utility company under the Act. BMG is an
Arizona public service corporation.
The Transaction is expected to produce significant benefits to the public,
investors and consumers and will meet all applicable standards of the Act. Among
other things, NSP and BMG believe that the Transaction offers strategic and
financial benefits to each company and their respective shareholders.
As discussed more fully at Item 3.D. below, NSP believes that, following the
consummation of the Transaction, it will continue to be a holding company
entitled to an exemption pursuant to Section 3(a)(2) of the Act because it will
continue to be predominantly a public-utility company and its operations as such
will remain confined to Minnesota, its state of incorporation, and states
contiguous thereto.
The shareholders of the common stock of BMG have approved the merger of BMG
with and into NSP at a special meeting of BMG's shareholders on May 21, 1998.
The Merger has been approved by the Arizona Corporation Service Commission (the
"Arizona Commission"), the Minnesota Public Utilities Commission (the "Minnesota
Commission") and the North Dakota Public Service Commission (the "North Dakota
Commission"). Various aspects of the Transaction are also subject to the
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"). In addition, BMG possesses
various franchises, permits and licenses granted by local and state authorities
that may need to be renewed or replaced as a result of the Transaction. Apart
from the approval of the Securities and Exchange Commission (the "Commission")
under the Act, the foregoing approvals are the only governmental approvals
required for the Transaction. In order to permit timely consummation of the
Transaction and the realization of the substantial benefits it is expected to
produce, NSP requests that the Commission's review of this
Application-Declaration commence and proceed as expeditiously as practicable.
1. General Request and Overview of Transaction
Pursuant to Section 9(a)(2) and Section 10 of the Act, NSP requests that the
Commission: (i) authorize the Spin-off of BMG as a wholly-owned, first-tier
subsidiary of NSP following the Merger as described herein, and (ii) grant such
other authorizations as may be necessary in connection therewith. NSP also
requests an order under Section 3(a)(2) of the Act declaring it exempt from all
provisions of the Act except Section 9(a)(2) following consummation of the
Transaction which will establish BMG as a direct wholly-owned subsidiary of NSP.
(1)
NSP and BMG have entered into an Agreement and Plan of Merger, dated as of
December 29, 1997 (the "Merger Agreement"), whereby BMG will be merged into NSP
with NSP as the surviving corporation. A copy of the Merger Agreement is
incorporated by reference as Exhibit B-1. Pursuant to the Merger Agreement, upon
effectiveness of the Merger, each issued and outstanding share of common stock,
no par value, of BMG ("BMG Common Stock") (except shares owned by BMG as
treasury stock or held by BMG shareholders who perfect dissenters' rights with
respect thereto ("BMG Dissenting Shares")) will be canceled and converted into
the right to receive a fraction of a share of common stock, $2.50 par value, of
NSP ("NSP Common Stock") equal to the quotient (hereinafter, the "Exchange
Ratio") derived by dividing (A) $17,750,000 by (B) the product of (i) the volume
weighted average of the closing prices for NSP Common Stock on the New York
Stock Exchange for the twenty full trading days ending on the third full trading
day prior to the date (the "Effective Time") the Merger becomes effective (the
"Average NSP
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(1) Following the initial step of the Transaction (i.e., the Merger), NSP's
utility operations will include the operations of BMG.
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Share Price") and (ii) the number of shares of BMG Common Stock issued and
outstanding immediately prior to the Effective Time. Pursuant to the Merger
Agreement an additional number of shares of NSP Common Stock equal to the
quotient derived by dividing $1,500,000 by the Average NSP Share Price will be
placed in escrow as soon as practicable after the Effective Time to satisfy any
indemnification claims of NSP under the Merger Agreement. Such additional
shares, net of any indemnification claims, will be distributed pro rata to the
former holders of BMG Common Stock, except BMG Dissenting Shares, on or about
the first anniversary of the closing of the Merger. Following receipt of the
Commission's approval of the Spin-off pursuant to this Application-Declaration,
NSP will cause the assets of BMG to be transferred to a newly-formed,
wholly-owned, first-tier subsidiary of NSP. The effect of such transfer will be
that BMG will become a wholly-owned subsidiary of NSP.
Upon completion of the Transaction, NSP will directly own NSP-W, a public
utility company, and BMG, also a public utility company. In addition to owning
NSP-W and BMG, NSP will continue to own all of its existing non-utility
subsidiaries upon consummation of the Transaction. See Exhibit E-2 for the
corporate structure to be in effect upon consummation of the Transaction.
B. Description of the Parties to the Transaction
1. General Description
(a) NSP
NSP was incorporated under the laws of the State of Minnesota in 1909. It is
a public-utility company and a holding company exempt from regulation by the
Commission under the Act (except for Section 9(a)(2) thereof) pursuant to
Section 3(a)(2) of the Act and by order of the Commission in NORTHERN STATES
POWER COMPANY, Holding Co. Act Release No. 22334, 24 SEC Docket 405 (Dec. 23,
1981). Following the Merger and prior to receipt of Commission approval of the
Transaction pursuant to this Application-Declaration, NSP will claim its
exemption under Section 3(a)(1) and/or Section 3(a)(2) by filing Form U-3A-2
pursuant to Rule 2. The Merger of NSP and BMG is a transitional combination and
the intended result of the contemporaneous steps of the Transaction is that NSP
becomes the holding company of a second public utility subsidiary. This view is
consistent with the Commission's policy to look at "the final result" rather
than "separate and succeeding transactions" where such are "integral parts of a
single plan and purpose." SEE, E.G., NATIONAL PROPANE CORP., Holding Co. Act
Release No. 20684, 46 S.E.C. 1332, 1337-8 (Aug. 24, 1978); SEE ALSO ASS'N OF
MASS CONSUMERS, INC. V. S.E.C., 516 F.2d 711, 717 (D.C. Cir. 1975), CERT. DENIED
423 U.S. 1052 (1976).
NSP is engaged primarily in the generation, transmission and distribution of
electricity throughout a 30,000 square mile service area. NSP also purchases,
distributes and sells natural gas to retail customers, and transports
customer-owned gas, in approximately 118 communities within this area. NSP
provides electric utility service in South Dakota and electric and gas utility
service in Minnesota and North Dakota. Of the more than 2.5 million people
served by NSP, the majority are concentrated in the Minneapolis-St. Paul
metropolitan area. In 1997, more than 73% of the electric retail revenue of NSP
was derived from sales in the Minneapolis-St. Paul metropolitan area and more
than 66% of its retail gas revenue was derived from sales in the St. Paul
metropolitan area. As of December 31, 1997, NSP provided electric utility
service to approximately 1,220,000 customers and gas utility service to
approximately 375,000 customers.
NSP owns all of the outstanding common stock of NSP-W, a Wisconsin
corporation, which is a public-utility company under the Act. NSP-W is engaged
in the generation, transmission, and distribution of electricity to
approximately 206,700 retail customers in an area of approximately 18,900 square
miles in northwestern Wisconsin, to approximately 9,200 electric retail
customers in an area of approximately 300 square miles in the western portion of
the Upper Peninsula of Michigan, and to 10 wholesale customers in the same
general area. NSP-W purchases, distributes and sells natural gas to retail
customers or transports customer-owned natural gas, in the same service
territory to approximately 72,100 customers in Wisconsin
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and 4,900 customers in Michigan. In 1997, NSP-W provided approximately 13% of
NSP's consolidated revenues.
Retail sales rates, services and other aspects of NSP's retail operations
are subject to the jurisdiction of the Minnesota Commission, the North Dakota
Commission and the South Dakota Commission within their respective states. The
Minnesota Commission also possesses regulatory authority over aspects of NSP's
financial activities including security issuances, property transfers when the
asset value is in excess of $100,000, mergers with other utilities, and
transactions between NSP and affiliates. In addition, the Minnesota Commission
reviews and approves NSP's electric resource and gas supply capacity plans for
meeting customers' future energy needs. NSP-W is subject to regulation of
similar scope by the Public Service Commission of Wisconsin (the "Wisconsin
Commission") and the Michigan Public Service Commission (the "Michigan
Commission"), except that the Michigan Commission does not regulate NSP-W's
issuances of securities. In addition, before facilities may be sited and built,
a state commission generally must certify the need for new generating plants and
transmission lines of designated capacities to be located within such state.
Wholesale rates for electric energy sold in interstate commerce, wheeling
rates for energy transmission in interstate commerce, and certain other
activities of NSP and NSP-W (including its hydro-electric facilities) are
subject to the jurisdiction of the Federal Energy Regulatory Commission (the
"FERC"). The operation and construction of NSP's Prairie Island and Monticello
nuclear facilities are subject to regulation by the Nuclear Regulatory
Commission.
Non-utility businesses conducted directly by NSP consist of: (i) an
appliance warranty program for its residential customers, (ii) construction of
natural gas distribution systems for third parties (primarily end-users and
municipal gas systems), (iii) sale and installation of power quality
instruments, primarily to protect equipment of customers from electric surges,
(iv) sale of steam to industrial customers in NSP's service territory, and (v)
installation and maintenance of street lighting for municipalities and other
customers.
While NSP-W is currently the only public-utility subsidiary of NSP under the
Act, NSP has ten other directly-owned subsidiaries that are engaged in various
non-utility businesses: NSP Financing I, Viking Gas Transmission Company
("Viking"), Energy Masters International, Inc. ("EMI," formerly Cenerprise,
Inc.), Eloigne Company ("Eloigne"), First Midwest Auto Park, Inc. ("FMAP"),
Cormorant Corporation ("Cormorant"), United Power & Land Company ("UP&L"), Seren
Innovations, Inc. ("Seren"), Ultra Power Technologies, Inc. ("Ultra Power") and
NRG Energy, Inc. ("NRG"). NSP-W has two wholly-owned subsidiaries, Clearwater
Investments, Inc. ("Clearwater") and NSP Lands, Inc. ("NSP Lands") and a 75.86%
owned subsidiary, Chippewa & Flambeau Improvement Company ("C&F"). The
activities of these subsidiaries are more fully described under Item 1.B.4(a)
below. For the year-ended December 31, 1997, approximately 8% of NSP's
consolidated operating revenues (before intercompany eliminations) and 7% of its
consolidated net income were derived from the non-utility businesses. As of
December 31, 1997, approximately 20% of NSP's consolidated assets were invested
in non-utility businesses.
NSP Common Stock is listed on the New York Stock Exchange, Inc. ("NYSE") and
the Chicago and Pacific Stock Exchanges. As of April 30, 1998, there were
75,368,508 shares of NSP Common Stock and 1,050,000 shares of NSP cumulative
preferred stock outstanding. NSP's principal executive office is located at 414
Nicollet Mall, Minneapolis, Minnesota 55401. NSP-W does not have any preferred
stock outstanding and all of its common stock is owned by NSP.
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On a consolidated basis, NSP's operating revenues for the twelve months
ended December 31, 1997, were $3.2 billion, consisting of the following (before
intercompany eliminations) (2)
<TABLE>
<CAPTION>
($IN MILLIONS)
ELECTRIC
UTILITY GAS UTILITY OTHER
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NSP....................................................... $ 2,105 $ 415 $ 0
NSP-W..................................................... $ 312 $ 90 $ 0
Non-Utility Subsidiaries.................................. $ 0 $ 0 $ 238
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Consolidated assets of NSP and its subsidiaries as of December 31, 1997 were
approximately $7.1 billion, consisting of $3.7 billion in net electric utility
property, plant and equipment ($3.1 billion for NSP and $573 million for NSP-W);
$415 million in net gas utility property, plant and equipment ($355 million for
NSP and $60 million for NSP-W); $1.4 billion in non-utility subsidiary assets;
and $1.6 billion in other corporate assets.
For the twelve months ended March 31, 1998, NSP's operating revenues were
$3.1 billion, consisting of the following (before intercompany eliminations).
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($IN MILLIONS)
ELECTRIC
UTILITY GAS UTILITY OTHER
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NSP....................................................... $ 2,105 $ 378 $ 0
NSP-W..................................................... $ 312 $ 82 $ 0
Non-Utility Subsidiaries.................................. $ 0 $ 0 $ 198
</TABLE>
Consolidated assets of NSP and its subsidiaries as of March 31, 1998 were
approximately $7.2 billion, consisting of $3.7 billion in net electric utility
property, plant and equipment ($3.1 billion for NSP and $574 million for NSP-W);
$414 million in net gas utility property, plant and equipment ($355 million for
NSP and $59 million for NSP-W); $1.4 billion in non-utility subsidiary assets;
and $1.7 billion in other corporate assets.
More detailed information concerning NSP and its subsidiaries is contained
in NSP's Annual Report on Form 10-K for the year ended December 31, 1997, its
Annual Report to Shareholders for the year ended December 31, 1997 and its
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, which are
incorporated by reference as Exhibits H-1, H-2 and H-3, respectively, and in
NSP-W's Annual Report on Form 10-K for the year ended December 31, 1997 and its
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, which are
incorporated by reference as Exhibits H- 4 and H-5, respectively.
(b) BMG
BMG was incorporated under the laws of Arizona in 1965. It is an Arizona
public service corporation that provides natural gas distribution to an area of
approximately 100 square miles in Maricopa County, Arizona, and provides propane
gas distribution to an area of approximately 20 square miles in Coconino County,
Arizona, pursuant to certificates of convenience and necessity issued by the
Arizona Commission. As of the year ended December 31, 1997, BMG provided utility
services to 6,097 customers. Most of its
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(2) In the following table, Electric Utility revenues are the revenues derived
by NSP and NSP-W from their operations as an "electric utility company" as
defined in Section 2(a)(3) under the Act; Gas Utility revenues are the revenues
derived by NSP and NSP-W from their operations as a "gas utility company" under
Section 2(a)(4) of the Act; and Non-Utility Subsidiaries revenues include all
other revenues of consolidated subsidiaries of NSP. These amounts do not conform
to NSP's consolidated financial reports, as NSP reports in its consolidated
financial statements: (i) the revenues of its wholly-owned regulated natural gas
interstate pipeline (Viking Gas Transmission Company) as part of Gas Utility
revenues, (ii) the revenues of its other consolidated subsidiaries as part of
"Other Income (Deductions)" and (iii) the results of the operations of its
non-consolidated subsidiaries under "Equity in Earnings of Unconsolidated
Affiliates."
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customers are residential. Non-residential customers include two school
districts, three resorts and multiple light commercial customers. As such, BMG
is a "gas utility company" as defined in Section 2(a)(4) of the Act. BMG does
not own, control or hold the voting securities of any public-utility company or
holding company under the Act and, thus, it is not a "holding company" as
defined under Section 2(a)(7) of the Act. BMG has no subsidiaries. BMG is not
subject to regulation under the jurisdiction of the FERC. The Company's rates
charged to customers are regulated by the Arizona Commission.
BMG also provides non-utility services and bulk propane sales through its
Lake Powell Propane division. Such non-utility services also include appliance
repair. In 1997, revenues and net income from non-utility services totaled
$865,000 and $190,000, respectively, representing 14% and 14.7% of BMG's
operating revenue and net income, respectively, for the year ended December 31,
1997.
BMG's total operating revenues for the years ended December 31, 1995, 1996
and 1997 were approximately $4.5 million, $5.2 million, and $6.2 million,
respectively. For the same periods, BMG's net income was approximately $900,000,
$975,000 and $1.3 million, respectively. BMG's net utility assets as of December
31, 1996 and 1997 were approximately $9.7 million and $10.3 million,
respectively.
More detailed information concerning BMG is contained in the Proxy Statement
of BMG dated April 23, 1998, attached as Exhibit C-2.
2. Description of Energy Sales and Facilities
(a) NSP and NSP-W
(i) Energy Sales
For the year ended December 31, 1997 and the twelve months ended March 31,
1998, NSP and NSP-W sold the following amounts of electric energy (at retail or
wholesale) and distributed the following amounts of natural or manufactured gas
at retail:
<TABLE>
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YEAR ENDED 12 MONTHS
DECEMBER 31, 1997 ENDED MARCH 31, 1998
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NSP
Kwh of electric energy sold (including amounts delivered in
interchange)........................................................ 30,146,167 30,102,120
Mcf of gas distributed at retail (including natural and manufactured
gas)................................................................ 80,350,058 76,449,915
NSP-W
Kwh of electric energy sold (including amounts delivered in
interchange)........................................................ 5,209,151 5,207,067
Mcf of gas distributed at retail (including natural and manufactured
gas)................................................................ 18,979,882 17,904,137
</TABLE>
(ii) Electric Generating Facilities
As of December 31, 1997, NSP and NSP-W had a total net generating capability
of 7,132 Mw and NSP had a total summer net generating capacity of 6,284 Mw
available primarily from the following units:
Sherburne County ("Sherco"): NSP owns two coal-fired generating units at
its Sherco station in Minnesota with a combined net capability of 1,433 Mw.
NSP owns a 59% undivided interest in the third unit at the station ("Sherco
3"), of which NSP's share of the net capability of this unit is 514 Mw.
Prairie Island: NSP owns two nuclear generating units at its Prairie
Island station in Minnesota with a combined net capability of 1,027 Mw.
Monticello: NSP owns one nuclear generating unit at its Monticello
station in Minnesota with a net capability of 545 Mw.
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King: NSP owns one coal-fired generating unit at its King station in
Minnesota with a net capability of 571 Mw.
Black Dog: NSP owns four coal-fired generating units at its Black Dog
station in Minnesota with a combined net capability of 462 Mw.
High Bridge: NSP owns two coal-fired generating units at its High Bridge
station in Minnesota with a combined net capability of 263 Mw.
Riverside: NSP owns two coal-fired generating units at its Riverside
station in Minnesota with a combined net capability of 372 Mw.
Anson: NSP owns two oil/gas-fired combustion turbine electric generating
units at its Angus Anson station in Sioux Falls, South Dakota, with an
aggregate net generating capability of 232 Mw.
Inver Hills: NSP owns five oil/gas-fired combustion turbine electric
generating units at its Inver Hills station located in Inver Grove Heights,
Minnesota, with an aggregate net generating capability of 343 Mw.
NSP also owns numerous smaller generating units fueled with coal,
natural gas, oil or waste, wind and one hydro-electric generating facility,
with an aggregate net capability of 522 Mw.
As of December 31, 1997, NSP-W had a total net summer generating capability
of 848 Mw from the following units:
Bay Front: NSP-W owns three steam electric generating units at its Bay
Front station in Ashland, Wisconsin that are fueled with coal, wood and gas,
with a combined net capability of 73 Mw.
French Island: NSP-W owns two steam electric generating units, fueled
with wood and refuse derived fuel, and two oil-fired combustion turbine
generating units at its French Island generating station in LaCrosse,
Wisconsin with a combined net capability of 171 Mw.
Flambeau: NSP-W owns a gas/oil-fired combustion turbine electric
generating unit at its Flambeau station in Park Falls, Wisconsin with a
summer net generating capability of 12 Mw.
Wheaton: NSP-W owns six oil-fired combustion turbine electric generating
units at its Wheaton station in Eau Claire, Wisconsin with a combined net
capability of 342 Mw.
Hydro Plants: NSP-W also owns and operates 19 hydro-electric generating
stations throughout northwestern Wisconsin with an aggregate net capability
of 250 Mw.
NSP-W presently relies primarily on NSP for base load generation and
purchases of power to meet the needs of NSP-W's customers. The electric
operations of NSP and NSP-W are fully integrated and all generating units are
centrally dispatched by NSP. The electric production and transmission costs of
NSP and NSP-W are shared by the companies under an agreement which is called the
"Agreement to Coordinate Planning and Operation and Interchange Power and Energy
Between Northern States Power Company (Minnesota) and Northern States Power
Company (Wisconsin)" ("Interchange Agreement"). The Interchange Agreement was
approved by the FERC in Docket No. ER84-690-000, dated August 21, 1985. On July
10, 1995, NSP and WEC filed an amendment to the Interchange Agreement with FERC
to substitute WEPCO for NSP-W. For the year ended December 31, 1997, the
combined energy (Kwh) sales of NSP and NSP-W were produced 47% by coal-fired
generation, 25% by nuclear generation, 24% by purchased and interchange
(including 14% from Manitoba Hydro) and 4% from NSP's hydroelectric and other
generation. The 1997 electric system peak load for NSP and NSP-W was 7,353 Mw
and occurred on July 16, 1997, exclusive of off-system transactions. For the
year ended December 31, 1997, the fuel resources for NSP's and NSP-W's
generation based Kwh was 62% obtained from coal-fired generation, approximately
34% from nuclear generation, and approximately 4% from other fuels.
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(iii) Electric Transmission and Other Facilities
As of December 31, 1997, NSP's electric transmission system included 265
circuit miles of 500 Kv line, 568 circuit miles of 345 Kv line, 283 circuit
miles of 230 Kv line, 59 circuit miles of 161 Kv line, 1,173 circuit miles of
115 Kv line and 1,730 circuit miles of transmission line under 115 Kv. The bulk
of NSP's high voltage transmission system is located in the State of Minnesota.
As of December 31, 1997, NSP's transmission substations had a combined capacity
of approximately 26,972 thousand KVA and the distribution substations totaled
approximately 12,205 thousand KVA. Manitoba Hydro-Electric Board, Minnesota
Power Company and NSP completed the construction of a 500 Kv transmission
interconnection between Winnipeg, Manitoba, Canada, and the Minneapolis-St.
Paul, Minnesota, area in May 1980. NSP has a contract with Manitoba
Hydro-Electric Board for 500 Mw of firm power utilizing this transmission line.
In addition, the Company is interconnected with Manitoba Hydro through a 230 Kv
transmission line completed in 1970.
As of December 31, 1997, NSP-W's electric transmission system included 166
circuit miles of 345 Kv line, 291 circuit miles of 161 Kv line, 436 circuit
miles of 115 Kv line and 1,498 circuit miles of transmission line under 115 Kv.
As of December 31, 1997, NSP-W's transmission substations had a combined
capacity of approximately 4,348 thousand KVA and the distribution substations
totaled approximately 2,000 thousand KVA.
Other assets owned by NSP and NSP-W include electric distribution systems
located throughout its service area, and property, plant and equipment owned or
leased supporting their electric and gas utility functions. NSP and NSP-W also
own or lease other physical properties, including real property, and other
facilities necessary to conduct their operations.
(iv) Fuel Sources
NSP's and NSP-W's electric power generation by fuel type during each of the
three calendar years ended December 31, 1997, as well as the average cost of
such fuels to NSP and NSP-W per million BTUs, are set forth in the NSP and NSP-W
Annual Reports on Form 10-K for the year ended December 31, 1997, which are
incorporated by reference as Exhibits H-1 and H-4.
(v) Gas Facilities
NSP provides natural gas service at retail in the St. Paul metropolitan area
and portions of southeast, northwest and central Minnesota, as well as eastern
North Dakota. NSP-W provides natural gas service in western and central
Wisconsin as well as Ironwood in Michigan's Upper Peninsula. Both NSP and NSP-W
are directly connected to various interstate pipelines and have separate
contractual supply portfolios for transportation through pipelines and with
suppliers of natural gas. The gas delivery operations of NSP and NSP-W are
managed out of St. Paul, Minnesota, pursuant to a Supervisory Control and Data
Acquisition Agreement among NSP, NSP-W and Viking Gas Transportation Company (a
wholly-owned interstate pipeline subsidiary of NSP). Under this agreement, NSP
manages the pressures of the various pipelines owned by these companies and the
inflow and outflow of natural gas from these pipelines. This agreement was
approved by the MPUC in Docket No. G002/AI-94-831 and by the PSCW in Docket No.
4220-AU-117.
The gas properties of NSP include 7,366 miles of natural gas distribution
and transmission mains, the Westcott LNG plant with a storage capacity of 2.1
Bcf equivalent and five propane-air plants with a storage capacity of 1.4 Bcf
equivalent to help meet the peak requirements of its firm residential,
commercial and industrial customers. NSP-W's gas properties include
approximately 1,620 miles of natural gas distribution mains, the Eau Claire and
LaCrosse LNG plants, having a storage capacity of .4 Bcf equivalent, and one
propane-air plant, with storage capacity of 0.02 Bcf equivalent.
NSP and NSP-W provide each other with certain wholesale LNG liquefaction,
storage and vaporization service under certificate authority granted by FERC.
NSP and NSP-W are also authorized to make certain sales of natural gas for
resale under blanket authority granted by the FERC under 18 CFR 284.402.
7
<PAGE>
For the year ended December 31, 1997, and the twelve months ended March 31,
1998, NSP and NSP-W distributed the following amounts of natural or manufactured
gas at retail:
<TABLE>
<CAPTION>
YEAR-ENDED 12 MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ---------------
<S> <C> <C>
NSP
Mcf of gas distributed at retail (including natural and manufactured
gas)..................................................................... 80,350,058 76,449,915
NSP-W
Mcf of gas distributed at retail (including natural and manufactured
gas)..................................................................... 18,979,882 17,904,137
</TABLE>
(b) BMG
BMG is directly connected to the El Paso Natural Gas Company interstate
pipeline and has a transportation contract with this pipeline. BMG has a
commodity purchase contract with Burlington Resources Inc. and is also connected
to Southwest Gas Corporation's utility distribution system The gas properties of
BMG include 250 miles of natural gas distribution mains and approximately 50
miles of propane vapor distribution mains.
For the year ended December 31, 1997, BMG distributed 524,000 Mcf of gas at
retail (including natural and manufactured gas).
3. Gas Coordination
The following table sets forth certain information with respect to the gas
operations of NSP, NSP-W and BMG pro forma as of December 31, 1997, adjusted to
give effect to the Transaction (before intercompany eliminations).
<TABLE>
<CAPTION>
MCF OF GAS DISTRIBUTED
AT
RETAIL (INCLUDING
GAS OPERATING REVENUES NATURAL
($ IN MILLIONS) AND MANUFACTURED GAS)
------------------------- -----------------------
<S> <C> <C>
NSP............................................................. $ 415 80,350,058
NSP-W........................................................... $ 90 18,979,882
BMG............................................................. $ 5 524,000
----- -----------
TOTAL........................................................... $ 510 99,853,940
----- -----------
----- -----------
</TABLE>
As is evident from the above table, for the year ended December 31, 1997,
BMG would have provided approximately 1% of the total operating revenues and
less than 1% of the total Mcf of gas distributed by the NSP system. When
electric utility operations are considered, BMG's operating revenues would have
provided approximately 0.2% of the consolidated utility operating revenues of
NSP.
NSP presently provides natural gas service at retail in Minnesota and North
Dakota. NSP-W provides gas service in western Wisconsin (near Eau Claire and the
Minnesota border), northwestern Wisconsin and Michigan's Upper Peninsula. BMG
presently provides gas service in Maricopa County and Coconino County, Arizona.
Upon completion of the Transaction, the NSP and BMG gas operations will continue
to serve those areas.
While the NSP, NSP-W and BMG gas systems are not physically interconnected,
following the Transaction, they will functionally perform as a coordinated
system through purchase of natural gas from common sources of supply.
8
<PAGE>
BMG has contracted to purchase commodity gas from Burlington Resources, Inc.
Burlington Resources Inc. buys gas from the Permian, Anadarko or San Juan supply
fields or basins. NSP, NSP-W and BMG, through Burlington Resources, Inc.,
purchase gas from the following major supply fields or basins:
<TABLE>
<CAPTION>
FIELD/BASIN NSP NSP-W BMG
- ----------------------------------------------------------------------- --- ------------- -----
<S> <C> <C> <C>
Hugoton/Anadarko....................................................... X X X
Permian................................................................ X X
Rocky Mountain......................................................... X X
Williston.............................................................. X
San Juan............................................................... X
Alberta, Canada........................................................ X X
</TABLE>
As indicated by the above table, NSP and BMG procure some gas supplies from
common producers.
4. Non-Utility Interests of NSP, NSP-W and BMG
(a) NSP and NSP-W
NSP's non-utility activities are conducted through its ten direct,
wholly-owned subsidiaries: NSP Financing I, NRG, Viking, Eloigne, EMI, Seren,
Ultra Power, FMAP, Cormorant and UP&L. NSP-W has two wholly-owned non-utility
subsidiaries, Clearwater and NSP Lands, and a 75.86% owned subsidiary, C&F. NSP
Financing I is a special purpose business trust formed for the purpose of
issuing preferred securities. NRG operates and has ownership interests in
independent, non-regulated power and energy businesses in the United States and
other countries. Each of its power generation businesses is a qualifying
cogeneration facility ("QF") under the Public Utility Regulatory Policies Act of
1978, an exempt wholesale generator ("EWG") under Section 32 of the Act or a
foreign utility company ("FUCO") under Section 33 of the Act. Viking owns and
operates a 500 mile interstate natural gas pipeline providing gas transportation
service to customers in the Upper Midwest from connections with three major
pipelines in the United States and Canada. Eloigne has ownership interests in
affordable housing projects, principally within NSP's service territory. EMI
delivers natural gas and electric products and services to commercial and
industrial customers, utilities, municipalities and energy marketers, and offers
performance contracting to customers nationwide. Seren was formed to pursue
communication and data services businesses in the Upper Midwest. Ultra Power
will market a proactive, non-destructive, power-cable testing technology. FMAP
owns and operates a parking garage located next to NSP's headquarters. Cormorant
was established for the principal purpose of acquiring fuel resources and has
historically engaged in oil, gas, coal lignite and uranium exploration. UP&L
owns and holds real property typically surrounding or adjacent to property owned
and used by NSP in its regulated operations. Clearwater was established to
identify and develop affordable housing investment opportunities for NSP-W. NSP
Lands was created to develop and sell land owned by NSP-W adjacent to a
hydro-electric generating facility previously owned by NSP-W. C&F was created in
1911 for the purpose of building, maintaining and operating dams and reservoirs
in Wisconsin.
Together, NSP's and NSP-W's non-utility subsidiaries and investments
constituted approximately 20% of NSP's consolidated assets as of December 31,
1997. NSP's and NSP-W's non-utility subsidiaries and investments also provided
approximately 8% of NSP's total revenues and approximately 8% of NSP's
consolidated net income for the year ended December 31, 1997.
(b) BMG
BMG provides non-utility services such as appliance repair and bulk propane
sales through its Lake Powell Propane division. Revenues and net income from
non-utility services represented 14% and 14.7% of BMG's operating revenues and
net income, respectively, for the year ended December 31, 1997.
9
<PAGE>
C. Description of Transaction and Statement as to Consideration
1. Background
The business of BMG has grown steadily over the past five years, and
beginning in 1996 BMG discontinued its regular dividend in favor of re-investing
excess operating income to sustain and increase such growth. In recognition of
BMG's need for access to additional capital, and to provide BMG shareholders
with liquidity in their investment, in mid-1997 BMG's Board of Directors (the
"BMG Board") engaged Principal Financial Securities, Inc. ("PFS"), to assist in
identifying sources of capital and potential merger partners for BMG. Through
this process, PFS introduced BMG to a number of possible merger partners which
conducted their own due diligence investigations of BMG and provided preliminary
offers to acquire BMG, one of which was NSP. In September 1997, Bernard C.
Ziegler, formerly Chief Executive Officer of The Ziegler Company, Inc. and a
Director of BMG, advised James J. Howard, Chairman, President and Chief
Executive Officer of NSP, that BMG was considering a possible sale or merger.
In September 1997, NSP management requested and obtained a confidential
information memorandum on BMG prepared by PFS. The confidential information
memorandum contained information on BMG's history, operations, financial results
and corporate structure. The confidential information memorandum was also made
available to other parties interested in a possible acquisition of or merger
with BMG. In addition to reviewing the confidential information memorandum, NSP
management conducted internal analyses of the benefits of a merger with BMG and
tested the financial assumptions in the confidential information memorandum.
From October to December 1997, representatives of NSP visited BMG to review
its operations and performed preliminary due diligence. During these visits
representatives of NSP reviewed documents concerning BMG that were made
available to parties interested in an acquisition or merger. Representatives of
NSP continued to test financial assumptions and constructed financial models
regarding BMG's potential growth. Representatives of NSP also obtained
additional information from BMG management, including Thomas LeNeau, President
and Chief Executive Officer of BMG.
In November 1997, NSP management briefed Mr. Howard regarding the
desirability of a merger with BMG. Based on the briefing, Mr. Howard directed
NSP management to perform additional due diligence and prepare an offer.
On November 17, 1997, NSP submitted a written offer to merge with BMG.
In December 1997, NSP management, including Cynthia L. Lesher, President of
NSP-Gas, visited BMG to conduct an additional review of its operations and
perform further due diligence. During this visit to BMG, NSP management met with
BMG management to discuss, among other things, a merger of the two companies. On
December 5, 1997, NSP submitted a revised written offer to merge with BMG.
On December 17, 1997, NSP management presented the proposed Merger to the
NSP Board. The NSP Board discussed the potential benefits to shareholders of NSP
and customers of NSP that could result from the proposed Merger and voted to
approve the Merger.
On December 29, 1997, the Agreement and Plan of Merger between NSP and BMG
was executed.
On April 17, 1998, Amendment No. 1 to the Agreement and Plan of Merger
between NSP and BMG (providing for certain minor technical changes) was
executed.
BMG retained PFS to act as financial advisor in connection with the
Transaction. PFS was selected by BMG based on PFS's experience, expertise and
familiarity with BMG and its businesses. As a nationally recognized investment
banking firm, PFS is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, leveraged buyouts,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes.
10
<PAGE>
Additional information regarding the background of the Transaction is set
forth in the Registration Statement on Form S-4 of NSP, which is filed as
Exhibit C-1 hereto (the "Registration Statement").
2. Merger Agreement
The Merger Agreement provides for BMG to be merged with and into NSP, with
NSP as the surviving corporation. Pursuant to the Merger Agreement, upon
effectiveness of the Merger, each issued and outstanding share of BMG (except
shares owned by BMG as treasury stock or BMG Dissenting Shares) will be canceled
and converted into the right to receive a fraction of a share of NSP Common
Stock, determined in accordance with the Exchange Ratio. Each issued and
outstanding share of NSP Common Stock (except NSP Dissenting Shares) will remain
outstanding, unchanged, as one share of NSP Common Stock. The Merger Agreement
is incorporated by reference as Exhibit B-1. The Merger is subject to customary
closing conditions, including the receipt of the requisite shareholder approvals
of BMG and all necessary governmental approvals. Following the Merger and
receipt of Commission approval pursuant to this Application-Declaration, NSP
will cause the assets of BMG to be transferred to a newly-formed, wholly-owned
subsidiary of NSP.
If any holder of BMG Common Stock would be entitled to receive a number of
shares of NSP Common Stock that includes a fraction, then in lieu of a
fractional share, such holder will be entitled to receive a cash payment based
on a formula agreed to in the Merger Agreement. The Transaction is expected to
be tax-free to NSP and BMG shareholders (except as to dissenters' rights and
fractional shares).
The Transaction is designed to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended. NSP and BMG
believe the Transaction will be treated as a "pooling of interests" for
accounting purposes.
The Merger Agreement contains certain covenants relating to the conduct of
business by the parties pending the consummation of the Merger. Generally, the
parties must carry on their businesses in the ordinary course consistent with
past practice, may not increase common stock dividends beyond specified levels,
and may not issue capital stock except as specified. The Merger Agreement also
contains restrictions on, among other things, charter and bylaw amendments,
capital expenditures, acquisitions, dispositions, incurrence of indebtedness,
certain increases in employee compensation and benefits and affiliate
transactions.
3. Management of NSP following the Transaction
As a result of the Transaction, BMG will become a second public-utility
subsidiary of NSP. Present utility operations of NSP and NSP-W and the
non-utility operations of NSP's other subsidiaries will be unaffected. NSP will
continue to be predominantly an operating public-utility, engaged as such in the
generation, transmission, and distribution of electricity and the distribution
of natural gas in the state of Minnesota, NSP's state of incorporation, and the
contiguous states of North Dakota and South Dakota. Following the Transaction,
there will be no change in the composition of the NSP Board or in the executive
management of NSP. After the Transaction, BMG, as a wholly-owned subsidiary of
NSP, will continue to distribute natural gas in the state of Arizona. BMG will
continue to maintain its headquarters at Cave Creek, Arizona, and no significant
changes to the operations of BMG are anticipated as a result of the Transaction.
4. Related Agreements
In connection with the Merger Agreement, NSP and BMG also entered into a
stock option agreement (the "Option Agreement") (Exhibit B-2 hereto) giving NSP
the right to acquire up to 181,386 shares of BMG Common Stock under specified
circumstances.
11
<PAGE>
ITEM 2. FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, in connection with the Transaction, including the solicitation of
proxies by BMG, registration of securities of NSP under the Securities Act of
1933, and other related matters, are estimated as follows:
<TABLE>
<S> <C>
Commission filing fee for the Registration Statement on Form S-4................. $2,596
Accountant's fees................................................................ (3)
Legal fees and expenses relating to the Act...................................... (3)
Other legal fees and expenses.................................................... (3)
Other............................................................................ (3)
Shareholder communication and proxy solicitation................................. (3)
NYSE listing fee................................................................. (3)
Exchanging, printing, and engraving of stock certificates........................ (3)
Investment bankers' fees and expenses............................................ (3)
Consulting fees related to human resource issues, public relations,
regulatory support, and other matters relating to the Transaction.............. (3)
Expenses related to integrating the operations of the acquired company
and miscellaneous.............................................................. (3)
TOTAL............................................................................ (3)
</TABLE>
ITEM 3. APPLICABLE STATUTORY PROVISIONS
Sections 9(a)(2) and 10 of the Act are directly or indirectly applicable to
the proposed Transaction. To the extent that other sections of the Act or the
Commission's rules thereunder are deemed to be applicable to the Transaction,
such sections and rules should be considered to be set forth in this Item 3.
Section 9(a)(2) of the Act makes it unlawful, without approval of the
Commission under Section 10, "for any person . . . to acquire, directly or
indirectly, any security of any public-utility company, if such person is an
affiliate. . . of such company and of any other public-utility or holding
company, or will by virtue of such acquisition become such an affiliate." Under
the definition set forth in Section 2(a)(11) of the Act, an "affiliate" of a
specified company means "any person that directly or indirectly owns, controls,
or holds with power to vote, 5 per centum or more of the outstanding voting
securities of such specified company," and "any company 5 per centum or more of
whose outstanding voting securities are owned, controlled, or held with power to
vote, directly or indirectly, by such specified company. . . ."
NSP, NSP-W and BMG, are "public-utility companies" as defined in Section
2(a)(5) of the Act. Since NSP currently owns more than five percent of the
voting securities of NSP-W and, following the Spin-off and the consummation of
the Transaction, will acquire more than five percent of the voting securities of
BMG, NSP should obtain the approval of the Commission for the Spin-off under
Section 9(a)(2) and 10 of the Act. The statutory standards to be considered by
the Commission in evaluating the Transaction are set forth in Sections 10(b),
10(c) and 10(f) of the Act.
As set forth more fully below, the Transaction complies with all of the
applicable provisions of Section 10 of the Act and should be approved by the
Commission:
- The consideration to be paid in the Transaction is fair and reasonable;
- The Transaction will not create detrimental interlocking relations or
concentration of control;
- The Transaction will not result in an unduly complicated capital structure
for the NSP system;
- The Transaction is in the public interest and the interests of investors
and consumers;
- ------------------------
(3) To be filed by Amendment.
12
<PAGE>
- The Transaction is consistent with Sections 8 and 11 of the Act;
- The Transaction tends toward the economical and efficient development of
an integrated public-utility system; and
- The Transaction will comply with all applicable state laws.
Furthermore, this Transaction also provides an opportunity for the
Commission to follow certain of the interpretive recommendations made by the
Division of Investment Management (the "Division") in the report issued by the
Division in June 1995 entitled "The Regulation of Public Utility Holding
Companies" (the "1995 Report"). While the Transaction and the requests contained
in this Application-Declaration are well within the precedent of transactions
approved by the Commission as consistent with the Act prior to the 1995 Report
and thus could be approved without any reference to the 1995 Report, a number of
the recommendations contained therein serve to strengthen the Applicant's
analysis and would facilitate the creation of a utility company better able to
compete in the rapidly evolving utility industry. The Division's overall
recommendation that the Commission "act administratively to modernize and
simplify holding company regulation . . . and minimize regulatory overlap, while
protecting the interests of consumers and investors(4)," should be used in
reviewing this Application-Declaration because, as demonstrated below, the
Transaction will benefit both consumers and shareholders of BMG and NSP and
because the state regulatory authorities with jurisdiction over this Transaction
will have approved it as in the public interest.
A. Section 10(b)
Section 10(b) provides that, if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)
unless:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public-utility companies, of a kind or to an
extent detrimental to the public interest or the interest of investors or
consumers;
(2) in the case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other remuneration, to
whomsoever paid, to be given, directly or indirectly, in connection with
such acquisition is not reasonable or does not bear a fair relation to the
sums invested in or the earning capacity of the utility assets to be
acquired or the utility assets underlying the securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure of the
holding-company system of the applicant or will be detrimental to the public
interest or the interest of investors or consumers or the proper functioning
of such holding-company system.
1. Section 10(b)(1)
Section 10(b)(1) requires a finding that control is "of a kind or to an
extent detrimental to the public interest or the interest of investors or
consumers." The framers of the Act sought, through Section 10(b)(1) to avoid "an
excess of concentration and bigness" while preserving the "opportunities for
economies of scale, the elimination of duplicative facilities and activities,
the sharing of production capacity and reserves and generally more efficient
operations" afforded by certain combinations. AMERICAN ELECTRIC POWER CO., INC.,
Holding Co. Act Release No. 20633, 46 S.E.C. 1299, 1309 (1978). The acquisition
of the very small distribution system of BMG by NSP will not create an "excess
of concentration and bigness," but, as discussed in more detail below, will
afford BMG the opportunity to achieve the economies of scale and efficiencies,
particularly in the areas of management expertise and gas supply, that the Act's
framers intended to preserve for the benefit of investors and consumers.
- ------------------------
(4) Letter of the Division of Investment Management to the Securities and
Exchange commission, 1995 Report at 3.
13
<PAGE>
2. Section 10(b)(2)
As noted above, the Commission may not approve the Transaction under Section
10(b)(2) if it finds that the consideration to be paid in connection with the
combination, including all fees, commissions and other remuneration, is "not
reasonable or does not bear a fair relation to the sums invested in or the
earning capacity of . . . the utility assets underlying the securities to be
acquired. . . ."
NSP and BMG believe that the standards of Section 10(b)(2) regarding
consideration are satisfied in the present case for the following reasons.
First, the Merger is a pure stock-for-stock exchange and qualifies for
treatment as a pooling of interests. As set forth more fully above at Item 1.C.2
and except for BMG Dissenting Shares, each share of BMG Common Stock will be
converted into the right to receive a fraction of a share of NSP Common Stock in
accordance with the Exchange Ratio, and each share of NSP Common Stock will
continue as a share of NSP Common Stock. The Transaction will therefore involve
no "acquisition adjustment" or other write-up of the assets of NSP or BMG.
Second, the Transaction was approved by the BMG Board and has been submitted
to, and approved by, the common shareholders of BMG. As provided under the
Arizona Business Corporation Act, the affirmative vote of a majority of the
votes entitled to be cast by the holders of the outstanding shares of BMG's
Common Stock is required for approval of the Merger.
Third, the Exchange Ratio is the product of arms-length negotiations between
NSP and BMG and was approved by the BMG Board. Such negotiations were preceded
by extensive due diligence, analysis and evaluation of the assets, liabilities
and business prospects of BMG. See Item 1.C.1 of this Application-Declaration
and "Background of the Merger" at pages 18 and 19 of the Registration Statement
(Exhibit C-1 hereto). As recognized by the Commission in OHIO POWER CO., Holding
Co. Act Release No. 16753, 44 S.E.C. 340, 346 (June 8, 1970), prices arrived at
through arms-length negotiations are particularly persuasive evidence that
Section 10(b)(2) is satisfied.
Finally, PFS, a nationally-recognized investment banking firm engaged by
BMG, has reviewed extensive information concerning BMG, analyzed the Exchange
Ratio employing a variety of valuation methodologies and opined that the
Exchange Ratio is fair to the holders of BMG Common Stock as of the date of the
Merger Agreement and as of the date the proxy statement/prospectus included in
the Registration Statement was mailed to the stockholders of BMG. PFS's analysis
and opinion is described in detail on pages 20 to 22 of the Registration
Statement (Exhibit C-1 hereto). The assistance of independent consultants in
setting consideration has been recognized by the Commission as evidence that the
requirements of Section 10(b)(2) have been met. THE SOUTHERN COMPANY; SV
VENTURES, INC., Holding Co. Act Release No. 24579, 40 SEC Docket 350 (Feb. 12,
1988).
In rendering its fairness opinion, PFS performed a number of analyses
relevant to the reasonableness of the Exchange Ratio and their relation to the
investment in, and earning capacity of, the utility assets of BMG. PFS reviewed
the Merger Agreement, related documents and certain publicly available business
and financial information relating to BMG and NSP. PFS also reviewed certain
other information, including financial projections provided to it by BMG and met
with management of BMG to discuss the business and prospects of BMG.
PFS also considered certain financial data for businesses similar to BMG and
considered, to the extent publicly available, the financial terms of certain
other business combinations and other transactions which have recently been
effected. PFS also considered such other information, financial studies,
analyses and investigations and financial, economic and market criteria that PFS
deemed relevant.
In light of PFS's opinion and an analysis of all relevant factors, including
the benefits that may be realized as a result of the Transaction, the Exchange
Ratio falls within the range of reasonableness, and the consideration for the
Transaction bears a fair relation to the sums invested in, and the earning
capacity of, the utility assets of BMG.
14
<PAGE>
Item 2 of this Application-Declaration sets forth the fees, commissions and
expenses in connection with the Transaction. NSP and BMG believe that the
overall fees, commissions and expenses incurred and to be incurred in connection
with the Transaction are reasonable and fair relative to other transactions and
the anticipated benefits of the Transaction to the public, investors and
consumers, consistent with recent precedent and the standards of Section
10(b)(2). Furthermore, the investment banking fees of BMG reflect the
competition in the marketplace, in which investment banking firms actively
compete with each other to act as financial advisors to merger partners.
3. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the
Transaction will "unduly complicate the capital structure" of the NSP system or
will be "detrimental to the public interest or the interest of investors or
consumers or the proper functioning" of the NSP system.
Capital structure: The corporate capital structure of NSP after the
Transaction will not be unduly complicated and will be substantially similar to
the capital structure of NSP prior to the Transaction, and, because neither
NSP-W nor BMG will have any preferred stock outstanding, less complex than
capital structures approved by the Commission in other orders. SEE, E.G.,
CENTERIOR ENERGY CORP., Holding Co. Act Release No. 24073, 35 SEC Docket 769
(April 26, 1986); MIDWEST RESOURCES, INC., ET AL., Holding Co. Act Release No.
25159, 47 SEC Docket 252 (Sept. 26, 1990); CINERGY CORP., Holding Co. Act
Release No. 26146, 57 SEC Docket 2353 (Oct. 21, 1994).
In the Transaction, the shareholders of BMG will receive NSP Common Stock.
NSP will own 100% of the common stock of NSP-W and BMG and there will be no
minority common stock interest remaining in either company. Furthermore, neither
NSP-W nor BMG will have any preferred stock outstanding. The existing debt
securities of NSP, NSP-W and BMG will remain outstanding without change. The
only voting securities of NSP which will be publicly held after the Transaction
will be NSP Common Stock and NSP preferred stock. The only class of voting
securities of NSP direct subsidiaries will be common stock and, in each case,
all issued and outstanding shares of such common stock will be held by NSP.
Set forth below are summaries of the historical capital structures of NSP,
NSP-W and BMG as of December 31, 1997, and the pro forma combined capital
structure of NSP (assuming the Transaction occurred on December 31, 1997):
NSP AND BMG HISTORICAL CAPITAL STRUCTURES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NSP BMG
------------ ---------
<S> <C> <C>
Common stock equity.................................................. $ 2,372,000 $ 8,319
Preferred securities(5).............................................. 400,000 -0-
Long-term debt....................................................... 1,879,000 3,000
Short-term debt(6)................................................... 425,000 1,092
------------ ---------
Total.............................................................. $ 5,076,000 $ 12,411
------------ ---------
------------ ---------
</TABLE>
NSP PRO FORMA COMBINED CAPITAL STRUCTURE
(DOLLARS IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
Common stock equity.................................... 2,380,319 47%
<S> <C> <C>
Preferred securities................................... 400,000 8%
Long-term debt......................................... 1,882,000 37%
Short-term debt(6)..................................... 426,092 8%
--------- ---------
Total................................................ $5,088,411 100%
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(5) Includes preferred securities subject to mandatory redemption.
(6) Includes current maturities of long-term debt.
15
<PAGE>
As is evident from the above, the distribution of NSP Common Stock in
connection with the Transaction will have virtually no effect on NSP's capital
structure.
Protected interests: Section 10(b)(3) also requires the Commission to
determine whether the proposed combination will be detrimental to the public
interest, the interests of investors or consumers or the proper functioning of
the NSP system. The combination of NSP and BMG is entirely consistent with the
proper functioning of the NSP holding company system. Further, as discussed in
Item 3.B.2.(a), the combination will result in benefits to the public and to
consumers and investors of both companies and also will improve the efficiency
of the BMG system. The Merger has been approved by the Minnesota Commission, the
North Dakota Commission and the Arizona Commission. Moreover, as noted by the
Commission in ENERGY CORPORATION ET AL., Holding Co. Act Release No. 25952, 55
SEC Docket 2035, 2045 (Dec. 17, 1993), "concerns with respect to investors'
interests have been largely addressed by developments in the federal securities
laws and the securities market themselves." NSP is and will remain a reporting
company subject to the continuous disclosure requirements of the 1934 Act
following the completion of the Transaction. The various reports previously
filed by NSP under the 1934 Act contain readily available information concerning
the Transaction. For these reasons, the Applicant believes that the Transaction
will be in the public interest and the interest of investors and consumers, and
will not be detrimental to the proper functioning of the resulting holding
company system.
B. Section 10(c)
Section 10(c) of the Act provides that, notwithstanding the provisions of
Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any other interest,
which is unlawful under the provisions of Section 8 or is detrimental to
the carrying out of the provisions of Section 11; (7) or
(2) the acquisition of securities or utility assets of a public-utility or
holding company unless the Commission finds that such acquisition will
serve the public interest by tending towards the economical and the
efficient development of an integrated public utility system. . . .
1. Section 10(c)(1)
(a) Compliance With Section 8
Section 8 prohibits registered holding companies from acquiring properties
which would result in combined gas and electric operations in the same area
without the authorization of the appropriate state commission, where state law
prohibits or requires authorization for such combined operations. Section 8
applies only to registered systems and thus, by its terms, is not applicable to
NSP, BMG, the Merger or the Transaction. Moreover, the Merger will occur only
after authorizations of the Arizona Commission, the Minnesota Commission and the
North Dakota Commission have been granted. The Spin-off may also require
authorization from such commissions, in which case, the Spin-off will not be
consummated until such authorizations have been obtained. Accordingly, the
Transaction will not be unlawful under Section 8, and thus that portion of
Section 10(c)(1) relating to Section 8 of the Act is satisfied.
(b) No Detriment to the Carrying Out of Section 11
Section 11 of the Act sets forth the integration and simplification
requirements of the Act applicable to registered holding company systems.
Section 11 requires the Commission to take action with respect to registered
holding company systems that will (1) limit the operations of each registered
holding company system to a single integrated public-utility system, certain
"functionally related" businesses, and one or
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(7) By their terms, Sections 8 and 11 only apply to registered holding companies
and are therefore inapplicable at present to NSP or BMG, since neither is now a
registered holding company. Also, under the present transaction structure, NSP
will remain an exempt holding company after consummation of the Transaction.
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more additional integrated public utility systems meeting certain requirements
(Section 11(b)(1)); and (2) ensure that the registered system has a simplified
corporate structure without undue or unnecessary complications or inequitable
distribution of voting power (Section 11(b)(2)).
Section 11 applies only to registered holding companies. In a proceeding
under Section 9(a)(2) where the resulting system would be exempt, as well as in
proceedings under Section 3 for the grant of an exemption, compliance with the
standards of Section 11 is not required.(8) As the Commission has stated in
approving an exempt company's application under both Section 9(a)(2) and Section
3, "Section 10(c)(1)'s requirement that the acquisition not be 'detrimental' to
carrying out the provisions of Section 11 does not mandate that the latter
section's integration requirements be met."(9)
Instead, in applying Section 10(c)(1) to an exempt system, the Commission
looks to whether the acquisition would be detrimental to the public interest.
With respect to combination gas and electric systems, which could raise
integration issues under Section 11 for registered holding companies, the
Commission approves applications for exempt systems where it finds generally
that the other requirements of Section 10 have been met and that the appropriate
state commission has acted favorably. For example, in DOMINION RESOURCES,
INC.,the Commission approved the acquisition by a combination company of a small
gas utility.(10) In so doing, the Commission explicitly recognized that the
limits in Section 11 were inapplicable given the applicant's exemption from
registration. With respect to the extension of the gas operations of the
combined system, the Commission took pains to state that "the only question" was
whether that extension would be "detrimental to the public interest or in the
interest of investors or consumers" within the language of Sections 10(b)(1) and
10(b)(3).(11) The Commission went on to state that Section 10(c)(1) of the Act
would bring Section 11(b)(1) into consideration only if Dominion Resources were
not entitled to an exemption under Rule 2 of the Act.(12) Furthermore, the
Commission cited favorably its decision in WPL HOLDINGS INC., Holding Co. Act
Release No. 24590, 40 SEC Docket 634 (Feb. 26, 1988), for the proposition that
where there is evidence of effective state regulation over the activities of a
combination company otherwise entitled to an exemption under Section 3(a), the
Commission need not find that permitting retention of combined operations would
be detrimental to the public interest. In the present circumstances, following
the Spin-off and consummation of the Transaction, NSP would be entitled to
continue its Section 3(a)(2) exemption pursuant to Rule 2.
Based on the foregoing precedent, the Transaction satisfies the requirements
of Section 10(c)(1) and will promote the public interest of creating stronger
competitors in the evolving utility industry. First, as discussed previously and
as will be discussed below, NSP's acquisition of BMG will meet the standards set
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(8) See e.g., TUC HOLDING COMPANY, Holding Co. Act Release No. 26749, 65 SEC
Docket 301, 305 (Aug. 1, 1997). ("By its terms, however, Section 11(b)(1)
applies only to registered holding companies."); GAZ METROPOLITAIN, INC.,
Holding Co. Act Release No. 26170, 58 SEC Docket 189, 193 (Nov. 23, 1994)
("Exempt holding companies are not directly subject to Section 11(b)(1)'s
integration standards."). SEE ALSO the 1995 Report at 61. ("Section 11's
integration provisions apply only to registered holding companies"); DOMINION
RESOURCES, INC., Holding Co. Act Release No. 24618, 40 SEC Docket 847, 849 (Apr.
4, 1988) (where no consideration of Section 11 (b)(1) was necessary as DRI was
entitled to an exemption under Rule 2 of the Act.)
(9) GAZ METROPOLITAN INC., SUPRA, note 10, at 193.
(10) DOMINION RESOURCES, INC., SUPRA, note 10, at 849.
(11) ID. at 849.
(12) ID., n.3. SEE ALSO MIDWEST RESOURCES, INC., SUPRA; I.E. INDUSTRIES INC.,
Holding Co. Act Release No. 25325, 48 SEC Docket 1735 (June 3, 1991); SOUTHERN
INDIANA GAS AND ELECTRIC COMPANY, Holding Co. Act Release No. 26075, 57 SEC
Docket 78 (June 30, 1994); NIPSCO INDUSTRIES, INC., Holding Co. Act Release No.
25766, 53 SEC Docket 1997 (Mar. 25, 1993); NIPSCO Industries, Inc., Holding Co.
Act Release No. 25470, 50 SEC Docket 1231 (Feb. 5, 1992); LG&E ENERGY CORP.,
Holding Co. Act Release No. 26866, 67 SEC Docket 107 (April 30, 1998). In these
cases, the Commission approved acquisitions or reorganizations involving exempt
combination systems without specifically addressing Section 10(c)(1).
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forth in Section 10, including the requirement that the Transaction tend toward
the efficient and economical development of an integrated public-utility system.
In brief, the combination will produce an integrated electric utility system
that substantially overlaps an integrated gas utility system and that will reap
the many benefits available from combined resources while preserving local
control and state regulation, and while also enhancing, rather than decreasing,
competition in the states served by NSP, NSP-W and BMG as well as nationwide.
Particularly, as detailed in Item 3.B.2(a) below, as a result of the
Transaction, BMG will be financially stronger, more technologically advanced and
possess more purchasing power, and its investors and customers in Arizona will
benefit from BMG's improved competitive position. Second, as previously
discussed, the Merger will not go forward until the Arizona Commission and the
state commissions which regulate NSP have addressed and ruled favorably on the
issues raised by the Merger. Finally, the Applicant believes that the
Transaction poses no other concerns to the public interest or the interest of
investors or consumers than those already addressed or that are likely to arise
in the state proceedings. Indeed, BMG's investors, its customers in Arizona and
the public, generally, will benefit from the economies and efficiencies that
will make BMG a more competitive gas utility company following the Transaction.
For these reasons, no adverse finding is required under Section 10(c)(1).
2. Section 10 (c)(2)
Because the Transaction is expected to result in economies and efficiencies
for the BMG system, it will tend toward the economical and efficient development
of an integrated public utility system, thereby serving the public interest, as
required by Section 10(c)(2) of the Act. "The Commission has previously
determined . . . that where a holding company will be exempt from registration
under section 3 of the Act following an acquisition of non-integrating utility
assets, it suffices for purposes of section 10(c)(2) to find benefits to one
integrated system."(13) The Transaction clearly satisfies this requirement as it
will produce benefits to the gas utility businesses of NSP, NSP-W and BMG. These
include joint procurement of gas and other supplies, sharing of NSP's extensive
technological, operational, gas purchasing and other expertise, enhanced
computer services, and access to NSP's management, legal, financial, accounting
and consulting services.
(a) Efficiencies and Economies
The Transaction will produce economies and efficiencies more than sufficient
to satisfy the standards of Section 10(c)(2) of the Act. Although some of the
anticipated economies and efficiencies will be fully realizable only in the
longer term, they are properly considered in determining whether the standards
of Section 10(c)(2) have been met. SEE IN THE MATTER OF AMERICAN ELECTRIC POWER
CO., SUPRA at 1320-1321. Some potential benefits cannot be precisely estimated,
nevertheless they too are entitled to be considered. "[S]pecific dollar
forecasts of future savings are not necessarily required; a demonstrated
potential for economies will suffice even when these are not precisely
quantifiable." CENTERIOR ENERGY CORP., SUPRA at 775, citing IN THE MATTER OF
AMERICAN ELECTRIC POWER CO., SUPRA.
The Transaction is expected to yield several types of economies and
efficiencies, which are identified by area below: (1) corporate and
administration benefits, (2) management and operational efficiencies, (3)
purchasing economies (gas supply and others), (4) enhanced technology and
computer services. These categories are described in greater detail below.
Corporate and Administrative Efficiencies: BMG will benefit from NSP's
breadth of management and operations expertise, which will enable BMG to develop
an efficient system in an efficient manner. Moreover, NSP and BMG can achieve
savings through the consolidation of overlapping or duplicative programs and
expenses. For example, coordinated marketing planning will occur to the benefit
of BMG as it can take advantage of NSP's expertise, efficiencies and economies
of advertising, promotions, direct mailings and other marketing programs. Other
specific areas in which economies, efficiencies and savings
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(13) TUC HOLDING COMPANY, SUPRA, note 8, at 306, citing GAZ METROPOLITAIN, INC.,
SUPRA, note 10.
18
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are expected to occur include information systems, professional services,
benefits, insurance, and shareholder services.
Management and Operational Efficiencies: NSP's management is highly trained
and experienced in the gas industry and will bring their technological,
operations, gas purchasing, customer service and regulatory expertise to BMG. In
addition to significant management enhancements, NSP will provide BMG with
regular legal, financial, accounting and consulting services.
Purchasing Economies (Gas Supply and Others): NSP and BMG will realize
economies through the combined procurement of material and supplies, as well as
from economies of scale from increased purchasing power over service providers.
Because NSP and BMG will continue to purchase from common sources of gas supply,
it is anticipated that areas of savings will result from optimizing
transportation capacity on various pipelines, shortening storage withdrawal
periods to provide greater peak day delivery and shifting purchases among
various producers.
Enhanced Technology and Computer Services: BMG will benefit from NSP's
utilization of state of the art technology and methods for providing gas
distribution services. NSP will provide BMG with access to enhanced computer
services to handle all customer-related information needs, including account
information and gas consumption monitoring. BMG will also be able to use NSP's
automated billing services.
(b) Integrated Public Utility System
Because Section 2(a)(29) specifies separate definitions for gas and electric
systems, the Commission has historically taken the position that gas and
electric properties together cannot constitute a single integrated
public-utility system.(14) However, Commission authority is equally clear that
Section 10(c)(2) does not limit Commission approval to acquisitions resulting in
only one integrated system. "[W]e have indicated in the past that acquisitions
may be approved even if the combined system will not be a single integrated
system. Section 10(c)(2) requires only that the acquisition tend 'towards the
economical and the efficient development of AN (emphasis in the original)
integrated public-utility system.' "(15)
In this case, the Transaction will tend toward the economical and efficient
development of the integrated electric utility system of NSP and NSP-W and an
integrated gas utility system of NSP, NSP-W and BMG.
(i) Electrical System
As applied to electric utility companies, the term "integrated public
utility system" is defined in Section 2(a)(29)(A) of the Act as:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility assets,
whether owned by one or more electric utility companies, are physically
interconnected or capable of physical interconnection and which under
normal conditions may be economically operated as a single
interconnected and coordinated system confined in its operations to a
single area or region, in one or more states, not so large as to impair
(considering the state of the art and the area or region affected) the
advantage of localized management, efficient operation, and the
effectiveness of regulation.
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(14) See, NEW CENTURY ENERGIES, INC., Holding Co. Act Release No. 26748, 65 SEC
Docket 277, 286 (Aug. 1, 1997), citing SEC V. NEW ENGLAND ELECTRIC SYSTEM, 384
U.S. 176, 178 n.7; IN THE MATTER OF COLUMBIA GAS & ELECTRIC CORPORATION, Holding
Co. Act Release No. 2477, 8 S.E.C. 443, 462-463 (Jan. 10, 1941) (rejecting an
earlier interpretation to the contrary in AMERICAN WATER WORKS AND ELECTRIC
COMPANY, INC., 2 S.E.C. 972, 983 (Dec. 30, 1937)).
(15) GAZ METROPOLITAIN, INC., SUPRA, note 10, at 192, quoting IN THE MATTER OF
UNION ELECTRIC COMPANY, Holding Co. Act Release No. 18368, 45 S.E.C. 489, 505
(April 10, 1974), aff'd without op. sub nom. CITY OF CAPE GIRARDEAU, MISSOURI V.
S.E.C., 521 F.2d 324 (D.C. Cir. 1975). SEE ALSO, NEW CENTURY ENERGIES, SUPRA.
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On the basis of this statutory definition, the Commission has established four
standards that must be met before the Commission will find that an integrated
electric system will result from a proposed acquisition of securities:
(1) the utility assets of the system are physically interconnected or
capable of physical interconnection;
(2) the utility assets, under normal conditions, may be economically
operated as a single interconnected and coordinated system;
(3) the system must be confined in its operations to a single area or
region; and
(4) the system must not be so large as to impair (considering the state of
the art and the area or region affected) the advantages of localized
management, efficient operation, and the effectiveness of regulation.
ENVIRONMENTAL ACTION, INC. V. SEC, 895 F.2d 1255, 1263 (9th Cir. 1990) (CITING
IN RE ELECTRIC ENERGY, INC., et al., 38 SEC 658, 668 (1958)). In the 1995
Report, the Division recommended that the Commission "respond realistically to
the changes in the utility industry and interpret more flexibly each piece of
the integration requirement."(16) The Transaction satisfies all four of these
requirements.
First, the Transaction will not change the electric utility system of NSP,
and the Commission has previously determined that the NSP system was an
integrated system.(17) Moreover, NSP and NSP-W are already physically
interconnected through numerous transmission lines that they own, including one
345 Kv transmission line, two 115 Kv transmission lines and two 69 Kv
transmission lines.
Second, NSP and NSP-W will be economically operated as a single
interconnected and coordinated system. The electric operations of NSP and NSP-W
are fully integrated and all generating units are centrally dispatched by NSP.
Third, this single integrated system will operate in a single area or
region, covering portions of Minnesota, Wisconsin, Michigan, North Dakota and
South Dakota. In the 1995 Report, the division stated that the evaluation of the
"single area or region" portion of the integration requirement "should be made
. . . in light of the effect of technological advances on the ability to
transmit electric energy economically over longer distances, and other
developments in the industry, such as brokers and marketers, that affect the
concept of geographic integration."(18)
Fourth, the system is not so large as to impair the advantages of localized
management, efficient operations, and the effectiveness of regulation. The
Commission's past decisions on "localized management" show that the Transaction
fully preserves the advantage of localized management. In these cases, the
Commission has evaluated localized management in terms of: (i) responsiveness to
local needs, see AMERICAN ELECTRIC POWER CO., Fed. Sec. L. Rep. PARA81,647 at
80,602 (1978) (advantages of localized management evaluated in terms of whether
an enlarged system could be "responsive to local needs"), GENERAL PUBLIC
UTILITIES CORP., 37 SEC 28, 36 (1956) (localized management evaluated in terms
of "local problems and matters involving relations with consumers"); (ii)
whether management and directors were drawn from local utilities, see CENTERIOR
ENERGY CORP., SUPRA (advantages of localized management would not be compromised
by the affiliation of two electric utilities under a new holding company because
the new holding company's management [would be] drawn from the present
management" of the two utilities); NORTHEAST UTILITIES, Holding Co. Act Release
No. 25221, 47 SEC Docket 1270 (Dec. 21, 1990)
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(16) 1995 report at 71.
(17) NORTHERN STATES POWER COMPANY, Holding Co. Act Release No. 22334 (In
discussing the integration of the electric system of Lake Superior District
Power Company into the NSP system, the Commission stated, "The principal
electric system of Northern States in southern Minnesota and northwestern
Wisconsin, centering in Minneapolis, and the electric system of Lake Superior
are integrated."
(18) 1995 report at 72-74.
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(advantages of localized management would be preserved in part because the board
of New Hampshire Utility, which was to be acquired by an out-of-state holding
company, included "four New Hampshire residents"); (iii) the preservation of
corporate identities, see NORTHEAST UTILITIES, SUPRA (utilities "will be
maintained as separate New Hampshire corporations . . . [t]herefore the
advantages of localized management will be preserved"); COLUMBIA GAS SYSTEM,
INC., Holding Co. Act Release No. 24599, 40 SEC Docket 654 (March 15, 1988)
(benefits of local management maintained where the utility to be added would be
a separate subsidiary); and (iv) the ease of communications, see AMERICAN
ELECTRIC POWER CO., Fed. Sec. L. Rep PARA81,647 at 80,602 (1978) (distance of
corporate headquarters from local management was a "less important factor in
determining what is in the public interest" given the "present-day" ease of
communications and transportation").
The Transaction satisfies all of these factors. NSP and NSP-W will continue
to operate through numerous regional offices with local service personnel and
line crews available to respond to customers' needs. After the Transaction, NSP
and NSP-W will maintain their current headquarters for the areas they presently
serve.
Finally, the NSP system will not impair the effectiveness of state
regulation. NSP and NSP-W will continue their separate existence as before and
their utility operations will remain subject to the same regulatory authorities
by which they are presently regulated, namely the MPUC, PSCW, MPSC, NDPUC, SDPUC
and the FERC. This Transaction will not be consummated unless all required
regulatory approvals are obtained.
(ii) Gas Utility System
Section 2(a)(29)(B) defines an "integrated public utility system" as applied
to gas utility companies as:
a system consisting of one or more gas utility companies which are so
located and related that substantial economies may be effectuated by
being operated as a single coordinated system confined in its operation
to a single area or region, in one or more States, not so large as to
impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation,
and the effectiveness of regulation: Provided, that gas utility
companies deriving natural gas from a common source of supply may be
deemed to be included in a single area or region.
As indicated above, in the 1995 Report, the Division recommended flexibility
in the interpretation of the integration requirement. In particular, the
Division stated that it believed that the Commission "must adopt a more flexible
interpretation of the geographic and physical integration standards, with more
emphasis on whether an acquisition will be economical and subject to effective
regulation."(19) The Division also believed it "appropriate to interpret the
'single area or region' requirement flexibly recognizing technological advances,
consistent with the purposes and provisions of the Act."(20)
NSP's acquisition of BMG, and the subsequent establishment of BMG as a first
tier subsidiary of NSP, will satisfy the integration standard set forth in
Section 2(a)(29)(B) of the Act as NSP, NSP-W and BMG will constitute a system so
located and related that substantial economies may be effectuated by their
operation as a single coordinated system confined in its operation to a single
area or region not so large as to impair the advantages of localized management,
efficient operation, and the effectiveness of regulation. The Transaction will
also result in economies and efficiencies accruing to the benefit of NSP, NSP-W,
BMG, their shareholders and customers and their integrated system and thus
should be approved by the Commission.
First, both the Commission's limited precedent and current technological
realities indicate that the combined NSP, NSP-W and BMG gas utility system will
operate as a coordinated system confined in its
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(19) 1995 Report at p. 70
(20) 1995 Report at p. 73.
21
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operation to a single area or region because it will derive natural gas from
common sources of supply. The Commission has not traditionally required that the
pipeline facilities of an integrated system be physically interconnected, (21)
and instead has looked to such issues as from whom the distribution companies
within the system receive much, although not all, of their gas supply.(22) The
Commission also has considered obtaining gas from a common pipeline (23) as well
as from different pipelines when the gas originates from the same gas field in
determining a common source of supply.(24) Since the time of most of these
decisions, the state of the art in the industry has developed to allow efficient
operation of systems whose gas supplies derive from many sources.(25)
Furthermore, the fact that Minnesota and Arizona are not contiguous does not
mean that the NSP system will not "be confined in its operation to a single area
or region." The Commission has previously found "utility properties to lie in a
single area within the meaning of the Act despite intervening territory."(26)
While the NSP and BMG gas systems are not physically interconnected, they
will functionally perform as a coordinated system through the purchase of
natural gas from common sources of supply (i.e., the Andarko and Permian
basins), and delivery through integrated interstate pipelines (all of which are
open access transportation only pipelines under FERC order 636). This
coordination will result in greater efficiency.
After the Transaction, it is anticipated that gas purchasing economic
efficiencies can be achieved by having NSP's gas department, which procures gas
for NSP and NSP-W, meet the gas purchasing needs of BMG as well.(27) Thus, some
of each company's gas supply will be handled by the same entity and on a
coordinated basis. Although these gas purchases for BMG will be made on an
economic basis and not with the main goal of ensuring a common source of supply,
given economies of scale and the past practice by the same purchasers, it can be
expected that each of the three companies will continue to purchase significant
amounts of their respective gas supply from the same fields and that much of the
rest of their
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(21) See, IN THE MATTER OF PENZOIL COMPANY, Holding Co. Act Release No. 15963,
43 S.E.C. 709 (Feb. 6, 1968) (finding an integrated system where facilities both
connected with an unaffiliated transmission company but not each other). SEE,
ALSO AMERICAN NATURAL GAS COMPANY, Holding Co. Act Release No. 15260, 43 S.E.C.
203, 207, n.5 (Dec. 12, 1966) ("It is clear the integrated or coordinated
operations of a gas system under the Act may exist in the absence of such
interconnection").
(22) See, e.g., IN THE MATTER OF PHILADELPHIA COMPANY AND STANDARD POWER AND
LIGHT COMPANY, Holding Co. Act Release No. 8242, 28 S.E.C. 35, 44 (1948) ("most
of the gas used by these companies in their operations is obtained from common
sources of supply"); CONSOLIDATED NATURAL GAS COMPANY, Holding Co. Act Release
No. 25040, 45 SEC Docket 672 (Feb. 14, 1990) (finding integrated system where
each company derived natural gas from two transmission companies, although one
such company also received gas from other sources).
(23) IN THE MATTER OF THE NORTH AMERICAN COMPANY, Holding Co. Act Release No.
10320, 32 S.E.C. 169 (Dec. 28, 1950).
(24) See, IN THE MATTER OF CENTRAL POWER COMPANY AND NORTHWESTERN PUBLIC SERVICE
COMPANY, Holding Co. Act Release No. 2471, 8 S.E.C. 425 (1941), in which the
Commission declared an integrated system to exist where two entities purchase
from different pipeline companies since the pipelines were interconnected at
points along the line.
(25) See, MCN CORPORATION, Holding Co. Act Release No. 26576, 62 S.E.C. 2379
(Sep. 17, 1996) (Commission determined that non-contiguous local distribution
companies are a part of an "integrated public utility system" where, among other
things, the local distribution companies are interconnected through common
pipelines and obtained gas from a common source).
(26) ID., at 2384, CITING American National Gas Co., 43 S.E.C. at 207.
(27) In MCN CORPORATION, SUPRA note 24, the Commission determined that a single
coordinated system existed where MCN stated that its energy trading subsidiary
intended to purchase gas supply for the new gas utility, to the extent it could
do so reliably and economically; however, the gas utility would continue to have
the option to purchase a part of its gas supply from other marketers if it could
do so more efficiently.
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respective gas supply will travel through the same pipelines even if it is not
from the same field. As noted above, NSP and BMG will functionally perform as a
coordinated system through the purchase of natural gas from common sources of
supply and the delivery of such gas, through integrated interstate gas
pipelines, to satisfy the "common source of supply" requirement of Section
2(a)(29)(B) of the Act.
Moreover, the combination of the NSP, NSP-W and BMG systems will tend toward
the economic and efficient development of a coordinated gas system in that there
will be centralized computer and customer service systems, marketing and
operations planning and consulting between the three companies after the
Transaction. Improved technology and centralized computer services for customer
services and centralized planning will occur to the benefit of BMG and its
customers.
Significant day-to-day centralization between BMG and NSP will occur via
NSP's computer information system (the "NSP System"). The NSP System handles all
customer-related information needs, including account information and gas
consumption monitoring. The NSP System personnel will provide frequent
consulting services to BMG's personnel on how to operate a link with the NSP
System and how to handle other customer service related matters.
Finally, the gas utility system resulting after consummation of the
Transaction will also meet the requirement that it be "not so large as to impair
(considering the state of the art and the area or region affected) the
advantages of localized management, efficient operation and the effectiveness of
regulation." IN THE MATTER OF AMERICAN NATURAL GAS COMPANY, Holding Co. Act
Release No. 15620 (Dec. 12, 1966), the Commission found that the American
Natural System would meet the above requirement after its acquisition of an
Indiana gas utility as:
Although American Natural will provide certain central facilities,
equipment and personnel . . . Central Indiana will retain its own local
management and board of directors, a majority of whom will be residents
of Indiana. Central Indiana will continue to be subject to regulation by
the Public Service Commission of Indiana.(28)
It is currently contemplated that localized management of BMG will be preserved.
Following the Transaction, there will be no significant change in the senior
management or board of directors of NSP and NSP-W. While, as discussed above,
BMG will receive a number of centralized services and benefits from NSP, BMG's
headquarters will remain in Arizona, BMG will be operated on a day-to-day basis
by its local management, and BMG will remain locally regulated by the Arizona
Commission. No significant change in management or operations of BMG will occur
as a result of the Transaction. NSP will remain subject to the regulation of the
Minnesota Commission in the State of Minnesota, the North Dakota Commission in
the State of North Dakota. NSP-W will remain subject to the regulation of the
Wisconsin Commission. Thus, each of NSP, NSP-W and BMG will be locally operated
and locally regulated, and each will have the economic advantage of certain
centralized services after the Transaction. From a regulatory standpoint, there
will be no impairment of regulatory effectiveness. The Arizona, Minnesota, and
Wisconsin commissions are already regulating multi-jurisdictional gas utilities
as several other gas utilities currently operate in several states, and, indeed,
NSP and NSP-W currently operate gas utilities in multiple states.
For all of the reasons discussed above, NSP's ownership of BMG will satisfy
the integration requirements of Section 2(A)(29)(B).
C. 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
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(28) See also CONSOLIDATED NATURAL GAS COMPANY, SUPRA ("As noted above, VNG's
Board of Directors will consist of, among others, senior members of Consolidated
management. However, VNG will continue to be locally managed and operated as a
business unit with autonomy.")
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respect of such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be detrimental
to the carrying out of the provisions of section 11.
As described below under Item 4, and as evidenced by the filings before the
Arizona Commission, Minnesota Commission, and North Dakota Commission, NSP and
BMG intend to comply with all applicable state laws related to the Transaction.
D. Section 3(a)(2)
NSP requests that the Commission issue an order under Section 3(a)(2) declaring
that NSP will be exempt from all provisions of the Act except Section 9(a)(2).
Section 3(a)(2) of the Act provides that the Commission may issue the
above-requested order to a holding company, if:
such holding company is predominantly a public-utility company whose
operations as such do not extend beyond the State in which it is
organized and States contiguous thereto.
Upon consummation of the Transaction, BMG and NSP-W will be direct wholly-owned
subsidiaries of NSP, and NSP will be predominantly a public-utility company
operating as such in Minnesota, its state of incorporation, and states
contiguous to Minnesota (North Dakota and South Dakota).
With regard to whether a company operates "predominantly" as a
public-utility, the Commission has often considered factors indicative of the
relative size of the utility operations of the holding company compared to the
utility operations of its subsidiaries with most significance given to gross
revenues.(29) Generally, the Commission has granted exemptions where the ratio
of the subsidiary's gross utility revenues to those of its parent was not more
than approximately 25%.(30) Recently in HOUSTON INDUSTRIES INCORPORATED, ET
AL.,(31) the Commission granted an exemption to Houston Industries Incorporated,
notwithstanding the fact that its subsidiary, NorAm Energy Corp., had utility
operating revenues which were 52.5% of those of Houston Industries Incorporated.
On a pro forma basis, for the year ended December 31, 1997, the combined utility
operating revenues of NSP-W and BMG were 14% of the utility operating revenues
of NSP, substantially lower than the ratios in prior cases where exemptions were
granted. Based on the foregoing, there is no question that NSP is predominantly
a public-utility company.
Furthermore, as previously discussed, NSP's operations as a public-utility
do not extend beyond Minnesota, its state of incorporation, and states
contiguous thereto, North Dakota and South Dakota. As to BMG's operations in the
noncontiguous state of Arizona, Section 3(a)(2) does not require geographic
contiguity as to the operations of subsidiaries. Thus, the location of BMG's
operations after the Transaction is not an issue.(32) In addition to being
consistent with Commission precedent, this view is also consistent with the
Commission's suggestion in the 1995 Report that geographic requirements for an
- ------------------------
(29) See, IN RE NORTHERN STATES POWER CO., Holding Co. Act Release No. 12655, 36
S.E.C. 1 (Sep. 16, 1954).
(30) See, e.g., OHIO EDISON CO., Holding Co. Act Release No. 21019, 17 SEC
Docket 436 (April 26, 1979); DELMARVA POWER & LIGHT CO.,Holding Co. Act Release
No. 19717, 10 SEC Docket 739 (Oct. 19, 1976); and WASHINGTON GAS AND LIGHT CO.,
Holding Co. Act Release No. 1964, 6 S.E.C. 954 (March 5, 1940).
(31) Holding Co. Act Release No. 26744, 65 SEC Docket 83 (July 24, 1997).
(32) See, UNION ELECTRIC CO. OF MISSOURI, 5 S.E.C. 252 (1939) (where the
Commission concluded that "it is plain that under that subsection [3(a)(2)],
Congress intended us to ignore as irrelevant the place of operation of the
operating subsidiaries of the holding company, and that we should in the instant
case consider solely whether the place of operations of Union Electric Company
of Missouri, itself, as an operating company, are confined to the state of
Missouri and contiguous states."); and IN RE NORTHERN STATES POWER CO., Holding
Co. Act Release No. 22334, 24 SEC Docket 405 (December 23, 1981) (approving the
acquisition by a holding company of a subsidiary and allowing the holding
company to maintain exempt status pursuant to section 3(a)(2), notwithstanding
that the new subsidiary had operations in states non- contiguous to the holding
company(1)s state of organization).
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<PAGE>
integrated public-utility should be flexibly interpreted, as "the relevance of
physical and geographic integration to a sound public-utility industry has
diminished."(33)
ITEM 4. REGULATORY APPROVALS
Set forth below is a summary of the regulatory approvals that NSP and BMG
expect to obtain in connection with the Merger. It is a condition to the
consummation of the Merger that final orders approving the Merger be obtained
from the Commission under the Act and from the various federal and state
commissions described below on terms and conditions which would not have, or
would not be reasonably likely to have, a material adverse effect on the
business, assets, financial condition or results of operations of BMG or NSP and
its prospective subsidiaries taken as a whole or which would be materially
inconsistent with the agreements of the parties contained in the Merger
Agreement.
A. Antitrust
The HSR Act and the rules and regulations thereunder provide that certain
transactions (including the Transaction) may not be consummated until certain
information has been submitted to the Department of Justice ("DOJ") and Federal
Trade Commission ("FTC") and the specified HSR Act waiting period requirements
have been satisfied. DOJ terminated the HSR Act waiting period on April 3, 1998.
The expiration of the HSR Act waiting period does not preclude the Antitrust
Division or the FTC from challenging the Transaction on antitrust grounds;
however the Applicant believes that the Transaction will not violate Federal
antitrust laws. If the Transaction is not consummated within twelve months after
the expiration or earlier termination of the initial HSR Act waiting period, NSP
and BMG will be required to submit new information to the Antitrust Division and
the FTC, and a new HSR Act waiting period would have to expire or be terminated
before the Transaction could be consummated.
B. State Public Utility Regulation
Applications for approval of the Merger and related transactions were filed
on January 12, 1998 with the Arizona Commission, on January 20, 1998 with the
Minnesota Commission, and on March 5, 1998 with the North Dakota Commission.
Each Commission must find, in general, that the Merger is in the public
interest. Such commissions may attach such conditions to their approval as they
deem to be appropriate or necessary. The Minnesota Commission approved the
Merger on May 7, 1998, the North Dakota Commission approved the Merger on June
3, 1998, and the Arizona Commission approved the Merger on July 21, 1998. The
Spin-off may also require authorization from such commissions, in which case,
the Spin-off will not be consummated until such authorizations have been
obtained.
Except as set forth above, no other state or local regulatory body or agency
and no other Federal commission or agency has jurisdiction over the transactions
proposed herein.
ITEM 5. PROCEDURE
The Commission is respectfully requested to issue and publish not later than
August 7, 1998, the requisite notice under Rule 23 with respect to the filing of
this Application-Declaration, such notice to specify a date not later than
August 24, 1998, by which comments must be entered and a date not later than
August 25, 1998, as the date after which an order of the Commission granting and
permitting this Application-Declaration to become effective may be entered by
the Commission.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the proposed
Transaction. The Division of Investment Management may assist in the preparation
of the Commission's decision. There should be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
- ------------------------
(33) 1995 Report at 72-74.
25
<PAGE>
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
A. Exhibits
<TABLE>
<CAPTION>
<C> <S>
A-1 Restated Articles of Incorporation of NSP (filed as Exhibit 3.01 to Form 10-Q of NSP for the quarter
ended March 31, 1992, File No. 1-3034, and incorporated herein by reference)
A-2 Restated Articles of Incorporation of NSP-W (filed as Exhibit 3.01 to Form 10-K of NSP-W for the year
ended December 31, 1987, File No. 10-3140, and incorporated herein by reference)
A-3 Articles of Incorporation of BMG (to be filed by amendment)
B-1 Agreement and Plan of Merger (Merger Agreement) (filed as Annex A to Registration Statement No.
333-49529 on Form S-4 and incorporated herein by reference)
B-2 Stock Option Agreement (filed as Annex B to Registration Statement No. 333-49529 on Form S-4 and
incorporated herein by reference)
C-1 Registration Statement of NSP on Form S-4 (as amended) (filed as Registration Statement No. 333-49529
and incorporated herein by reference)
C-2 Proxy Statement and Prospectus (included in Exhibit C-1) D-1.1 Application of NSP and BMG before the
Arizona Commission (to be filed by amendment)
D-1.1 Application of NSP and BMG before the Arizona Commission (to be filed by amendment)
D-1.2 Application of NSP and BMG before the Minnesota Commission and Order dated May 7, 1998 approving the
Transaction (to be filed by amendment)
D-1.3 Application of NSP and BMG before the North Dakota Commission and Order dated June 3, 1998 approving the
Transaction (to be filed by amendment)
E-1 NSP corporate chart (to be filed by amendment)
E-2 Pro Forma NSP Corporate Chart (to be filed by amendment)
F-1 Preliminary opinion of counsel to NSP (to be filed by Amendment)
F-2 Preliminary opinion of counsel to BMG (to be filed by Amendment)
G-1 Opinion of PFS (filed as Annex C to Registration Statement No. 333-49529 on Form S-4 and incorporated
herein by reference)
H-1 Annual Report of NSP on Form 10-K for the year ended December 31, 1997 (File No. 1-3034 and incorporated
herein by reference)
H-2 NSP 1997 Annual Report to Shareholders (File No. 1-3034 and incorporated herein by reference)
H-3 NSP Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 1-3034 and incorporated
herein by reference)
H-4 Annual Report of NSP-W on Form 10-K for the year ended December 31, 1997 (File No. 10-3140 and
incorporated herein by reference)
H-5 NSP-W Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 10-3140 and
incorporated herein by reference)
</TABLE>
26
<PAGE>
B. Financial Statements
<TABLE>
<CAPTION>
<C> <S>
FS-1 NSP Consolidated Balance Sheet as of December 31, 1997 (see Annual Report of on Form 10-K for the year
ended December 31, 1997 (Exhibit H-1 hereto) at p. 53)
FS-2 NSP Consolidated Statements of Income for its last three fiscal years (see Annual Report NSP on Form
10-K for the year ended December 31, 1997 (Exhibit H-1 hereto) at p. 51)
FS-3 NSP-W Consolidated Balance Sheet as of December 31, 1997 (see Annual Report of NSP-W on Form 10-K for
the year ended December 31, 1997 (Exhibit H-4 hereto), at p. 23)
FS-4 NSP-W Consolidated Statements of Income for its last three fiscal years (see Annual Report of NSP-W on
Form 10-K for the year ended December 31, 1997 (Exhibit H-4 hereto), at p. 21)
FS-5 BMG Balance Sheet Data as of December 31, 1997 (see Proxy Statement and Prospectus (Exhibit C-2) at p.
46)
FS-6 BMG Income Statement Data for its last five fiscal years (See Proxy Statement and Prospectus (Exhibit
C-2) at p. 46)
</TABLE>
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
The Transaction neither involves "major federal actions" nor "significantly
[affects] the quality of the human environment" as those terms are used in
Section (2)(C) of the National Environmental Policy Act, 42 U.S.C. S.E.C. 4332.
The only federal actions related to the Transaction pertain to the Commission's
declaration of the effectiveness of the Registration Statement, the approvals
and actions described under Item 4 and Commission approval of this
Application-Declaration. Consummation of the Transaction will not result in
changes in the operations of NSP, NSP-W or BMG that would have any impact on the
environment. No federal agency is preparing an environmental impact statement
with respect to this matter.
27
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned company has duly caused this Application-Declaration to be
signed on its behalf by the undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
NORTHERN STATES POWER COMPANY
By: /s/ EDWARD J. MCINTYRE
-----------------------------------------
VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
</TABLE>
Date: July 22, 1998
28
<PAGE>
INDEX OF EXHIBITS
EXHIBIT - DESCRIPTION - TRANSMISSION METHOD
<TABLE>
<CAPTION>
METHOD EXHIBIT
OF FILING NUMBER DESCRIPTION
- ----------- ----------- ---------------------------------------------------------------------------------------------
<C> <C> <S>
A-1 Restated Articles of Incorporation of NSP (filed as Exhibit 3.01 to Form 10-Q of NSP for the
quarter ended March 31, 1992, File No. 1-3034, and incorporated herein by reference)
A-2 Restated Articles of Incorporation of NSP-W (filed as Exhibit 3.01 to Form 10-K of NSP-W for
the year ended December 31, 1987, File No. 10-3140, and incorporated herein by reference)
A-3 Articles of Incorporation of BMG (to be filed by amendment)
B-1 Agreement and Plan of Merger (Merger Agreement) (filed as Annex A to Registration Statement
No. 333-49529 on Form S-4 and incorporated herein by reference)
B-2 Stock Option Agreement (filed as Annex B to Registration Statement No. 333-49529 on Form S-4
and incorporated herein by reference)
C-1 Registration Statement of NSP on Form S-4 (as amended) (filed as Registration Statement No.
333-49529 and incorporated herein by reference)
C-2 Proxy Statement and Prospectus (included in Exhibit C-1)
D-1.1 Application of NSP and BMG before the Arizona Commission (to be filed by amendment)
D-1.2 Application of NSP and BMG before the Minnesota Commission and Order dated May 7, 1998
approving the Transaction (to be filed by amendment)
D-1.3 Application of NSP and BMG before the North Dakota Commission and Order dated June 3, 1998
approving the Transaction (to be filed by amendment)
E-1 NSP corporate chart (to be filed by amendment)
E-2 Pro Forma NSP Corporate Chart (to be filed by amendment)
F-1 Preliminary opinion of counsel to NSP (to be filed by Amendment)
F-2 Preliminary opinion of counsel to BMG (to be filed by Amendment)
G-1 Opinion of PFS (filed as Annex C to Registration Statement No. 333-49529 on Form S-4 and
incorporated herein by reference)
H-1 Annual Report of NSP on Form 10-K for the year ended December 31, 1997 (File No. 1-3034 and
incorporated herein by reference)
H-2 NSP 1997 Annual Report to Shareholders (File No. 1-3034 and incorporated herein by reference)
H-3 NSP Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 1-3034 and
incorporated herein by reference)
H-4 Annual Report of NSP-W on Form 10-K for the year ended December 31, 1997 (File No. 10-3140
and incorporated herein by reference)
H-5 NSP-W Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 10-3140
and incorporated herein by reference)
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
METHOD EXHIBIT
OF FILING NUMBER DESCRIPTION
- ----------- ----------- ---------------------------------------------------------------------------------------------
<C> <C> <S>
FS-1 NSP Consolidated Balance Sheet as of December 31, 1997 (see Annual Report of on Form 10-K for
the year ended December 31, 1997 (Exhibit H-1 hereto) at p. 53
FS-2 NSP Consolidated Statements of Income for its last three fiscal years (see Annual Report of
NSP on Form 10-K for the year ended December 31, 1997 (Exhibit H-1 hereto) at p. 51)
FS-3 NSP-W Consolidated Balance Sheet as of December 31, 1997 (see Annual Report of NSP-W on Form
10-K for the year ended December 31, 1997 (Exhibit H-4 hereto), at p. 23)
FS-4 NSP-W Consolidated Statements of Income for its last three fiscal years (see Annual Report of
NSP-W on Form 10-K for the year ended December 31, 1997 (Exhibit H-4 hereto), at p. 21)
FS-5 BMG Balance Sheet Data as of December 31, 1997 (see Proxy Statement and Prospectus (Exhibit
C-2) at p. 46)
FS-6 BMG Income Statement Data for its last five fiscal years (See Proxy Statement and Prospectus
(Exhibit C-2) at p. 46)
</TABLE>
30
<PAGE>
EXHIBIT I-1
SECURITIES AND EXCHANGE COMMISSION
(RELEASE NO. 35- )
FILING UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
__________, 1998
NORTHERN STATES POWER COMPANY (70-_____)
Notice is hereby given that the following filing has been made with the
Commission pursuant to provisions of the Act and rules promulgated thereunder.
All interested persons are referred to the application-declaration for complete
statements of the proposed transaction(s) summarized below. The
application-declaration is available for public inspection through the
Commission's Office of the Public Reference.
Interested persons wishing to comment or request a hearing on the
application-declaration should submit their views in writing by ,
1998 to the Secretary, Securities and Exchange Commission, Washington, D.C.
20549, and serve a copy of the relevant application(s) and/or declaration(s) at
the address(es) specified below. Proof of service (by affidavit or, in the case
of an attorney at law, by certificates) should be filed with the request. Any
request for hearing shall identify specifically the issues of fact or law that
are disputed. A person who so requests will be notified of any hearing, if
ordered, and will receive a copy of any notice or order issued in the matter.
After said date, the application-declaration, as filed or as amended, may be
granted and/or permitted to become effective.
Northern States Power Company ("NSP"), a Minnesota corporation located at
414 Nicollet Mall, Minneapolis, Minnesota 55401, is a public utility company and
a holding company exempt from all provisions of the Act except section 9(a)(2)
pursuant to Section 3(a)(2) of the Act and by order of the Commission in
NORTHERN STATES POWER COMPANY, Holding Co. Act Release No. 22334, 24 SEC Docket
405 (Dec. 23, 1981). NSP has filed an application-declaration relating to the
proposed merger (the "Merger") of Black Mountain Gas Company, an Arizona
corporation ("BMG"), into NSP, and following the Merger, the separation (the
"Spin-off") of BMG into a wholly-owned, first-tier subsidiary of NSP (the Merger
and the Spin-off are collectively referred to as the "Transaction"). The
application-declaration requests an order under section 9(a)(2) and 10 of the
Act authorizing the Spin-off of BMG as a wholly-owned, first-tier subsidiary of
NSP following the Merger. The application-declaration also requests an order
under section 3(a)(2) of the Act declaring it exempt from all provisions of the
Act except section 9(a)(2) following consummation of the Transaction which will
establish BMG as a direct wholly-owned subsidiary of NSP.
NSP and BMG have entered into an Agreement and Plan of Merger, dated as of
December 29, 1997 (the "Merger Agreement"), whereby BMG will be merged into NSP
with NSP as the surviving corporation. Following receipt of the Commission's
approval of the Spin-off pursuant to the application-declaration, NSP will cause
the assets of BMG to be transferred to a newly-formed, wholly-owned, first-tier
subsidiary of NSP. The effect of such transfer will be that BMG will become a
wholly-owned subsidiary of NSP.
Upon completion of the Transaction, NSP will directly own Northern States
Power Company, a Wisconsin corporation ("NSP-W"), a public utility company, and
BMG, also a public utility company. In addition to owning NSP-W and BMG, NSP
will continue to own all of its existing non-utility subsidiaries upon
consummation of the Transaction.
NSP is engaged primarily in the generation, transmission and distribution of
electricity throughout a 30,000 square mile service area. NSP also purchases,
distributes and sells natural gas to retail customers, and transports
customer-owned gas, in approximately 118 communities within this area. NSP
provides electric utility service in South Dakota and electric and gas utility
service in Minnesota and North Dakota.
31
<PAGE>
Of the more than 2.5 million people served by NSP, the majority are concentrated
in the Minneapolis-St. Paul metropolitan area. In 1997, more than 73% of the
electric retail revenue of NSP was derived from sales in the Minneapolis-St.
Paul metropolitan area and more than 66% of its retail gas revenue was derived
from sales in the St. Paul metropolitan area. As of December 31, 1997, NSP
provided electric utility service to approximately 1,220,000 customers and gas
utility service to approximately 375,000 customers.
NSP owns all of the outstanding common stock of NSP-W, a Wisconsin
corporation, which is a public-utility company under the Act. NSP-W is engaged
in the generation, transmission, and distribution of electricity to
approximately 206,700 retail customers in an area of approximately 18,900 square
miles in northwestern Wisconsin, to approximately 9,200 electric retail
customers in an area of approximately 300 square miles in the western portion of
the Upper Peninsula of Michigan, and to 10 wholesale customers in the same
general area. NSP-W purchases, distributes and sells natural gas to retail
customers or transports customer-owned natural gas, in the same service
territory to approximately 72,100 customers in Wisconsin and 4,900 customers in
Michigan. In 1997, NSP-W provided approximately 13% of NSP's consolidated
revenues.
Non-utility businesses conducted directly by NSP consist of: (i) an
appliance warranty program for its residential customers, (ii) construction of
natural gas distribution systems for third parties (primarily end-users and
municipal gas systems), (iii) sale and installation of power quality
instruments, primarily to protect equipment of customers from electric surges,
(iv) sale of steam to industrial customers in NSP's service territory, and (v)
installation and maintenance of street lighting for municipalities and other
customers.
While NSP-W is currently the only public-utility subsidiary of NSP under the
Act, NSP has nine other directly-owned subsidiaries that are engaged in various
non-utility businesses. For the year-ended December 31, 1997, approximately 8%
of NSP's consolidated operating revenues (before intercompany eliminations) and
8% of its consolidated net income were derived from the non-utility businesses.
As of December 31, 1997, approximately 20% of NSP's consolidated assets were
invested in non-utility businesses.
On a consolidated basis, NSP's operating revenues for the twelve months
ended December 31, 1997, were $3.2 billion, of which approximately $2.1 billion
was derived from NSP's electric operations, approximately $415 million was
derived from NSP's gas operations, approximately $312 million was derived from
NSP-W's electric operations, approximately $90 million was derived from NSP-W's
gas operations and approximately $238 was derived from non-utility businesses.
Consolidated assets of NSP and its subsidiaries as of December 31, 1997 were
approximately $7.1 billion, consisting of $3.7 billion in net electric utility
property, plant and equipment ($3.1 billion for NSP and $573 million for NSP-W);
$415 million in net gas utility property, plant and equipment ($355 million for
NSP and $60 million for NSP-W); $1.4 billion in non-utility subsidiary assets;
and $1.6 billion in other corporate assets.
As of April 30, 1998, there were 75,368,508 shares of NSP Common Stock and
1,050,000 shares of NSP cumulative preferred stock outstanding. NSP-W does not
have any preferred stock outstanding and all of its common stock is owned by
NSP.
BMG is an Arizona public service corporation that provides natural gas
distribution to an area of approximately 100 square miles in Maricopa County,
Arizona, and provides propane gas distribution to an area of approximately 20
square miles in Coconino County, Arizona, pursuant to certificates of
convenience and necessity issued by the Arizona Commission. As of the year ended
December 31, 1997, BMG provided utility services to 6,097 customers. Most of its
customers are residential. Non-residential customers include two school
districts, three resorts and multiple light commercial customers. As such, BMG
is a "gas utility company" as defined in Section 2(a)(4) of the Act. BMG does
not own, control or
32
<PAGE>
hold the voting securities of any public-utility company or holding company
under the Act and, thus, it is not a "holding company" as defined under Section
2(a)(7) of the Act. BMG has no subsidiaries.
BMG also provides non-utility services and bulk propane sales through its
Lake Powell Propane division. Such non-utility services also include appliance
repair. In 1997, revenues and net income from non-utility services totaled
$865,000 and $190,000, respectively, representing 14% and 14.7% of BMG's
operating revenue and net income, respectively, for the year ended December 31,
1997.
For the year ended December 31, 1997, BMG's total operating revenues and net
income were approximately $6.2 million and $1.3 million, respectively. BMG's net
utility assets as of December 31, 1997, were approximately $10.3 million.
Pursuant to the Merger Agreement, upon effectiveness of the Merger, each
issued and outstanding share of common stock, no par value, of BMG ("BMG Common
Stock") (except shares owned by BMG as treasury stock or held by BMG
shareholders who perfect dissenters' rights with respect thereto ("BMG
Dissenting Shares")) will be canceled and converted into the right to receive a
fraction of a share of common stock, $2.50 par value, of NSP ("NSP Common
Stock") equal to the quotient (hereinafter, the "Exchange Ratio") derived by
dividing (A) $17,750,000 by (B) the product of (i) the volume weighted average
of the closing prices for NSP Common Stock on the New York Stock Exchange for
the twenty full trading days ending on the third full trading day prior to the
date (the "Effective Time") the Merger becomes effective (the "Average NSP Share
Price") and (ii) the number of shares of BMG Common Stock issued and outstanding
immediately prior to the Effective Time. Pursuant to the Merger Agreement an
additional number of shares of NSP Common Stock equal to the quotient derived by
dividing $1,500,000 by the Average NSP Share Price will be placed in escrow as
soon as practicable after the Effective Time to satisfy any indemnification
claims of NSP under the Merger Agreement. Such additional shares, net of any
indemnification claims, will be distributed pro rata to the former holders of
BMG Common Stock, except BMG Dissenting Shares, on or about the first
anniversary of the closing of the Merger. Following receipt of the Commission's
approval of the Spin-off pursuant to the application-declaration, NSP will cause
the assets of BMG to be transferred to a newly-formed, wholly-owned, first-tier
subsidiary of NSP.
The application-declaration states that the Transaction is expected to
produce significant benefits to the public, investors and consumers and will
meet all applicable standards of the Act. Among other things, NSP and BMG
believe that the Transaction offers strategic and financial benefits to each
company, including economies and efficiencies through the consolidation of
overlapping or duplicative programs and expenses and the combined procurement of
material and supplies. The Transaction is also expected to improve the
efficiency of the BMG system through the technological, operations, gas
purchasing, customer service and regulatory expertise of NSP.
Following consummation of the Transaction, NSP states that it will continue
to be an exempt holding company under the Act because NSP will continue to be
predominantly a public-utility company and its operations as such will remain
confined to Minnesota, its state of incorporation, and states contiguous
thereto.
For the Commission, by the Division of Investment Management, pursuant to
delegated authority.
33
