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As filed with the Securities and Exchange Commission on October 6, 1999
File No. 70-09337
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
AMENDMENT NO. 2
TO
FORM U-1 APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
------------------------------------
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
<TABLE>
<S> <C>
Item 1. Description of Proposed Transaction . . . . . . . . . . . . . . . . 1
A. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. General Request and Overview of Transaction . . . . . . . . 2
B. Description of the Parties to the Transaction . . . . . . . . . . . 3
1. General Description . . . . . . . . . . . . . . . . . . . . 3
(a) NSP . . . . . . . . . . . . . . . . . . . . . . . . 3
(b) BMG . . . . . . . . . . . . . . . . . . . . . . . . 5
2. Description of Energy Sales and Facilities. . . . . . . . . 6
(a) NSP and NSP-W . . . . . . . . . . . . . . . . . . . 6
(i) Energy Sales . . . . . . . . . . . . . . . . . 6
(ii) Electric Generating Facilities. . . . . . . . 7
(iii) Electric Transmission and Other Facilities . 9
(iv) Fuel Sources. . . . . . . . . . . . . . . . . 9
(v) Gas Facilities . . . . . . . . . . . . . . . . 9
(b) BMG . . . . . . . . . . . . . . . . . . . . . . . .10
3. Gas Coordination. . . . . . . . . . . . . . . . . . . . . .11
4. Non-Utility Interests of NSP, NSP-W and BMG . . . . . . . .12
(a) NSP and NSP-W . . . . . . . . . . . . . . . . . . .12
(b) BMG . . . . . . . . . . . . . . . . . . . . . . . .13
C. Description of Transaction and Statement as to Consideration. . . .13
1. Background. . . . . . . . . . . . . . . . . . . . . . . . .13
2. Merger Agreement. . . . . . . . . . . . . . . . . . . . . .14
3. Management of NSP following the Transaction . . . . . . . .15
4. Related Agreements. . . . . . . . . . . . . . . . . . . . .15
Item 2. Fees, Commissions and Expenses. . . . . . . . . . . . . . . . . . .15
Item 3. Applicable Statutory Provisions . . . . . . . . . . . . . . . . . .16
A. Section 10(b) . . . . . . . . . . . . . . . . . . . . . . . . . . .17
1. Section 10(b)(1). . . . . . . . . . . . . . . . . . . . . .18
2. Section 10(b)(2). . . . . . . . . . . . . . . . . . . . . .18
3. Section 10(b)(3). . . . . . . . . . . . . . . . . . . . . .20
B. Section 10(c) . . . . . . . . . . . . . . . . . . . . . . . . . . .22
1. Section 10(c)(1). . . . . . . . . . . . . . . . . . . . . .22
(a) Compliance With Section 8 . . . . . . . . . . . . .22
(b) No Detriment to the Carrying Out of Section 11. . .23
2. Section 10 (c)(2) . . . . . . . . . . . . . . . . . . . . .24
(a) Efficiencies and Economies. . . . . . . . . . . . .25
(b) Integrated Public Utility System. . . . . . . . . .26
(i) Electrical System . . . . . . . . . . . . . .26
(ii) Gas Utility System. . . . . . . . . . . . . .29
C. Section 10(f) . . . . . . . . . . . . . . . . . . . . . . . . . . .32
D. Section 3(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . .33
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Item 4. Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . .37
A. Antitrust . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
B. State Public Utility Regulation . . . . . . . . . . . . . . . . . .38
Item 5. Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Item 6. Exhibits and Financial Statements . . . . . . . . . . . . . . . . .39
A. Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
B. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . .40
Item 7. Information as to Environmental Effects . . . . . . . . . . . . . .41
</TABLE>
ii
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Item 1. Description of Proposed Transaction
A. Introduction
This Application-Declaration relates to the separation (the "Spin-off")
of the former assets of Black Mountain Gas Company, formerly an Arizona
corporation ("BMG"), into a wholly-owned, first-tier subsidiary of Northern
States Power Company, a Minnesota corporation ("NSP"). NSP acquired BMG on July
24, 1998 pursuant to a Merger (the "Merger") in which BMG was merged into NSP
with NSP as the surviving corporation. 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. Prior to the
Merger, BMG was 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 approved the merger of BMG
with and into NSP at a special meeting of BMG's shareholders on May 21, 1998.
The Merger was 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"). In addition, NSP recently obtained approval of
the Spin-off from the Arizona Commission, the Minnesota Commission and the
North Dakota Commission. The waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") has expired.
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.
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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 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)
Pursuant to an Agreement and Plan of Merger, dated as of December 29,
1997 (the "Merger Agreement"), on July 24, 1998, BMG 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, each issued and
outstanding share of common stock, no par value, of BMG ("BMG Common Stock")
(except shares owned by BMG as treasury stock) was 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 July 24, 1998, the date the Merger became effective (the "Average
NSP Share Price") and (ii) the number of shares of BMG Common Stock issued and
outstanding immediately prior to July 24, 1998. 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 was
placed in escrow to satisfy any indemnification claims of NSP under the Merger
Agreement. Such additional shares, net of any indemnification claims, were
distributed pro rata to the former holders of BMG Common Stock on or about July
24, 1999, 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.
If the Commission does not authorize the Spin-off and the relief
requested above, then NSP requests, in the alternative, an order under Section
3(a)(2) of the Act declaring it exempt from all provisions of the Act except
Section 9(a)(2).
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(1) Since completion of the initial step of the Transaction (i.e., the
Merger) on July 24, 1998, NSP's utility operations have included the operations
of BMG.
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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). 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 1998, more than 73% of the electric retail revenue of NSP
was derived from sales in the Minneapolis-St. Paul metropolitan area and more
than 64% of its retail gas revenue was derived from sales in the St. Paul
metropolitan area. As of December 31, 1998, NSP provided electric utility
service to approximately 1,240,000 customers and gas utility service to
approximately 385,000 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 210,400 retail customers in an area of approximately 18,900 square
miles in northwestern Wisconsin, to approximately 9,100 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 78,000 customers in Wisconsin and 5,000 customers in
Michigan. In 1998, 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
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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 eleven 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"), Reddy Kilowatt Corportion ("Reddy Kilowatt"), United
Power & Land Company ("UP&L"), Seren Innovations, Inc. ("Seren"), Ultra Power
Technologies, Inc. ("Ultra Power"), Nuclear Management Company ("NMC") 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, 1998, approximately 6%
of NSP's consolidated operating revenues (before intercompany eliminations)
and 15% of its consolidated net income were derived from the non-utility
businesses. As of December 31, 1998, approximately 21% 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 December 31, 1998, there
were 152,696,971 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, 1998, were $3.2 billion, consisting of the following (before
intercompany eliminations) (2):
<TABLE>
<CAPTION>
($ in millions)
Electric Utility Gas Utility Other
<S> <C> <C> <C>
NSP $2,244 $366 $ 0
NSP-W $325 $79 $ 0
Non-Utility $ 0 $ 0 $202
Subsidiaries
</TABLE>
Consolidated assets of NSP and its subsidiaries as of December 31, 1998 were
approximately $7.4 billion, consisting of $3.7 billion in net electric utility
property, plant and equipment ($3.1 billion for NSP and $594 million for NSP-W);
$439 million in net gas utility property, plant and equipment ($376 million for
NSP and $63 million for NSP-W); $1.6 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: (i) NSP's Annual Reports on Form 10-K for the years ended
December 31, 1997 and December 31, 1998, its Annual Reports to Shareholders
for the years ended December 31, 1997 and December 31, 1998, and its
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998, June
30, 1998, September 30, 1998, March 31, 1999, June 30, 1999, and September
30, 1999, (ii) NSP-W's Annual Reports on Form 10-K for the years ended
December 31, 1997 and December 31, 1998 and its Quarterly Reports on Form
10-Q for the quarters ended March 31, 1998, June 30, 1998, September 30,
1998, March 31, 1999, June 30, 1999, and September 30, 1999, and (iii) NRG's
Annual Reports on Form 10-K for the year ended December 31, 1997 and December
31, 1998 and its Quarterly Reports on Form 10-Q for the quarters ended March
31, 1998, June 30, 1998, September 30, 1998, March 31, 1999, June 30, 1999,
and September 30, 1999. Each of the aforementioned reports on Form 10-K and
Form 10-Q are incorporated by reference as Exhibits H-1 through H-19.
(b) BMG
BMG was incorporated under the laws of Arizona in 1965. Prior to the
Merger, it was an Arizona public service corporation providing natural gas
distribution to an area of approximately
- ---------------------------
(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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100 square miles in Maricopa County, Arizona, and providing 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, 1998, BMG provided
utility services to 6,463 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 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 1998, revenues and net income from non-utility services
totaled $1.7 million and $84,000, respectively, representing 28% and 23% of
BMG's operating revenue and net income, respectively, for the year ended
December 31, 1998.
BMG's total operating revenues for the years ended December 31, 1996,
1997, and 1998 were approximately $6.3 million, $6.2 million, and $6.3 million,
respectively. For the same periods, BMG's net income was approximately
$975,000, $1.3 million, and $400,000 respectively. BMG's net utility assets as
of December 31, 1997, and 1998 were approximately $10.3 million and $15.5
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, 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:
6
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<TABLE>
<CAPTION>
Year ended
December 31, 1998
-----------------
<S> <C>
NSP
Kwh of electric energy sold (including amounts 31,151,096
delivered in interchange)
Mcf of gas distributed at retail (including
natural and manufactured gas) 73,361,063
NSP-W
Kwh of electric energy sold (including amounts 5,380,325
delivered in interchange)
Mcf of gas distributed at retail (including 16,680,874
natural and manufactured gas)
</TABLE>
(ii) Electric Generating Facilities
As of December 31, 1998 NSP and NSP-W had a total net generating
capability of 7,186 Mw and NSP had a total summer net generating capacity of
6,338 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 1,039 Mw.
Monticello: NSP owns one nuclear generating unit at its
Monticello station in Minnesota with a net capability of 578 Mw.
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 267 Mw.
Riverside: NSP owns two coal-fired generating units at its
Riverside station in Minnesota with a combined net capability of 380 Mw.
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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 519 Mw.
As of December 31, 1998, 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, 1998, the combined energy (Kwh) sales of NSP and
NSP-W were produced 46% by coal-fired generation, 25% by nuclear generation,
27% by purchased and interchange and 2% from NSP's
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hydroelectric and other generation. The 1998 electric system peak load for NSP
and NSP-W was 7,639 Mw and occurred on July 14, 1998, exclusive of off-system
transactions. For the year ended December 31, 1998, the fuel resources for
NSP's and NSP-W's generation based Kwh was 60% obtained from coal-fired
generation, approximately 35% from nuclear generation, and approximately 5% from
other fuels.
(iii) Electric Transmission and Other Facilities
As of December 31, 1998, NSP's electric transmission system included 265
circuit miles of 500 Kv line, 751 circuit miles of 345 Kv line, 287 circuit
miles of 230 Kv line, 59 circuit miles of 161 Kv line, 1,276 circuit miles of
115 Kv line and 1,775 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, 1998, NSP's transmission substations had a combined capacity
of approximately 27,665 thousand KVA and the distribution substations totaled
approximately 13,260 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, 1998, NSP-W's electric transmission system included
165 circuit miles of 345 Kv line, 280 circuit miles of 161 Kv line, 448 circuit
miles of 115 Kv line and 1,496 circuit miles of transmission line under 115 Kv.
As of December 31, 1998 NSP-W's transmission substations had a combined capacity
of approximately 4,404 thousand KVA and the distribution substations totaled
approximately 2,036 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-6.
(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, and in Arizona through BMG. 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
9
<PAGE>
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 7,989 miles of natural gas
distribution and transmission mains, 50 miles of propane vapor distribution
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 1,724 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.
For the year ended December 31, 1998, NSP and NSP-W distributed the
following amounts of natural or manufactured gas at retail:
<TABLE>
<CAPTION>
Year-ended
December 31, 1998
-----------------
<S> <C> <C>
NSP Mcf of gas distributed at retail 73,361,063
(including natural and manufactured
gas)
NSP-W Mcf of gas distributed at retail 16,680,874
(including natural and manufactured
gas)
</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, 1998, BMG distributed 484,305 Mcf of gas
at retail (including natural and manufactured gas).
10
<PAGE>
3. Gas Coordination
The following table sets forth certain information with respect to the
gas operations of NSP, NSP-W and BMG as of December 31, 1998, adjusted to give
effect to the Transaction (before intercompany eliminations).
<TABLE>
<CAPTION>
Mcf of Gas Distributed at
Gas Operating Revenues Retail (including natural
($ in millions) and manufactured gas)
--------------- ---------------------
<S> <C> <C>
NSP (excluding BMG) $360 72,876,758
NSP-W $79 16,680,874
BMG $5 484,305
TOTAL $445 90,041,937
---- ----------
---- ----------
</TABLE>
As is evident from the above table, for the year ended December 31,
1998, BMG would have provided approximately 1% of the total gas 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.
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
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
FIELD/BASIN NSP NSP-W BMG
----------- --- ----- ---
<S> <C> <C> <C>
Williston X
San Juan X
Alberta, Canada X X
</TABLE>
As indicated by the above table, NSP and BMG procure a portion of their
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, Reddy Kilowatt 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. 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. Reddy Kilowatt
(formerly Cormorant Corporation) originally was established for the
principal purpose of acquiring fuel resources and has historically engaged in
oil, gas, coal lignite and uranium exploration. Recently, Reddy Kilowatt
acquired the trademark and associated rights to the "Reddy Kilowatt" name and
changed the name of Cormorant Corporation. 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 21% of NSP's consolidated assets as of
December 31, 1998. NSP's and NSP-W's non-utility subsidiaries and investments
also provided approximately 6% of NSP's total revenues and approximately 15% of
NSP's consolidated net income for the year ended December 31, 1998.
12
<PAGE>
(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 28% and 23% of BMG's operating
revenues and net income, respectively, for the year ended December 31, 1998.
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.
13
<PAGE>
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.
On May 21, 1998, BMG's shareholders approved the Merger. On July 24,
1998, following receipt of necessary state regulatory approvals, BMG was merged
into NSP.
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.
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 provided for BMG to be merged with and into
NSP, with NSP as the surviving corporation. Pursuant to the Merger Agreement,
each issued and outstanding share of BMG (except shares owned by BMG as treasury
stock) was 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 remained outstanding,
unchanged, as one share of NSP Common Stock. The Merger Agreement is
incorporated by reference as Exhibit B-1. 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 was placed in escrow to
satisfy any indemnification claims of NSP under the Merger Agreement. Such
additional shares, net of any indemnification claims, were distributed pro
rata to the former holders of BMG Common, on or about July 24, 1999, the first
anniversary of the closing of the Merger. Following 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.
14
<PAGE>
If any holder of BMG Common Stock was entitled to receive a number of
shares of NSP Common Stock that includes a fraction, then in lieu of a
fractional share, such holder is 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 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.
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. The Option Agreement terminated by its terms upon completion of
the Merger.
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)
15
<PAGE>
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, as a result of the Spin-off and the
consummation of the Transaction, will acquire more than five percent of the
voting securities of BMG, NSP would appear to need 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.
- ------------------------------
(3) To be filed by Amendment.
16
<PAGE>
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;
- 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 followed 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;
- ------------------------
(4) Letter of the Division of Investment Management to the Securities and
Exchange Commission, 1995 Report at 3.
17
<PAGE>
(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.
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 was a pure stock-for-stock exchange and qualifies for
treatment as a pooling of interests. As set forth more fully at above Item
1.C.2, each share of BMG Common Stock was 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 was
submitted to, and approved by, the common shareholders of BMG. As provided
under the Arizona Business
18
<PAGE>
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 was 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.
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).
19
<PAGE>
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 received 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 and BMG as of December 31, 1997 (prior to the Merger), the combined capital
structure of NSP as of December 31, 1998, and the pro forma capital structure of
NSP and BMG following the Spin-off:
20
<PAGE>
NSP and BMG Historical Capital Structures
as of December 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
NSP BMG
--- ---
<S> <C> <C>
Common stock equity $2,372,000 $8,319
Preferred securities1 400,000 -0-
Long-term debt 1,879,000 3,000
Short-term debt2 425,000 1,092
---------- -------
Total $5,076,000 $12,411
---------- -------
---------- -------
</TABLE>
NSP Combined Capital Structure
as of December 31, 1998
(dollars in thousands) (unaudited)
<TABLE>
<S> <C> <C>
Common stock equity $2,281,246 47%
Preferred securities 305,340 6%
Long-term debt 1,851,146 35%
Short-term debt(6) 609,030 12%
---------- ---
Total $5,246,762 100%
</TABLE>
NSP and BMG Pro Forma Capital Structures
as of December 31, 1998
(dollars in thousands) (unaudited)
<TABLE>
<CAPTION>
NSP BMG
--- ---
<S> <C> <C>
Common stock equity $2,471,911 $9,335
Preferred securities 305,340 -0-
Long-term debt 1,848,146 3,000
Short-term debt(6) 609,030 -0-
---------- -------
Total $5,234,427 $12,335
---------- -------
---------- -------
</TABLE>
As is evident from the above, 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
- -----------------------------
(5) Includes preferred securities subject to mandatory redemption.
(6) Includes current maturities of long-term debt.
21
<PAGE>
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 ENTERGY CORPORATION, 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 or the Transaction.
Moreover, the Merger occurred only after authorizations of the Arizona
Commission, the Minnesota Commission and the North Dakota Commission were
granted. Further, the Arizona Commission, the Minnesota Commission and the
North Dakota Commission have approved the Spin-off as being in the public
interest. Accordingly,
- ---------------------------
(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.
22
<PAGE>
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 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
- ---------------------------
(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. 5, 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 METROPOLITAIN INC., SUPRA, note 8, at 193.
(10) DOMINION RESOURCES, INC., SUPRA, note 8, at 849.
(11) ID. at 849.
23
<PAGE>
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 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 Arizona Commission and the state
commissions that 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
- ---------------------------
(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).
24
<PAGE>
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 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 its 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
- ------------------------------
(13) TUC HOLDING COMPANY, SUPRA, note 8, at 306, citing GAZ METROPOLITAIN,
INC., SUPRA, note 8.
25
<PAGE>
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.
The Commission recently determined that benefits in the area of gas
supply, increased purchasing power and the ability to utilize the expertise and
resources available from public utility affiliates and other affiliates was
sufficient to satisfy Section 10(c)(2).(14) These are precisely the types of
benefits that are expected to be realized by BMG.
(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.(15) 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.'"(16)
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:
- -------------------------------
(14) SEMPRA ENERGY, Holding Co. Act Release No. 26971 (Feb. 1, 1999).
(15) 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)).
(16) GAZ METROPOLITAIN, INC., SUPRA, note 8, 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.
26
<PAGE>
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.
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."(17) 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.(18) 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.
- ---------------------------
(17) 1995 report at 71.
(18) 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."
27
<PAGE>
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."(19)
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.,
Holding Co. Act Release No. 20633, 15 S.E.C. Docket 375 (July 21, 1978)
(advantages of localized management evaluated in terms of whether an enlarged
system could be "responsive to local needs"), GENERAL PUBLIC UTILITIES CORP.,
Holding Co. Act Release No. 13116, 37 SEC 28, 36 (Mar. 2, 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) (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., supra. (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
- --------------------------------
(19) 1995 report at 72-74.
28
<PAGE>
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."(20) 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."(21) Subsequently, in SEMPRA ENERGY, the Commission stated, "we
have taken notice of developments that have occurred in the gas industry, and
have interpreted the Act and analyzed proposal transactions in light of these
changed and changing circumstances."(22)
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
- ----------------------------
(20) 1995 Report at p. 70.
(21) 1995 Report at p. 73.
(22) SEMPRA ENERGY, SUPRA, note 14.
29
<PAGE>
coordinated system confined in its 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,(23) 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.(24) The Commission also has considered obtaining gas
from a common pipeline (25) as well as from different pipelines when the gas
originates from the same gas field in determining a common source of supply.(26)
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.(27) 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."(28) In SEMPRA ENERGY, the Commission reiterated
that "it is appropriate to treat gas systems as being in a 'single area or
region' when doing so does not undercut the policies of the Act," and held that
the distances between Sempra and its North Carolina subsidiary would not
undercut the policies of the Act though such distances were significantly
greater than the distances considered in MCN.(29)
- ---------------------------------
(23) 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. 15620, 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").
(24) 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).
(25) IN THE MATTER OF THE NORTH AMERICAN COMPANY, Holding Co. Act Release No.
10320, 32 S.E.C. 169 (Dec. 28, 1950).
(26) 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.
(27) See, SEMPRA ENERGY, SUPRA, note 14 (authorizing the acquisition of
Frontier, a North Carolina gas utility, by Sempra, a California public
utility holding company, through its North Carolina subsidiary and
finding that the resulting system will be operated as a single
coordinated system because, among other things, the trading affiliate
"will be able to obtain gas for Frontier from [common] basins by other
more flexible means, due to the development of market centers, hubs and
pooling points"). See also, 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).
(28) SEMPRA ENERGY, SUPRA, note 14 (citing MCN CORPORATION at 2384).
(29) ID.
30
<PAGE>
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.(30) 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 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
- ------------------------
(30) In SEMPRA ENERGY, SUPRA note 14, the Commission found that a single
coordinated system would exist where Sempra's North Carolina subsidiary
could coordinate its purchase of gas in the San Juan and Permian Basins
with affiliate companies through Sempra Trading, which would also
coordinate gas transportation and storage arrangements. Similarly, in
MCN CORPORATION, SUPRA note 27, 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.
31
<PAGE>
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.(31)
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 and the South Dakota Commission in South 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.(32) 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
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.
- ---------------------------------
(31) 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.")
(32) In SEMPRA ENERGY, SUPRA, note 14, the Commission similarly determined
that the effectiveness of local regulation would not be impaired when a
California gas utility holding company acquired a North Carolina gas
utility.
32
<PAGE>
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)
In connection with the request under Section 10 of the Act, 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) following
completion of the Transaction. 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.(33) 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%.(34) Recently in HOUSTON INDUSTRIES
INCORPORATED, (35) the Commission granted an exemption to Houston Industries
Incorporated, even though its subsidiary, NorAm Energy Corp., had utility
operating revenues which were 52.5% of those of Houston Industries
Incorporated. For the year ended December 31, 1998, the combined utility
operating revenues of NSP-W and BMG were 15% 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 will be confined to 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
- --------------------------
(33) See, IN RE NORTHERN STATES POWER CO., Holding Co. Act Release No. 12655,
36 S.E.C. 1 (Sep. 16, 1954).
(34) 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).
(35) Holding Co. Act Release No. 26744, 65 SEC Docket 83 (July 24, 1997).
33
<PAGE>
BMG's operations after the Transaction is not an issue.(36) 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 integrated public-utility should be flexibly interpreted, as "the relevance
of physical and geographic integration to a sound public-utility industry has
diminished."(37)
In the event that the Commission does not issue an order approving the
Transaction under Section 10 of the Act, then NSP requests that the Commission
issue an order under Section 3(a)(2) declaring that NSP (which will include the
operations of BMG if the Spin-off does not occur) is exempt from all provisions
of the Act except Section 9(a)(2).
With one exception, the prior analysis of NSP's entitlement to an
exemption under Section 3(a)(2) following the Spin-off is equally applicable to
NSP in the event that the Spin-off does not occur. NSP will continue to be
predominantly a public-utility company, with NSP-W (its only subsidiary that is
a public-utility company) representing less than 15% of its utility operating
revenues for the year ended December 31, 1998. Other than the BMG operations,
all of NSP's operations as a public utility will be confined to its state of
incorporation and states contiguous thereto. Thus, the issue presented is
whether, under Section 3(a)(2), all of NSP's operations as a public utility must
be confined to NSP's state of incorporation and states contiguous thereto or
whether a de minimis amount (38) may be conducted in a non-contiguous state. In
light of the legislative history of Section 3(a)(2), the significant changes in
the utility industry since the enactment of Section 3(a)(2), the views expressed
in the 1995 Report, the approval of the corporate structure in question by the
applicable state regulatory authorities and the de minimis nature of the BMG
operations, Applicant believes that it should be exempt under Section 3(a)(2).
The legislative history of Section 3(a)(2) does not provide a
dispositive answer to the question of whether a holding company can conduct a de
minimis amount of utility operations in a non-contiguous state. An indication
of the proper interpretation of Section 3(a)(2) is given by
- -------------------------
(36) 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's state of organization).
(37) 1995 Report at 72-74.
(38) The de minimis nature of BMG's utility operations to the existing
utility operations of NSP is shown on the prior pages of this
Application, with BMG's net utility assets, utility revenues and net
income representing significantly less than 1% of the net utility
assets, utility revenues and net income of NSP on a stand-alone basis
without the inclusion of NSP-W.
34
<PAGE>
the Senate Report to Senate Bill 2796 (39) in which it is stated that Section
3(a)(2) of the Act is to govern a case where:
the company is itself a utility, being a holding company only in form by
reason of the fact that it has one or more minor subsidiary
utilities.(40)
This statement clearly implies that the focus of Section 3(a)(2) is on the size
of the utility subsidiaries and not on requiring that every aspect of the
utility operations of the parent holding company must be located solely in its
state of incorporation and states contiguous thereto. Applicant does not know
of any statements in the legislative history of Section 3(a)(2) that would
preclude an exempt holding company under Section 3(a)(2) from having a de
minimis amount of utility operations in a non-contiguous state.
Applicant is aware that, in EASTERN SHORE PUBLIC SERVICE COMPANY,
5.S.E.C.1022 (1940), the Commission addressed the meaning of the phrase "whose
operations as such do not extend beyond the State in which it is organized and
States contiguous thereto" in Section 3(a)(2). While the Commission's
interpretation of this phrase was not determinative to the case as Eastern Shore
did not meet the requirement of being predominantly a public utility company
(the revenues of Eastern Shore's utility subsidiaries represented in excess of
75% of the combined utility revenues of the system), the Commission interpreted
the phrase as requiring that the holding company's public utility operations be
confined to its state of incorporation and states contiguous (i.e., touching)
thereto. This case, however, is distinguishable as the Commission was not faced
with the situation, like the present case, where the non-contiguous operations
reflected less than 1% of the holding company's utility revenues.
Moreover, in order to respond flexibly to the legislative, regulatory
and technological changes that are transforming the structure and shape of the
utility industry,(41) the Commission has indicated a willingness to reconsider
precedent in interpreting Section 3(a) of the Act.(42) In this regard, the
Commission has announced its intention to reject bright-line tests and rather to
consider the specific facts and circumstances surrounding each specific request
for exemption, giving significant attention to the availability of state
regulation for the proposed transaction.(43) In the present case, the proposed
structure with the BMG operations being conducted directly by NSP has been
approved by the Minnesota Commission, the Arizona Commission and the North
Dakota Commission. None of these commissions expressed any reservation about
their ability to effectively regulate the utility operations of NSP. In fact,
the Minnesota Commission, the North Dakota Commission and the South Dakota
Commission have effectively regulated NSP as an
- ---------------------------
(39) There were no changes to Section 3(a)(2) as set forth in Senate Bill
2796 prior to enactment.
(40) 7482 Cong., 1st sess., Report No. 621, p. 24. The House Report
contained similar language (74th Cong. 1st sess., Report No. 1318, p.
10).
(41) 1995 Report at 70.
(42) ID. at 119.
(43) 1995 Report at 119.
35
<PAGE>
exempt holding company under Section 3(a)(2) for many years. The addition of
the BMG operations to NSP will not affect this regulation. Thus, the present
case is not one involving an unregulated entity through which potential abuse
could occur. Instead, NSP will be subject to extensive regulation by four state
regulatory commissions. Under these circumstances, it seems evident that the
holding company structure will not be used to evade state or local regulation or
that regulation under the Act is needed to supplement state regulation in order
to prevent detriment to the interests protected by the Act.
As acknowledged by the Staff in the 1995 Report, "the [Commission's]
decisions under [Section 3(a)(1) and 3(a)(2)] have generally focused on size as
a proxy for effective state regulation. The result has been a somewhat
confusing array of decisions."(44) The present case amply demonstrates this
confusing array. As shown previously, NSP meets the criteria for an exemption
under Section 3(a)(2) if BMG is a wholly-owned subsidiary of NSP. The same
result follows if BMG is made part of the operations of NSP-W, as the location
of utility operations of subsidiaries is not relevant under Section 3(a)(2).
UNION ELECTRIC CO. OF MISSOURI, 5 S.E.C.252 (1939). Finally, if BMG were
combined with Viking Gas Transmission Company (NSP's wholly-owned interstate
pipeline), Viking would appear to qualify for an exemption under Rule 7 under
the Act. BMG's revenues from its gas utility operations have averaged less than
$5 million annually for the last three calendar years ($4.6 million for 1998,
$5.3 million for 1997, and $4.4 million for 1996). Viking, with annual revenues
in excess of $19 million from its interstate pipeline business, would appear to
be engaged primarily in a business other than the gas utility business for
purposes of Rule 7. It is only when BMG's operations are part of NSP that an
issue arises under Section 3(a)(2). Yet, there does not appear to be any policy
or purpose of the Act that is served by permitting the above corporate
structures to be exempt under Section 3(a)(2), but not permitting a corporate
structure where BMG is part of the parent company operations of NSP.
As stated previously, the precise issue presented is whether, under
Section 3(a)(2), a holding company can have a de minimis amount of utility
operations outside of its state of incorporation and states contiguous thereto.
In EASTERN GAS, SUPRA, the Commission arguably answered this question in the
negative. However, through numerous no-action letters and orders, the
Commission has effectively permitted non-contiguous operations that historically
would have appeared to be utility operations. This is shown by the various
no-action letters and orders issued in the context of energy marketing.
The initial series of no-action letters permitted utility affiliates or
independent companies to engage in the wholesale sale of electricity. ENRON
POWER MARKETING, INC., SEC No-Action Letter, January 5, 1994; CRSS POWER
MARKETING, INC., SEC No-Action Letter, March 31, 1994; ELECTRIC CLEARINGHOUSE,
INC., SEC No-Action Letter, April 13, 1994; INTER-COAST POWER MARKETING CO., SEC
No-Action Letter, December 6, 1994; and LG&E POWER MARKETING, INC., SEC
No-Action Letter, April 21, 1995. The basis for these decisions was that such
activities did not constitute "utility" operations under the Act and the
decisions were in response, at least in part, to the rapidly changing
electricity and gas utility industry. The next series of no-action letters and
orders permitted the retail sale of electricity and natural gas where the
marketing
- ---------------------------
(44) 1995 Report at 111.
36
<PAGE>
company did not own any physical utility assets. LG&E POWER MARKETING, INC.,
SEC No-Action Letter, April 26, 1996; UNITIL CORPORATION, Holding Company Act
Release No. 26527 (May 31, 1996). Again, the basis for these decisions was that
this activity did not constitute "utility" operations. The final step was the
sale by marketing companies of electricity and natural gas coupled with the
installation and/or ownership of certain ancillary equipment such as meters,
electric wire droplines, breaker panels and short segments of gas pipe or
electric wiring to connect the customer to the local distribution system. ENRON
CAPITAL & TRADE RESOURCES CORP., SEC No-Action Letter, February 13, 1997; SUNOCO
POWER MARKETING, L.L.C., SEC No-Action letter, July 24, 1997; SEI HOLDINGS,
INC., Holding Company Act Release No. 26581 (September 26, 1996).
The overall effect of the foregoing decisions is that exempt holding
companies today are permitted under the Act to sell electricity and natural gas
at wholesale throughout the United States and at retail in numerous states
which, through retail pilot programs or legislative enactment, have permitted
such action to occur. Often, the regulation of such energy marketing activities
is far less than the typical, extensive regulation imposed by states on
traditional electric and gas utilities, including the regulation imposed on the
BMG operations in Arizona by the Arizona Commission.
Applicant's point in discussing the above energy marketing decisions is
to show that historical perceptions of permitted utility operations under
Section 3(a)(2) have changed significantly. Applicant does not question the
wisdom or correctness of the various energy marketing no-action letters and
orders. In fact, Applicant supports such decisions. Yet, there is nothing in
the Act or its legislative history expressly stating that an entity which
provides electric or natural gas service is not an electric utility company or a
gas utility company merely because it does not own or operate certain physical
assets. Similarly, there is nothing in the Act or, to the knowledge of the
Applicant, its legislative history requiring that exempt holding companies under
Section 3(a)(2) cannot have a de minimis amount of utility operations in a
noncontiguous state. It is for this reason, along with the approval of the
applicable state utility commissions that will regulate NSP, the ability of NSP
to otherwise qualify for an exemption and the lack of potential harms to the
interests sought to be protected by the Act, that the Applicant believes it
should be exempt under Section 3(a)(2) from all provisions of the Act other than
Section 9(a)(2). The granting of such exemption would be consistent with the
Commission's broad power to interpret the terms, phrases and provisions of the
Act. See, e.g., GAZ METROPOLITAIN, INC., Holding Company Act Release No. 26170
(November 23, 1994). In addition, the uniqueness of the facts in the present
case makes it highly unlikely that the grant of an exemption under
Section 3(a)(2) will be relied upon for precedential effect in future cases.
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 Transaction. It is a
condition to the consummation of the Transaction that final orders approving
the Transaction 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
37
<PAGE>
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.
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 found, in general, that the Merger was in the public interest.
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.
On August 27, 1999, the Arizona Commission approved the Spin-off
noting that BMG is a fit and proper entity to receive NSP's gas utility
assets and Certificate of Convenience and Necessity. The Commission further
stated that the Spin-off and the resultant formation of NSP as a public
utility holding company in Arizona "is in the public interest." The North
Dakota Commission and the Minnesota Commission separately approved the
Spin-off, each finding that the Spin-off is compatible with the public
interest.
Following consummation of the Transaction, NSP and BMG expect to
engage in various intercompany transactions. These affiliated interest
transactions require prior approval of the Arizona Commission and the
Minnesota Commission. Accordingly, as part of the application for approval
of the Spin-off, NSP sought and received authorization for these affiliated
interest transactions from the Arizona and Minnesota Commissions.
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 September 15, 1998, the requisite notice under Rule 23 with respect
to the filing of this
38
<PAGE>
Application-Declaration, such notice to specify a date not later than October 6,
1998, by which comments must be entered and a date not later than October 7,
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.
Item 6. Exhibits and Financial Statements
<TABLE>
<S> <C>
A. Exhibits
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 and
Order dated July 21, 1998 approving the Merger (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 Merger (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 Merger (to be filed by
Amendment)
D-1.4 Application of NSP before the Minnesota Commission and Order
dated April 9, 1999, approving the Spin-off
D-1.5 Application of NSP before the North Dakota Commission and Order
dated April 14, 1999, approving the Spin-off
D-1.6 Application of NSP before the Arizona Commission and Order dated
August 27, 1999, approving the Spin-off
E-1 NSP corporate chart
39
<PAGE>
E-2 Pro Forma NSP Corporate Chart (to be filed by Amendment)
F-1 Preliminary opinion of counsel to NSP
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 Annual Report of NSP on Form 10-K for the year ended December
31, 1998 (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 NSP Quarterly Report on Form 10-Q for the quarter ended June 30,
1998 (File No. 1-3034 and incorporated herein by reference)
H-5 NSP Quarterly Report on Form 10-Q for the quarter ended September
30, 1998 (File No. 1-3034 and incorporated herein by reference)
H-6 NSP Quarterly Report on Form 10-K for the quarter ended March
31, 1999 (File No. 1-3034 and incorporated herein by reference)
H-7 NSP Quarterly Report on Form 10-K for the quarter ended June
30, 1999 (File No. 1-3034 and incorporated herein by reference)
H-8 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-9 Annual Report of NSP-W on Form 10-K for the year ended December
31, 1998 (File No. 10-3140 and incorporated herein by reference)
H-10 NSP-W Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 (File No. 10-3140 and incorporated herein by
reference)
H-11 NSP-W Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 (File No. 10-3140 and incorporated herein by
reference)
H-12 NSP-W's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998 (File No. 10-3140 and incorporated herein by
reference)
H-13 NSP-W Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999 (File No. 10-3140 and incorporated herein by
reference)
H-14 NSP-W Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999 (File No. 10-3140 and incorporated herein by
reference)
H-15 Annual Report of NRG on Form 10-K for the year ended
December 31, 1997 (File No. 333-33397 and incorporated herein by
reference)
H-16 Annual Report of NRG on Form 10-K for the year ended
December 31, 1998 (File No. 333-33397 and incorporated herein by
reference)
H-17 NRG Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 (File No. 333-33397 and incorporated herein by
reference)
H-18 NRG Quarterly Report on Form 10-Q for the quarter ended June 30,
1998 (File No. 333-33397 and incorporated herein by reference)
H-19 NRG Quarterly Report on Form 10-Q for the quarter ended September
30, 1998 (File No. 333-33397 and incorporated herein by
reference)
H-20 NRG Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999 (File No. 333-33397 and incorporated herein by
reference)
H-21 NRG Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999 (File No. 333-33397 and incorporated herein by
reference)
I-1 Form of Notice (Previously filed)
B. Financial Statements
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 Consolidated Balance Sheet as of December 31, 1998 (see
Annual Report on Form 10-K for the year ended December 31,
1998 (Exhibit H-2 hereto) at p. 42)
FS-4 NSP Consolidated Statements of Income for its last three fiscal
years ended December 31, 1998 (see Annual Report on Form 10-K
for the year ended December 31, 1998 (Exhibit H-2 hereto)
at p. 40)
FS-5 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)
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<PAGE>
FS-6 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-7 NSP-W Consolidated Balance Sheet as of December 31, 1998
(see Annual Report on Form 10-K for the year ended December 31,
1998 (Exhibit H-9 hereto) at p. 20)
FS-8 NSP-W Consolidated Statements of Income for its last three fiscal
years ended December 31, 1998 (see Annual Report on Form 10-K for
the year ended December 31, 1998 (Exhibit H-9 hereto) at p. 18)
FS-9 BMG Balance Sheet Data as of December 31, 1997 (see Proxy
Statement and Prospectus (Exhibit C-2) at p. 46)
FS-10 BMG Income Statement Data for its last five fiscal years (See
Proxy Statement and Prospectus (Exhibit C-2) at p. 46)
FS-11 BMG Balance Sheet Data as of December 31, 1998
FS-12 BMG Income Statement for its last five fiscal years ended
December 31, 1998
</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.
41
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned company has duly caused this Amendment No. 1 to its
Application-Declaration to be signed on its behalf by the undersigned thereunto
duly authorized.
NORTHERN STATES POWER COMPANY
BY: /s/ E.J. McIntyre
-------------------------------
Vice President and Chief
Financial Officer
Date: October 6, 1999
42
<PAGE>
Index of Exhibits
EXHIBIT - DESCRIPTION - TRANSMISSION METHOD
<TABLE>
<CAPTION>
Method Exhibit Description
of Filing Number -----------
- --------- ------
<S> <C> <C>
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 and Order dated July 21, 1998 approving the
Merger (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
Merger (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
Merger (to be filed by Amendment)
DT D-1.4 Application of NSP before the Minnesota Commission and
Order dated April 9, 1999, approving the Spin-off
DT D-1.5 Application of NSP before the North Dakota Commission
and Order dated April 14, 1999, approving the Spin-off
DT D-1.6 Application of NSP before the Arizona Commission and
Order dated August 27, 1999, approving the
Spin-off
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
G-1 Opinion of PFS (filed as Annex C to Registration
Statement No. 333-49529 on Form S-4 and incorporated
herein by reference)
43
<PAGE>
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 Annual Report of NSP on Form 10-K for the year ended
December 31, 1998 (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 NSP Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 (File No. 1-3034 and incorporated herein
by reference)
H-5 NSP Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998 (File No. 1-3034 and incorporated
herein by reference)
H-6 NSP Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 (File No. 10-3034 and incorporated
herein by reference)
H-7 NSP Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999 (File No. 10-3034 and incorporated
herein by reference)
H-8 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-9 Annual Report of NSP-W on Form 10-K for the year ended
December 31, 1998 (File No. 10-3140 and incorporated
herein by reference)
H-10 NSP-W Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 (File No. 10-3140 and incorporated
herein by reference)
H-11 NSP-W Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998 (File No. 10-3140 and incorporated
herein by reference)
H-12 NSP-W's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 (File No. 10-3140 and
incorporated herein by reference)
H-13 NSP-W Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 (File No. 10-3140 and incorporated
herein by reference)
H-14 NSP-W Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999 (File No. 10-3140 and incorporated
herein by reference)
H-15 Annual Report of NRG on Form 10-K for the year ended
December 31, 1997 (File No. 333-33397 and incorporated
herein by reference)
H-16 Annual Report of NRG on Form 10-K for the year ended
December 31, 1998 (File No. 333-33397 and incorporated
herein by reference)
H-17 NRG Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 (File No. 333-33397 and incorporated
herein by reference)
H-18 NRG Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 (File No. 333-33397 and incorporated
herein by reference)
H-19 NRG Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998 (File No. 333-33397 and incorporated
herein by reference)
H-20 NRG Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999 (File No. 333-33397 and incorporated
herein by reference)
H-21 NRG Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999 (File No. 333-33397 and incorporated
herein by reference)
I-1 Form of Notice (Previously filed)
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 Consolidated Balance Sheet as of December 31, 1998
(see Annual Report on Form 10-K for the year ended
December 31, 1998 (Exhibit H-2 hereto) at p. 42)
44
<PAGE>
FS-4 NSP Consolidated Statements of Income for its last
three fiscal years ended December 31, 1998 (see Annual
Report on Form 10-K for the year ended December 31,
1998 (Exhibit H-2 hereto) at p. 40)
FS-5 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-6 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-7 NSP-W Consolidated Balance Sheet as of December 31,
1998 (see Annual Report on Form 10-K for the year ended
December 31, 1998 (Exhibit H-9 hereto) at p. 20)
FS-8 NSP-W Consolidated Statements of Income for its last
three fiscal years ended December 31, 1998
(see Annual Report on Form 10-K for the year ended
December 31, 1998 (Exhibit H-9 hereto) at p. 18)
FS-9 BMG Balance Sheet Data as of December 31, 1997 (see
Proxy Statement and Prospectus (Exhibit C-2) at p. 46)
FS-10 BMG Income Statement Data for its last five fiscal
years (See Proxy Statement and Prospectus (Exhibit C-2)
at p. 46)
FS-11 BMG Balance Sheet Data as of December 31, 1998
FS-12 BMG Income Statement for its last five fiscal years
ended December 31, 1998
</TABLE>
45
<PAGE>
Exhibit D.1.4
RECEIVED
APR 12 1999
NSP LAW DEPT.
BEFORE THE MINNESOTA PUBLIC UTILITIES COMMISSION
Edward A. Garvey Chair
Joel Jacobs Commissioner
Marshall Johnson Commissioner
LeRoy Koppendrayer Commissioner
Gregory Scott Commissioner
Northern States Power Company SERVICE DATE: APR 9 1999
Attn: Dennis C. Fulton
825 Rice Street DOCKET NO. G-002/AI-99-46
St. Paul, MN 55117
In the Matter of a Request by Northern States Power Company for a Transfer of
Gas Utility Assets to a Newly Incorporated Subsidiary and Related Affiliated
Interest Agreements
The above entitled matter has been considered by the Commission and the
following disposition made:
APPROVED
The Commission agrees with and adopts the recommendations of the Department
of Public Service which are attached and hereby incorporated in the Order.
BY ORDER OF THE COMMISSION
/s/ Burl W. Haar
Burl W. Haar
Executive Secretary
(S E A L)
This document can be made available in alternative formats (i.e., large print
or audio tape) by calling (651) 297-4596 (voice), (651) 297-1200 (TTY), or
1-800-627-3529 (TTY relay service).
<PAGE>
{SEAL}
MINNESOTA
DEPARTMENT OF
PUBLIC SERVICE
March 1, 1999
Burl W. Haar
Executive Secretary
Minnesota Public Utilities Commission
121 7th Place East, Suite 350
St. Paul, Minnesota 55101-2147
RE: COMMENTS OF THE MINNESOTA DEPARTMENT OF PUBLIC SERVICE
Docket No. G002/AI-99-46
Dear Mr. Haar:
Attached are the comments of the Minnesota Department of Public Service
(Department) in the following matter:
Northern States Power Company Petition for Approval of a Transfer of Gas
Utility Assets to a Newly Incorporated Subsidiary and Related Affiliated
Interest Agreements.
The petition was filed on January 13, 1999 by:
Mr. Dennis C. Fulton
Director, Gas Finance and Rates
Northern States Power Company
825 Rice Street
St. Paul, Minnesota 55117
The Department recommends APPROVAL and is available to answer any questions
the Commission may have.
Sincerely,
/s/ Nancy Campbell
NANCY CAMPBELL
FINANCIAL ANALYST
/s/ Michelle St. Pierre
MICHELLE ST. PIERRE
FINANCIAL ANALYST
NC/MS/jl
Attachment
Suite 200 TRIANGLE 121 7th Place East TRIANGLE St. Paul, Minnesota 55101-2145
TRIANGLE (651) 296-7107 TRIANGLE (651) 297-1959 fax TRIANGLE (651) 297-3067
TTY
An equal opportunity employer
<PAGE>
{SEAL}
MINNESOTA
DEPARTMENT OF
PUBLIC SERVICE
- --------------------------------------------------------------------------------
BEFORE THE MINNESOTA PUBLIC UTILITIES COMMISSION
COMMENTS OF THE
MINNESOTA DEPARTMENT OF PUBLIC SERVICE
DOCKET NO. G002/AI-99-46
- --------------------------------------------------------------------------------
SUMMARY OF NORTHERN STATES POWER COMPANY'S PROPOSAL
Pursuant to Minn. Stat. Section 216B.50 (Restrictions on Property Transfers
and Mergers), Northern States Power (NSP or the Company) requests approval
from the Minnesota Public Utilities Commission (the Commission) of the
transfer of gas utility assets and related liabilities previously owned by
Black Mountain Gas Company of Arizona ("old BMG") to a newly-formed
subsidiary of NSP, which will be named Black Mountain Gas Company ("New
BMG")(1). NSP also requests approval of an unexecuted Administrative Services
Agreement (ASA) and an unexecuted Tax Sharing Agreement (TSA) between itself
and New BMG pursuant to Minn. Stat. Section 216B.48 (Relations with
Affiliated Interests).(2) NSP proposes the agreements be effective on May 1,
1999, the proposed date New BMG becomes an operating subsidiary of NSP.
The ASA will account for services including management, supervisory,
construction, engineering, accounting, legal and public affairs, financial,
regulatory, auditing, general business forecasting, human and information
resources, shareholder and investor relations resources, gas supply
portfolio analysis(3) and other similar services provided to the other
party.(4) Also, included is the provision that interest be assessed to cover
carrying costs on overdue payments. Interest on any amounts unpaid by the due
date will be calculated at the daily commercial prime loan lending rate.
Additionally, NSP
- ------------------------------
(1) NSP, as a part of this restructuring and completion of its acquisitions
of the Old BMG operations, is also seeking approval of the Securities and
Exchange Commission under the Public Utility Holding Act of 1935, as amended.
SEC approval is contingent upon approval of the transfer of Old BMG's
operations into New BMG by the Commission.
(2) NSP also filed the ASA and TSA for approval by the Arizona Corporate
Commission.
(3) In its filing, NSP states that it will not provide SCADA or gas dispatch
services to New BMG under the ASA and if such services were to be provided in
the future, NSP would file an agreement for Commission approval.
(4) Although the ASA provides that the parties may perform various services
for each other, NSP anticipates that most services will be provided from NSP
to New BMG.
<PAGE>
Docket No. G002/AI-99-46
Analyst assigned: Nancy Campbell, Michelle St. Pierre
Page 2
states that the ASA will comply with cost allocation principles adopted by
the Commission on March 1, 1995, in Docket No. G,E999/CI-90-1008.
The TSA provides the framework for NSP to file a consolidated federal and
state income tax return, including New BMG.
DEPARTMENT ANALYSIS
STATUTORY REQUIREMENTS
Minn. Stat. Section 216B.50 is applicable to this filing. The Company
proposes to transfer the assets and liabilities of Old BMG that were merged
with NSP(5) to a separate direct subsidiary of NSP the New BMG.
Minn. Stat. Section 216B.50 provides in relevant part:
Upon filing of an application for the approval and
consent of the commission thereto the commission shall
investigate, with or without public hearing, and in
case of a public hearing, upon such notice as the
commission may require, and if it shall find that the
proposed action is CONSISTENT WITH THE PUBLIC INTEREST
it shall give its consent and approval by order in
writing. (Emphasis added.)
The Commission has stated that "this standard does not require an affirmative
finding of public benefit, just a finding that the transaction is compatible
with the public interest." Order Approving Merger, page 4, Docket No.
G008/PA-90-604. As discussed below, the Minnesota Department of Public
Service (Department) agrees that the transfer of Old BMG to a NSP subsidiary
is compatible with the public interest.
The new subsidiary falls under the definition of "affiliated interest" in
Minn. Stat. Section 216B.48, subd. 1, since, if approved, New BMG will be a
wholly-owned subsidiary of NSP. The Department has reviewed the two proposed
affiliated interest agreements and finds that the filing by NSP complies with
Minnesota Rules part 7825.2200B as required by Minn. Stat. Section 216B.48,
by supplying documentation or responses to the following items:
(1) a descriptive title of each agreement;
(2) a copy of each agreement (see NSP's Attachment 2-A);
(3) a list and history of outstanding contracts between the utility
and its affiliate;
- ------------------------------
(5) This merger was approved in the Commission's May 7, 1998, Order in
G002/PA-98-109. The merger took effect July 16, 1998.
<PAGE>
Docket No. G002/AI-99-46
Analyst assigned: Nancy Campbell, Michelle St. Pierre
Page 3
(4) a descriptive summary of the reasons the agreements are in the
public interest; and
(5) competitive bidding.
The Company stated that competitive bidding is not applicable in this case
since NSP will be the vendor of services to New BMG. Also, since this is the
first agreement between NSP and New BMG, the requirement to list outstanding
agreements between the petitioner and affiliated interest is not applicable.
NSP also provided the information required pursuant to the affiliated
interest filing guidelines in Docket No. G,E999/CI-98-651 (see NSP's
Appendix 2)
ANALYSIS OF THE ASSET TRANSFER
As noted above, NSP and Old BMG merged into a single company, with NSP as the
survivor in the Docket No. G002/PA-98-109. NSP has now determined that it
would be more appropriate to have the Old BMG operations conducted through a
subsidiary on a long-term basis. As a result, NSP seeks approval to transfer
the operations of Old BMG to the newly created NSP subsidiary.(6)
NSP provides the following concerns with the current structure under which
the Old BMG operations are conducted directly by NSP.
- NSP becomes subject to regulation as a public utility by the
Arizona Corporation Commission (Arizona Commission), which
will result in unnecessary expense to NSP.
- The current structure imposes an unnecessary level of
complexity to the Arizona Commission in regulating the Old
BMG operations and will require NSP to present various issues
to the Arizona Commission that are irrelevant to Arizona gas
ratepayers. For example, NSP would need Arizona Commission
approval to issue securities even if the proceeds of the
securities are to finance NSP's electric operation in
Minnesota.
- In rate cases for Old BMG's operations in Arizona, NSP would
need to segregate the Old BMG assets and financial results
from its total NSP Company financial statements. In such rate
cases, NSP would also need to create a stand-alone, imputed
capital structure for Old BMG in order to determine, among
other things, an appropriate return on equity.
- ------------------------------
(6) New BMG will be a corporation incorporated in the state of Minnesota.
<PAGE>
Docket No. G002/AI-99-46
Analyst assigned: Nancy Campbell, Michelle St. Pierre
Page 4
NSP indicates in its filing that the creation of a subsidiary will enhance
accurate allocation of costs to the New BMG. By creating a subsidiary, New
BMG would be reported in the stand-alone financial statements of New BMG. As
discussed below, any services provided would be charged back to the other
party pursuant to the ASA.
NSP's Appendix 1 provides proposed accounting entries using amounts as of
December 1998 for the transfer of the Old BMG assets and liabilities of NSP
to New BMG. NSP states that the pooling of interests approved in the merger
will not be affected and NSP will not experience a gain or loss associated
with the transfer. NSP also states that New BMG's assets, liabilities and
operations are virtually identical to the assets, liabilities and operations
of Old BMG had it continued in existence as a subsidiary of NSP and had not
been merged with NSP. The Department reviewed the proposed accounting and
believes that it is appropriate.
The Department believes that the NSP transfer is consistent with the public
interest since it will also maintain a separation of BMG's operations for
financial statement and cost of capital purposes and enhance accurate
allocation of costs to New BMG as discussed below. It will also provide a
better separation of Minnesota verses Arizona regulatory jurisdictions.
ANALYSIS OF THE AGREEMENTS
Currently, NSP provides various corporate and other services to its retail
gas operations in Arizona and makes an internal allocation of costs to the
Arizona gas operation, just as NSP provides an internal allocation to its
retail gas operations in North Dakota. In its filing, NSP claims that
accounting and allocating these various segregated and common expenses is a
difficult task, which complicates accounting for the costs of the Minnesota
jurisdiction. As a result of the proposed transfer to New BMG, the internal
NSP cost allocation will be replaced by a charge-back via the ASA.
The ASA, Appendix B, defines the components of actual costs (labor,
transportation and employee expenses, materials and supplies, other expenses,
and corporate residual) and the ASA, Appendix C, specifies the Company's
accounting and charging procedures for each of these cost categories. The
accounting and charging procedures set forth that expenses may be charged
directly or through special work orders. Special works orders may be issued
to record costs for functions which are not assignable solely to either
party. As directed in the ASA, the approved special work orders and
applicable prorates are to be reviewed and revised as needed, at least
annually by NSP. The Department believes that the proposed ASA is reasonable
and provides a contractual mechanism whereby NSP and New BMG can provide
various services to each other in order to take advantage of efficiencies and
economies of scale.
<PAGE>
Docket No. G002/AI-99-46
Analyst assigned: Nancy Campbell, Michelle St. Pierre
Page 5
Additionally, the proposed ASA and TSA are substantively similar(7) to
previous affiliated interest agreements that were approved by the Commission
and complied with the cost allocation principles in Docket No. G,
E999/CI-90-1008. These include agreements between NSP and Ultra Power
Technologies, Inc. (Docket No. E002/AI-97-1677), Seren Innovations, Inc.
(Docket No. E002/AI-97-300), and First Midwest Auto Park, Inc.
(Docket No. E002/AI-94-1041).
Concerning competitive bidding, the Department believes that affiliated
transactions where the services or goods acquired are competitively available
should require competitive bidding and/or a showing of actual market prices.
However, due to the small level of administrative services to be provided, the
Department did not request this information. In NSP Gas's most recent rate
case, Docket No. G002/GR-97-1606, NSP estimated $5,043 for allocation of
costs from NSP to BMG.
The proposed TSA will allow NSP to file a consolidated income tax return
which includes New BMG. New BMG will be assessed its income tax liability as
if it had filed separately. If New BMG incurs tax losses, NSP shall reimburse
New BMG to the extent NSP has received a tax benefit from the consolidated
return.
Both the ASA and the TSA appear to satisfy the public interest criterion
since the ASA serves to establish procedures which protect NSP (and its
ratepayers) from any cross-subsidization. Additionally, the TSA enables the use
of consolidated tax filing resulting in the use of tax benefits to reduce the
income tax liability of the consolidated tax-filing entity. In this respect,
each is reasonable and consistent with the public interest.
SUMMARY
The Department believes that the transfer is consistent with the public
interest since it will maintain a separation of BMG's operations for
financial statement and cost of capital purposes and will enhance accurate
allocation of costs from NSP to New BMG. It will also provide a better
separation of regulatory jurisdictions. The Department also believes that the
proposed accounting is appropriate. Thus, the Department recommends the
Commission approve the transfer of BMG's assets and liabilities to a separate
NSP subsidiary.
Additionally, the ASA is consistent with the public interest since it serves
as a blue print for allocations between the companies and ensures that
ratepayers are not indirectly subsidizing the BMG operations of the Company.
Further, NSP has historically maintained similar agreements with its
subsidiaries that have been approved by the Commission. Also, the TSA allows
NSP to take advantage of the benefits of filing a consolidated tax return
while assessing New BMG's tax liability as if the subsidiary had
- ------------------------------
(7) The Company used the same form but added more detail to Article II,
Services Rendered.
<PAGE>
Docket No. G002/AI-99-46
Analyst assigned: Nancy Campbell, Michelle St. Pierre
Page 6
filed separately. Therefore, the Department recommends the Commission approve
the Administrative Services Agreement and Tax Sharing Agreement as proposed
by NSP.
RECOMMENDATION
The Department recommends that the Commission approve:
- the transfer of BMG's assets and liabilities to a separate NSP
subsidiary; and
- the Administrative Services Agreement and Tax Sharing Agreement as
proposed by NSP.
/jl
<PAGE>
Exhibit D.1.5
STATE OF NORTH DAKOTA
PUBLIC SERVICE COMMISSION
Northern States Power Company Case No. PU-400-99-35
Transfer-Black Mountain Gas Assets
Application
ORDER APPROVING TRANSFER OF ASSETS
April 14, 1999
On January 20, 1999 Northern States Power Company (NSP) filed a Petition
for Approval of the transfer of NSP's Black Mountain Gas (BMG) assets to a
newly created subsidiary named Black Mountain Gas Company (New BMG).
NSP proposes that New BMG become an operating subsidiary of NSP on May
1, 1999. BMG assets are used for natural gas service to approximately 5,000
customers in and around Phoenix and Scottsdale, Arizona. BMG also provides
propane service to approximately 1,300 customers in the city of Page and
about 500 customers in Lake Powell, both located in Coconine County, Arizona.
BMG assets also include an unregulated bulk propane service in Arizona.
On February 17, 1999, the Commission issued a Notice of Opportunity for
Hearing, providing that written comments and requests for hearing would be
received through March 26, 1999. No comments or hearing requests have been
received.
In Case No. PU-400-98-118 the Commission, on June 3, 1998, issued an
order approving the merger of BMG into NSP and the merger was completed in
July 1998. NSP now seeks to transfer BMG assets to a subsidiary because
conducting BMG operations directly subjects NSP to regulation as a public
utility by the Arizona Corporation Commission. NSP states the transfer would
eliminate unnecessary expense to NSP and an unnecessary level of complexity
to the Arizona Commission's regulation of BMG operations. NSP further states
that the creation of a subsidiary will enhance accurate allocation of costs
to New BMG through stand-alone financial statements.
NSP states the transaction will occur at book value and will not change
the operations of NSP-ND or the provisions of electric or natural gas service
to North Dakota customers.
Having considered this matter, the Commission finds the requested
transfer is compatible with public interest and should be approved.
<PAGE>
Order
The Commission Orders that NSP's transfer of former Black Mountain Gas
Company assets to a new NSP subsidiary entitled Black Mountain Gas Company,
as described and represented in its application, is APPROVED.
PUBLIC SERVICE COMMISSION
/s/ Susan E. Wefald /s/ Bruce Hagen /s/ Leo M. Reinbold
- ------------------------ ----------------------- -----------------------
Susan E. Wefald Bruce Hagen Leo M. Reinbold
Commissioner President Commissioner
<PAGE>
Exhibit D.1.6
Arizona Corporation Commission
BEFORE THE ARIZONA CORPORATION COMMISSION
DOCKETED AUG. 27, 1999
DOCKETED BY {ILLEGIBLE INITIALS}
RECEIVED TB AUG. 31, 1999
CARL J. KUNASEK
CHAIRMAN
JIM IRVIN
COMMISSIONER
WILLIAM A. MUNDELL
COMMISSIONER
IN THE MATTER OF THE REQUEST BY
NORTHERN STATES POWER COMPANY FOR
APPROVAL OF A TRANSFER OF GAS UTILITY
TO A NEWLY INCORPORATED SUBSIDIARY
AND AFFILIATED INTEREST AGREEMENTS.
DOCKET NO. G-03493A-99-0054
G-03703A-99-0054
DECISION NO. 61914
OPINION AND ORDER
-----------------
DATE OF HEARING: May 19, 1999
PLACE OF HEARING: Phoenix, Arizona
PRESIDING OFFICER: Marc E. Stern
APPEARANCES: FENNEMORE CRAIG, PC, by Mr. Timothy Berg, on behalf of
Northern States Power Company;
MARTINEZ & CURTIS, PC, by Mr. Paul Michaud, on behalf
of the City of Page, Arizona; and
Ms. Janice Alward, Staff Attorney, Legal Division, on
behalf of the Utilities Division of the Arizona
Corporation Commission.
BY THE COMMISSION:
On February 5, 1999, Northern States Power Company dba Black Mountain Gas
Company of Arizona ("NSP") filed with the Arizona Corporation Commission
("Commission") an application requesting the Commission's approval for the
transfer of NSP's Arizona gas utility assets, related liabilities and its
Certificate of Convenience and Necessity ("Certificate") to a newly formed
subsidiary, Black Mountain Gas Company ("BMG"), a Minnesota corporation, and
for a waiver of A.A.C. R14-2-803 and A.A.C. R14-2-805(A)(6).
On April 15, 1999, the Commission's Utilities Division ("Staff") filed
its Staff Report recommending approval after a hearing.
On April 23, 1999, by Procedural Order, the above-captioned matter was
scheduled for hearing.
Pursuant to the Procedural Order, notice of the application and hearing
thereon were provided
<PAGE>
DOCKET NO. G-03493A-99-0054 ET AL.
in a newspaper of general circulation in NSP's certificated service area.
On May 17, 1999, the City of Page ("City") filed a Motion for Leave to
Intervene ("Motion"). There was no opposition to the City's Motion and
intervention was granted.
On May 19, 1999, a full public hearing took place before a duly
authorized Hearing Officer of the Commission at its Offices in Phoenix,
Arizona. NSP, the City and Staff appeared with counsel. At the conclusion
of the proceeding, the matter was taken under advisement pending submission
of a recommended Opinion and Order to the Commission.
********************************************************************************
Having considered the entire record herein and being fully advised in the
premises, the Commission finds, concludes, and orders that:
FINDINGS OF FACT
----------------
1. Pursuant to authority granted by the Commission, NSP(1) provides public
natural gas distribution in the vicinity of Cave Creek, Maricopa County,
Arizona and underground public propane distribution in the vicinity of Page,
Coconino County, Arizona.
2. On February 5, 1999, NSP filed an application requesting the
Commission's approval for the transfer of NSP's Arizona gas utility assets
including its Certificate and related liabilities to a newly formed
subsidiary, BMG, a Minnesota corporation, and for a waiver of Commission Rules
A.A.C. R14-2-803 and A.A.C. R14-2-805(A)(6).
3. On July 16, 1998, the Commission issued Decision No. 61009 which
approved the sale of assets including the Certificate of what was then a
privately held corporation known as Black Mountain Gas Company ("Black
Mountain") providing natural gas service in the vicinity of Cave Creek, and
underground propane service in the vicinity of Page, Arizona, to NSP.
4. NSP has operated Black Mountain for approximately six months as a
separate division rather than as an independent subsidiary.
5. Upon the completion of NSP's acquisition of Black Mountain in 1998,
NSP became a Class A Arizona public service corporation which prompted NSP to
file for a waiver of A.A.C. R14-
___________________
(1) NSP is a publicly held gas and electric utility which primarily
provides service in the states of Minnesota, Michigan, Wisconsin, North
Dakota and South Dakota to approximately 2 million customers. NSP's Arizona
operations account for only 6,300 customers.
<PAGE>
DOCKET NO. G-03493A-99-0054 ET AL.
2-801, ET SEQ., the Commission's Affiliated Interest Rules or ("Rules").
6. On October 28, 1998, the Commission approved a partial waiver of the
Rules, but it did not apply to A.A.C. R14-2-803 which involves the
requirement that the Commission approve the organization or reorganization of
a public utility holding company.
7. Upon the Commission's approval of the application herein, BMG will be
a subsidiary of NSP. Pursuant to the Rules, NSP will no longer be an Arizona
public service corporation, but will become a public utility holding company.
8. The Rules provide the Commission with jurisdiction over the
transaction because it entails NSP's becoming a public utility holding
Company pursuant to A.A.C. R14-2-803.
9. NSP has several reasons for transferring the assets of its Arizona
gas division to its new subsidiary, BMG.
10. The primary reasons for the transfer relate to the regulation of NSP
as a public utility in Arizona increasing its regulatory costs which are
allocated to its Arizona operations, and possibly complicating its other
activities such as financing capital improvements in other jurisdictions and
possibly affecting NSP's announced merger with New Century Energies.
11. Additionally, NSP believes that the operation of BMG as a subsidiary
will lead to a reduction in the accounting expenses required to allocate its
expenses as a division of NSP, and that the transfer of NSP's Arizona gas
operations will allow BMG to have an independent capital structure which will
enable the Commission to establish rates for BMG rather than allocating them
according to the capital structure of a NSP Division.(2)
12. Under the terms of the transfer, NSP has agreed to absorb the costs
of the transaction so that it will not affect the cost of gas service to
BMG's customers.
13. Based on the record, BMG's capital structure will not change and it
will be comprised of debt previously incurred and equity retained by BMG.
14. As a further benefit of the transaction, BMG, as a subsidiary of
NSP, should be
_____________________
(2) During the hearing, a witness for NSP, Mr. Dennis Fulton agreed
that it would be a good idea to review the revenue requirements of BMG as
against those of NSP in its pending rate case before the Commission.
However, Staff's witness indicated that the pending rate case was based upon
a 1997 test year and that such a review might not be feasible since it was
the last year of Black Mountain's operations prior to NSP acquiring it in
1998.
<PAGE>
DOCKET NO. G-03493A-99-0054 ET AL.
insulated from financial losses by NSP's other subsidiaries.
15. As part of the transfer process, NSP has agreed to file copies of
the documentation which verifies that NSP's existing franchises for the
operation of its Arizona gas operations are either assigned or transferred to
BMG or that new franchises have been issued by the appropriate governmental
authorities in Cave Creek and Page, Arizona for the operation BMG's gas
facilities in the public rights-of-way.
16. BMG will continue to utilize NSP's existing rates and charges and
assume all responsibility for deposits and refunds as they become due.
17. Staff is recommending that NSP's application should be approved
because BMG is a fit and proper entity to receive NSP's Arizona gas utility
assets and Certificate and the formation of a public utility holding company
by NSP is in the public interest.
18. Staff is also recommending that the Commission approve the formation
by NSP of a public utility holding company and that the Commission approve a
partial waiver of the Rules for NSP and BMG as follows:
- that NSP's filings pursuant to A.A.C. R14-2-803 be
limited to (1) any organization or reorganization that
would affect the relationship between NSP and BMG, (2)
any organization or reorganization of BMG, and (3) any
organization or reorganization of NSP which would result
in a change in the control of NSP;(3)
- that NSP be required to file a notice of organization or
reorganization under A.A.C. R14-2-803 for all
transactions likely to increase direct or allocated
costs or expenses to BMG;
- that NSP inform the Commission of consummated
transactions not noticed by including a brief
description of those transactions in the annual
A.A.C. R14-2-805 filing; and
- that NSP and BMG file the basis for allocations of cost
and expenses made to BMG, but waive the filing of the
basis of allocation among NSP and its other affiliates
except that the basis of these allocations between NSP
and its other affiliates would remain available for
review in rate cases for BMG in Arizona.
CONCLUSIONS OF LAW
------------------
1. NSP is a public service corporation within the meaning of Article XV
of the Arizona
_______________________
(3) The definition of ("change in control") includes mergers or
consolidations of NSP either approved by the stockholders or through the
acquisition of securities possessing more than 51 percent of the total
combined voting power of NSP's outstanding securities. A change in control
would also occur with the sale or other disposition of all, or substantially
all, of the assets of NSP, and the complete liquidation or dissolution of NSP.
<PAGE>
DOCKET NO. G-03493A-99-0054 ET AL.
Constitution and A.R.S. Section 40-2., ET SEQ.
2. Upon approval of the application, BMG will become a public service
corporation within the meaning of Article XV of the Arizona Constitution and
A.R.S. Sections 40-281, 40-282 and 40-285.
3. Upon approval of the application, NSP will become a public utility
holding Company pursuant to A.A.C. R14-2-801, ET SEQ.
4. The Commission has jurisdiction over NSP and BMG and the subject
matter of the application.
5. There is a continuing need for public gas utility service in NSP's
certificated service area.
6. BMG is a fit and proper entity to receive the Certificate.
7. The application should be approved subject to a partial waiver of the
Affiliated Interest Rules for NSP and BMG as described hereinabove in Finding
of Fact No. 18.
8. BMG should continue to charge the rates and charges presently in
effect for NSP.
9. BMG should file, within 365 days of the effective date of this
Decision, copies of either the assignments or the transfers of the franchises
under which NSP operates its gas utility in Cave Creek and Page, Arizona or
copies of the approvals of new franchises approved for BMG to operate in the
public rights-of-way in Cave Creek and Page, Arizona or the approvals granted
hereinafter shall be rendered null and void without further order by the
Commission.
ORDER
-----
IT IS THEREFORE ORDERED that the application of Northern States Power
Company for the approval of the transfer of its Arizona gas utility assets
and its Certificate of Convenience and Necessity and related liabilities to
Black Mountain Gas Company be, and is hereby, granted subject to the
condition that Black Mountain Gas Company files, within 365 days of the
effective date of this Decision, certification that the requisite franchises
from the cities of Cave Creek and Page, Arizona have either been assigned,
transferred or issued for the operation of a gas utility by Black Mountain
Gas Company in the public rights-of-way in these municipalities or the
authorization granted herein shall be null and void without further order by
the Commission.
<PAGE>
DOCKET NO. G-03493A-99-0054 ET AL.
IT IS FURTHER ORDERED that, upon the conclusion of the transaction
herein, Northern States Power Company shall be a public utility holding
company pursuant to the terms of the Commission's Affiliated Interest Rules.
IT IS FURTHER ORDERED that Black Mountain Gas Company shall continue to
charge those rates and charges presently in effect for Northern States Power
Company in its certificated service area.
IT IS FURTHER ORDERED that a partial waiver of the Affiliated Interest
Rules for Northern States Power Company and Black Mountain Gas Company be,
and is hereby, approved as set forth in Findings of Fact No. 18 and
Conclusion of Law No. 7 hereinabove.
IT IS FURTHER ORDERED that this Decision shall become effective
immediately.
BY ORDER OF THE ARIZONA CORPORATION COMMISSION.
/s/ Carl Kunasek /s/ James Irvin /s/ William A. Mundell
- -------------------------------------------------------------------------------
CHAIRMAN COMMISSIONER COMMISSIONER
IN WITNESS WHEREOF, I, BRIAN C. McNEIL, Executive
Secretary of the Arizona Corporation Commission,
have hereunto set my hand and caused the official
seal of the Commission to be affixed at the
Capitol, in the City of Phoenix, this
27th day of August, 1999.
/s/ Brian C. McNeil
-------------------------------------------------
BRIAN C. McNEIL
EXECUTIVE SECRETARY
DISSENT_____________________
MES:bbs
<PAGE>
SERVICE LIST FOR: NORTHERN STATES POWER COMPANY
DOCKET NO. G-03493A-99-0054 AND G-03703A-99-0054
Timothy Berg
Theresa Dwyer
FENNEMORE CRAIG
3003 North Central Avenue, Suite 2600
Phoenix, Arizona 85012-2913
Attorneys for Northern States Power Company
dba Black Mountain Gas Company
Michael A. Curtis
Paul R. Michaud
MARTINEZ & CURTIS, P.C.
2712 North 7th Street
Phoenix, Arizona 85006-1090
Attorneys for the City of Page, Arizona
Paul Bullis, Chief Counsel
Legal Division
ARIZONA CORPORATION COMMISSION
1200 West Washington Street
Phoenix, Arizona 85007
Director, Utilities Division
ARIZONA CORPORATION COMMISSION
1200 West Washington Street
Phoenix, Arizona 85007
<PAGE>
EXHIBIT F-1
NORTHERN STATES POWER COMPANY
414 Nicollet Mall
Minneapolis, Minnesota 55401
612-330-5500
September ____, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Northern States Power Company
Form U-1 Application-Declaration
(File No. 70-09337)
Ladies and Gentlemen:
I refer to the Form U-1 Application-Declaration, as amended (the
"Application"), under the Public Utility Holding Company Act of 1935, as
amended (the "Act"), filed with the Securities and Exchange Commission (the
"Commission") by Northern States Power Company ("NSP"), a Minnesota
corporation, with respect to the separation (the "Spin-off") of the former
assets of Black Mountain Gas Company, formerly an Arizona corporation
("BMG"), into a newly-formed, wholly-owned, first-tier subsidiary of NSP
("New BMG"). Capitalized terms used in this letter but otherwise not defined
shall have the meanings ascribed to such terms in the Application.
The Application seeks authorization and approval of the Transaction and
pursuant thereto NSP's ultimate acquisition of all the issued and outstanding
stock of New BMG. Pursuant to the Merger Agreement, each issued and
outstanding share of BMG Common Stock (except shares owned by BMG as treasury
stock) was canceled and converted into the right to receive a fraction of a
share of NSP Common Stock equal to the Exchange Ratio, and an additional
number of shares of NSP Common Stock was placed in escrow to satisfy any
indemnification claims of NSP under the Merger Agreement. Such additional
shares, net of any indemnification claims, were distributed pro rata to the
former holders of BMG Common Stock on or about July 24, 1999, the first
anniversary of the closing of the Merger. Following receipt of the
Commission's approval of the Spin-off pursuant to the Application, NSP will
cause the assets of BMG to be transferred to New BMG, and New BMG will become
a wholly-owned subsidiary of NSP.
<PAGE>
I have acted as counsel for NSP in connection with the Application and,
as such counsel, I am familiar with the corporate proceedings taken by NSR in
connection with the Transaction as described in the Application.
I have examined originals, or copies certified to my satisfaction, of
such corporate records of NSP and BMG, certificates of public officials,
certificates of officers and representatives of NSP and BMG, and other
documents as I have deemed it necessary to examine as a basis for the
opinions hereinafter expressed. In such examination I have assumed the
genuineness of all signatures and the authenticity of all documents submitted
to me as originals and the conformity with the originals of all documents
submitted to me as copies. As to various questions of fact material to such
opinions I have, when relevant facts were not independently established,
relied upon certificates of officers of NSP and BMG and other appropriate
persons and statements contained in the Application and the exhibits thereto.
The opinions expressed below are subject to the following further
assumptions and conditions:
(a) The Transaction, as contemplated by the Application, shall have
been authorized by the Commission and shall have been consummated
as described in the Application.
(b) The Transaction shall have been duly authorized and approved to
the extent required by the governing documents and applicable
federal or state laws and by the respective Board of Directors of
NSP and BMG, and such authorization or approval shall remain in
full force and effect.
(c) The Commission shall have duly entered an appropriate order or
orders with respect to the Transaction, as described in the
Application, granting and permitting the Application to become
effective under the Act and the rules and regulations thereunder
and the Transaction shall have been consummated in accordance with
the Application.
(d) A registration statement with respect to the shares of NSP common
stock to be issued in connection with the Transaction shall have
become effective pursuant to the Securities Act of 1933, as
amended; no stop order shall have been entered with respect
thereto; and the issuance of securities in connection with the
Transaction shall have been consummated in compliance with the
Securities Act of 1933, as amended, and the rules and regulations
thereunder.
(e) The parties shall have obtained all consents, waivers and releases,
if any, required for the Transaction under all applicable governing
corporate documents, contracts, agreements, debt instruments,
indentures, franchises, licenses and permits.
(f) No act or event other than as described herein shall have occurred
subsequent to the date hereof which would change the opinions
expressed herein.
<PAGE>
(g) The Transaction shall have been consummated as described in the
Application and under my supervision as the General Counsel of NSP
acting for NSP, and all legal matters incident thereto shall be
satisfactory to me.
Based upon the foregoing, and subject to the assumptions and conditions
set forth herein, and having regard to legal considerations which I deem
relevant, I am of the opinion that, in the event that the Transaction is
consummated in accordance with the Application:
1. All laws of the State of Minnesota applicable to the Transaction
will have been complied with.
2. NSP is validly organized and duly existing under the laws of the
State of Minnesota.
3. The shares of NSP common stock issued in connection with the Merger
were validly issued, fully paid and nonassessable, and the holders
thereof are entitled to the rights and privileges appertaining
thereto set forth in the Restated Articles of Incorporation of NSP.
4. NSP legally acquired the shares of common stock of BMG exchanged
for common stock of NSP in connection with the Merger and will
legally acquire the shares of New BMG to be issued in connection
with the Spin-off.
5. The consummation of the Transaction will not violate the legal
rights of the holders of any securities issued respectively by NSP
or its subsidiaries.
I hereby consent to the use of this opinion as an exhibit to the
Application.
Very truly yours,
/s/ Gary R. Johnson
--------------------
Gary R. Johnson,
Vice President and
General Counsel
