As filed with the Securities and Exchange Commission on February 3, 2000
File No . 70-_____
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM U-1 APPLICATION OR DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Sierra Pacific Resources Portland General Electric Company
6100 Neil Road 121 SW Salmon Street
Reno, Nevada 89511 Portland, Oregon 97204
(Name of company or companies filing this statement
and address of principal executive offices)
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Michael R. Niggli Peggy Y. Fowler
Chairman and Chief President and Chief Operating Officer
Executive Officer Portland General Electric Company
Sierra Pacific Resources 121 SW Salmon Street
6100 Neil Road Portland, Oregon 97204
Reno, Nevada 89511 (503) 464-8000
(702) 834-3600
(Name and addresses of agents for service)
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The Commission is requested to send copies of all notices,
orders and communications in connection with this
Application to:
Clifford M. (Mike) Naeve, Esq. Joanne C. Rutkowski, Esq.
Mary Margaret Farren, Esq. LeBoeuf, Lamb, Greene
W. Mason Emnett, Esq. & MacRae, L.L.P.
William C. Weeden 1875 Connecticut Avenue, N.W.
Skadden, Arps, Slate, Washington, D.C. 20009
Meagher & Flom LLP
1440 New York Avenue, N.W. Adam Wenner, Esq.
Washington, D.C. 20005 Vinson & Elkins L.L.P.
1455 Pennsylvania Avenue, NW
Washington, DC 20004
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Table of Contents
Page
Item 1. Description of Proposed Transaction............................... 4
A. Description of the Parties to the Transaction................ 4
1. Sierra Pacific and its subsidiaries..................... 4
a. SPPC............................................... 5
b. Nevada Power....................................... 6
c. Non-Utility Subsidiaries........................... 8
2. PGE and PGH II and their subsidiaries................... 11
a. PGE................................................ 11
b. PGH II............................................. 13
B. Description of the Transaction............................... 14
1. Reasons for the Transaction............................. 14
2. Stock Purchase Agreement................................ 16
3. Background and Negotiations Leading to the
Transaction............................................. 18
C. Sierra Pacific Management Following the Transaction.......... 21
Item 2. Fees, Commissions and Expenses.................................... 21
Item 3. Applicable Statutory Provisions................................... 21
A. Acquisition of PGE and PGH II and Retention of Certain
Businesses................................................... 22
1. Section 10(b)........................................... 23
a. Section 10(b)(1): "Interlocking Relations" or
"Concentration of Control"......................... 24
b. Section 10(b)(2): Reasonableness of Consideration
and Fees........................................... 26
c. Section 10(b)(3): Capital Structure and the Public
Interest........................................... 28
2. Section 10(c)........................................... 30
a. Section 10(c)(1): Lawfulness under Section 8 and
Detriment to Carrying Out Section 11............... 30
i. The Transaction is lawful under Section 8..... 30
ii. The Transaction will not be detrimental
to carrying out the provisions of
Section 11.................................... 30
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(a) Section 11(b)(1) - Single Integrated
Public Utility System.................... 31
(i) Physical Interconnection.......... 35
(ii) Coordination...................... 43
(iii) Single Area or Region............. 46
(iv) Localized Management,
Efficient Operation, and
Effective Regulation.............. 48
Retention and Acquisition of
Non-Utility Businesses............ 50
Retention of the SPPC Gas System.. 51
(b) Section 11(b)(2) - Structure and
Voting Power............................. 54
b. Section 10(c)(2)................................... 55
3. Section 10(f)........................................... 56
B. Financing of the Acquisition................................. 57
1. Overview of the Financing Request....................... 57
2. Parameters for Financing Authorization.................. 60
3. Description of Specific Types of Financing.............. 61
a. Short-Term Debt.................................... 61
b. Long-Term Debt..................................... 62
(i) Terms of Sierra Pacific Indenture........... 63
(ii) Terms of Borrowings from Banks
and Other Financial Institutions............ 65
(iii) Terms of Money Market Notes and
Similar Instruments......................... 65
c. Other Securities................................... 65
d. Interest Rate Risk Management Devices.............. 66
4. Filing of Certificates of Notification.................. 66
Item 4. Regulatory Approval............................................... 67
A. Antitrust Considerations..................................... 67
B. Atomic Energy Act............................................ 68
C. Federal Power Act............................................ 68
D. Nevada PUC................................................... 68
E. Oregon PUC................................................... 69
Item 5. Procedure......................................................... 69
Item 6. Exhibits and Financial Statements................................. 69
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a. Exhibits........................................... 69
b. Financial statements............................... 72
Item 7. Information as to Environmental Effects........................... 74
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Introduction and Request for Commission Action
Pursuant to Sections 9(a)(2) and 10 of the Public Utility Holding
Company Act of 1935 (the "Act"), this Application requests that the Securities
and Exchange Commission (the "SEC" or "Commission") approve the acquisition by
Sierra Pacific Resources ("Sierra Pacific"), which is an exempt intrastate
holding company under the Act, of Portland General Electric Company ("PGE") and
PGH II, Inc. ("PGH II") (the "Transaction"). PGE is a wholly-owned public
utility subsidiary company of Enron Corp. ("Enron"), an exempt holding company
pursuant to Section 3(a)(1) of the Act under Rule 2 thereof. PGH II, an indirect
subsidiary of Enron and an affiliate of PGE, owns several energy-related
companies. Pursuant to the Transaction, Sierra Pacific will acquire from Enron
all of the issued and outstanding common stock of PGE and PGH II, which thereby
will become wholly-owned subsidiaries of Sierra Pacific. Following the
consummation of the Transaction, Sierra Pacific will register with the
Commission as a holding company pursuant to Section 5 of the Act.
PGE is an electric utility company under the Act. Sierra Pacific owns
all of the common stock of Sierra Pacific Power Company ("SPPC"), an electric
and gas company under the Act, and all of the common stock of Nevada Power
Company ("Nevada Power"), an electric utility company under the Act. The
Transaction will not impact the structure of either SPPC or Nevada Power. SPPC
and Nevada Power will continue to be wholly-owned subsidiaries of Sierra Pacific
and will become sister companies to PGE and PGH II.
The Transaction is not subject to shareholder approval of PGE, PGH II,
Enron or Sierra Pacific. Thus, Sierra Pacific and PGE (collectively, the
"Applicants") are not required to file Form S-4 with the Commission regarding
the Transaction. The Transaction will be governed by the terms of a Stock
Purchase Agreement dated as of November 5, 1999 (the "Stock Purchase
Agreement"), by and among Sierra Pacific and Enron. Pursuant to the Stock
Purchase Agreement, Sierra Pacific will acquire from Enron all of the issued and
outstanding common stock of PGE and PGH II for a consideration of $2.1 billion.
As a result of this acquisition, PGE and PGH II will become wholly-owned
subsidiaries of Sierra Pacific.
The acquisition of PGE substantially increases and diversifies the
combined company's asset base, resulting in increased efficiency in the delivery
of services. Pursuant to state mandate, Sierra Pacific currently is divesting
all of its generation plants. Thus, the combination of PGE's assets with Sierra
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Pacific's distribution and transmission assets will result in a broader and more
diverse asset base. The creation of a service company to perform various common
and shared functions among the three operating companies also will help Sierra
Pacific to achieve substantial efficiencies through the combining of functions,
economies of scale, and the sharing of non-generation assets and facilities. The
Applicants anticipate the nominal dollar value of synergies from the Transaction
to be in excess of $40 million per year over a 10-year period.
The Transaction is designed to create a merged company that will be
able to participate more effectively in the increasingly competitive energy
marketplace. By combining with PGE, Sierra Pacific will almost double its
current customer base. In addition, PGE is experiencing higher than national
average annual population growth of approximately 3% and, through PGE, Sierra
Pacific and its shareholders will be able to participate in this rapid growth.
Moreover, while Sierra Pacific's current customer base is predominantly gaming
and mining, PGE's service territory, which contains approximately 44% of
Oregon's population and 60% of Oregon's economic base, is very diverse. This
diversity in the combined company's customer base will enable Sierra Pacific to
generate and sustain substantially increased cash flows from more diverse
sources for further reinvestment or growth.
The Transaction is conditioned, among other things, upon approval by
the SEC, the Oregon Public Utility Commission ("Oregon PUC"), the Federal Energy
Regulatory Commission ("FERC"), and the Nuclear Regulatory Commission ("NRC"),
and on the expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (as amended) (the "HSR
Act").1
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1 The Applicants do not believe the Transaction is subject to the review of
the Public Utilities Commission of Nevada ("Nevada PUC"). Accordingly, the
Applicants filed with the Nevada PUC a Petition for Declaratory Relief
requesting the Nevada PUC disclaim jurisdiction over the Transaction. The
Petition for Declaratory Relief is attached hereto as Exhibit D-1. However,
as described more fully in the concurrent Application/Declaration request
ing approval to form Sierra Pacific Resources Services Company ("Sierra
Pacific Services") (File 70-_____), the Nevada PUC has an open docket to
consider a shared services agreement proposed by Sierra Pacific which
predates the Transaction. The Services Agreement proposed in the concur
rent Application/Declaration will supplant the earlier proposed agreement
in the Nevada PUC docket.
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The Applicants request expedited treatment of this application so
that, upon receipt of other regulatory approvals, Sierra Pacific and Enron will
be in a position to consummate the Transaction promptly. Based on the
anticipated receipt of these other regulatory approvals, the Applicants request
that the Commission issue an order authorizing the Transaction by September 1,
2000. Unless otherwise indicated, all financial information set forth herein is
for the fiscal year ended December 31, 1998.
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
A. DESCRIPTION OF THE PARTIES TO THE TRANSACTION.
1. SIERRA PACIFIC AND ITS SUBSIDIARIES.
Sierra Pacific is a public utility holding company incorporated in the
State of Nevada and currently is exempt from regulation by the Commission
(except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the Act by
order of the Commission. Sierra Pacific Resources, Holding Co. Act Release No.
27054 (July 26, 1999) [hereinafter Sierra Pacific]. Nevada Power and SPPC,
described below, are wholly-owned operating subsidiaries of Sierra Pacific.
Sierra Pacific is headquartered in Reno, Nevada.
The common stock of Sierra Pacific, par value $1 per share ("Sierra
Pacific Common Stock"), is listed on the New York Stock Exchange (the "NYSE"),
under the symbol SRP. As of the close of business on December 31, 1999, there
were 78,428,480 shares of Sierra Pacific Common Stock issued and outstanding.
For the year ended December 31, 1998, Sierra Pacific's operating
revenues on a consolidated basis were approximately $741.8 million, of which
$7.5 million are attributable to non-utility activities. Consolidated assets of
Sierra Pacific and its subsidiaries at December 31, 1998, were approximately
$2.0 billion, of which approximately $1.6 billion consisted of net utility plant
and equipment. These figures, however, do not completely reflect the financial
strength of Sierra Pacific given that, on July 28, 1999, Sierra Pacific merged
with Nevada Power. For the nine months ending September 30, 1999, Sierra
Pacific's operating revenues on a consolidated basis were approximately $899.2
million, of which $2.7 million are attributable to non-utility activities.
Consolidated assets of Sierra Pacific and its subsidiaries at September 30,
1999, were approximately $5.3 billion, of which approximately $3.8 billion
consisted of net utility plant and equipment. Once calendar year 1999
information is available, Applicants will update the information provided
herein.
Sierra Pacific's principal executive office is located at 6100 Neil
Road, Reno, Nevada 89511. At December 31, 1998, Sierra Pacific and its
subsidiaries employed 1,476 employees, of which 1,446 were employed by SPPC.
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More detailed information concerning Sierra Pacific and its
subsidiaries is contained in Sierra Pacific's and SPPC's Annual Reports on Form
10-K for the year ended December 31, 1998, which are incorporated herein by
reference as Exhibits G-1 and G-3, respectively.
a. SPPC
SPPC is a public utility incorporated in the State of Nevada. SPPC
provides electric service to approximately 294,000 retail customers in northern
Nevada and northeastern California. SPPC also sells electric power at wholesale.
In the Reno/Sparks area of northwestern Nevada, SPPC distributes natural gas at
retail to approximately 105,000 customers and provides water service to about
67,000 customers. During 1998, 87% of SPPC's revenues were from retail sales of
electricity, natural gas and water in Nevada, 5% from retail sales of
electricity in California and 8% from wholesale sales of electricity and gas.
SPPC's 1998 electric and gas operating revenues, which totaled $685.2 million,
were comprised of its electric business ($585.7 million, or 85%) and its natural
gas business ($99.5 million, or 15%). Of these 1998 electric and gas operating
revenues, $644.5 million, or 94% were from sales in Nevada and $40.7 million, or
6% were from sales in California. In addition SPPC's water business operating
revenues were $49.1 million. As of December 31, 1998, SPPC's net utility plant
in service was $ 1.6 billion. A map of SPPC's electric/gas service area is
attached as Exhibit E-1.
During 1998, the peak electric demand experienced by SPPC was 1423
megawatts ("MW"). SPPC served this demand, plus a reserve margin, with a
combination of the following: (i) 1049 MW of power generated by plants owned by
SPPC, (ii) 323 MW of power purchased pursuant to long term contracts, and (iii)
additional firm and short-term power purchases. SPPC's fuel requirements for
electric generation were provided by natural gas (60.7%), coal (39.0%) and oil
(0.3%).
As of December 31, 1998, SPPC's electric transmission facilities
consisted of approximately 4,000 overhead pole line miles and 81 substations.
Its electric distribution facilities consisted of approximately 9,000 overhead
pole line miles, 4,500 underground cable miles and 178 substations.
SPPC's natural gas business consists of providing local distribution
service in the Reno/Sparks area that accounted for $99.5 million in 1998
operating revenues, or 13.6% of total SPPC operating revenues. SPPC has
contracted for firm winter-only and annual natural gas supplies with Canadian
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and domestic suppliers to meet the firm gas requirements of its local
distribution and electric operations. The contracts total 157,000 decatherms per
day through March 1999; 93,000 decatherms per day through April 1999; 78,000
decatherms per day for May through October 1999; and 65,000 decatherms per day
for the remainder of 1999. SPPC's firm natural gas supply is supplemented with
natural gas storage services and supplies from a Northwest Pipeline Company
facility located at Jackson Prairie in southern Washington and a liquid natural
gas storage facility. For 1998, SPPC's total local gas distribution supply
requirements were 14.9 million decatherms and its electric generating fuel
requirements were 35 million decatherms. As of December 31, 1998, SPPC owned and
operated 1,296 miles of three-inch equivalent natural gas distribution lines.
SPPC also serves approximately 67,000 water customers in the Reno and
Sparks areas of Nevada. SPPC's water system is closely associated with its
natural gas system, with the service areas of each system largely overlapping.
The two systems have been operated on an integrated basis within a single
division of SPPC since the late 1800s. As of December 31, 1998, SPPC owned
approximately $274 million in water assets, with total water production of 22.1
billion gallons. SPPC experienced during 1998 a peak day send-out of water of
130.9 million gallons.
SPPC is subject to regulation by the Nevada PUC and the California
Public Utilities Commission ("California PUC") with respect to its rates for
retail sales of electricity as well as terms of service, issuance of certain
securities, siting of and necessity for generation and certain transmission
facilities, accounting and other matters. The Nevada PUC also has jurisdiction
with respect to SPPC's gas and water business. In addition, SPPC is subject to
regulation by FERC under the Federal Power Act with respect to rates for the
sale of electricity for resale, the terms and conditions for providing
interstate electric transmission service, and other matters. SPPC also is
subject to applicable federal and state environmental regulations.
b. NEVADA POWER
Sierra Pacific and Nevada Power merged on July 28, 1999, which merger
was approved by the Commission under Section 9(a)(2) on July 26, 1999. Sierra
Pacific, supra. As a result of that transaction, Nevada Power became an
operating subsidiary of Sierra Pacific, as was SPPC. Nevada Power is a public
utility, incorporated in the State of Nevada, that provides retail electric
service predominantly to the more than 1.3 million residents of Clark County,
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Nevada, with limited service provided to the Federal Department of Energy (U.S.
Government Test Site) in Nye County, Nevada. Both Clark County and Nye County
are located in southern Nevada. Nevada Power also sells electric power at
wholesale. A map of Nevada Power's service area is attached hereto as Exhibit
E-2.
Nevada Power owns plants with generating capacity totaling 1,939 MW.
Nevada Power purchases an additional 750 MW of generating capacity, including
(i) 235 MW of Hoover Dam power purchased pursuant to a contract with the State
of Nevada, (ii) 210 MW of power purchased pursuant to a contract with Nevada
Sun-Peak Limited Partnership, an independent power producer, and (iii) 305 MW of
power purchased pursuant to contracts with four qualifying facilities. In
addition, Nevada Power has agreements with other suppliers to purchase 965 MW of
firm capacity and associated energy. During 1998, the peak demand experienced by
Nevada Power was 3,855 MW. Nevada Power served this demand, plus a reserve
margin, with a combination of its 1,939 MW of owned generating capacity, 750 MW
of purchased generating capacity and additional firm and short-term power
purchases. To obtain additional firm capacity and associated energy to meet peak
needs, Nevada Power utilizes a competitive bidding process and spot market
purchases. During 1998, 67% of the energy generated by Nevada Power's plants
came from coal-fired stations and 33% from natural gas- fired stations.
As of December 31, 1998, Nevada Power owned approximately 1,650 miles
of electric transmission facilities (a portion of that under shared ownership),
114 transmission and distribution substations, and a distribution system
consisting of approximately 3,162 overhead pole line miles and 9,338 underground
cable miles.
Nevada Power is subject to regulation by the Nevada PUC with respect
to its rates for retail sales of electricity as well as terms of service,
issuance of certain securities, siting of and necessity for generation and
certain transmission facilities, and accounting and other matters. In addition,
Nevada Power is subject to regulation by FERC under the Federal Power Act with
respect to rates for the sale of electricity for resale, the terms and
conditions for providing interstate electric transmission service, and other
matters. Nevada Power is also subject to applicable federal and state
environmental regulations.
For the year ended December 31, 1998, Nevada Power's utility operating
revenues on a consolidated basis were approximately $874 million. Consolidated
assets of Nevada Power and its subsidiaries at December 31, 1998, were
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approximately $2.6 billion, of which approximately $1.9 billion consisted of net
electric plant and equipment.
Nevada Power's principal executive office is located at 6226 West
Sahara Avenue, Las Vegas, Nevada, 89146. At December 31, 1998, Nevada Power
employed approximately 1,888 employees.
More detailed information concerning Nevada Power is contained in
Nevada Power's Annual Report on Form 10-K for the year ended December 31, 1998,
which is incorporated herein by reference as Exhibit G-5.
c. NON-UTILITY SUBSIDIARIES
Sierra Pacific is engaged in various non-utility businesses through
the following material subsidiaries:
1. Tuscarora Gas Pipeline Company: Tuscarora Gas Pipeline Company was formed as
a wholly-owned subsidiary in 1993 for the purpose of entering into a partnership
(the Tuscarora Gas Transmission Company, or "TGTC") with a subsidiary of
TransCanada, a non-affiliated Canadian natural gas transportation company, to
develop, construct and operate a natural gas pipeline to serve an expanding gas
market in Reno, northern Nevada and northeastern California. Sierra Pacific has
an investment of approximately $15.5 million in this subsidiary. In 1995, TGTC
completed construction and began service of its 229-mile pipeline extending from
Malin, Oregon to Reno, Nevada. At Malin, Oregon, TGTC interconnects with Pacific
Gas Transmission Company ("PGT"), a major interstate natural gas pipeline
extending from Oregon to the U.S./Canadian border. The PGT system provides TGTC
customers access to natural gas reserves in the Western Canadian Sedimentary
basin, one of the largest natural gas reserve basins in North America. As an
interstate pipeline, TGTC provides only transportation service. During 1998,
SPPC and Sierra Pacific were the two largest customers of TGTC, contributing
89.3% and 7.6% of TGTC's revenues, respectively. Malin, Oregon began taking
service from TGTC during the later part of 1996. The Sierra Army Depot at
Herlong, California began taking service from TGTC during the later part of
1997. In 1998, TGTC began serving two new customers, the United States Gypsum
Company, located north of Empire, Nevada and HL Power Company located northwest
of Wendel, California.
2. Sierra Energy Company d/b/a e-three: Sierra Energy Company d/b/a
e-three ("e-three") is an unregulated, wholly-owned subsidiary that provides
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energy-related products and services both inside and outside SPPC's service
territory. e-three recently has entered into a 50% Nevada limited liability
company, e-three Custom Energy Solutions LLC, with a subsidiary of Nevada Power
to do performance contracts and similar energy-related services in southern
Nevada.
3. Lands of Sierra, Inc.: Lands of Sierra, Inc. ("LOS") was organized in 1964 to
develop and manage SPPC non-utility property in Nevada and California. In recent
years, Sierra Pacific has focused on selling the LOS properties and the
properties remaining include only vacant land in Nevada and land leases in the
Lake Tahoe region.
4. Sierra Pacific Energy Company: Sierra Pacific Energy Company ("SPEC") markets
a package of technology and energy-related products and services in Northern and
Southern Nevada. SPEC sell products and services related to home, entertainment,
and communications in Northern Nevada under the brand name of Sierra Pacific
Energy, and in Southern Nevada under the brand name Nevada Power Services,
through affiliations and agreements with its suppliers. SPEC offers satellite
television, cellular telephone services and in the future, plans to offer
computer leasing and other technological and energy related services through a
retail store in Northern Nevada, kiosk locations in Southern Nevada and on its
website. Upon approval of the Nevada PUC, and after receiving its license as an
Alternative Seller of Electricity under Nevada's restructuring act, SPEC will
begin selling electricity along with its other products and service to all
eligible customers in Northern and Southern Nevada.
Sierra Pacific also has several immaterial subsidiaries, listed by
category as follows:
1. Non-profit making subsidiaries created to assist other business activities.
Commonsite Inc.: Commonsite Inc. is a Nevada corporation owning the real
estate occupied by Reid Gardner 4, a coal fired plant owned jointly by
Nevada Power and the California Department of Water Resources.
NVP Capital I: NVP Capital I is a Delaware trust needed for Nevada Power to
issue QUIPS, Quarterly Income Preferred Securities.
NVP Capital II: NVP Capital II is a Delaware trust needed for Nevada Power
to issue QUIPS, Quarterly Income Preferred Securities.
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2. Other Subsidiaries.
Nevada Electric Investment Company: Nevada Electric Investment Company
("NEICO") is a Nevada corporation that, in the past, has conducted
energy-related business activities. NEICO owns two corporations that once
were involved in mining activities (Genwal Coal Co. and Castle Valley
Resources, Inc.), and another corporation that has never conducted business
(Alkan Mining Company). All three of these corporations are listed below.
NEICO was inactive for a period of years, and in recent months, has
obtained ownership interests in three new limited liability companies
involved in various energy-related activities.
Northwind Las Vegas, L.L.C.: NEICO owns 50% of this Nevada limited
liability company. UTT Nevada. Inc., an affiliate of Unicom, owns the other
50%. Northwind Las Vegas, L.L.C. develops opportunities for district
heating and cooling within Nevada.
Northwind Aladdin, LLC: NEICO owns 25% of this Nevada limited liability
company. UTT Nevada. Inc., an affiliate of Unicom, owns the other 75%.
Northwind Aladdin, LLC will construct, own and operate district heating and
cooling facilities at the Aladdin casino complex, currently under
construction.
e-three Custom Energy Solutions, LLC: NEICO owns 50% of this Nevada limited
liability company, and e-three, a wholly owned subsidiary of Sierra
Pacific, owns the other half. This limited liability subsidiary recently
was formed to enter into performance contracts and similar energy-related
services in southern Nevada.
3. Inactive Subsidiaries.
Sierra Water Development Company - A Nevada corporation formerly engaged in
water exploration activities in northern Nevada.
Sierra Gas Holdings Company - A Nevada corporation formerly engaged in gas
and oil exploration.
Great Basin Energy Company - A Nevada corporation, which has never done any
business, but was formed to hold real property for a proposed power plant
that was never constructed.
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Genwal Coal Co. - A Nevada corporation that is inactive but kept in good
standing. Assets were sold on January 1, 1995.
Castle Valley Resources Inc. - A Nevada corporation that is inactive but
kept in good standing. Previously, it was the sales arm of Genwal Coal Co.
Sierra Pacific Communications: A Nevada corporation established to explore
fiber optics opportunities in Nevada.
Alkan Mining Company - A Nevada corporation owned entirely by NEICO that
has never conducted business but has been kept in good standing.
Nevada Power recently created several Nevada limited liability companies
that have conducted no business activities but are in good standing. They
are: Nevada Power Services, LLC; Nevada Power Choices, LLC; Nevada Power
Solutions, LLC; Las Vegas Energy, LLC; Nevada Solutions, LLC; Power Choice,
LLC; Nevada Power Energy Services, LLC; and Nevada Choices, LLC. It is
anticipated one or more of these companies will engage in the future in
competitive energy markets.
2. PGE AND PGH II AND THEIR SUBSIDIARIES.
a. PGE
PGE, a wholly-owned subsidiary of Enron, is a public utility company
incorporated in the state of Oregon. PGE provides electric service to
approximately 704,000 customers in northwestern Oregon. PGE also sells electric
power at wholesale. For the year ended December 31, 1998, PGE's utility
operating revenues on a consolidated basis were approximately $1.1 billion. A
map of PGE's electric service area is attached as Exhibit E-3.
During 1998, the peak electric demand experienced by PGE was 4,073 MW.
PGE served this demand, plus a reserve margin, with a combination of the
following: (i) 2,122 MW of power generated or reserved by plants owned by PGE,
(ii) 1,894 MW of power purchased pursuant to long term contracts, and (iii)
additional firm and short-term power purchases. PGE's fuel requirements for
electric generation were provided by hydroelectric (14%), natural gas (19%), and
coal (25%).
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At December 31, 1998, PGE's electric transmission facilities consisted
of approximately 1,430 overhead pole line miles wholly owned, approximately 565
overhead pole line miles jointly owned, and 45 substations. Its electric
distribution facilities consisted of approximately 8,800 overhead pole line
miles, 5,600 underground cable miles, and 152 substations.
PGE wholly-owns the following subsidiaries:
121 SW Salmon Street Corporation - An Oregon corporation leasing PGE's
headquarters complex in Portland, Oregon and subleasing the complex to PGE.
World Trade Center Northwest Corporation, a wholly-owned subsidiary of 121 SW
Salmon Street Corporation and also an Oregon corporation manages the World Trade
Center in Portland, Oregon, and promotes and provides services to international
commerce.
Portland General Transport Corp. - An Oregon corporation formed to sell
segmented gas pipeline capacity. Portland General Transport Corp. is currently
inactive.
Salmon Springs Hospitality Group - An Oregon corporation providing operations
and catering services to PGE and, to the extent available, to third parties in
meeting facilities of the World Trade Center Building Two complex. The assets
and revenues of Salmon Springs Hospitality Group are de minimis and, as such,
the subsidiary is immaterial for purposes of the Act.
PGE is subject to regulation by the Oregon PUC with respect to its
rates for retail sales of electricity as well as terms of service, issuance of
certain securities, accounting and other matters. In addition, PGE is subject to
regulation by the FERC under the Federal Power Act with respect to rates for the
sale of electricity for resale, the terms and conditions for providing
interstate electric transmission service, and other matters. PGE also is subject
to applicable federal and state environmental regulations.
PGE's principal executive office is located at 121 SW Salmon Street,
Portland, Oregon 97204. At December 31, 1998, PGE employed approximately 2,728
employees.
More detailed information concerning PGE is contained in PGE's Annual
Report on Form 10-K for the year ended December 31, 1998, which is incorporated
herein by reference as Exhibit G-7.
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b. PGH II
PGH II, a wholly-owned indirect subsidiary of Enron and an affiliate
of PGE, is engaged in developing several non-utility lines of business. The PGH
II subsidiaries listed below currently generate no material revenue and hold de
minimis assets.
Columbia-Willamette Development Company - An Oregon corporation, currently
inactive, formerly engaged in real estate development in Oregon and Washington.
Enron MicroClimates, Inc. - An Oregon corporation organized to design, own, and
operate heating, cooling, and network infrastructure.
Portland General Distribution Company - An Oregon corporation established to
hold minority corporate interests in distribution and network services
investment opportunities. The services provided include operation and
maintenance services for utility distribution systems.
Portland General Operations Company, Inc. ("PGO") - PGO, an Oregon corporation,
provides consulting services to global markets regarding equipment and
engineering design and maintenance, project management, and alternative
financing solutions for electric and telecommunications facilities.
Tule Hub Services Company - An inactive Oregon corporation established to engage
in the business opportunity of electric trading hub transaction information
management.
PGH II holds a 99% ownership interest in the following limited
liability companies, with the remaining 1% being held by Portland General
Distribution Company:
Columbia-Pacific Distribution Services Company, LLC - An Oregon limited
liability company established to provide operation and maintenance services for
utility distributions systems.
Enron Distribution Services Company, LLC - A Delaware limited liability company
established to hold investments in transmission and distribution services
companies to be acquired.
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Portland Energy Solutions Company, LLC - An Oregon limited liability company
established to develop opportunities in district heating and cooling in downtown
Portland, Oregon.
B. DESCRIPTION OF THE TRANSACTION.
1. REASONS FOR THE TRANSACTION.
For the past several years prior to their merger, Sierra Pacific and
Nevada Power carefully monitored developments in the electric and natural gas
industry and especially the growth of competition in the western region. Sierra
was an active participant in the deregulation of the California electric utility
industry and both Sierra Pacific and Nevada Power were active participants in
deregulation proceedings in Nevada, which commenced with the passage of a
deregulation and restructuring law by the Nevada legislature in 1997. Both
companies adopted strategies focused on growing and improving their distribution
and transmission businesses and providing a variety of energy-related services
to small and medium sized customers. The merger of the two companies implemented
their strategies by creating a very robust and rapidly growing distribution
business with a much broader customer base. However, both companies appreciated
the difficulties which small and medium-sized utilities would face in competing
with larger utility and energy-service companies. Both companies engaged
investment banks and other industry experts to explore strategic alternatives
and possible business combinations to advance their strategic goals. After
considering various possible combinations, the Boards of both companies voted to
merge on April 29, 1998. After the merger was consummated on July 28, 1999, the
combined company (Sierra Pacific) continued to monitor the markets and focus on
its pre-merger strategy of growing its customer base, increasing its
distribution and transmission businesses, and increasing its scale of operations
so as to improve service and compete more effectively in rapidly deregulating
utility markets. Sierra Pacific continued to explore opportunities in the
western region to advance its corporate strategy.
In the week of August 11, 1999, Sierra Pacific learned that Enron had
engaged investment bankers to assist it in the sale of PGE and that these
bankers were soliciting interest from potential buyers, including Sierra
Pacific. Sierra Pacific's senior management then conducted an internal
preliminary review to determine whether the acquisition of PGE would fit in with
its corporate strategy of growing customer base, expanding its distribution and
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transmission businesses, and enhancing its competitive position in the region.
Management concluded that an acquisition of PGE would advance its strategy and,
after presentations to the Planning and Finance committee of the Board of
Directors, engaged the investment banking firm of Salomon Smith Barney and the
law firm of Skadden Arps Slate Meagher & Flom ("Skadden") to assist it in the
evaluation. After submitting first and second-round bids, Sierra Pacific was
invited to negotiate a definitive stock purchase agreement with Enron consistent
with general terms and conditions and pricing parameters previously approved and
authorized by the Board of Directors in its final bid. The Board authorized
management to negotiate a definitive agreement, which the Board formally adopted
and approved on November 5, 1999.
The Board believes that the acquisition of PGE will put the company in
a position to become one of the major and most significant transmission and
distribution companies in the western region, and that it will substantially
enhance the company's competitive position by increasing its size, financial
flexibility, and securing significant future growth opportunity and potential,
all of which will benefit Sierra Pacific, its shareholders, and employees,
including all the following:
1. Customer Growth, Expansion Potential, and Broader Customer Base
The acquisition of PGE will bring to the combined company
approximately 700,000 retail customers located in the Portland metropolitan
area. The acquisition will increase Sierra Pacific's total retail customer base
to approximately 1.8 million customers. Moreover, PGE is experiencing higher
than national average annual population growth of approximately 3%. Through PGE,
Sierra Pacific and its shareholders will be able to participate in this rapid
growth. In addition, while Sierra Pacific's current customer base is
predominantly gaming and mining, PGE's service territory, which contains
approximately 44% of Oregon's population and 60% of Oregon's economic base, is
very diverse. PGE's revenues are derived from residential, paper, technology,
industrial, and wholesale businesses. While PGE's 20 largest customers represent
approximately 22% of its total retail revenues, these revenues are derived from
approximately 10 different industries. In addition, 41% of its retail sales are
derived from residential customers and 39% from small commercial operations.
Thus, the addition of PGE's customer base will result in significantly greater
diversity in the combined company's customer base.
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2. Financial Strength and Benefits
The acquisition of PGE should substantially enhance and improve Sierra
Pacific's position in the utility market place. Its service territories will now
include three of the fastest growing regions in the western United States. After
the acquisition of PGE, the combined company's revenues should increase to
approximately $2.9 billion annually and its customer base will increase to
approximately 1.8 million. As a result, the combined company should be able to
generate and sustain substantially increased cash flows from more diverse
sources for further reinvestment or growth. The combined company also should
enjoy the benefits resulting from greater and more sustained financial stability
through its substantially larger size. Finally, the acquisition of PGE permits
Sierra Pacific to redeploy the proceeds of its generation sales in a timeframe
consistent with the realization of those proceeds and in the manner which is not
only consistent with but also substantially advances the company's strategy.
3. Operation Efficiencies
As a result of the acquisition of PGE and creation of a service
company to perform various common and shared functions among the three operating
companies, Sierra Pacific will be able to achieve substantial efficiencies
through the combination of functions, economies of scale, and the sharing of
assets and facilities. PGE's relative proximity to SPPC and Nevada Power should
enhance the combined company's ability to capture and sustain these
efficiencies. In addition, PGE's winter peaking load should help to balance the
Las Vegas summer peaking load experienced by Sierra Pacific by smoothing out
cash flows and enabling better risk management.
2. STOCK PURCHASE AGREEMENT.
Pursuant to the Stock Purchase Agreement, attached hereto as Exhibit
B-1, Sierra Pacific will acquire all of the issued and outstanding common stock
of PGE and PGH II (the "Shares"), which will thereby become wholly- owned
subsidiaries of Sierra Pacific. The proposed transaction, which is subject to
customary regulatory approvals, is expected to close in the second half of 2000.
Under the terms of the Stock Purchase Agreement, Enron will sell PGE
and cause Portland General Holdings, Inc. to sell PGH II to Sierra Pacific for
$2.1 billion in cash, reduced by the book value of Enron's obligations remaining
as of the closing date, pursuant to the order of the Oregon Public Utilities
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Commission dated June 4, 1997 approving Enron's acquisition of PGE ("Enron's
Merger Payment Obligation"). Sierra Pacific will assume Enron's Merger Payment
Obligation as of the closing date.
The proposed transaction is subject to certain customary closing
conditions, including, without limitation, (i) the absence of any injunction,
order, law or regulation preventing consummation of the sale of the Shares, (ii)
receipt by Enron and Sierra Pacific of required statutory approvals, (iii)
performance of obligations of Enron and Sierra Pacific pursuant to the Stock
Purchase Agreement and (iv) the accuracy of Enron's and Sierra Pacific's
representations and warranties. In addition, the obligation of Sierra Pacific to
purchase the Shares is subject to the condition that since November 5, 1999, no
material adverse effect on PGE shall have occurred.
The Stock Purchase Agreement contains certain covenants of the parties
pending the consummation of the Transaction. Generally, Enron must cause PGE,
PGH II and their subsidiaries to carry on their respective businesses in the
ordinary course consistent with past practice and use all reasonable efforts to
preserve intact their present business organizations and goodwill. The Stock
Purchase Agreement also contains certain restrictions and limitations of PGE,
PGH II and their subsidiaries with respect to, among other things, dividends on
and repurchases of their capital stock, issuance of securities, amendment of
charter documents, acquisitions, dispositions, indebtedness, capital
expenditures, compensation and benefits, nuclear operations, contracts, the
solicitation of employees and accounting matters. Subject to certain exceptions,
cash dividends on PGE common stock between November 5, 1999, and the closing
date are limited to the lesser of: (i) the aggregate amount of consolidated net
income of PGE for the period from January 1, 1999, through the closing date;
(ii) an aggregate amount of $129.1 million for 1999, $142.6 million for 2000,
and $143.8 million for 2001 (regardless of when such dividends are actually
declared and paid and prorated for the year in which the closing occurs); less,
in the case of (i) and (ii), any dividends declared and paid by PGE to Enron
between January 1, 1999, and November 5, 1999. Article V of the Stock Purchase
Agreement, attached hereto as Exhibit B-1, provides additional details regarding
the conduct of business pending the closing.
The Stock Purchase Agreement may be terminated under certain
circumstances, including by mutual consent of the parties; by either party if
(i) there is a permanent injunction order by any federal or state court of
competent jurisdiction; (ii) the closing shall not have occurred on or before
November 5, 2000 or May 5, 2001 if certain statutory approvals are not obtained;
or (iii) any of the required statutory approvals have been denied by a final and
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nonappealable order, judgment or decree. Furthermore, the Stock Purchase
Agreement may be terminated by Sierra Pacific if there is a breach or violation
by Enron of any covenant, representation or warranty which resulted in a PGE
Material Adverse Effect, as defined in the Stock Purchase Agreement, and such
breach or violation is not cured by the earlier of the closing date or within 60
days of notice to Enron. The Stock Purchase Agreement may be terminated by Enron
if there is a material breach or violation by Sierra Pacific of any covenant,
representation or warranty and such breach or violation is not cured by the
earlier of the closing date or within 60 days of notice to Sierra Pacific. If
the Stock Purchase Agreement is terminated because of a party's breach or
violation of its covenants or its representations and warranties, then the
breaching party will pay the other party an amount in cash equal to all
documented out-of-pocket expenses and fees incurred by the non-breaching party.
This reimbursement of expenses will be in addition to any rights that the
non-breaching party may have at common law or otherwise.
3. BACKGROUND AND NEGOTIATIONS LEADING TO THE TRANSACTION.
During the week of August 11, 1999, Steve Oldham, Vice President,
Corporate Development and Strategic Planning, learned from the investment
banking firm of SG Barr Devlin, which had been engaged by Enron, that Enron was
interested in selling all of its interest in PGE for cash in a transaction to be
structured as a stock purchase. Mr. Oldham and his staff conducted a preliminary
evaluation of a potential acquisition of PGE by Sierra Pacific and concluded
that such an acquisition would complement and advance Sierra Pacific's strategic
vision, and that the timing would be conducive to the redeployment of the
proceeds of the sale of generation in a timeframe reasonably concomitant with
the sale of Sierra Pacific's generating plants. Mr. Oldham presented the
opportunity to Mr. Niggli, CEO, of Sierra Pacific, and Malyn Malquist, President
and COO of Sierra Pacific.
Management then presented the opportunity to the Planning and Finance
Committee of the Board of Directors of Sierra Pacific on August 18, 1999, at
which time the Committee authorized management to retain the investment banking
firm of Salomon Smith Barney to analyze the transaction. The Committee directed
management to conduct further due diligence preparatory to submitting a
non-binding first round "indication of interest" bid.
Management, Salomon Smith Barney, and Sierra Pacific's outside
attorneys, Skadden, then conducted various evaluations and analyses and
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presented their findings to the Planning and Finance Committee at a meeting on
September 10, 1999, after which the Committee authorized management to submit a
preliminary non-binding first round "indication of interest" bid.
On September 13, 1999, Sierra Pacific submitted to Enron a
non-binding "indication of interest" bid to purchase the stock of PGE.
On September 15, 1999, Sierra Pacific was informed by SG Barr Devlin
that Sierra Pacific had been selected to conduct on-site due diligence and to
submit, based on that due diligence, a second-round bid. Management and its
outside experts and advisors were invited to PGE to participate in a
presentation by senior management of PGE and to conduct on-site due diligence
preparatory to submitting a second-round bid.
On September 21, 1999, the Planning and Finance Committee, senior
management, and its outside experts and advisors, presented to the Board of
Directors of Sierra Pacific an analysis and evaluation of a proposed acquisition
of PGE, after which presentation the Board authorized management to conduct the
invited due diligence and to report the results to the Board. On September 30,
1999, Mr. Niggli, Mr. Malquist, key members of Sierra Pacific's senior
management, and Sierra Pacific's outside experts and advisors went to Portland
to participate in a management discussion and presentation by PGE in connection
with the detailed due diligence to be conducted immediately thereafter.
From September 30 to October 4, 1999, key members of Sierra Pacific's
senior management, various other employees, and Sierra Pacific's outside experts
and advisors, including Salomon Smith Barney, Skadden, and Duke Engineering,
conducted due diligence on all aspects of PGE, its operations, and future
prospects.
On October 8, 1999, management and the Sierra Pacific's outside
experts and advisors reported at a meeting of the Board of Directors of Sierra
Pacific on all aspects of the due diligence which had been conducted. The Board
of Directors requested that management and its experts and advisors continue to
conduct due diligence and to report to the Board at a follow-up meeting on
October 15, 1999.
On October 15, 1999, management and its outside experts and advisors
presented to the Board further conclusions resulting from continued due
diligence and updated management's valuations and risk analyses, after which the
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Board of Directors requested further refinements and analyses to be presented at
a special meeting of the Board of Directors to be convened on October 22, 1999.
On October 22, 1999, management and its outside experts and advisors
presented their findings and conclusions to the Board of Directors on final due
diligence, valuation, and risk analyses, and presented terms and conditions of a
proposed stock purchase agreement to be submitted together with a second round
bid. The Board of Directors authorized management to submit their proposed stock
purchase agreement and second-round bid.
In late October, 1999, a representative of SG Barr Devlin informed
Steve Oldham that Sierra's senior management was invited to come to Houston to
participate in discussions and negotiations to clarify certain aspects of its
proposed definitive stock purchase agreement, and to discuss other matters
relative to a proposed transaction.
On November 1, 1999, key members of Sierra Pacific's senior management
and representatives of Salomon Smith Barney and Skadden met with senior members
of Enron's management together with Enron's outside consultants and legal
counsel to clarify aspects of a proposed stock purchase agreement and to
negotiate terms and conditions for a final agreement. Negotiations continued
until November 4, 1999, at which time senior management of both Enron and Sierra
Pacific reached consensus on final terms and conditions and on price, subject to
approval of the Boards of Directors of both companies.
On November 5, 1999, senior management and its outside experts and
advisors presented to the Board of Directors of Sierra Pacific the terms and
conditions and price of a proposed final stock purchase agreement, after which
time the Board of Directors authorized Mr. Niggli to execute a final stock
purchase agreement on the terms and conditions presented.
On November 5, 1999, Mr. Niggli was informed that the agreement had
been approved at a special meeting of the Board of Directors of Enron, at which
time Mr. Niggli and Mr. J. Mark Metts, Executive Vice President, Corporate
Development, of Enron, executed the stock purchase agreement.
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C. SIERRA PACIFIC MANAGEMENT FOLLOWING THE TRANSACTION.
The management of Sierra Pacific after the transaction will remain
unchanged. The Sierra Pacific Board of Directors will continue to consist of the
current 14 members. The corporate headquarters of Sierra Pacific and the
principal offices of the natural gas and water business units will remain in
Reno, Nevada. The headquarters of SPPC and Nevada Power will remain in Las
Vegas, Nevada. The headquarters of PGE will remain in Portland, Oregon. Nevada
Power, SPPC, and PGE will operate on an integrated basis as the public utility
subsidiaries of Sierra Pacific.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, by Sierra Pacific in connection with the Transaction are estimated
as follows:
HSR filing fee..................................................... **
Legal fees and expenses ........................................... **
Accountants' fees.................................................. **
Investment bankers' fees and expenses.............................. **
Consultants and other (public relations, regulatory support,
travel, integration, printing, exchange listing fees, etc.)........ **
-----------
TOTAL (estimated) ............................................ $21,400,000
**To be filed by amendment
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
The following sections of the Act and the Commission's rules relate to
the Transaction:
Section of the Act Activities to which the Section may be applicable
- --------------------------------------------------------------------------
4,5 and rules Registration of Sierra Pacific as a holding company
thereunder following consummation of the Transaction.
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6, 7 and rules Issuance of securities by Sierra Pacific.
thereunder
9(a), 10 and Acquisition by Sierra Pacific of common stock of PGE
rules thereunder and PGH II.
8, 11(b) Retention by Sierra Pacific of the operations of the
21 and rules gas system of SPPC and of various non-utility
thereunder businesses.
A. ACQUISITION OF PGE AND PGH II AND RETENTION OF CERTAIN BUSINESSES
Section 9(a)(2) of the Act provides that unless the acquisition has
been approved by the Commission under Section 10, it shall be unlawful for any
person to acquire, directly or indirectly, the securities of a public utility
company, if that person will, by virtue of the acquisition, become an affiliate
of that public utility and any other public utility or holding company. The term
"affiliate" for this purpose means any person that directly or indirectly owns,
controls, or holds with power to vote, five percent or more of the outstanding
voting securities of the specified company. Section 9(a)(2) is applicable to the
Transaction because Sierra Pacific - which already is affiliated with two public
utility companies, SPPC and Nevada Power - will acquire the securities of PGE,
also a public utility company.
As set forth more fully below, the Transaction fully complies with all
the applicable provisions of Section 10 of the Act and should be approved by the
Commission. Thus:
the Transaction will not create detrimental interlocking relations or a
detrimental concentration of control;
the consideration and fees to be paid in the Transaction are fair and
reasonable;
the Transaction will not result in an unduly complicated structure for
post-Transaction Sierra Pacific system;
the Transaction is in the public interest and in the interests of investors
and consumers;
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the post-Transaction Sierra Pacific system will be a single integrated
electric utility system;
the Transaction equitably distributes voting power among the investors in
the combined company and does not unduly complicate the structure of the
holding company;
the Transaction tends toward the economical and efficient development of an
integrated electric and gas utility system; and
the Transaction will comply will all applicable state laws.
The Standards of Section 10
The statutory standards to be considered by the Commission in
evaluating the Transaction under Section 9(a)(2) are set forth in Sections
10(b), 10(c) and 10(f) of the Act.
1. SECTION 10(B).
Under Section 10(b) of the Act, the Commission must approve the
Transaction unless the Commission finds that:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public-utility companies, of a kind or to
an extent detrimental to the public interest or the interest of
investors or consumers;
(2) in 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 the 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
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public interest or the interest of investors or consumers or the
proper functioning of such holding company system.
a. SECTION 10(B)(1): "INTERLOCKING RELATIONS" OR
"CONCENTRATION OF CONTROL."
The Transaction will not result in detrimental interlocking relations
or concentration of control. By its nature, any merger or acquisition results in
new links between previously unrelated companies. The Commission has recognized
that such interlocking relationships are permissible in the interest of
efficiencies and economies. Northeast Utilities, Holding Co. Act Release No.
25221 (Dec. 21, 1990), as modified, Holding Co. Act Release No. 25273 (Mar. 15,
1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992)
[hereinafter Northeast Utilities] ("interlocking relationships are necessary to
integrate [merging entities]"). The links that will be established as a result
of the Transaction are not the types of interlocking relationships targeted by
Section 10(b)(1), which was primarily aimed at preventing business combinations
unrelated to operating synergies. There currently are no common directors of
Sierra Pacific and PGE, but following consummation of the Transaction there may
be common directors and officers of Sierra Pacific, SPPC, Nevada Power and PGE.
Such interlocking relationships merely would serve to integrate the merging
companies, and are characteristic of virtually every merger transaction subject
to Section 9(a)(2). Thus, any interlocking relations which do occur will be of
the kind generally approved of by the Commission and will not be detrimental to
interests of consumers, investors or the public.
The Transaction also will not result in a detrimental concentration of
control. While the size of the post-Transaction Sierra Pacific system will be
roughly double its current size, the merged company still will be much smaller
than almost all of its neighboring utilities and holding company systems,
including Southern California Edison, Pacific Gas & Electric, PacifiCorp and
Bonneville Power Administration ("BPA"), which are among the largest utilities
in the country.2 Following the Transaction, Sierra Pacific will have total
- ---------------
2 At December 31, 1998, Pacific Gas & Electric Company had $23 billion in
utility assets and generated $8.9 billion in operating revenues for 1998.
Southern California Edison had $20.7 billion in utility assets and
generated $7.4 billion in operating revenues for 1998. PacifiCorp had $9.1
billion in utility assets as of December 31, 1998 and $4.8 billion in
operating revenues for 1998.
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utility assets of $6.3 billion, total utility revenues of $3.0 billion, and will
serve approximately 1.6 million electric customers, 101,000 natural gas
customers and 67,000 water customers. The post-Transaction Sierra Pacific system
will be considerably smaller than these neighboring utilities and, as a
consequence, Sierra Pacific will have no ability to dominate the region.
Moreover, Sierra Pacific already has committed to divesting all of its existing
generation assets. In any case, the Commission has approved a number of
transactions which resulted in holding companies of a much larger size.3
Section 10(b)(1) also requires the Commission to consider possible
anti-competitive effects of a proposed merger. In this case, the Commission has
concurrent jurisdiction with the Department of Justice (the "DOJ"), Federal
Trade Commission (the "FTC"), and the FERC to consider the competitive effects
of the Transaction. The Applicants expect to file in early March, 2000,
Notification and Report Forms with the DOJ and the FTC, as required by the HSR
Act, which contained a description of the Transaction's effects on competition.
Consummation of the Transaction is conditioned on the expiration or termination
of the applicable waiting period under the HSR Act. In addition, the Applicants
have filed, or intend to file shortly, for the approval of the Oregon PUC and
the FERC, the agencies having immediate jurisdiction over PGE's utility
operations. These filings will contain detailed explanations of why the
Transaction will not have any adverse competitive effect.
Moreover, under a new Oregon law (S.B. 1149, signed into law on July
23, 1999), PGE's retail electric service territory will be opened to retail
competition for commercial and industrial customers commencing October 1,
2001. The service areas of Nevada Power and SPPC, including all customer
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3 See, e.g., TUC Holding Co., Holding Co. Act Release No. 26749 (Aug. 1,
1997) [hereinafter TUC Holding] (combination of Texas Utilities Company and
ENSERCH Corporation; combined assets at time of acquisition of $22.6
billion and combined operating revenues of $8.7 billion, serving
approximately 3.7 million customers); Entergy Corp., Holding Co. Act
Release No. 25952 (Dec. 17, 1993) [hereinafter Entergy] (acquisition of
Gulf States Utilities; combined assets at time of acquisition of $22.9
billion and combined revenues of $6.3 billion, serving approximately 2.4
million customers).
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classes, will be opened to retail competition as early as March 1, 2000. See
Nev. Revised Stat. Sections 704.961-990 (1997). FERC already has introduced
competition into wholesale electric markets through its many orders authorizing
market-based rates for wholesale power sales and a series of orders mandating
non- discriminatory access to electric transmission facilities. As noted above,
Sierra Pacific previously has committed to divesting its generating assets.
Sierra Pacific further commits to joining one or more regional transmission
organizations ("RTOs"), in the form of a non-profit Independent System Operator
or a for-profit "Transco", which would operate the transmission system of the
post-Transaction Sierra Pacific system and the transmission systems of other RTO
members by the end of 2001. In light of these commitments, the Applicants do not
expect the Transaction to have any adverse competitive effects.
The additional benefits accompanying the Transaction are outlined
above in Item 1(B)(1) and below in Item 3(A)(2)(b) and are benefits which the
Commission has weighed against any concerns about concentration of control it
has had in other transactions. See American Electric Power Co., Holding Co. Act
Release No. 20633 (July 21, 1978). Indeed, the Commission has approved even
those acquisitions "that decrease competition when it concludes that [such]
acquisitions would result in benefits such as possible economies of scale,
elimination of the duplication of facilities and activities, sharing of
production capacity and reserves, and generally more efficient operations."
Northeast, supra (emphasis added).
For all of these reasons, the Applicants believe that the Transaction
will not result in a concentration of control which will be detrimental to the
public interest, but will offer the potential to facilitate an actual increase
in competition in regional electricity markets.
b. SECTION 10(B)(2): REASONABLENESS OF CONSIDERATION AND
FEES.
Section 10(b)(2), as applied to the Transaction, provides that the
Commission shall approve the Transaction unless it finds that the consideration,
including all fees, paid by Sierra Pacific is not reasonable or does not bear a
fair relation to the earning capacity of the utility assets underlying Enron's
shares in PGE. In its determination as to whether or not consideration for an
acquisition meets the fair and reasonable test of Section 10(b)(2), the
Commission has considered whether the price was decided as the result of
arm's-length negotiations, American Natural Gas, Holding Co. Act Release No.
15620 (Dec. 12, 1966), and whether each party's Board of Directors has approved
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the purchase price. Consolidated National Gas Co., Holding Co. Act Release No.
25040 (Feb. 14, 1990). The Commission also considers the opinions of investment
bankers, id., and the earnings, dividends, and book and market value of the
shares of the company to be acquired. Northeast Utilities, Holding Co. Act
Release No. 15448 (Apr. 13, 1966).
Pursuant to the Stock Purchase Agreement, Sierra Pacific will pay
Enron $2.1 billion in cash for all the issued and outstanding common stock of
PGE and PGH II. The consideration to be paid to Enron was the result of
arm's-length negotiations between the management and financial and legal
advisors of Sierra Pacific and Enron over a period of several months, as
detailed in Item 1(B)(3) above. The Boards of Directors of Sierra Pacific and
Enron approved the Transaction in separate meetings held on November 5, 1999.
In addition, nationally-recognized investment banking firms retained
separately by Sierra Pacific and Enron have reviewed extensive information
concerning the Transaction and analyzed several valuation methodologies. In
connection with the approval of the Stock Purchase Agreement, (i) Sierra
Pacific's Board of Directors considered the opinion of its financial advisor,
Salomon Smith Barney, to the effect that the aggregate consideration to be paid
to Enron is fair, from a financial point of view, to the holders of Sierra
Pacific Common Stock, and (ii) Enron's Board of Directors considered the opinion
of its financial advisors Credit Suisse First Boston Corporation and SG Barr
Devlin, to the effect that the aggregate consideration to be received by Enron
in connection with the Transaction is fair to Enron from a financial point of
view. The fairness opinion of Salomon Smith Barney is attached hereto as Exhibit
I-1 and incorporated herein by reference.
In rendering its fairness opinion, Salomon Smith Barney performed a
number of analyses relevant to the fairness of the Transaction consideration,
including: a comparison of select historical and projected operating performance
data of the Applicants and comparable companies; discounted cash flow analyses;
and analyses of the potential pro forma results of the Transaction. In preparing
its opinion, the financial advisor reviewed, among other things, both public and
non- public historical and projected financial information and forecasts related
to the earnings, assets, business, dividends, cash flow, and prospects of Sierra
Pacific, PGE, PGH II, and comparable companies.
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In rendering their fairness opinions, Credit Suisse First Boston
Corporation and SG Barr Devlin each performed a number of analyses relevant to
the fairness of the Transaction consideration to Enron, including one or more of
the following: a comparison of the results of operations of PGE with those of
certain companies deemed relevant; an analysis of the valuation of PGE and PGH
II shares using various valuation methodologies; and, a comparison of proposed
financial terms of the Transaction with those of certain utility industry
business combinations deemed relevant. In preparing their opinions, the
financial advisors conducted discussions with members of senior management of
PGE and PGH II and reviewed, among other things, both public and non-public
historical and pro forma financial information and forecasts related to the
business, earnings, capital expenditures, cash flow, assets, and prospects of
PGE.
Moreover, the Applicants believe that the overall fees, commissions,
and expenses to be incurred by Sierra Pacific in connection with the Transaction
will be reasonable and fair in light of the size and complexity of the
Transaction relative to other transactions and the anticipated benefits of the
Transaction to the public, investors, and consumers. Sierra Pacific estimates
its fees and expenses to be $21.4 million, representing approximately 1.0% of
the value of the consideration to be paid. These fees will be consistent with
percentages previously approved by the Commission. See, e.g., Entergy, supra
(fees and expenses representing approximately 1.7% of the value of consideration
paid to shareholders of Gulf States Utilities); Northeast Utilities, supra (fees
and expenses representing approximately 2% of the value of the assets acquired).
In light of the fairness opinion of Salomon Smith Barney and
considering all relevant factors, the Applicants believe the aggregate
consideration and fees to be paid are reasonable and bear a fair relation to the
earnings capacity of the utility assets underlying the Applicants' shares.
Accordingly, the consideration to be paid by Sierra Pacific meets the standards
of Section 10(b)(2).
c. SECTION 10(B)(3): CAPITAL STRUCTURE AND THE PUBLIC
INTEREST.
Section 10(b)(3) requires the Commission to determine whether the
Transaction will unduly complicate Sierra Pacific's capital structure or would
be detrimental to the public interest, the interests of investors or consumers,
or the proper functioning of Sierra Pacific's system.
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Following the Transaction, Sierra Pacific will have a capital
structure which is substantially similar to capital structures which the
Commission has approved in other orders.4 After consummation of the Transaction,
Sierra Pacific will own 100 percent of the shares of PGE and PGH II common
stock, and will continue to own 100 percent of the shares of common stock of
both SPPC and Nevada Power. As described more fully in Item 3.B. below, Sierra
Pacific will enter into certain financing arrangements in the amount of
approximately $2.1 billion in order to finance the Transaction. The issuance of
such debt is appropriate under Section 7(c)(2)(A) of the Act for the "purpose of
effecting a merger." The Transaction will not affect the outstanding securities
of SPPC or Nevada Power, including first mortgage bonds, junior subordinated
debentures, or classes of preferred stock. For these reasons, the Applicants
believe that the Transaction will not unduly complicate Sierra Pacific's capital
structure.
As explained in more detail in Item 3.B. below, the ratio of
consolidated common equity to total capitalization of the combined companies
will be, on an unaudited pro forma basis, 23 percent. During the first year
after the acquisition has been completed, Sierra Pacific will increase its
consolidated common equity to approximately 29 percent as a result of: (a)
proceeds from the sale of generating assets of SPPC and Nevada Power aggregating
approximately $1 billion, $750 million of which will be applied to the reduction
of holding company debt; (b) proceeds from the sale of additional common stock
estimated to aggregate $220 million; and (c) increased retained earnings
realized from the combined operations of Sierra and PGE. Based on present
expectations, Sierra Pacific expects increases in retained earnings from
operations to raise consolidated common equity to 30 percent within the 24
months following the Transaction. Further, approximately $300 million of
mandatory convertible securities to be issued within nine months of the closing
of the acquisition of PGE will automatically convert to common equity no later
than three years from the date of the issue. As a result of this conversion, the
consolidated common equity will increase to approximately 33 percent no later
than December 31, 2004. The Commission has approved common equity to total
capitalization ratios as low as 27.6 percent. Northeast Utilities, supra.
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4 See, e.g., TUC Holding Co., supra; CINergy, Corp., Holding Co. Act Release
No. 26909 (Aug. 21, 1998) (authorizing the issuance of up to $400 million
of unsecured debt securities); Entergy, supra. In each of these orders, the
Commission approved mergers which resulted in a holding company acquiring
100 percent of a utility operating company's common stock.
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In addition, as discussed earlier in Item 1(B)(1), the Applicants
believe that the Transaction, by achieving efficiencies and economies, will
benefit the interests of the public, consumers and investors and will not impair
the proper functioning of the holding company system.
2. SECTION 10(C).
Section 10(c) of the Act provides that, notwithstanding the provisions
of Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of Section 8 or is
detrimental to the carrying out of the provisions of Section 11; 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.
a. SECTION 10(C)(1): LAWFULNESS UNDER SECTION 8 AND
DETRIMENT TO CARRYING OUT SECTION 11
i. THE TRANSACTION IS LAWFUL UNDER SECTION 8
Section 8 prohibits an acquisition by a registered holding company of
an interest in an electric utility and a gas utility serving substantially the
same territory without the express approval of the state commission where state
law prohibits or requires approval of the acquisition. As noted, the Transaction
is not subject to Nevada PUC approval, nor is the operation of a combined
electric and gas system prohibited by Nevada law. Accordingly, the Transaction
does not raise any issue under Section 8.
ii. THE TRANSACTION WILL NOT BE DETRIMENTAL TO
CARRYING OUT THE PROVISIONS OF SECTION 11
Section 10(c)(1) also requires that the Transaction not be
"detrimental to the carrying out of the provisions of Section 11." First,
Section 11(b)(1) generally requires a registered holding company to limit its
operations to a "single integrated public-utility system, and to such other
businesses as are reasonably incidental, or economically necessary or
appropriate to the operations of such integrated public-utility system." Second,
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Section 11(b)(2) directs the Commission "to ensure that the corporate structure
or continued existence of any company in the holding-company system does not
unduly or unnecessarily complicate the structure, or unfairly or inequitably
distribute voting power among security holders, of such holding-company system."
By its terms, however, Section 10(c)(1) does not require that the Transaction
"comply to the letter with Section 11." Madison Gas & Electric Co. v. SEC, 168
F.3d 1337, 1343 (Mar. 16, 1999) [hereinafter Madison Gas] ("In contrast to its
strict incorporation of section 8 (proscribing approval of an acquisition "that
is unlawful" thereunder), with respect to section 11 section 10(c)(1) prohibits
approval of an acquisition only if it "is detrimental to the carrying out of
[its] provisions."). As described below, the Applicants believe the Transaction
is not detrimental to carrying out the provisions of Section 11.
(a) SECTION 11(B)(1) - SINGLE INTEGRATED PUBLIC
UTILITY SYSTEM
Section 11(b)(1) directs the Commission generally to limit a
registered holding company "to a single integrated public-utility system."
Section 2(a)(29) of the Act provides separate definitions for "integrated
public-utility system" for gas and electric companies. For electric utility
companies, the term means:
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 advantages of
localized management, efficient operation, and the effectiveness of
regulation[.]
For gas utility companies, the term means:
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 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
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advantages of localized management, efficient operation, and the
effectiveness of regulation; Provided, that gas utility companies deriving
gas from a common source of supply may be deemed to be included in a single
area or region.
Further, Section 11(b)(1) permits the acquisition and retention of
more than one integrated public utility system if the requirements of Section
11(b)(1)(A), (B) and (C) are satisfied.
Background
In the early years of its administration of the Act, the Commission
construed Section 11(b)(1) to preclude significant geographic expansion by
holding company systems. However, as the Commission has acknowledged, the Act
"creates a system of pervasive and continuing economic regulation that must in
some measure at least be fashioned from time to time to keep pace with changing
economic and regulatory climates."5 In recent decisions, the Commission has
cited U.S. Supreme Court and federal Courts of Appeals cases that recognize that
an agency is not required to "establish rules of conduct to last forever,"6 but
must adapt [its] rules and policies to the demands of changing circumstances"7
and to "treat experience not as a jailer but as a teacher."8
As the definition of an integrated public utility system suggests,
Section 11 is not intended to impose "rigid concepts" but rather creates a
"flexible" standard designed "to accommodate changes in the electric utility
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5 Union Electric Co., Holding Co. Act Release No. 18368, n. 52 (Apr. 10,
1974), quoted in Consolidated Natural Gas Co., Holding Co. Act Release No.
26512 (April 30, 1996) (authorizing international joint venture to engage
in energy marketing activities).
6 Rust v. Sullivan, 500 U.S. 173 (1991) [hereinafter Rust]; American Truck
ing Assns., Inc. v. Atchison, T.&S.F.R. Co., 387 U.S. 397 (1967); Shawmut
Assn. V. SEC, 146 F.2d 791 (1st Cir. 1945) [hereinafter Shawmut].
7 NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10, 1999)
[hereinafter NIPSCO], citing Rust, supra at 186-87.
8 NIPSCO, supra, citing Shawmut, supra at 796-97.
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industry." UNITIL Corp., Holding Co. Act Release No. 25524 (Apr. 24, 1992)
[hereinafter UNITIL]. Accordingly, the Commission has recognized that the
concept of what constitutes an integrated public utility system has evolved in
light of the dramatic changes in the law, technology, and structure of the
industry since the passage of the Act over sixty years ago. This evolution is
appropriate considering the text of Section 2(a)(29)(A), which expressly directs
the Commission to consider the "state of the art" in analyzing size and to apply
"normal conditions" as the standard for determining whether a system may be
economically operated as a single coordinated system. The Commission is not
constrained to its past decisions interpreting the integration standards based
on a different "state of the art." See, e.g., American Elec. Power, Holding Co.
Act Release No. 20633 (July 21, 1978) [hereinafter AEP] (noting that the state
of the art - technological advances in generation and transmission, unavailable
thirty years prior - served to distinguish a prior case and justified "large
systems spanning several states").
The ongoing corporate restructuring of the U.S. utility industry
reflects the effects of emerging FERC policy on transmission, including Order
Nos. 8889 and 88910 requiring open-access transmission on comparable terms and
the functional unbundling of the transmission and wholesale merchant functions,
the formation of Independent System Operators, and the recent rulemaking
regarding RTOs.11 It is also the product of many recent state laws mandating
competitive resource procurement and retail electric competition, and the
functional separation (and, in some states, divestiture) of generation from
transmission and distribution operations. Overlaying these changes are rapid
developments in technology and the emergence and growth of the power marketing
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9 Promoting Wholesale Competition through Open Access Non-Discrimina tory
Transmission Services by Public Utilities, Order No. 888, FERC Stats. &
Regs., Regulations Preambles,P. 31,036 (1996), order on reh'g, FERC Stats.
& Regs., Regulations Preambles,P. 31,048 (1997), order on reh'g, 81 FERCP.
61,248 (1997), order on reh'g, 82 FERCP. 61,046 (1998).
10 Open Access Same-Time Information System (formerly Real-Time Informa tion
Network) and Standards of Conduct, Order No. 889, FERC Stats. & Regs.,
Regulations Preambles,P. 31,035 (1996), order on reh'g, III FERC Stats. &
Regs., Regulations PreamblesP. 61,253 (1997).
11 Regional Transmission Organizations, Order No. 2000, 89 FERCP. 61,285 (Dec.
20, 1999), reprinted at 65 Fed. Reg. 810 (Jan. 6, 2000).
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and energy trading businesses, both of which facilitate efficient and
competitive low-cost electric markets. Perhaps the most notable among all of
these changes, however, is the recent evolution of RTOs. RTOs facilitate trading
regions with vastly reduced economic constraints on transmission access and with
the ability to manage and plan for new transmission on a regional basis to help
alleviate transmission constraints, thereby providing entities with both the
requisite physical and economic means to integrate their systems.
The cumulative effect of these regulatory, technological, and economic
changes has dramatically altered the "state of the art" that Congress directed
the Commission to consider more than sixty years ago. It is against this
backdrop of rapid change that Sierra Pacific has developed a plan to integrate
the Sierra Pacific and PGE systems. Applicants therefore request the Commission,
as the SEC Staff suggests, to "respond realistically to the changes in the
utility industry and interpret more flexibly each piece of the integration
requirement."12 The ultimate determination has always been whether, on the facts
of a given matter, the proposed transaction "will lead to a recurrence of the
evils the Act was intended to address."13
Integration Standards
Under the definition of integrated public utility system, the
Commission traditionally has established four standards that must be met before
the Commission will find that an integrated public utility system will result
from a proposed merger of two separate systems:
(i) the utility assets of the systems must be physically interconnected
or capable of physical interconnection;
(ii) the utility assets, under normal conditions, must be economically
operated as a single interconnected and coordinated system;
(iii) the system must be confined in its operations to a single area or
region; and
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12 Division of Investment Management, The Regulation of Public-Utility Holding
Companies, June 1995 at 67 [hereinafter "1995 Report"].
13 Southern Co., Holding Co. Act Release No. 25639 (Sep. 23, 1992), quoting
Union Electric, supra.
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<PAGE>
(iv) 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.
See, e.g., Environmental Action, Inc. v. SEC, 895 F.2d 1255, 1263 (9th Cir.
1990) (citing In re Electric Energy Inc., Holding Co. Act Release No. 13871
(Nov. 28, 1958)). As noted above, however, Section 10(c)(1) does not require the
SEC to find that the Transaction "compl[ies] to the letter with section 11",
rather simply that the Transaction is not "detrimental" to the Commission's
carrying out the provisions found in that Section. Madison Gas, supra at 1343.
In any event, Applicants believe the Transaction meets each of these standards,
as discussed below.
(i) Physical Interconnection
The first requirement for an integrated public utility system is that
the electric generation and/or transmission and/or distribution facilities
comprising the system be "physically interconnected or capable of physical
interconnection." Sierra Pacific will satisfy this requirement by connecting its
system through the use of transmission paths over third party systems and
through participation in RTOs.
The Commission in previous cases has found that parties relying on
third-party lines to interconnect their systems are "physically interconnected
or capable of physical interconnection." See, e.g., Northeast Utilities, supra;
Centerior Energy Corp., Holding Co. Act Release No. 24073 (Apr. 29, 1986)
[hereinafter Centerior]; UNITIL, supra; Conectiv, Inc., Holding Co. Act Release
No. 26832 (Feb. 25, 1998); C&T Enterprises, Inc., Holding Co. Act Release No.
26973 (Feb. 5, 1999). Specifically, the Commission in these cases has held that
a system's use of another party's transmission lines to interconnect its system
is sufficient to satisfy the requirements of Section 2(a)(29)(A). For example,
in Centerior, supra, the Commission accepted a plan to interconnect two systems
through the use of third-party transmission lines where such use was available
only to the extent it would not interfere with the third-party's own use of the
line. In that case, the Commission accepted Centerior's reliance on the
third-party's lines, based on the applicants' demonstration that their use of
the lines would not interfere with the third-party's own use and that the lines
would be available to the applicants at any time needed. See also Northeast
Utilities, supra (accepting applicants' interconnection through reliance on a
right to use a third-party's lines). In other cases, the Commission has accepted
participation in "tight" power pools as providing for physical interconnection,
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<PAGE>
given that such pools provide access to interconnecting pool participants'
transmission facilities. See, e.g., UNITIL, supra; Conectiv, supra.
As in these cases, Sierra Pacific will interconnect its post-
Transaction system through a combination of transmission paths over third-party
lines. As described below, (i) the Applicants will purchase a 50 MW long-term
firm contract transmission path connecting PGE and Nevada Power, and (ii) nearly
all of the hours of the year the Applicants and load serving entities will be
able to reserve on an open access basis extensive firm and non-firm transmission
capacity on third party transmission paths that interconnect PGE and SPPC, and
SPPC and Nevada Power.14
Regarding (ii), because the transmission paths connecting PGE with
SPPC and connecting SPPC and Nevada Power have such high availability, Sierra
Pacific and load serving entities will be able to reserve firm or non-firm
transmission capacity on these paths on a short-term, as-needed basis and
thereby avoid paying the high cost of reserving the transmission capacity on a
long-term basis. These cost savings are substantial because reserving
transmission capacity on a long-term (i.e., 24 hours/day, 365 days/year), firm
basis, is significantly more expensive than purchasing transmission capacity for
only those hours in which the transmission is needed. Therefore, electric
consumers served by the Sierra Pacific system will receive almost all of the
benefits of a long-term, firm transmission path at a significantly lower cost,
which, in turn, makes integration of the Applicants' system more economic.
The small amount of the time that the non-firm paths are not available
will have no effect on the ability of the Applicants and load serving entities
to meet load obligations. To explain, SPPC, Nevada Power and PGE each have
access to sufficient generation capacity to serve their entire load obligations
requirements. The transmission paths that Applicants propose to utilize to
integrate the systems simply enable load serving entities in the Applicants'
control areas to substitute more economic power from generation resources
located in the
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14 Due to commencement of competition in Nevada, a variety of entities will
compete and assume responsibility for providing electric service to SPPC's
and Nevada Power's current native load customers. SPPC and Nevada Power
will continue to serve those customers that do not select a new energy
service provider. Thus, both Sierra Pacific and these new load serving
entities will have the ability to purchase transmission service on third
party systems to serve their loads.
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<PAGE>
control area of one of the affiliated companies at times when the substitute
generation resources are less expensive to run. Thus, the occasional
unavailability of the transmission path is not a reliability issue but only an
economic issue.
The following simplified schematic shows the interconnections among
various entities in the region:
SCHEMATIC OF TRANSMISSTION
PATHS BETWEEN PGE, SPPC
AND NEVADA POWER
[GRAPHIC OMITTED]
1. PACIFIC DC INTERTIE - INTERCONNECTING PGE AND NEVADA POWER
One major transmission line connecting the Pacific Northwest to
California is the 500 kV Pacific Direct Current ("DC") Intertie running from The
Dalles, Oregon through Nevada to near Los Angeles, California. PGE owns 100 MW
of firm rights on this line from The Dalles to the Nevada-Oregon Border ("NOB").
The Los Angeles Department of Water and Power ("LADWP") owns at least 100 MW of
firm rights on the line from NOB to the Los Angeles area. LADWP also is
interconnected with both SPPC and Nevada Power. Sierra Pacific intends to use 50
MW of PGE's firm rights on the DC Intertie from PGE to NOB. Sierra Pacific will
purchase from LADWP 50 MW of firm rights that will allow it to transmit firm
37
<PAGE>
power from NOB through LADWP's system to Nevada Power. This firm path connecting
PGE and Nevada Power is shown on the following schematic.
SCHEMATIC OF TRANSMISSTION
PATH USING
PACIFIC DC INTERTIE
[GRAPHIC OMITTED]
2. ALTURAS LINE - INTERCONNECTING PGE AND SPPC
The PGE system will be integrated with the SPPC system using
short-term transmission service from PGE's interconnection at the Malin
substation to SPPC's interconnection with Bonneville Power Administration
("BPA") at Hilltop, California. The BPA line at Hilltop runs to the Malin
substation.
38
<PAGE>
SCHEMATIC OF TRANSMISSTION
PATHS USING
ALTURAS LINE
[GRAPHIC OMITTED]
Two features of this path deserve further discussion. First, there
currently is a proceeding at the FERC in which certain California entities are
asserting that Sierra Pacific may not use its Alturas Line (which interconnects
with BPA at Hilltop) on a firm basis. Sierra Pacific is contesting this
assertion and believes that it will prevail.15 Second, in order to improve the
economics of this transmission path, transmission service will be contracted for
with PacifiCorp (to transmit power over the Malin substation) and BPA (to
transmit power from Malin to Hilltop) on a short-term firm or non-firm basis.
There is a substantial savings that results from this strategy, with very little
impact on transmission capability. Based on publicly available data, Sierra
Pacific has determined that approximately 95% of the hours of the year there has
been 360 MW of non-firm capacity available on the path connecting PGE to SPPC,
and up to 50 MW has been available 98% of the hours. There is no reason to
believe that this percentage of availability will be reduced significantly at
any time in the near future. The availability of this transmission path is even
higher when transmitting power in the other direction (i.e., from SPPC to PGE).
As discussed above, electric consumers served by the Sierra Pacific system will
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15 Note that there is no dispute that power can go from Hilltop to SPPC on a
non-firm basis or that power can go from SPPC to Hilltop on a firm basis.
Therefore, even if Sierra Pacific were unsuccessful before the FERC,
sufficient transmission capacity still would be available on a non-firm
basis 95-98% of the time.
39
<PAGE>
receive almost all of the benefits of a long-term, firm transmission path at a
significantly lower cost, which makes integration of the Applicants' system more
economic.
3. THROUGH PACIFICORP EAST - INTERCONNECTING SPPC AND NEVADA POWER
SPPC and Nevada Power are interconnected through the PacifiCorp East
system. The Applicants will use short-term firm or non-firm transmission on
PacifiCorp East to transmit power between SPPC and Nevada Power, both of which
interconnect with PacifiCorp East. Sierra Pacific has determined that there has
been 100 MW of non-firm transmission capacity available on this path
approximately 96% of the hours of the year to transmit power from SPPC to Nevada
Power and 97% of the hours to transmit power in the other direction (from Nevada
Power to SPPC).16 This path is shown on the following schematic.
SCHEMATIC OF TRANSMISSTION
PATHS USING
PACIFICORP EAST
[GRAPHIC OMITTED]
To summarize, the PGE, SPPC and Nevada Power systems will be
interconnected through a long-term, firm 50 MW contract path from PGE to Nevada
Power over the Pacific DC Intertie and the purchase of short-term firm or
non-firm transmission service over a number of high-availability transmission
paths. The availability of those transmission paths is as follows: (i) the
transmission path between PGE to SPPC over the Alturas Line has been available
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16 Moreover, in cases where the path is constrained in one direction,
typically it is fully available in the other direction.
40
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approximately 95-98% of the time from PGE to SPPC and an even larger percentage
of the time from SPPC to PGE and (ii) the transmission path between SPPC to
Nevada Power over PacifiCorp East has been available approximately 96% of the
time from SPPC to Nevada Power and 97% of the time from Nevada Power to SPPC.
Sierra Pacific's reliance on this combination of firm and non-firm
transmission paths is consistent with the Commission's precedent. As discussed
above, the Commission in several prior cases has found that holding companies
are able to integrate their systems through the use of interconnecting,
third-party lines. See Northeast Utilities, supra; Centerior Energy Corp.,
supra; UNITIL, supra; Conectiv, Inc., supra; C&T Enterprises, Inc., supra. In
several of these cases, holding companies had secured firm contracts to use
third-party lines, and in other cases holding companies relied on participation
in tight power pools to satisfy the physical interconnection requirement. In
such situations, however, the Commission has focused on the actual ability of
the holding company systems to access third-party transmission lines. That is,
so long as there is an ability to use third-party lines, those paths are
sufficient to satisfy the physical interconnection requirement. See, e.g.,
Centerior, supra (right to use available third-party lines satisfies
interconnection requirement).
Sierra Pacific and other load serving entities will have such rights
of use for both the firm and non-firm transmission paths described above to
integrate the electric systems of PGE, SPPC and Nevada Power. In particular,
interconnecting transmission paths between the Sierra Pacific operating
companies will be accessible pursuant to the relevant transmission owner's open
access tariff. Under these open access tariffs, transmission owners are required
to provide open access to their transmission lines to all parties requesting
service. Thus, so long as capacity is available, transmission owners may not
deny Sierra Pacific or other load serving entities the right to use the paths.
This right of use is analogous to the rights of use provided by power pools
previously accepted by the Commission. See, e.g., UNITIL, supra.
To explain, the open access requirements of Order No. 888 require
transmission owners to grant to Sierra Pacific a right of access to
interconnecting transmission systems. Prior to Order No. 888, electric utilities
typically needed to construct direct interconnections or enter into bilateral
contracts in order to facilitate capacity and energy transfers. Now, as a matter
of right under Order No. 888, two utilities can arrange contractually for
transmission to achieve interconnection solely by relying on an open access
41
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tariff. Pursuant to an open access tariff service agreement, market participants
have a federally-mandated right to acquire either a firm or a non-firm path to
transfer power between utility systems.
Sierra Pacific believes that its plan to integrate its
post-Transaction system through a combination of long-term firm and short-term
firm or non-firm transmission paths represents a rational and appropriate
response to the fundamental changes that open access has caused in the
transmission industry. As mentioned, prior to the initiation of open access,
integration of non-contiguous systems was commonly achieved through entering
into bilateral transmission contracts, power pool agreements or some other form
of bilateral agreement that resulted in interconnections. In the world of open
access, however, such agreements no longer are necessary - FERC's Order No. 888
requires transmission owners to provide available transmission capacity to any
party requesting service. Sierra Pacific's reliance on transmission provided
under open access tariffs is, in essence, identical to power pool participants'
reliance on transmission access provided under power pool agreements, in that
both rely on a market participant's right to use transmission facilities owned
by third parties to accomplish integration.
The fact that Sierra Pacific will rely, in part, on a non-firm
contract path does not affect Sierra Pacific's ability to physically
interconnect its system. As described above, up to 50 MW of non-firm
transmission capacity on the Alturas path will be available to Sierra Pacific
98% of hours, and up to 360 MW of capacity will be available 95% of hours.
Similarly, on the PacifiCorp East path at least 100 MW of capacity is available
for use 96-97% of the time. Given the high availability of these lines, electric
consumers served by the Sierra Pacific system will receive almost all of the
benefits of a long-term, firm transmission path at a fraction of the cost. The
limited hours in which the transmission lines are not available will have no
impact on reliability, given that the PGE, SPPC, and Nevada Power systems
already have access to sufficient capacity to serve their individual loads.
Rather, the only effect of Applicants' reliance on a combination of firm and
non-firm paths is that integration of the post-Transaction Sierra Pacific system
becomes significantly more economic and flexible.
Moreover, Sierra Pacific intends to further enhance the
interconnection of the post-Transaction Sierra Pacific system through
participation in RTOs. Sierra Pacific has participated actively in recent
discussions with other regional utilities regarding the creation of one or more
regional transmission entities to satisfy the FERC's RTO rule. At this
preliminary stage, Sierra Pacific expects that SPPC and Nevada Power will join
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one RTO with utilities in the central southwest and PGE will join a second RTO
in the Pacific Northwest. It is expected that these RTOs will be contiguous with
one another, thereby permitting interconnection through inter-RTO coordination.
Sierra Pacific has not finalized the details regarding its participation in
RTOs, given that the FERC only recently has issued its final rule. However, the
final rule requires that Sierra Pacific file its RTO proposal with the FERC by
October 15, 2000 and that the RTOs be operational by December 15, 2001.
In sum, the post-Transaction Sierra Pacific system will be "physically
interconnected" through interconnections with third-party transmission owners.
Such third-party interconnections will be provided through the transmission
paths described above. The Commission previously has accepted applicants'
reliance on contract paths and participation in power pools to satisfy the
interconnection requirements. Following this precedent, Applicants believe the
Transaction will satisfy the interconnection requirements of Section
2(a)(29)(A).
(ii) Coordination
Sierra Pacific will coordinate the economic dispatch of the post-
Transaction system by coordinating load planning and power purchasing for the
Nevada Power, SPPC and PGE systems. Due to the divestiture of Sierra Pacific's
generation assets joint dispatch of the post-Transaction system would be
impossible since the SPPC and Nevada Power systems no longer will have
generation assets to dispatch.
Historically, the Commission has interpreted the requirement that an
integrated electric system be economically operated under normal conditions as a
single interconnected and coordinated system "to refer to the physical operation
of utility assets as a system in which, among other things, the generation
and/or flow of current within the system may be centrally controlled and
allocated as need or economy directs." Conectiv, supra, citing North American
Co., Holding Co. Act Release No. 3466 (Apr. 14, 1942), aff'd, 133 F.2d 148 (2d
Cir. 1943), aff'd, 327 U.S. 686 (1946). The Commission has noted that, through
this standard, Congress "intended that the utility properties be so connected
and operated that there is coordination among all parts, and that those parts
bear an integral operating relationship to one another." Id. (internal citations
omitted).
The text of Section 2(a)(29)(A) in relevant part requires only that
systems be "economically operated" and "coordinated." As more states move down
the path toward retail competition, with some states requiring significant
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divestiture of generating assets (as Nevada has done), and as the growth in
liquidity in wholesale markets continues, coordination in the market (and not
joint dispatch) will be the key means of achieving the efficiency objectives
previously obtained through joint dispatch. In a competitive market,
coordination of regional generation facilities and efficiency in generation
dispatch will be achieved through a combination of competitive bidding for
generation sales (which will ensure that the most-economic units will be
dispatched first) and RTOs (which will coordinate generation maintenance
schedules and generation dispatch for system reliability purposes).
Applicants believe that in today's environment, the coordination
requirement should be deemed satisfied if utilities are able to achieve
efficiencies through such measures as: coordinated generation operations, even
where such operations do not rise to the level of joint dispatch; coordinated
transmission through membership in RTOs; coordinated marketing efforts, both as
a buyer and seller of electricity; the integration of administration and general
services and programs; and gas/electric convergence measures, which will lead to
lower costs for gas as a fuel for the generation of electricity. In light of the
developments that have occurred in the electric utility industry and the
regulatory framework that applies to it, as discussed above, Applicants believe
the coordination of utilities in the current marketplace can better be achieved
through these market and contractual arrangements rather than through historical
joint dispatch.
This is not a matter of first impression. Nearly a decade ago, the
Commission found that the coordination requirement could be satisfied despite
the fact that a system's generating units are not jointly dispatched and,
indeed, even if power never flows between two parts of the system. See Sierra
Pacific Resources, Holding Co. Act Release No. 24566 (Jan. 28, 1988), aff'd by
Environmental Action, Inc., supra (approving Sierra Pacific's participation in a
consortium of utilities acquiring interests in a company that would own and
operate the Thousand Springs generating unit); Electric Energy, Inc., supra
(approving the acquisition by a consortium of utilities of interests in a
company that would own and operate a generating unit). In both these cases, the
Commission authorized holding companies to join a consortium of utilities to
acquire interests in companies formed solely for the purpose of operating a
generating plant. In neither of these cases, however, did the participating
holding companies commit to jointly dispatching the plants nor otherwise
coordinate the output of the plants with the rest of their systems. Rather, the
utilities participating in the consortium were to take output from the
particular facilities only where it was available and/or economical. Thus, it
was the rule of the market, not the ability to dispatch the plants, on which the
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holding companies relied and, despite the lack of dispatching ability, the
Commission nonetheless found in both cases that the plants at issue could be
operated as part of a coordinated system within the meaning of Section
2(a)(29)(A).
Moreover, in applying the integration standard, the Commission
consistently has looked beyond the coordination of generation and transmission
within a system and also has considered the coordination of other activities,
including the coordination of services and interrelated operations. See, e.g.,
General Public Utilities Corp., Holding Co. Act Release No. 13116 (Mar. 2, 1956)
(integration is accomplished through central load dispatching as well as through
coordination of maintenance and construction requirements); Middle South
Utilities, Inc., Holding Co. Act Release No. 11782 (Mar. 20, 1953), petition to
reopen denied, Holding Co. Act Release No. 12978 (Sep. 13, 1955), rev'd sub nom.
Louisiana Public Service Commission v. SEC, 235 F.2d 167 (5th Cir. 1956), rev'd,
353 U.S. 368 (1957) (integration accomplished through operating committee
coordinating not only central dispatching but also of construction programs,
maintenance of records and necessary reports, and other interrelated operations
involving the coordination of generation and transmission); North American Co.,
Holding Co. Act Release No. 10320 (Dec. 28, 1950) (economic integration
demonstrated by exchange of power, coordination of future demand, sharing of
extensive experience regarding engineering and other operating problems, and
furnishing of financial support to company being acquired.); see also NIPSCO,
supra (functional merger of Bay States and NIPSCO gas supply department through
NIPSCO Services, "a service company subsidiary of NIPSCO that provides
financial, accounting, tax, purchasing, natural gas portfolio management, and
other administrative services to associate companies.").
Applicants will satisfy the coordination requirement in several ways.
First, Sierra Pacific can coordinate the dispatch of PGE's generation assets
with SPPC's and Nevada Power's purchases of power from wholesale markets.17
Specifically, Sierra Pacific will coordinate the purchase from third parties of
electricity needed to meet the individual requirements of each of its members
systems, achieving economies of scale by aggregating energy purchases. PGE,
SPPC, and Nevada Power already have the ability to reach common suppliers,
purchasers, and trading hubs in various combinations. These coordinating
activities will be facilitated by the Contract Paths described above.
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17 Once divestiture is complete, SPPC and Nevada Power will rely completely on
the wholesale power market to meet their loads.
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Second, SPPC, Nevada Power, and PGE will coordinate transmission
functions, including transmission access, system operation, planning, and system
expansion functions. Transmission and substation maintenance functions also will
be integrated and SPPC, Nevada Power, and PGE will share resources during
emergencies. Until such time as SPPC, Nevada Power, and PGE join RTOs, the
transmission systems of the combined company will be operated pursuant to a
joint open access transmission tariff filed with FERC, which will establish a
single "license plate" rate for transmission services that utilize the
facilities of SPPC, Nevada Power, and/or PGE. Upon joining RTOs, Sierra Pacific
will work to ensure there will be reciprocity under the relevant RTO tariffs to
prevent "pancaked" rates for use of the combined company's system.
Third, Nevada Power, SPPC, and PGE will integrate many services,
including accounting and finance, human resources, information services,
external relations, legal and executive administration, customer service,
marketing and sales, and purchasing and materials management. As described in
the concurrent Application/Declaration, File No. 70-_____, seeking authorization
to form Sierra Pacific Services, a services subsidiary of Sierra Pacific, which
will perform a variety of administrative and general services for the Sierra
Pacific system. In addition, the accounting functions of the combined system
will be prepared and consolidated through the use of a single system. Sierra
Pacific will have a single accounting organization which will be managed by a
single team in one or more locations. Additional integration of the combined
system will be achieved through the coordination of information system networks,
customer service, procurement, organizational structures for power purchases,
energy delivery, and customer relation, as well as additional support services.
In short, the combined company will be centrally and efficiently
planned and operated. As with other merger applications approved by the
Commission, the combined system will be capable of being economically operated
as a single interconnected and coordinated system.
(iii) Single Area or Region
As required by Section 2(a)(29)(A), the operations of the post-
Transaction Sierra Pacific system will be confined to a "single area or region
in one or more States." While the terms "area" and "region" are not defined in
the Act, the "single area or region" requirement does not mandate that a
system's operations be confined to a small geographic area or a single state.
Indeed, no absolute size limitation is specified. The Act itself provides, and
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the Commission recognizes, that the question of size must be informed by
practical considerations, including the system's effect, if any, on the
"advantages of localized management, efficient operation, and the effectiveness
of regulations"18 in light of, as Section 2(a)(29)(A) makes clear, "the state of
the art and the area or region effected."
Moreover, the Staff has recommended that the Commission "interpret the
'single area or region' requirement flexibly, recognizing technological
advances, consistent with the purposes and provisions of the Act" and that the
Commission place "more emphasis on whether an acquisition will be economical"
1995 Report at 66, 69. The Staff has recognized that "recent institutional,
legal and technological changes ... have reduced the relative importance of ...
geographical limitations by permitting greater control, coordination and
efficiencies" and "have expanded the means for achieving the interconnection and
economic operation and coordination of utilities with non- contiguous service
territories." Id. at 69. It also has recognized that the concept of "geographic
integration" has been affected by "technological advances in the ability to
transmit electric energy economically over longer distances, and other
developments in the industry, such as brokers and marketers." Id. The Commission
has confirmed its support for the Staff's Report, citing, in particular, the
Staff's recommendation that the Commission "continue to interpret the 'single
area or region' requirement of [the Act] to take into account technological
advances." NIPSCO, supra; Sempra, Holding Co. Act Release No. 27095 (Oct. 25,
1999) [hereinafter Sempra].
The Applicants believe that the post-Transaction Sierra Pacific system
will satisfy the "single area or region" requirement. While the electric service
territories of the Nevada Power, SPPC and PGE systems do not overlap, they
nonetheless are in the same "area or region." The systems of Nevada Power and
SPPC are located predominantly in Nevada.19 The PGE system is located entirely
within the adjoining state of Oregon. The distance between the PGE and SPPC
systems is approximately 325 miles. Maps showing the service territories and
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18 NIPSCO, supra (analyzing the single area or region requirement for gas
utility properties, the Commission noted that the acquisition would not
have "an adverse effect upon localized management, efficient operation or
effective operation").
19 The service territories of Nevada Power and SPPC are separated geographi
cally by 38 miles. Located between their service territories is federal
land, including a Nevada test site and the Nellis Air Force Base bombing
range, that impedes direct physical interconnection.
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transmission systems of SPPC, Nevada Power, and PGE and the surrounding region
are attached hereto at Exhibits E-1 through E-3 and E-5 through E-7,
respectively. The Commission previously has found that combining systems need
not be contiguous in order to meet the "single area or region" test. See, e.g.,
Conectiv, supra; cf. New Century, supra (integration test met where entities
planned to build a 300 mile transmission line to interconnect systems operating
in noncontiguous territories).
The Transaction represents a logical extension of the Sierra Pacific's
system's existing service territory in light of contemporary circumstances. As
the Commission has recognized, the concept of area or region is not a static one
and must be refashioned to take into account the present realities of the
electric industry, consistent with the provisions of the Act. These present
realities have effectively shrunk the world in which the industry operates.
Thus, more than 50 years after the Commission's finding that the seven-state
American Electric Power Company system operates within a single area or region,
American Gas & Electric Co., Holding Co. Act Release No. 6333 (Dec. 26, 1945),
the concept of a region under Section 2(a)(29)(A) surely includes the two-state
area that comprises the post-Transaction Sierra Pacific system.
(iv) Localized Management, Efficient Operation, and Effective Regulation
The final clause of Section 2(a)(29)(A) requires the Commission to
consider the size of the post-Transaction Sierra Pacific system (considering the
state of the art and the area or region affected) and its effect upon localized
management, efficient operation, and the effectiveness of regulation. The size
of the post-Transaction Sierra Pacific system will not impair the advantages of
localized management, the efficient operation of the system, or the
effectiveness of regulation. Instead, the Transaction actually will increase the
efficiency of operations.
Localized Management - The Commission has found that an acquisition
does not impair the advantages of localized management where the new holding
company's "management [would be] drawn from the present management," Centerior,
supra, or where the acquired company's management would remain substantially
intact. AEP, supra. The Commission has noted that the 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 communication
and transportation." AEP, supra. The Commission also evaluates localized
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management in terms of whether a merged system will be "responsive to local
needs." Id.
The management of the post-Transaction Sierra Pacific system will be
drawn primarily from the existing management of Sierra Pacific and PGE and their
subsidiaries. Sierra Pacific will continue to maintain its system headquarters
in Reno, Nevada and will integrate the organizational structures of the combined
company. Changes to the management of the combined company and its subsidiaries
may be made in order to achieve the economies associated with the Transaction,
as discussed in Item 3.A.2.b. herein. The electric utility subsidiaries will
continue to operate through the regional offices with local service personnel
and line crews available to respond to customers needs. Sierra Pacific expects
the post-Transaction system will preserve the well-established delegations of
authority - currently in place at Sierra Pacific and PGE - which permit the
local, district, and regional management teams to budget for, operate, and
maintain the electric distribution system, to procure materials and supplies,
and to schedule work forces in order to continue to provide the high quality of
service which customers of Sierra Pacific and PGE have enjoyed in the past.
Accordingly, the advantages of localized management will not be impaired.
Efficient Operation - As discussed above in the analysis of Section
10(b)(1), the size of the post-Transaction Sierra Pacific will not impede
efficient operation; rather, the Transaction will result in significant
economies and efficiencies as described in Item 3(A)(2)(b) below. Operations are
more efficiently performed on a centralized basis because of economies of scale,
standardized operating and maintenance practices, and closer coordination of
system-wide matters.
Effective Regulation - The Transaction will not impair the
effectiveness of regulation at either the state or the federal level. On a state
level, the Commission has found that the effectiveness of regulation is not
impaired where the same state regulators have jurisdiction both before and after
a merger. See, e.g., Conectiv, supra; General Public Utilities Corp., Holding
Co. Act Release No. 13116 (Mar. 2, 1956) [hereinafter GPU]. The electric utility
subsidiaries of Sierra Pacific will continue to be regulated by the Nevada PUC
with respect to retail rates, service, and related matters. PGE will continue to
be regulated by the Oregon PUC with respect to retail rates, service, and
related matters.
On the federal level, the post-Transaction Sierra Pacific system will
continue to be regulated by the Commission. The electric utility subsidiaries of
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the combined system will continued to be regulated by the FERC with respect to
interstate electric sales for resale and transmission services and by the NRC
with respect to the operation of nuclear facilities. The jurisdiction of other
federal regulators is similarly unaffected.
Retention and Acquisition of Non-Utility Businesses
In complying with Section 10(c)(1)'s requirement that the Transaction
not be "detrimental to the carrying out of the provisions of Section 11," the
Commission also must consider whether the retention and/or acquisition by Sierra
Pacific of the non-utility businesses of SPPC, Nevada Power, PGE, and PGH II
satisfies the requirements of Section 11(b)(1). But see Madison Gas, supra at
1343 (Section 10(c)(1) does not require that the Transaction "comply to the
letter with Section 11."). Section 11(b)(1) of the Act requires that a
registered holding company limit its operations to a single integrated public
utility system and "such other businesses as are reasonably incidental, or
economically necessary or appropriate to the operations of such integrated
public-utility system." The Commission has interpreted these provisions to
require the existence of an operating or functional relationship between the
utility operations of the registered holding company and its nonutility
activities. 20 As demonstrated by the adoption of Rule 58, however, the
Commission increasingly has responded to developments in the utility industry by
expanding its concept of a functional relationship.21
The retention of SPPC's existing water system conforms to the "other
businesses" standards of the Act as previously determined by the Commission.
SPPC has operated its natural gas system and its water system on an integrated
basis for over 100 years. Operating within a single division of SPPC, the gas
and water systems are closely associated, making divestiture of the water system
costly and contrary to the public interest. Divestiture of SPPC's water system
would result in substantial divestiture costs and the loss in significant
operating revenues, amounting to $49.1 million in 1998. Retention of SPPC's
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20 See, e.g., Michigan Consolidated Gas Co., Holding Co. Act Release No. 16763
(June 22, 1970), aff'd, 444 F.2d 913 (D.C. Cir. 1971).
21 See Exemption of Acquisition by Registered Public-Utility Holding Compa
nies of Securities of Non-Utility Companies Engaged in Certain Energy-
Related and Gas-Related Activities, Holding Co. Act Release No. 26667 (Feb.
14, 1997).
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water system will not be detrimental to the public interest or the interests of
investors or consumers; rather, it will be beneficial to investors, consumers,
and the public at large. See, e.g. WPL Holdings, Holding Co. Act Release Act No.
26856 (Apr. 14, 1998) (permitting retention of water system).
The retention of the non-utility interests of SPPC and of Nevada
Power, as well as the acquisition of PGH II and the non-utility businesses of
PGE, also conforms to the "other businesses" standards of the Act. For a
description of these non-utility activities, see Items 1(A)(1)(c) and 1(A)(2)
above. All of these activities fall within the definition of an energy-related
company as provided in Rule 58, are otherwise functionally related, are de
minimis and should be permitted to be retained, or are within the definition of
an exempt telecommunications company as provided in Section 34 of the Act.
Accordingly, these businesses will have a functional relationship with the
utility operations of the post-Transaction Sierra Pacific system and, as such,
Sierra Pacific should be permitted to retain and/or acquire the businesses.22
Retention of the SPPC Gas System
In complying with Section 10(c)(1)'s requirement that the Transaction
not be "detrimental to the carrying out of the provisions of Section 11," the
Commission also must consider whether the retention of SPPC's gas system
satisfies the requirements of Section 11(b)(1). But see Madison Gas, supra at
1343 (Section 10(c)(1) does not require that the Transaction "comply to the
letter with Section 11."). The Commission historically has interpreted this
provision to require registered holding companies to be comprised of either an
integrated gas system or an integrated electric system, but not both. To the
extent an integrated electric system seeks to retain a gas system, the electric
system must satisfy the "A-B-C" clauses of Section 11(b)(1). Under those
provisions, a registered holding company can own "one or more" additional
integrated systems if certain conditions are met. Specifically, the Commission
must find that (A) the additional system "cannot be operated as an independent
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22 The Applicants request that, in approving Sierra Pacific's retention of PGH
II, the Commission exclude Sierra Pacific's investments in PGH II and in
other non-utility companies already owned by Sierra Pacific from the
limitation on investment in energy-related companies under Rule 58. See New
Century, supra (excluding from Rule 58 limitations investments in
non-utility businesses prior to New Century's registration as a holding
company under the Act).
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system without the loss of substantial economies which can be secure by the
retention of control by such holding company of such system," (B) the additional
system is located in one state or adjoining states, and (C) the combination of
systems under the control of a single holding company is not so large ... as to
impair the advantages of localized management, efficient operation, or the
effectiveness of regulation." The Applicants believe the requirements of the
"A-B-C" clauses are met and, as such, request authority to retain the SPPC gas
system.
(A) Loss of Economies
The Commission has interpreted Clause A to require a showing that the
"additional system could not be operated under separate ownership without a loss
of economies 'so important as to cause a serious impairment of that system' and
'substantial in the sense that they were important to the ability of the
additional system to operate soundly.'" Ameren Corp., Holding Co. Act Release
No. 26809 (Dec. 30, 1997) (internal citations omitted). In its 1995 Report,
however, the SEC Staff noted that, in a competitive utility environment, any
loss of economies threatens a utility's competitive position and even a "small"
loss of economies could render a utility vulnerable to significant erosion of
its competitive position.
Historically, the Commission has measured projected loss of economies
associated with divestiture as a percentage of: (i) total utility operating
revenues; (ii) total utility expense or "operating revenue deductions"; (iii)
gross utility income; and (iv) net utility operating income. Although the
Commission has declined to draw a bright-line numerical test under Section
11(b)(1)(A), it has indicated that cost increases resulting in a 6.78% loss of
operating revenues, a 9.72% increase in operating revenue deductions, a 25.44%
loss of gross gas income, and a 42.46% loss of net income would afford an
"impressive basis for finding a loss of substantial economies." Engineers Public
Service Co., Holding Co. Act Release No. 1,632 (Sept. 16, 1942). The loss of
economies associated with divestiture of the SPPC gas system easily satisfies
these thresholds.
As set forth in the gas system retention study, attached hereto as
Exhibit H-1, Sierra Pacific would suffer approximately $16.4 million in economic
losses if required to divest the SPPC gas system. Specifically, the projected
impact on Sierra Pacific's shareholders would be a 15.8% loss of operating
revenues, a 18.7% loss of operating revenue deductions, a 100.1% loss of gross
gas income, and a 149.0% loss of net income. These ratios are well above the
cost increases indicated in Engineers Public Service, supra. The table below
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shows the 1998 gas operating revenues, gas operating revenue deductions, gas
gross income, and gas net income of the SPPC gas system:
Gas Operating Gas Operating Gas Gross Gas Net
Revenues Revenue Deductions Income Income
$99,531,525 $83,854,133 $15,677,392 $10,534,969
In order to recover the lost economies and income taxes associated
with divestiture, the party acquiring the SPPC gas system would be required to
raise rates for SPPC's current gas utility customers by approximately 16.5%.
Divesting SPPC's gas system also would result in a rate increase for SPPC's
remaining electric customer of approximately $4.0 million, roughly 0.75% over
current rates. Moreover, divestiture of SPPC's gas system would cause a
significant, although difficult to quantify, amount of damages to SPPC's ability
to compete in the marketplace, resulting in further increased costs to SPPC's
current customers. Given these significant loss of economies and resulting rate
increases, Applicants respectfully submit the Commission should find the
standards of Clause A satisfied with respect to the SPPC gas system.
(B) Same State or Adjoining States
The retention of SPPC's gas system does not raise any issue under
Section 11(b)(1)(B) of the Act. The Commission has paraphrased Clause B as
follows: "All of such additional systems are located in a state in which the
single integrated public utility operates, or in states adjoining such a state,
or in a foreign country contiguous thereto." Engineers Public Service Co.,
Holding Co. Act Release No. 2897 (July 23, 1941), rev'd on other grounds, 138
F.2d 936 (D.C. Cir. 1943), vacated as moot, 332 U.S. 788 (1947). SPPC's gas
system is located entirely within the state of Nevada and, as such, the
requirement that the additional system be located in one state or adjoining
states is satisfied.
(C) Localized Management, Efficient Operation, and Effective
Regulation
Finally, retention of the SPPC gas system as an additional integrated
system raises no issues under Section 11(b)(1)(C) of the Act. SPPC's gas system
already is incorporated into the Sierra Pacific system and, after the
Transaction, the management of SPPC's gas system will remain unchanged. The
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operation of the SPPC gas system in no way impairs the economic operation of
SPPC's electric system and, in fact, provides substantial benefits. Retention of
the SPPC gas system also will not effect the regulation of the post-Transaction
Sierra Pacific system. SPPC's gas operations will remain subject to regulation
by the Nevada PUC and the FERC, as well as other federal regulators.
(b) SECTION 11(B)(2) - STRUCTURE AND VOTING POWER
Section 11(b)(2) of the Act directs the Commission "to ensure that the
corporate structure or continued existence of any company in the holding-
company system does not unduly or unnecessarily complicate the structure, or
unfairly or inequitably distribute voting power among security holders, of such
holding-company system." The Transaction is consistent with Section 11(b)(2).
The resulting capital structure is not unduly complicated, as discussed in Item
3(A)(1)(c) above. See Sierra Pacific Resources, Holding Co. Act Release No.
24566 (Jan. 28, 1988), aff'd sub nom. Environmental Action, Inc., 895 F.2d 1255
(D.C. Cir. 1990) (Commission incorporates its Section 10(b)(3) capital structure
analysis into its Section 11(b)(2) corporate structure analysis). Similarly, the
Transaction does not inequitably distribute voting power among security holders.
SPPC and Nevada Power will remain wholly-owned subsidiaries of Sierra Pacific
and will be joined by PGE and PGH II, which also will be wholly-owned
subsidiaries of Sierra Pacific. The voting power of all relevant shareholders
will remain unchanged.
Section 11(b)(2) also requires Sierra Pacific to have a simple
corporate structure. See, e.g., TUC Holding, supra at n. 20. In particular,
Section 11(b)(2) limits a registered holding company system to no more than two
tiers of holding companies and directs the Commission to evaluate the facts and
circumstances "to ensure that the corporate structure or continued existence of
any company in the holding-company system does not unduly or unnecessarily
complicate the structure ... of such holding-company system." The Transaction
satisfies these requirements. First, only one holding company - Sierra Pacific -
will exist after the Transaction, as the combined corporate organization chart
in Exhibit E-11 demonstrates. Second, the acquisition of PGE and PGH II by
Sierra Pacific will not unduly or unnecessarily complicate the structure of the
Sierra Pacific system. Rather, the consolidation of PGE and PGH II as first-tier
subsidiaries is a straightforward way to integrate the Sierra Pacific system and
does not serve to complicate the structure of the system.
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b. SECTION 10(C)(2).
Section 10(c)(2) further requires that the Commission not approve an
acquisition unless "the Commission finds that such acquisition will serve the
public interest by tending towards the economical and efficient development of
an integrated public-utility system." Because the Transaction is expected to
result in substantial cost savings and synergies, it will tend toward the
economical and efficient development of the post-Transaction Sierra Pacific
system.
The Transaction will produce economies and efficiencies more than
sufficient to satisfy the requirements 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 AEP, supra. As the Commission
has noted, while some benefits cannot be precisely estimated, they nonetheless
may be considered for purposes of Section 10(c)(2): "specific dollar forecasts
of future savings are not necessarily required; a demonstrated potential for
economies will suffice even when these are not precisely quantifiable."
Centerior, supra. In addition, benefits realized by an acquisition need not be
immediate. As the Commission has stated, "the underlying advantages of
affiliation should be assessed on a long-term basis." WPL Holdings, Holding Co.
Act Release No. 25377 (Sep. 18, 1991), citing AEP, supra ("Some of the
anticipated savings may not immediately happen .... Yet the underlying economic
advantages [of the affiliation] remain.").
The Applicants estimate the nominal dollar value of synergies from the
Transaction to be in excess of $40 million per year over a 10-year period. These
expected savings will meet or exceed the anticipated savings in an number of
recent acquisitions approved by the Commission. See, e.g., IE Industries,
Holding Co. Act Release No. 25325 (June 3, 1991) (expected savings of $91
million over ten years); Midwest Resources, Holding Co. Act Release No. 25159
(Sep. 26, 1990) (estimated savings of $25 million over five years).
The Applicants anticipate opportunities for savings as a result of,
among other things, (i) labor savings through the consolidation of functions,
the elimination of duplicative activities, and the realization of combined
productivity efficiencies, (ii) nonlabor savings through the consolidation of
overlapping or duplicative programs and expenses, including advertising,
benefits administration, insurance, information services, facilities, vehicles,
and research and development, and (iii) non-fuel purchasing economies through
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the combined procurement of material and services and through the reduction in
contract services on which PGE currently relies.
In addition to these benefits, there are other benefits which, while
presently difficult to quantify, are nonetheless substantial. First, the
combined company will be able to meet more effectively the challenges of the
increasingly competitive environment in the utility industry than either Sierra
Pacific or PGE standing along. See WPL Holdings, Inc., Holding Co. Act Release
No. 25096 (May 25, 1990) (benefits supporting Section 10(c)(2) finding include
"[a] structure that could more effectively address the growing national
competition in the energy industry, refocus various utility activities,
facilitate selective diversification into non-utility business . . . and provide
additional flexibility for financing . . ."). In particular, the Transaction
will create the opportunity for strategic, financial, and operational benefits
for customers in the form of lower rates over the long term and for shareholders
in the form of greater financial strength and financial flexibility. Second, the
combined Sierra Pacific system will be able to draw on a larger and more diverse
senior-level management to lead the new company forward in an increasingly
competitive environment for the delivery of energy and should be better able to
attract and retain the most qualified employees. Finally, the combined system
will be larger and more diverse than either of Sierra Pacific or PGE as
independent entities. This increased geographical diversity will mitigate the
risk of changes in economic, competitive or climatic conditions in any given
sector of the combined service territory.
3. SECTION 10(F).
To approve an acquisition, the Commission is required, under Section
10(f), to find that the acquisition has complied with all applicable state laws.
The Transaction is conditioned expressly on receipt of all required regulatory
approvals, including that of the Oregon PUC. The Applicants have filed an
Application with the Oregon PUC, a copy of which is attached hereto as Exhibit
D-3. The Applicants do not believe the Transaction is subject to the
jurisdiction of the Nevada PUC. Accordingly, Applicants have filed a Petition
for Declaratory Relief requesting the Nevada PUC disclaim jurisdiction over the
Transaction, a copy of which is attached hereto as Exhibit D-1. When these
approvals and/or orders have been received, the Transaction will comply with
Section 10(f).
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B. FINANCING OF THE ACQUISITION.
This Application/Declaration also seeks the authorization and approval
of the Commission with respect to issuances and sales of securities to finance
the Transaction. A separate Application/Declaration will be filed in the near
future to request additional financing authority to maintain existing financing
facilities after the Transaction and to meet the capital requirements for the
Sierra Pacific system after the Transaction and the registration of Sierra
Pacific as a holding company. Specifically, in order to ensure that the Sierra
Pacific may raise the cash consideration required to consummate the Transaction,
Sierra Pacific hereby requests authorization for financing transactions for the
period beginning with the effective date of an order issued pursuant to this
filing and continuing for a period of one year from the date of such order (the
"Authorization Period").
1. OVERVIEW OF THE FINANCING REQUEST
Sierra Pacific hereby requests authorization to engage in the
financing transactions set forth herein during the Authorization Period. The
approval by the Commission of this Application/Declaration will give Sierra
Pacific the flexibility to raise the funds required to consummate the
acquisition of PGE in the most efficient and cost-effective manner. Sierra
Pacific anticipates that it will finance most of the consideration required to
consummate the Transaction through the use of short-term debt authorized by this
Application/Declaration, such as commercial paper, money market notes and/or
bank loans. Depending on interest rates at the time of the Transaction closing,
it may also be cost-effective to issue some of the long-term debt authorized by
this Application/Declaration at that time. However, the aggregate amount of
short-term and long-term debt outstanding to finance the Transaction will not
exceed $2.1 billion. After the Transaction is consummated, Sierra Pacific plans
to pay off part of the outstanding short-term debt with the proceeds of the sale
of the electric generation assets of SPPC and Nevada Power and to further reduce
holding company debt through issuance of additional common stock. Sierra Pacific
then plans to refinance within the Authorization Period the remaining balance of
short-term debt incurred to fund the Transaction consideration with one or more
forms of long-term debt authorized by this Application/ Declaration. All of the
financing required to raise the Transaction consideration will be effected at
the holding company level. Consequently, the authorizations sought in this
Application/Declaration relate only to Sierra Pacific. Again, a separate
Application/Declaration will be filed in the near future to address the
financing needs of the Sierra Pacific system after the Transaction.
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Immediately following the acquisition of PGE, the consolidated common
equity of Sierra will be 23 percent as a result of the issuance of $2.1 billion
of holding company debt. However, during the first year after the acquisition
has been completed Sierra will increase its consolidated common equity to
approximately 29 percent as a result of: (a) proceeds from the sale of
generating assets of Sierra Pacific and Nevada Power aggregating approximately
$1 billion, $750 million of which will be applied to the reduction of holding
company debt; (b) proceeds from the sale of additional common stock estimated to
aggregate $220 million; and (c) increased retained earnings realized from the
combined operations of Sierra and PGE. Based on present expectations, Sierra
Pacific believes that increases in retained earnings from operations will
increase its consolidated common equity to 30 percent within 24 months following
the Transaction. Further, approximately $300 million of mandatorily convertible
securities to be issued within nine months of the closing of the acquisition of
PGE will automatically convert to common equity no later than three years from
the date of the issue. As a result of this conversion the consolidated common
equity will increase to approximately 33 percent no later than December 31,
2004. Applicants note the Commission has approved consolidated common equity to
total capitalization ratios as low as 27.6 percent. Northeast Utilities, supra.
We believe in light of the steps to be taken by Sierra in the year immediately
following the acquisition so as to increase its consolidated common equity as
outlined above, it is entirely proper that Sierra be allowed to finance such
acquisition as described above.
Set forth below are summaries of the historical capital structures of
Sierra Pacific and PGE as of September 30, 1999, and the pro forma consolidated
capital structure of Sierra Pacific, PGE, and PGH II as of the same date:
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Sierra Pacific and PGE Historical Capital Structures
(dollars in thousands)
Sierra Pacific PGE
Common Stock Equity $1,526 36% $1,029 51%
Preferred Stock $73 2% $30 1%
Preferred Securities $237 6% n/a 0%
Long-term Debt $1,670 39% $709 35%
Short-term Debt $670 16% $213 11%
Current Maturities $100 2% $25 1%
------ ---- ------ ----
Total Capitalization $4,276 100% $2,006 100%
Sierra Pacific's Post-Transaction Consolidated Capital Structure
(dollars in thousands)
(unaudited)
Sierra Pacific
Common Stock Equity23 $1,926 29%
Preferred Stock $103 2%
Preferred Securities $237 4%
Long-term Debt $2,379 35%
Short-term Debt24 $1,933 29%
Current Maturities $125 2%
------ ----
Total Capitalization $6,703 100%
- ---------------
23 Adjustments to consolidated common equity include:
$ (1,029) elimination of PGE equity as required by acquisition
accounting
$ 180 increase in retained earnings of $80 million and $100
million in 2000 and 2001
$ 220 new equity issuance in 2001
24 Adjustments to short-term debt include:
$ 2,020 acquisition "bridge" financing
$ (750.0) divestiture proceeds
$ (220.0) new common equity proceeds
Note: Short-term debt balances will be further reduced by the
issuance of long-term debt.
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The financing authorizations requested herein relate to (a) (i)
external issuances by Sierra Pacific of long-term debt, short-term debt,
commercial paper and other debt securities for cash and (ii) the entering into
by Sierra Pacific of transactions to manage interest rate risk ("hedging
transactions"); and (b) entering into credit facilities or loan agreements with
commercial or investment banks, both for purposes of direct borrowings and to
serve as back-up for commercial paper programs.
2. PARAMETERS FOR FINANCING AUTHORIZATION
Authorization is requested herein to engage in certain financing
transactions during the Authorization Period for which the specific terms and
conditions are not available at this time, without further prior approval by the
Commission. The following general terms will be applicable where appropriate to
the financing transactions requested to be authorized hereby:
a. EFFECTIVE COST OF MONEY ON BORROWINGS
The effective cost of money on long-term debt borrowings occurring
pursuant to the authorizations granted under this Application/Declaration will
not exceed 300 basis points over the comparable term U.S. Treasury securities,
and the effective cost of money on short-term debt borrowings pursuant to
authorizations granted under this Application/Declaration will not exceed 300
basis points over the comparable term London Interbank Offered Rate ("LIBOR").
b. MATURITY OF DEBT
The maturity of indebtedness will not exceed 50 years.
c. ISSUANCE EXPENSES
The underwriting fees, commissions or other similar remuneration paid
in connection with the non-competitive issue, sale or distribution of a security
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pursuant to this Application/Declaration will not exceed 5 percent of the
principal or total amount of the security being issued.
d. USE OF PROCEEDS
The proceeds from the sale of securities in external financing
transactions pursuant to this Application/Declaration will be used (i) to pay
the consideration required in order to consummate the Transaction or (ii) to
refinance short-term debt originally incurred to raise all or a portion of the
Transaction consideration.
3. DESCRIPTION OF SPECIFIC TYPES OF FINANCING
Sierra Pacific requests authorization to obtain funds externally
through sales of short- term debt and long-term debt securities. In addition,
Sierra Pacific seeks the flexibility to enter into certain hedging transactions
to manage rate risk and authority to issue and sell other types of securities,
as described below.
a. SHORT-TERM DEBT
Sierra Pacific requests Commission authorization during the
Authorization Period to issue short-term debt securities in an amount not to
exceed $2.1 billion. This amount consists entirely of financing for the
Transaction consideration of approximately $2.1 billion. Sierra Pacific
anticipates that most of the Transaction consideration will be funded
temporarily through the use of short-term debt. This short-term debt will be
paid off in part with the proceeds of the divestiture of SPPC's and Nevada
Power's electric generation assets, and the sale of common equity with the
balance refinanced as long-term debt within the Authorization Period. The
short-term debt will consist of one or more of the following: bank borrowings,
commercial paper, money market notes, floating rate or variable notes (all as
described below).
Sierra Pacific currently maintains a committed line of credit for $500
million under an unsecured revolving credit facility with Mellon Bank, First
Union National Bank and Wells Fargo, as syndication agents. This facility may be
used for working capital and general corporate purposes, including for
commercial paper backup. It is anticipated that all or a portion of the
short-term debt used to fund the Transaction will be borrowed by Sierra Pacific,
either through its existing credit facility or through one or more new
facilities to be
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entered into prior to the Transaction. These amounts are included within the
overall authorization amount requested above.
Sierra Pacific also may sell commercial paper in established domestic
or European commercial paper markets to provide temporary funding of the
Transaction consideration. Such commercial paper would be sold to dealers at the
discount rate or the coupon rate per annum prevailing at the date of issuance
for commercial paper of comparable quality and maturities sold to commercial
paper dealers generally. It is expected that the dealers acquiring commercial
paper from Sierra Pacific will reoffer such paper at a discount to corporate,
institutional and, with respect to European commercial paper, individual
investors. Institutional investors are expected to include commercial banks,
insurance companies, pension funds, investment trusts, foundations, colleges and
universities and finance companies. The commercial paper programs will be backed
up by the bank credit facilities described above.
Sierra Pacific also may incur short-term debt through the issuance of
instruments customarily referred to as "money market notes", "floating rate
notes" or "variable rate notes". This type of debt is usually issued pursuant to
a fiscal and paying agency agreement or similar type of agreement, rather than
through an indenture, and bears an interest rate that is either (a) tied to a
customary interest rate index such as LIBOR which is adjusted on a periodic
basis or (b) set by an auction process. These notes are typically sold to
qualified institutional investors or other accredited investors pursuant to Rule
144A promulgated under the Securities Act of 1933, as amended, although it is
possible that they may be offered in one or more of the manners described under
Long-Term Debt below. The maturity of these notes may vary from less than one
year to up to two years. Hence, they are referenced in this Application/
Declaration both under Short-Term Debt and Long-Term Debt. The specific terms of
any such notes will be determined by Sierra Pacific at the time of issuance and
will comply in all regards with the parameters on financing authorization set
forth in Section D above.
b. LONG-TERM DEBT
Sierra Pacific requests Commission authorization during the
Authorization Period to issue long-term debt securities in an amount not to
exceed $2.1 billion. This amount would be used exclusively to refinance
short-term debt originally incurred to finance the Transaction consideration of
$2.1 billion. Such long-term debt securities would be comprised of (a) unsecured
notes, debentures, medium-term notes, or other debt securities under an
indenture (the "Sierra Pacific Indenture"), (b) instruments customarily referred
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to as "money market notes", "floating rate notes" or "variable rate notes" with
maturities of greater than one year or (c) long-term loans from commercial or
investment banks pursuant to credit facilities or loan agreements. Any long-term
debt security would have such designation, aggregate principal amount, maturity,
interest rate(s) or methods of determining the same, terms of payment of
interest, redemption provisions, sinking fund terms and other terms and
conditions as Sierra Pacific may determine at the time of issuance. The request
for authorization for Sierra Pacific to issue long-term debt securities is
consistent with authorization that the Commission has granted to other holding
companies. See CINergy Corp., supra (authorizing issuance of up to $400 million
of unsecured debt securities).
(i) TERMS OF SIERRA PACIFIC INDENTURE
Sierra Pacific has filed a universal shelf registration with the
Commission on June 7, 1999 (Registration No. 333-80149). As part of that filing,
Sierra Pacific filed a form of the Sierra Pacific Indenture, which will permit
the issuance of a wide variety of unsecured debt securities in one or more
series. Although no securities have as yet been issued under the Sierra Pacific
Indenture, it is anticipated (a) that prior to the Transaction, Sierra Pacific
will issue approximately $500 million principal amount of debt securities under
the Sierra Pacific Indenture pursuant to its existing shelf registration and (b)
that Sierra Pacific would file a new universal shelf registration with the
Commission for the issuance of Long-Term Debt securities authorized pursuant to
this Application/Declaration and would utilize the Sierra Pacific Indenture for
the issuance of any such Long-Term Debt securities. The Sierra Pacific Indenture
will be qualified under the Trust Indenture Act of 1939, as amended.
The Sierra Pacific Indenture will permit debt securities with a number
of variable terms, such as the principal amounts (including original issue
discount), interest rates (including those based on a formula or index),
redemption terms, sinking funds, currency of payment, denominations, events of
default, etc., to be included or excluded or made applicable to a particular
series of securities. These terms will be set forth either in (i) a supplemental
indenture or (ii) an officer's certificate and company order, as applicable. In
theory, any combination of the variable terms could be included in a single
series of securities which, under current practice, would be called
"notes,""debentures" or "medium-term notes." The Sierra Pacific Indenture will
also permit any series of securities to be issued either in certificated form or
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in "global" form (i.e., transferable only by book- entry on the records of a
securities depository such as The Depository Trust Company).
Other than certain provisions relating to restrictions on liens,
mergers and the sale of significant subsidiaries, the Sierra Pacific Indenture
will contain no negative covenants or restrictions. Any additional covenants or
restrictions negotiated at the time of issuance will be included in either (i) a
supplemental indenture or (ii) an officer's certificate and company order, as
applicable, establishing a particular security. The Sierra Pacific Indenture
will contain the following event of default provisions: (i) defaults in payment
of the Sierra Pacific Indenture securities; (ii) defaults under covenants under
the Sierra Pacific Indenture, (iii) failures to comply with instruments
governing other indebtedness and certain other agreements; and (iv) certain
events of insolvency with respect to Sierra Pacific subject, as applicable, to
customary grace periods.
A copy of any new supplemental indenture under the Sierra Pacific
Indenture or an officer's certificate and company order executed and delivered
pursuant to this Authorization will be filed under cover of the first quarterly
report under Rule 24 filed after such execution and delivery.
Sierra Pacific may sell Long-Term Debt securities covered by this
Application/Declaration in any one of the following ways: (i) through
underwriters or dealers; (ii) through agents; or (iii) directly to a limited
number of purchasers or a single purchaser, including sales made pursuant to
Rule 144A. If underwriters are used in the sale of the securities, such
securities will be acquired by the underwriters for their own account and may be
resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. The securities may be offered to the public either through
underwriting syndicates (which may be represented by a managing underwriter or
underwriters designated by Sierra Pacific) or directly by one or more
underwriters acting alone. The securities may be sold directly by Sierra Pacific
or through agents designated by Sierra Pacific from time to time. If dealers are
utilized in the sale of any of the securities, Sierra Pacific will sell such
securities to the dealers as principals. Any dealer may then resell such
securities to the public at varying prices to be determined by such dealer at
the time of resale.
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(ii) TERMS OF BORROWINGS FROM BANKS AND OTHER FINANCIAL
INSTITUTIONS
Borrowings from commercial or investment banks and other financial
institutions will be unsecured and will rank pari passu with debt securities
issued under the Sierra Pacific Indenture and the short-term credit facilities
(as described above). Specific terms of any borrowings will be determined by
Sierra Pacific at the time of issuance and will comply in all regards with the
parameters on financing authorization set forth in Section D above. A copy of
any additional note or agreement executed and delivered pursuant to this
Authorization will be filed under cover of the first quarterly report under Rule
24 filed after such execution and delivery.
(iii) TERMS OF MONEY MARKET NOTES AND SIMILAR INSTRUMENTS
As noted above under Short-Term Debt, Sierra Pacific may issue
instruments customarily referred to as "money market notes", "floating rate
notes" or "variable rate notes". Although these notes frequently have maturities
of less than one year, they can also be issued with maturities of up to two
years. The specific terms of any such notes will be determined by Sierra Pacific
at the time of issuance and will comply in all regards with the parameters on
financing authorization set forth in Section D above. As is the case with the
short-term version of this instrument, these notes are usually issued pursuant
to a fiscal and paying agency agreement or similar type of agreement, rather
than through an indenture, and bear an interest rate that is either (a) tied to
a customary interest rate index such as LIBOR which is adjusted on a periodic
basis or (b) set through an auction process. These notes are typically sold to
qualified institutional investors or other accredited investors pursuant to Rule
144A, although they may also be sold in one or more of the manners described
above for other Long-Term Debt securities.
c. OTHER SECURITIES
In addition to the specific securities for which authorization is
sought herein, Sierra Pacific may also find it necessary or desirable to
minimize financing costs or to obtain new capital under then-existing market
conditions to issue and sell other types of securities from time to time during
the Authorization Period. The issuance of any such securities would be subject
to the aggregate $2.1 billion limit on short-term and long-term debt and to the
parameters on financing authorization discussed above. Sierra Pacific will
undertake to file an amendment in this proceeding which will describe the
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general terms of each such securities and the amount to be issued and to request
a supplemental order of the Commission authorizing the issuance thereof by
Sierra Pacific.
D. INTEREST RATE RISK MANAGEMENT DEVICES
Sierra Pacific requests authority to enter into, perform, purchase and
sell financial instruments intended to manage the volatility of interest rates,
including but not limited to interest rate swaps, caps, floors, collars and
forward agreements or any other similar agreements. Sierra Pacific would employ
interest rate swaps as a means of prudently managing the risk associated with
any of its outstanding debt issued pursuant to this authorization or an
applicable exemption by, in effect, synthetically (i) converting variable rate
debt to fixed rate debt, (ii) converting fixed rate debt to variable rate debt,
(iii) limiting the impact of changes in interest rates resulting from variable
rate debt and (iv) providing an option to enter into interest rate swap
transactions in future periods for planned issuances of debt securities. In no
case will the notional principal amount of any interest rate swap exceed that of
the underlying debt instrument and related interest rate exposure. Thus, Sierra
Pacific will not engage in "leveraged" or "speculative" transactions. The
underlying interest rate indices of such interest rate swaps will closely
correspond to the underlying interest rate indices of Sierra Pacific's debt to
which such interest rate swap relates. Sierra Pacific will only enter into
interest rate swap agreements with counter parties whose senior debt ratings, as
published by Standard & Poor's, A Division of The McGraw-Hill Companies, are
greater than or equal to "BBB+", or an equivalent rating from Moody's Investors
Service, Inc., Fitch IBCA, Inc. or Duff & Phelps Credit Rating Co.
4. FILING OF CERTIFICATES OF NOTIFICATION
It is proposed that, with respect to Sierra Pacific, the reporting
systems of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and
the 1933 Act be integrated with the reporting system under the Act. This
integration would eliminate duplication of filings with the Commission that
cover essentially the same subject matters, resulting in a reduction of expense
for both the Commission and Sierra Pacific. To effect such integration, the
portion of the 1933 Act and 1934 Act reports containing or reflecting
disclosures of transactions occurring pursuant to the authorization granted in
this proceeding would be incorporated by reference into this proceeding through
Rule 24 certificates of notification. The certificates would also contain all
other information required by Rule 24, including the certification that each
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transaction being reported on had been carried out in accordance with the terms
and conditions of and for the purposes represented in this
Application/Declaration. Such certificates of notification would be filed within
60 days after the end of the last calendar quarter in which transactions occur.
Rule 54 promulgated under the Act states that in determining whether
to approve the issue or sale of a security by a registered holding company for
purposes other than the acquisition of an exempt wholesale generator ("EWG") or
foreign utility company ("FUCO"), or other than with respect to EWGs or FUCOs,
the Commission shall not consider the effect of the capitalization or earnings
of any subsidiary which is an EWG or FUCO upon the registered holding company
system if Rules 53(a), (b) and (c) are satisfied. Sierra Pacific does not have,
and after the Transaction will not retain, any EWGs or FUCOs. Therefore, Rules
53(a), (b) and (c) are satisfied.
ITEM 4. REGULATORY APPROVAL.
As stated above, the Transaction is conditioned on the Applicants'
receipt of all relevant regulatory approvals. Set forth below is a summary of
the material regulatory requirements affecting the Transaction. In addition to
required Commission approvals, the state utility commission of Oregon, the FERC,
and the NRC have jurisdiction over various aspects of the Transaction. Further,
both Sierra Pacific and Enron are required to file notification and report forms
under the HSR Act with the FTC and the DOJ with respect to the Transaction.
Additional consents from or notifications to governmental agencies may be
necessary or appropriate in connection with the Transaction.
A. ANTITRUST CONSIDERATIONS
The HSR Act and the rules and regulations thereunder prohibit certain
transactions (including the Transaction) until certain information has been
submitted to the Antitrust Division of the Department of Justice ("DOJ") and the
Federal Trade Commission ("FTC") and the specified HSR Act waiting period
requirements have been satisfied. It is expected that Sierra Pacific and PGE
will submit the Notification and Report Forms and all required information to
the DOJ and FTC in early March.
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B. ATOMIC ENERGY ACT
PGE owns an interest in the Trojan nuclear electric generating
station. The Trojan station ceased operations in 1993 and is currently being
decommissioned. PGE holds NRC licenses with respect to its ownership interests
in the Trojan station. Section 184 of the Atomic Energy Act provides that no
license may be transferred, assigned or in any manner dispose of, directly or
indirectly, through transfer of control of any license to any person, unless the
NRC finds that the transfer is in accordance with the provisions of the Atomic
Energy Act and gives its consent in writing. PGE filed for such consent on
January 14, 2000, a copy of such request is attached hereto as Exhibit D-7.
C. FEDERAL POWER ACT
Section 203 of the Federal Power Act provides that no public utility
may sell or otherwise dispose of its jurisdictional facilities, directly or
indirectly merge or consolidate its facilities with those of any other person,
or acquire any security of any other public utility, without first having
obtained authorization from the FERC. Under Section 203, the FERC will approve a
merger if it finds the mergers "consistent with the public interest." FERC has
stated in a Policy Statement that, in analyzing a merger under Section 203, it
will evaluate the following criteria: (i) the effect of the merger on
competition in electric power markets, utilizing an initial screening approach
derived from the DOJ/FTC Horizontal Mergers Guidelines to determine if a merger
will result in an increase in an applicant's market power; (ii) the effect of
the merger on the applicants' wholesale sales and transmission customers; and
(iii) the effect of the merger on state and federal regulation of the
applicants. It is expected Sierra Pacific and PGE jointly will request FERC
approval of the Transaction in early March, 2000.
D. NEVADA PUC
The Applicants do not believe the Transaction is subject to the
jurisdiction of the Nevada PUC. Accordingly, Applicants filed on January 7,
2000, a Petition for Declaratory Relief requesting the Nevada PUC disclaim
jurisdiction over the Transaction. The Petition for Declaratory Relief is
attached hereto as Exhibit D-1. However, as described more fully in the
concurrent Application/Declaration requesting approval to form Sierra Pacific
Resources Services Company ("Sierra Pacific Services") (File 70-_____), the
Nevada PUC has an open docket to consider a shared services agreement proposed
by Sierra Pacific which predates the Transaction. The Services Agreement
proposed in the
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concurrent Application/Declaration will supplant the earlier proposed agreement
in the Nevada PUC docket.
E. OREGON PUC
PGE is subject to the jurisdiction of the Oregon PUC. Pursuant to
Oregon Revised Statutes Section 757.511, Oregon PUC approval is required for
Sierra Pacific to acquire all of the common stock of PGE. The acquisition of PGH
II is not subject to Oregon PUC jurisdiction. On January 18, 2000, Sierra
Pacific filed with the Oregon PUC an Application to acquire PGE, which is
attached hereto as Exhibit D-3.
Except as set forth above, no other state or federal regulatory body
has jurisdiction over the Transaction.
ITEM 5. PROCEDURE.
The Applicants respectfully request that the Commission issue and
publish not later than March 3, 2000, the requisite notice under Rule 23 with
respect to the filing of this Application, such notice to specify a date not
later than March 28, 2000, by which comments may be entered and a date not later
than September 1, 2000, as a date after which an order of the Commission
granting and permitting this Application to become effective may be entered by
the Commission.
The Applicants submit that a recommended decision by a hearing or
other responsible officer of the Commission is not needed for approval of the
proposed Transaction. The Division of Investment Management may assist in the
preparation of the Commission's decision. There should be no waiting period
between the issuance of the Commission's order and the date on which it is to
become effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
a. EXHIBITS.
A-1 Articles of Incorporation of Sierra Pacific
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A-2 By-Laws of Sierra Pacific (Exhibit (3)(A) to Form 10-K, File No. 1-8788,
filed March 21, 1997, and incorporated herein by reference)
A-3 Articles of Incorporation of PGE (Exhibit 4 to Form S-8, Registration No.
2-85001, filed July 7, 1983, and incorporated herein by reference)
A-4 By-Laws of PGE (Exhibit 3 to Form 10-K, File No. 1-5532, filed March 22,
1999, and incorporated herein by reference)
A-5 Articles of Incorporation of PGH II
A-6 By-Laws of PGH II
B-1 Stock Purchase Agreement (Appendix to Exhibit D-3 hereto)
D-1 Petition for Declaratory Relief filed with the Nevada PUC
D-2 Order of the Nevada PUC**
D-3 Application to the Oregon PUC
D-4 Order of the Oregon PUC**
D-5 Application to the FERC**
D-6 Order of the FERC**
D-7 Application to the NRC
D-8 Order of the NRC**
E-1 Map of SPPC's service area
E-2 Map of Nevada Power's service area
E-3 Map of PGE's service area
E-4 Map showing the combined service areas of SPPC, Nevada Power, and PGE
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E-5 Map showing the transmission system of SPPC (Exhibit E-1 hereto)
E-6 Map showing the transmission system of Nevada Power (Exhibit E-2 hereto)
E-7 Map showing the transmission system of PGE (Exhibit E-3 hereto)
E-8 Sierra Pacific organization chart
E-9 PGE organization chart
E-10 PGH II organization chart
E-11 Combined company organization chart after the Transaction
F-1 Opinion of Counsel**
F-2 Past Tense Opinion of Counsel**
G-1 Sierra Pacific's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (File No. 1-8788, filed March 23, 1999, and incorporated
herein by reference)
G-2 Sierra Pacific's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 (File No. 1-8788, filed November 15, 1999, and
incorporated herein by reference)
G-3 SPPC's Annual Report on Form 10-K for the fiscal year ended December 31,
1998 (File No. 0-508, filed March 23, 1999, and incorporated herein by
reference)
G-4 SPPC's Quarterly Report on Form 10-Q for the quarter ended September 30,
1999 (File No. 0-508, filed November 15, 1999, and incorporated herein by
reference)
G-5 Nevada Power's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (File No. 1-4698, filed March 19, 1999, and incorporated
herein by reference)
G-6 Nevada Power's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 (File No. 2-28348, filed November 15, 1999, and
incorporated herein by reference)
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G-7 PGE's Annual Report on Form 10-K for the fiscal year ended December 31,
1998 (File No. 1-5532, filed March 19, 1999, and incorporated herein by
reference)
G-8 PGE's Quarterly Report on Form 10-Q for the quarter ended September 30,
1999 (File No. 1-5532, filed November 15, 1999, and incorporated herein by
reference)
H-1 SPPC Gas System Retention Study
I-1 Opinion of Salomon Smith Barney
J-1 Proposed Form of Notice
B. FINANCIAL STATEMENTS.
FS-1 Sierra Pacific Consolidated Balance Sheet as of December 31, 1998
(previously filed with the Commission in Sierra Pacific Annual Report
on Form 10-K for the year ended December 31, 1998 (Exhibit G-1 hereto),
filed March 23, 1999, File No. 1-8788, and incorporated herein by
reference)
FS-2 Sierra Pacific Consolidated Balance Sheet as of September 30, 1999
(previously filed with the Commission in Sierra Pacific Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999 (Exhibit
G-2 hereto), filed November 15, 1999, File No. 1-8788, and incorporated
herein by reference)
FS-3 Sierra Pacific Consolidated Statement of Income for the 12 months ended
December 31, 1998 (previously filed with the Commission in Sierra
Pacific Annual Report on Form 10-K for the year ended December 31, 1998
(Exhibit G-1 hereto), filed March 23, 1999, File No. 1-8788, and
incorporated herein by reference)
FS-4 Sierra Pacific Consolidated Statement of Income for the 3 months ended
September 30, 1999 (previously filed with the Commission in Sierra
Pacific Quarterly Report on Form 10-Q for the quarter ended September
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30, 1999 (Exhibit G-2 hereto), filed November 15, 1999, File No.
1-8788, and incorporated herein by reference)
FS-5 PGE Consolidated Balance Sheet as of December 31, 1998 (previously
filed with the Commission in PGE Annual Report on Form 10-K for the
year ended December 31, 1998 (Exhibit G-7 hereto), filed March 19,
1999, File No. 1-5532, and incorporated herein by reference)
FS-6 PGE Consolidated Balance Sheet as of September 30, 1999 (previously
filed with the Commission in PGE Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999 (Exhibit G-8 hereto), filed November
15, 1999, File No. 1-5532, and incorporated herein by reference)
FS-7 PGE Consolidated Statement of Income for the 12 months ended December
31, 1998 (previously filed with the Commission in PGE Annual Report on
Form 10-K for the year ended December 31, 1998 (Exhibit G-7 hereto),
filed March 19, 1999, File No. 1-5532, and incorporated herein by
reference)
FS-8 PGE Consolidated Statement of Income for the 3 months ended September
30, 1999 (previously filed with the Commission in PGE Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999 (Exhibit G-8
hereto), filed November 15, 1999, File No. 1-5532, and incorporated
herein by reference)
FS-9 Pro Forma Combined Financial data for Sierra Pacific and PGE**
**To be filed by amendment
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ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
The Transaction will not involve major federal action significantly
affecting the quality of the human environment as those terms are used in
Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C. Section
4321 et seq. ("NEPA"). First, no major federal action within the meaning of NEPA
is involved Second, consummation of the Transaction will not result in changes
in the operations of PGE or the subsidiaries of Sierra Pacific that would have
any significant impact on the environment. To the Applicants' knowledge, no
federal agency is preparing an environmental impact statement with respect to
this matter.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned Applicants have duly caused this
Application to be signed on their behalf by the undersigned thereunto duly
authorized.
SIERRA PACIFIC RESOURCES:
By: /s/ William E. Peterson Date: 2/3/00
------------------------------------ ------
Name: William E. Peterson
-----------------------------------
Title: Senior Vice President, General Counsel and Corporate Secretary
--------------------------------------------------------------------
Portland General Electric Company:
By: /s/ Date: 2/3/00
-------------------------------------------- ------
Name: Alvin L. Alexanderson
------------------------------------------
Title: Senior Vice President, General Counsel, Secretary
------------------------------------------------------
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned Applicants have duly caused this Application to be
signed on their behalf by the undersigned thereunto duly authorized.
SIERRA PACIFIC RESOURCES:
By: /s/ Date: 2/3/00
--------------------------------------------- ------
Name: William E. Peterson
-------------------------------------------
Title: Senior Vice President, General Counsel and Corporate Secretary
-------------------------------------------------------------------
Portland General Electric Company:
By: /s/ Alvin L. Alexanderson Date: 2/3/00
---------------------------------- ------
Name: Alvin L. Alexanderson
--------------------------------
Title: Senior Vice President, General Counsel, Secretary
------------------------------------------------------
76
CERTIFICATE
OF
RESTATED
ARTICLES OF INCORPORATION
OF
SIERRA PACIFIC RESOURCES
SIERRA PACIFIC RESOURCES, a corporation organized under the laws of
the State of Nevada (the "Corporation"), by its President and Secretary, does
hereby certify:
(1) That by resolution of the Board of Directors of the Corporation
adopted at a regular meeting of the Board of Directors held on July 13, 1999,
the Board of Directors authorized and directed the President and Secretary of
the Corporation to execute and file this certificate to restate in a single
certificate the articles of incorporation of the Corporation, as amended to the
date of this Certificate.
(2) That the following is a correct restatement of the entire text of
the Restated Articles of Incorporation of the Corporation, as amended to the
date of this Certificate:
[this space intentionally left blank]
1
<PAGE>
RESTATED
ARTICLES OF INCORPORAITON
OF
SIERRA PACIFIC RESOURCES
(Effective Date: July 28, 1999)
History of Changes
------------------
Original Articles Filed December 12, 1983
Amended-Restated Articles on July 11, 1985 and Filed August 14, 1985
Amended-Restated Articles on May 18, 1987 and Filed October 23, 1987
Amended-Restated Articles on May 16, 1989 and Filed May 22, 1989
Amended-Restated Articles on May 21, 1990 and Filed October 5, 1990
Amended in Articles of Merger Filed on July 28, 1999
<PAGE>
RESTATED ARTICLES OF INCORPORATION
OF
SIERRA PACIFIC RESOURCES
ARTICLE I
---------
NAME
----
The name of the corporation is SIERRA PACIFIC RESOURCES.
ARTICLE II
----------
PRINCIPAL PLACE OF BUSINESS
---------------------------
The location of the Corporation's principal office or place of
business in the State of Nevada shall be 6100 Neil Road, Sierra Plaza, P.O. Box
30150, Reno, Washoe County, Nevada 89520. The Corporation may maintain an office
or offices in such other place within or without the State of Nevada as may be
from time to time designated by the Board of Directors or by the By-Laws of the
Corporation, and the Corporation may conduct all Corporation business of every
kind and nature relative to the purposes of the Corporation, including the
holding of meetings of directors and stockholders, outside the State of Nevada
as well as in the State of Nevada.
ARTICLE III
-----------
PURPOSE
-------
The purpose for which the Corporation is organized is to transact any
or all lawful business for which corporations may be incorporated under the
Nevada Revised Statutes, Chapter 78.
2
<PAGE>
ARTICLE IV
----------
TERM OF EXISTENCE
-----------------
The Corporation shall have a perpetual existence.
ARTICLE V
---------
CAPITAL STOCK AND AMENDMENTS TO
-------------------------------
ARTICLES OF INCORPORATION
-------------------------
Authorized Capital Stock
------------------------
Section 1:
- ---------
The amount of the total authorized capital stock of the Corporation is
two hundred fifty million (250,000,000) shares of common stock of $1.00 par
value. Said shares may be issued by the Corporation from time to time for such
consideration as may be fixed from time to time by the Board of Directors.
Voting Rights
-------------
Section 2:
- ---------
The holders of common stock shall exclusively possess full voting
rights for the election of directors and for all other purposes. Each holder of
record of shares of common stock entitled to vote at any meeting of stockholders
shall, as to all matters in respect of which such stock has voting power, be
entitled, except as otherwise provided herein or in the By-Laws of the
Corporation, to one vote for each share of such stock held and owned by him, as
shown by the stock books of the Corporation, and may cast such vote in person or
by proxy.
3
<PAGE>
Preemptive Rights
-----------------
Section 3:
- ---------
No holder of any stock, or of rights or options to purchase stock of
the Corporation of any class, now or hereafter authorized, shall have any
preferential or preemptive right to purchase or subscribe for any part of any
stock of the Corporation, now or hereafter authorized or any bonds, certificates
of indebtedness, debentures, options, warrants or other securities convertible
into or evidencing the right to purchase stock of the Corporation, but any such
stock or securities convertible into or evidencing the right to purchase stock
may at any time be issued and disposed of by the Board of Directors to such
purchasers, in such manner, for such lawful consideration and upon such terms as
the Board of Directors may, in its discretion, determine without offering any
thereof on the same terms or on any terms to all or any stockholders, as such,
of the Corporation.
Scrip Certificates
------------------
Section 4:
- ---------
No certificates for fractional shares of any class of stock shall be
issued. In lieu thereof, scrip certificates or other evidences of ownership of
fractional interests in shares of the stock of the Corporation may be issued by
the Corporation representing rights to such fractional shares and exchangeable,
when accompanied by other certificates in such amount as to represent in the
aggregate one or more full shares of stock, for certificates for full shares of
4
<PAGE>
stock. The holders of scrip certificates or other evidences of ownership of
fractional interests in shares of stock of the Corporation will not be entitled
to any rights as stockholders of the Corporation until the scrip certificates
are so exchanged. Such scrip certificates may, at the election of the Board of
Directors of the Corporation, be in bearer form, shall be non-dividend bearing,
non-voting and shall have such expiration date as the Board of Directors of the
Corporation shall determine at the time of the authorization or issuance of such
scrip certificates.
Amendments of Articles of Incorporation
---------------------------------------
Section 5:
- ---------
The provisions of the Articles of Incorporation, except as expressly
otherwise herein provided or otherwise required by law, may be amended or
altered by a vote of the holders of a majority of the common stock of the
Corporation then issued, outstanding and entitled to vote.
ARTICLE VI
----------
BOARD OF DIRECTORS
------------------
The members of the governing board of the Corporation shall be known
as Directors, and the number of Directors shall be as fixed in the By-Laws and
may, from time to time, be increased or described by a two-thirds (2/3)
affirmative vote of the entire Board of Directors provided that the number shall
not be increased to more than fifteen (15). Directors need not be stockholders
5
<PAGE>
of the Corporation, however, they shall be at least twenty-one (21) years of age
and at least a majority of them shall be citizens of the United States.
The Directors of this Corporation shall be divided into three classes:
Class I, Class II and Class III. Such classes shall be as nearly equal in number
as possible. The term of office of the initial Class I Directors shall expire at
the Annual Meeting of Stockholders in 1986; the term of office of the initial
Class II Directors shall expire at the Annual Meeting of Stockholders in 1987;
and the term of office of the initial Class III Directors shall expire at the
Annual Meeting of Stockholders in 1988; or in each case thereafter when their
respective successors are elected and have qualified. At each annual election
held after the initial election of Directors according to classes, the Directors
chosen to succeed those whose terms then expire, shall be identified as being of
the same class of the Directors they succeed and shall be elected for a term
expiring at the third succeeding Annual Meeting of Stockholders or in each case
thereafter when their respective successors are elected and have qualified. If
the number of Directors has changed, any increase or decrease in Directors shall
be apportioned among the classes so as to maintain all classes as nearly equal
in number as possible, but in no case shall the decrease in number of Directors
shorten the term of any incumbent Director.
A Director or Directors may be removed from office only by the vote of
stockholders representing not less than two-thirds (2/3) of the issued and
outstanding capital stock entitled to vote generally in the election of
Directors.
Vacancies occurring in the Board of Directors for any reason,
including any newly created directorships resulting from an increase in the
6
<PAGE>
number of Directors shall be filled by the affirmative vote of a majority of the
remaining Directors, though less than a quorum. Each Director so chosen shall
hold office until the expiration of the term of Director, if any, whom he or she
has been chosen to succeed, or if none, until the expiration of the term of the
class assigned to the newly created directorship to which he or she has been
elected and until his or her successor shall be duly elected and qualified or
until his or her earlier death, resignation or removal.
Notwithstanding any other provisions of these Articles of
Incorporation or the By-Laws of the Corporation (and notwithstanding the fact
that a lesser percentage may be specified by law, these Articles of
Incorporation or the By-Laws of the Corporation), the affirmative vote of the
holders of sixty-six and two-thirds percent (66 2/3%) or more of the Common
Stock of the Corporation then issued, outstanding and entitled to vote, shall be
required to amend or repeal, or adopt any provisions inconsistent with, this
Article VI, unless two-thirds (2/3) of the entire Board of Directors approves
any such amendment, in which case, the affirmative vote of the holders of a
majority of the Common Stock of the Corporation then issued, outstanding and
entitled to vote shall be required.
ARTICLE VII
-----------
STOCK NON-ASSESSABLE
--------------------
The capital stock, after the amount of the subscription price, or par
value, has been paid in, shall not be subject to assessment to pay the debts of
the Corporation.
7
<PAGE>
ARTICLE VIII
------------
FAIR PRICE PROVISIONS
---------------------
Section 1:
- ---------
(A) In addition to any affirmative vote required by law or these
Articles of Incorporation, and except as otherwise expressly provided in
paragraph 2 of this Article VIII:
(i) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with (a) any Interested
Stockholder (as hereinafter defined) or (b) any other corporation
(whether or not itself an Interested Stockholder) which is, or after
such merger or consolidation would be, an Affiliate (as hereinafter
defined) of an Interested Stockholder; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of transactions) to
or with any Interested Stockholder of any assets of the Corporation or
any Subsidiary having an aggregate Fair Market Value (as hereinafter
defined) of $1,000,000 or more; or
8
<PAGE>
(iii) the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of transactions) of any
securities of the Corporation or any Subsidiary to any Interested
Stockholder or any Affiliate of any Interested Stockholder in exchange
for cash, securities or other property (or a combination thereof)
having any aggregate Fair Market Value of $1,000,000 or more; or
(iv) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an
Interested Stockholder or any Affiliate of any Interested Stockholder;
or
(v) any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any
other transaction (whether or not with or into or otherwise involving
an Interested Stockholder) which has the effect, directly or
indirectly, of increasing the proportionate share of the outstanding
shares of any class of equity or convertible securities of the
Corporation of any Subsidiary which is directly or indirectly owned by
any Interested Stockholder or any Affiliate of any Interested
Stockholder;
shall require the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66 2/3%) of the then outstanding shares of common
stock of the Corporation authorized to be issued from time to time under
Article V of these Articles of Incorporation (the "Common Stock"). Such
affirmative vote shall be required notwithstanding the fact that no vote
9
<PAGE>
may be required, or that a lesser percentage may be specified, by law or in
any agreement with any national securities exchange or otherwise.
(B) The term "Business Combination" as use in this Article VIII shall
mean any transaction which is referred to in any one or more of clauses (i)
through (v) of subparagraph (A) of this paragraph 1.
Section 2:
- ---------
The provisions of paragraph 1 of this Article VIII shall not be
applicable to any particular Business Combination, and such Business Combination
shall require only such affirmative vote as is required by law and any other
provision of these Articles of Incorporation, if all of the conditions specified
in either of the following subparagraphs (A) or (B) are met:
(A) The Business Combination shall have been approved by a majority
of the Continuing Directors (as hereinafter defined); provided, however,
that such approval shall only be effective if obtained at a meeting at
which a Continuing Director Quorum (as hereinafter defined) is present, or
(B) All of the following conditions have been met:
(i) The aggregate amount of (x) cash and (y) Fair Market Value
as of the date of the consummation of the Business Combination of
consideration other than cash, to be received per share by holders of
the Corporation's Common Stock in such Business Combination
transaction shall be at least equal to the highest amount determined
under sub-clauses (a), (b) and (c) below:
10
<PAGE>
(a) (if applicable) the highest per share price (including
any brokerage commissions, transfer taxes and soliciting dealers'
fees) paid by the Interested Stockholders for any share of Common
Stock acquired by it (1) within the two- year period immediately
prior to the first public announcement of the proposal of the
Business Combination (the "Announcement Date") or (2) in the
transaction in which it became an Interested Stockholder,
whichever is higher;
(b) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder (such latter date is
referred to in this Article VIII as the "Determination Date"),
whichever is higher; and
(c) (if applicable) the price per share equal to the Fair
Market Value per share of Common Stock determined pursuant to
subparagraph (B)(i)(b) above, multiplied by the ratio of (1) the
highest per share price (including any brokerage commissions,
transfer taxes and soliciting dealers' fees) paid by the
Interested Stockholder for any shares of Common Stock acquired by
it within the two-year period immediately prior to the
Announcement Date to (2) the Fair Market Value per share of
11
<PAGE>
Common Stock on the first day in such two-year period in which
the Interested Stockholder acquired any shares of Common Stock.
(ii) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business
Combination: (a) except as approved by a majority of the Continuing
Directors, there shall have been no failure to declare and pay at the
regular date therefor any full quarterly dividends (whether or not
cumulative) on any stock of the Corporation having preferential
dividend rights; (b) there shall have been (1) no reduction in the
annual rate of dividends paid on the Common Stock (except as necessary
to reflect any subdivision of the Common Stock), except as approved by
a majority of the Continuing Directors, and (2) an increase in such
annual rate of dividends as necessary to reflect any reclassification
(including any reverse stock split), recapitalization, reorganization
or any similar transaction which has the effect of reducing the number
of outstanding shares of the Common Stock, unless the failure so to
increase such annual rate is approved by a majority of the Continuing
Directors; and (c) such Interested Stockholder shall not have become
the beneficial owner of any additional shares of Common Stock except
as part of the transaction which results in such Interested
Stockholder becoming an Interested Stockholder. The approval by a
majority of the Continuing Directors of an exception to the
requirements set forth in clauses (a) and (b) above shall only be
12
<PAGE>
effective if obtained at a meeting at which a Continuing Director
Quorum is present.
(iii) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the
benefit, directly or indirectly (except proportionately as a
stockholder) of any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax advantages
provided by the Corporation, whether in anticipation of or in
connection with such Business Combination or otherwise.
(iv) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder (or any subsequent provisions replacing such Act, rules or
regulations) shall be mailed to public stockholders of the Corporation
at least 30 days prior to the consummation of such Business
Combination (whether or not such proxy or information statement is
required to be mailed pursuant to such Act or subsequent provisions).
Section 3:
- ---------
For the purpose of this Article VIII
(A) The term "person" shall mean any individual, firm, corporation,
or other entity.
13
<PAGE>
(B) The term "Interested Stockholder" shall mean any person (other
than the Corporation or any Subsidiary and other than any profit-sharing,
employee stock ownership, or other employee benefit plan of the Corporation or
any Subsidiary or any trustee or fiduciary with respect to any such plan when
acting in such capacity) who or which:
(i) is the beneficial owner (as hereinafter defined) of more
than ten percent (10%) of the Common Stock; or
(ii) is an Affiliate (as hereinafter defined) of the Corporation
and at any time within the two-year period immediately prior to the date in
question was the beneficial owner of ten percent (10%) or more of the Common
Stock; or
(iii) is an assignee of or has otherwise succeeded to any shares
of Common Stock which were at any time within the two-year period immediately
prior to the date in question beneficially owned by any Interested Stockholder,
if such assignment or succession shall have occurred in the course of a
transaction or series of transactions not involving a public offering within the
meaning of the Securities Act of 1933.
(C) A person shall be a "beneficial owner" of any Common Stock:
(i) which such persons or any of its Affiliates or Associates
(as hereinafter defined) beneficially owns, directly or indirectly; or
(ii) which such person or any of its Affiliates or Associates
has, directly or indirectly, (a) the right to acquire (whether such right is
exercisable immediately or only after the passage of time), pursuant to any
agreement, arrangement, or understanding, or upon the exercise of conversion
14
<PAGE>
rights, exchange rights, warrants or options, or otherwise, or (b) the right to
vote pursuant to any agreement, arrangement or understanding; or
(iii) which is beneficially owned, directly or indirectly, by any
other person with which such person or any of its Affiliates or Associates has
any agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of Common Stock.
(D) For purposes of determining whether a person is an Interested
Stockholder pursuant to subparagraph (B) of this paragraph 3, the number of
shares of Common Stock deemed to be outstanding shall include shares deemed
owned through application of subparagraph (C) of this paragraph 3 but shall not
include any other shares of Common Stock which may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion rights,
warrants or options, or otherwise.
(E) The term "Affiliate" or "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as in effect on April 1,
1985, or amendments thereto.
(F) The term "Subsidiary" means any corporation of which a majority
of any class of equity security is owned, directly or indirectly, by the
Corporation, provided, however, that for the purposes of the definition of
Interested Stockholder set forth in subparagraph (B) of this paragraph 3, the
term "Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned, directly or indirectly, by the Corporation.
15
<PAGE>
(G) The term "Continuing Director" means any member of the Board of
Directors of the Corporation (the "Board") who is unaffiliated with the
Interested Stockholder and was a member of the Board prior to the time that the
Interested Stockholder became an Interested Stockholder, and any successor of a
Continuing Director who is unaffiliated with the Interested Stockholder and is
recommended to succeed a Continuing Director by a majority of Continuing
Directors, provided that such recommendation or election shall only be effective
if made at a meeting at which a Continuing Director Quorum is present.
(H) The term "Continuing Director Quorum" means six Continuing
Directors capable of exercising the powers conferred upon them under the
provisions of the Articles of Incorporation or By-Laws of the Corporation or by
law.
(I) The term "Fair Market Value" means: (i) in the case of stock, the
highest closing sale price during the 30-day period immediately preceding the
date in question of a share of such stock on the Composite Tape for New York
Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite
Tape, on the New York Stock Exchange, or, if such stock is not listed on such
Exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934 on which such stock is listed, or, if such
stock is not listed on any such exchange, the highest closing bid quotation with
respect to a share of such stock during the 30-day period preceding the date in
question on the National Association of Securities Dealers, Inc., Automated
Quotations System or any system then in use, or if no such quotations are
available, the fair market value on the date in question of such stock as
determined by the Board in good faith, and (ii) in the case of the property
16
<PAGE>
other than cash or stock, the fair market value of such property on the date in
question as determined in good faith by a majority of Continuing Directors,
provided that such determination shall only be effective if made at a meeting at
which a Continuing Director Quorum is present.
(J) In the event of any Business Combination in which the Corporation
survives, the phrase "other consideration to be received" as used in
subparagraphs (B)(i) and (ii) of paragraph 2 of this Article VIII shall include
the shares of Common Stock retained by the holders of such shares.
Section 4:
- ---------
Nothing contained in this Article VIII shall be construed to relieve
any Interested Stockholder from any fiduciary obligation imposed by law.
Section 5:
- ---------
Notwithstanding any other provisions of these Articles of
Incorporation or the By-Laws of the Corporation (and notwithstanding the fact
that a lesser percentage may be specified by law, these Articles of
Incorporation or the By-Laws of the Corporation), the affirmative vote of the
holders of sixty-six and two-thirds percent (66 2/3%) or more of the shares of
Common Stock shall be required to amend or repeal, or adopt any provisions
inconsistent with this Article VIII.
17
<PAGE>
ARTICLE IX
----------
SPECIAL PROVISIONS
------------------
Section 1:
- ---------
The private property of the stockholders, directors, or officers shall
not be subject to the payment of any corporate debts to any extent whatsoever.
Section 2:
- ---------
(A) To the fullest extent that the laws of the State of Nevada, as in
effect on March 18, 1987, or as thereafter amended, permit elimination or
limitation of the liability of directors and officers, no Director, officer,
employee, fiduciary or authorized representative of the Company shall be
personally liable for monetary damages as such for any action taken, or any
failure to take any action, as a Director, officer or other representative
capacity.
(B) This Article shall not apply to any action filed prior to March
18, 1987, nor to any breach of performance or failure of performance of duty by
a Director, officer, employee, fiduciary, or authorized representative occurring
prior to March, 1987. Any amendment or repeal of this Article which has the
effect of increasing Director liability shall operate prospectively only, and
shall not affect any action taken, or any failure to act, prior to its adoption.
Section 3:
- ---------
(A) Right to Indemnification. Except as prohibited by law, every
------------------------
director and officer of the company shall be entitled as a matter of right to be
18
<PAGE>
indemnified by the company against reasonable expense and any liability paid or
incurred by such person in connection with any actual or threatened claim,
action, suit or proceeding, civil, criminal, administrative, investigative or
other, whether brought by or in the right of the company or otherwise, in which
he or she may be involved, as a party or otherwise, by reason of such person
being or having been a Director or officer of the company or by reason of the
fact that such person is or was serving at the request of the company as a
Director, officer, employee, fiduciary or other representative of the
Corporation or another corporation, partnership, joint venture, trust, employee
benefit plan or other entity (such claim, action, suit, or proceeding
hereinafter being referred to as "action"); provided, however, that no such
right of indemnification shall exist with respect to an action brought by a
director or officer against the company (other than a suit for indemnification
as provided in paragraph (B)). Such indemnification shall include the right to
have expenses incurred by such person in connection with an action paid in
advance by the company prior to final disposition of such action, subject to
such conditions as may be prescribed by law. As used herein, "expense" shall
include fees and expenses of counsel selected by such person; and "liability"
shall include amounts of judgments, excise taxes, fines and penalties, and
amounts paid in settlement.
(B) Right of Claimant to Bring Suit. If a claim under paragraph (A)
-------------------------------
of this Section is not paid in full by the company within thirty days after a
written claim has been received by the company, the claimant may at any time
thereafter bring suit against the company to recover the unpaid amount of the
claim, and, if successful in whole or in part, the claimant shall also be
19
<PAGE>
entitled to be paid the expense of prosecuting such claim. It shall be a defense
to any such action that the conduct of the claimant was such that under Nevada
law the company would be prohibited from indemnifying the claimant for the
amount claimed, but the burden of proving such defense shall be on the company.
Neither the failure of the company (including its Board of Directors,
independent legal counsel and its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because the conduct of the claimant was not such
that indemnification would be prohibited by law, nor an actual determination by
the company (including the Board of Directors, independent legal counsel, or its
stockholders) that the conduct of the claimant was such that indemnification
would be prohibited by law, shall be a defense to the action or create a
presumption that the conduct of the claimant was such that indemnification would
be prohibited by law.
(C) Insurance and Funding. The Company may purchase and maintain
---------------------
insurance to protect itself and any person eligible to be indemnified hereunder
against any liability or expense asserted or incurred by such person in
connection with any action, whether or not the company would have the power to
indemnify such person against such liability or expense by law or under the
provisions of this Section 3. The company may make other financial arrangements
which include a trust fund, program of self-insurance, grant a security interest
or other lien on any assets of the corporation, establish a letter of credit,
guaranty or surety as set forth in 1987 Statutes of Nevada, Chapter 28 to ensure
the payment of such sums as may become necessary to effect indemnification as
provided herein.
20
<PAGE>
(D) Non-Exclusive; Nature and Extent of Rights. The right of
------------------------------------------
indemnification provided for herein (1) shall not be deemed exclusive of any
other rights, whether now existing or hereafter created, to which those seeking
indemnification hereunder may be entitled under any agreement, by-law or article
provision, vote of stockholders or directors or otherwise, (2) shall be deemed
to create contractual rights in favor of persons entitled to indemnification
hereunder, (3) shall continue as to persons who have ceased to have the status
pursuant to which they were entitled or were denominated as entitled to
indemnification hereunder and shall inure to the benefit of the heirs and legal
representatives of persons entitled to indemnification hereunder and (4) shall
be applicable to actions, suits or proceedings commenced after the adoption
hereof, whether arising from acts or omissions occurring before or after the
adoption hereof. The right of indemnification provided for herein may not be
amended, modified or repealed so as to limit in any way the indemnification
provided for herein with respect to any acts or omissions occurring prior to the
adoption of any such amendment or repeal.
Section 4:
- ---------
In furtherance, and not in limitation, of the powers conferred by
statute, the Board of Directors, by majority vote of those present at any called
meeting, is expressly authorized:
(A) To hold its meetings, to have one or more offices, and to keep
the books of the Corporation, except as may be otherwise specifically required
21
<PAGE>
by the laws of the State of Nevada, within or without the State of Nevada, at
such places as may be from time to time designated by it.
(B) To determine from time to time whether, and if allowed under what
conditions and regulations, the accounts and books of the Corporation (other
than the books required by law to be kept at the principal office of the
Corporation in Nevada), or any of them, shall be open to inspection of the
stockholders, and the stockholders' rights in this respect are and shall be
restricted or limited accordingly.
(C) To make, alter, amend and rescind the By-Laws of the Corporation,
to fix the amount to be reserved as working capital, to fix the times for the
declaration and payment of dividends, and to authorize and cause to be executed
mortgages and liens upon the real and personal property of the Corporation.
(D) To designate from its number an executive committee, which, to
the extent provided by the By-Laws of the Corporation or by resolution of the
Board of Directors, shall have and may exercise in the intervals between
meetings of the Board of Directors, the powers thereof which may lawfully be
delegated in respect of the management of the business and the affairs of the
Corporation, and shall have power to authorize the seal of the Corporation to be
affixed to such papers as may require it. The Board of Directors may also, in
its discretion, designate from its number a finance committee and delegate
thereto such of the powers of the Board of Directors as may be lawfully
delegated, to be exercised when the Board is not in session.
22
<PAGE>
ARTICLE X
---------
OTHER CONSTITUENCIES PROVISIONS
-------------------------------
In taking action, including (but not limited to) action which may
involve or relate to a change or potential change in the control of the
Corporation, the Board of Directors of the Corporation shall be entitled to
consider, without limitation, (1) both the long-term and the short-term
interests of the Corporation and its stockholders and (2) the effects that the
Corporation's actions may have in the short-term or in the long-term upon any of
the following: (i) the prospects for potential growth, development,
productivity, and profitability of the Corporation; (ii) the Corporation's
current employees; (iii) the Corporation's creditors; and (iv) the ability of
the Corporation to provide, as a going concern, goods, services, employment
opportunities and employment benefits and otherwise to contribute to the
communities in which it does business and to serve the public interest. Nothing
in this paragraph shall create any duties owed by any Director to any person or
entity to consider or afford any particular weight to any of the foregoing. For
purposes of this paragraph, "control" shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of the Corporation, whether through the ownership of voting stock, by
contract or other.
23
<PAGE>
IN WITNESS WHEREOF, the said SIERRA PACIFIC RESOURCES has caused this
Certificate to be signed by its President and its Secretary, and its corporate
seal to be hereto affixed this 28th day of July, 1999.
SIERRA PACIFIC RESOURCES
By /s/ Malyn K. Malquist
-----------------------------------
Malyn K. Malquist, President
By /s/ William E. Peterson
-----------------------------------
William E. Peterson, Secretary
24
ARTICLES OF INCORPORATION
OF
PGH II, INC.
Matt A. Maxwell, as incorporator under the Oregon Business Corporation
Act, adopts the following Articles of Incorporation:
ARTICLE 1.
The name of the corporation is PGH II, Inc.
ARTICLE 2.
The purpose for which this corporation is organized is to engage in
any lawful business as authorized by the provisions of the Oregon Business
Corporation Act and to do anything in the operation of this corporation or for
the accomplishment of any of its purposes or for the exercise of any of its
powers necessary or beneficial to this corporation.
ARTICLE 3.
The aggregate number of shares which this corporation shall have
authority to issue is 10,000, all of which are to be of the par value of $1.00
each and all of one class and all to be designated as the Common Stock of the
corporation. No shareholder shall have any preemptive right to acquire shares of
this corporation, whether of shares originally authorized herein or other shares
which may subsequently be authorized.
1
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ARTICLE 4.
The address of the initial registered office of the corporation is:
520 S.W. Yamhill, Suite 800
Portland, Oregon 97204
and the name of its initial registered agent at such address is:
CT Corporation System
and the address to which notices required by the Oregon business corporation Act
may be mailed is:
121 SW Salmon Street
1-WTC-13
Portland, OR 97204
Attention: Legal Department
ARTICLE 5.
The number of directors constituting the Board of Directors shall
consist of not less than 3 or more than 7 persons, the exact number to be fixed
from time to time by a resolution adopted by a majority of the total number of
directors then in office, though less than a quorum, or by a sole remaining
director, at a regular or special meeting of the Board of Directors, provided
that no decrease in the number of directors shall shorten the term of any
incumbent director.
Any vacancy occurring in the Board of Directors, including a vacancy
created by reason of an increase in the number of directors, may be filled by a
majority vote of the directors then in office, though less than a quorum, or by
a sole remaining director, acting at a regular or special meeting of the Board
2
<PAGE>
of Directors, such new directors to serve until a successor shall be duly
elected and qualified.
ARTICLE 6.
The name and address of the incorporator is:
Matt A. Maxwell
1400 Smith Street, Suite 4804
Houston, Texas 77002
ARTICLE 7.
This corporation shall have the right to make distributions to the
shareholders as provided in the Oregon Business Corporation Act as it shall be
in effect form time to time.
ARTICLE 8.
To the fullest extent permitted by law, no director of this
corporation shall be personally liable to the corporation or its shareholders
for monetary damages for conduct as a director. No amendment or repeal of this
provision shall adversely affect any right or protection of a director existing
at the time of such amendment or repeal. No change in the law shall reduce or
eliminate the rights and protections applicable at the time this provision shall
become effective unless the change in law shall specifically require such
reduction or elimination.
ARTICLE 9.
Articles 1, 2, 3, 5, 7, 8 and 9 may be amended or repealed only upon a
majority vote of the shareholders.
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<PAGE>
IN WITNESS WHEREOF, the undersigned incorporator declares under
penalties of perjury that she has examined the foregoing document and to the
best of her knowledge and belief, it is true, correct and complete.
DATED this 27th day of August, 1999.
/s/ Matt A. Maxwell
----------------------------------------
Matt A. Maxwell
Incorporator
BYLAWS
OF
PGH II, INC.
An Oregon Corporation
Date of Adoption
August 27, 1999
<PAGE>
BYLAWS
TABLE OF CONTENTS
Page
----
Article I Offices 1
- -----------------
Section 1. Registered Office......................................1
Section 2. Other Offices..........................................1
Article II Stockholders 1
- -----------------------
Section 1. Place of Meetings......................................1
Section 2. Quorum; Adjournment of Meetings........................1
Section 3. Annual Meetings........................................2
Section 4. Special Meetings.......................................2
Section 5. Record Date............................................2
Section 6. Notice of Meetings.....................................3
Section 7. Stockholder List.......................................3
Section 8. Proxies................................................4
Section 9. Voting; Elections; Inspectors..........................4
Section 10. Conduct of Meetings....................................5
Section 11. Treasury Stock.........................................5
Section 12. Action Without Meeting.................................5
Section 13. Business to be Brought Before the Annual Meeting.......6
Article III Board of Directors 7
- ------------------------------
Section 1. Power; Number; Term of Office..........................7
Section 2. Quorum; Voting.........................................7
Section 3. Place of Meetings; Order of Business...................7
Section 4. First Meeting..........................................8
Section 5. Regular Meetings.......................................8
Section 6. Special Meetings.......................................8
Section 7. Nomination of Directors................................8
Section 8. Removal................................................9
Section 9. Vacancies; Increases in the Number of Directors........9
Section 10. Compensation..........................................10
Section 11. Action Without a Meeting; Telephone Conference
Meetings..............................................10
Section 12. Approval or Ratification of Acts or Contracts by
Stockholders..........................................10
Article IV Committees 10
- ---------------------
Section 1. Executive Committee...................................10
Section 2. Audit Committee.......................................11
Section 3. Other Committees......................................11
Section 4. Procedure; Meetings; Quorum...........................11
Section 5. Substitution and Removal of Members; Vacancies........11
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Section 6. Limitation on Power and Authority of Committees.......12
Article V Officers 12
- ------------------
Section 1. Number, Titles and Term of Office.....................12
Section 2. Powers and Duties of the Chairman of the Board........12
Section 3. Powers and Duties of the Chief Executive Officer......12
Section 4. Powers and Duties of the President....................13
Section 5. Powers and Duties of the Vice Chairman of the Board...13
Section 6. Vice Presidents.......................................13
Section 7. General Counsel.......................................13
Section 8. Secretary.............................................14
Section 9. Deputy Corporate Secretary and Assistant Secretaries..14
Section 10. Treasurer.............................................14
Section 11. Assistant Treasurers..................................14
Section 12. Action with Respect to Securities of Other
Corporations..........................................15
Section 13. Delegation............................................15
Article VI Capital Stock 15
- ------------------------
Section 1. Certificates of Stock.................................15
Section 2. Transfer of Shares....................................16
Section 3. Ownership of Shares...................................16
Section 4. Regulations Regarding Certificates....................16
Section 5. Lost or Destroyed Certificates........................16
Article VII Miscellaneous Provisions 16
- ------------------------------------
Section 1. Fiscal Year...........................................16
Section 2. Corporate Seal........................................16
Section 3. Notice and Waiver of Notice...........................17
Section 4. Facsimile Signatures..................................17
Section 5. Reliance upon Books, Reports and Records..............17
Section 6. Application of Bylaws.................................17
Article VIII Amendments 18
- -----------------------
ii
<PAGE>
BYLAWS
OF
PGH II, INC.
ARTICLE I
Offices
-------
Section 1. Registered Office. The registered office of the Corporation required
by the state of incorporation of the Corporation to be maintained in the state
of incorporation of the Corporation shall be the registered office named in the
original charter documents of the Corporation, or such other ' office as may be
designated from time to time by the Board of Directors in the manner provided by
law.
Section 2. Other Offices. The Corporation may also have offices at such other
places both within and without the state of incorporation of the Corporation as
the Board of Directors may from time to time determine or the business of the
Corporation may require.
ARTICLE II
Stockholders
------------
Section 1. Place of Meetings. All meetings of the stockholders shall be held at
the principal office of the Corporation, or at such other place within or
without the state of incorporation of the Corporation as shall be specified or
fixed in the notices or waivers of notice thereof.
Section 2. Quorum; Adjournment of Meetings. Unless otherwise required by law or
provided in the charter documents of the Corporation or these Bylaws, (i) the
holders of a majority of the voting power attributable to the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at any meeting of stockholders for the
transaction of business, (ii) in all matters other than election of directors,
the affirmative vote of the holders of a majority of the voting power
attributable to such stock so present or represented at any meeting of
stockholders at which a quorum is present shall constitute the act of the
stockholders, and (iii) where a separate vote by a class or classes is required,
a majority of the voting power attributable to the outstanding shares of such
class or classes, present in person or represented by proxy shall constitute a
quorum entitled to take action with respect to that vote on that matter and the
affirmative vote of the majority of the voting power attributable to the shares
of such class or classes present in person or represented by proxy at the
meeting shall be the act of such class.
Directors shall be elected by a plurality of the votes of the shares present in
person or represented by proxy at the meeting and entitled to vote on the
election of directors.
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Notwithstanding the other provisions of the charter documents of the Corporation
or these Bylaws, the chairman of the meeting or the holders of a majority of the
voting power attributable to the issued and outstanding stock, present in person
or represented by proxy and entitled to vote thereat, at any meeting of
stockholders, whether or not a quorum is present, shall have the power to
adjourn such meeting from time to time, without any notice other than
announcement at the meeting of the time and place of the holding of the
adjourned meeting. If the adjournment is for more than thirty (30) days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at such meeting. At such adjourned meeting at which a quorum
shall be present or represented any business may be transacted which might have
been transacted at the meeting as originally called.
Section 3. Annual Meetings. An annual meeting of the stockholders, for the
election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place (within or without the state of incorporation of the
Corporation), on such date, and at such time as the Board of Directors shall fix
and set forth in the notice of the meeting, which date shall be within thirteen
(13) months subsequent to the last annual meeting of stockholders.
Section 4. Special Meetings. Unless otherwise provided in the charter documents
of the Corporation, special meetings of the stockholders for any purpose or
purposes may be called at any time by the Chairman of the Board, by the
President, by the Vice Chairman of the Board, by a majority of the Board of
Directors, or by a majority of the Executive Committee (if any), at such time
and at such place as may be stated in the notice of the meeting. Business
transacted at a special meeting shall be confined to the purpose(s) stated in
the notice of such meeting.
Section 5. Record Date. For the purpose of determining stockholders entitled to
notice of or to vote at any meeting of stockholders, or any adjournment thereof,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors of the Corporation may fix a date as the record
date for any such determination of stockholders, which record date shall not
precede the date on which the resolutions fixing the record date are adopted and
which record date, in the case of a meeting of stockholders, shall not be more
than sixty (60) days nor less than ten (10) days before the date of such meeting
of stockholders, nor, in the case of any other action, more than sixty (60) days
prior to any such action.
If the Board of Directors does not fix a record date for any meeting of the
stockholders, the record date for determining stockholders entitled to notice of
or to vote at such meeting shall be at the close of business on the third
business day next preceding the day on which notice is given. If the Board of
Directors does not fix the record date for determining stockholders for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts the resolution relating thereto. A
determination of stockholders of record entitled to notice of or to vote at a
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<PAGE>
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
For the purpose of determining the stockholders entitled to consent to corporate
action in writing without a meeting, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which date
shall not be more than ten (10) days after the date upon which the resolution
fixing the record date is adopted by the Board of Directors. If the Board of
Directors does not fix the record date, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board of Directors is necessary, shall be
the first date on which a signed written consent setting forth the action taken
or proposed to be taken is delivered to the Corporation at its registered office
in the state of incorporation of the Corporation, at its principal place of
business, or an officer or agent of the Corporation having custody of the book
in which proceedings of meetings of stockholders are recorded. Delivery made to
a corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. If the Board of Directors does not fix the
record date, and prior action by the Board of Directors is necessary, the record
date for determining stockholders entitled to consent to corporate action in
writing without a meeting shall be at the close of business on the day on which
the Board of Directors adopts the resolution taking such prior action.
Section 6. Notice of Meetings. Written notice of the place, date and hour of all
meetings, and, in case of a special meeting, the purpose or purposes for which
the meeting is called, shall be given by or at the direction of the Chairman of
the Board, the President, the Vice Chairman of the Board, the Secretary or other
person(s) calling the meeting to each stockholder entitled to vote thereat not
less than ten (10) nor more than sixty (60) days before the date of the meeting.
Such notice is given when deposited in the United States mail, postage prepaid,
directed to the stockholder at such stockholder's address as it appears on the
records of the Corporation.
Section 7. Stockholder List. A complete list of stockholders entitled to vote at
any meeting of stockholders, arranged in alphabetical order for each class of
stock and showing the address of each such stockholder and the number of shares
registered in the name of such stockholder, shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or if not so specified, at the
place where the meeting is to be held. The stockholder list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Section 8. Proxies. Each stockholder entitled to vote at a meeting of
stockholders may authorize another person or persons to act for him by proxy.
Proxies for use at any meeting of stockholders shall be filed with the
Secretary, or such other officer as the Board of Directors may from time to time
determine by resolution, before or at the time of the meeting. All proxies shall
3
<PAGE>
be received and taken charge of and all ballots shall be received and canvassed
by the secretary of the meeting, who shall decide all questions touching upon
the qualification of voters, the validity of the proxies, and the acceptance or
rejection of votes, unless an inspector or inspectors shall have been duly
appointed as provided in Section 9 of Article II hereof, in which event such
inspector or inspectors shall decide all such questions.
No proxy shall be valid after three (3) years from its date, unless the proxy
provides for a longer period. Each proxy shall be revocable unless expressly
provided therein to be irrevocable and coupled with an interest sufficient in
law to support an irrevocable power.
Should a proxy designate two or more persons to act as proxies, unless such
instrument shall provide the contrary, a majority of such persons present at any
meeting at which their powers thereunder are to be exercised shall have and may
exercise all the powers of voting or giving consents thereby conferred, or if
only one be present, then such powers may be exercised by that one; or, if an
even number attend and a majority do not agree on any particular issue, each
person designated to act as proxy and so attending shall be entitled to exercise
such powers in respect of such portion of the shares as is equal to the
reciprocal of the fraction equal to the number of persons designated to act as
proxies and in attendance divided by the total number of shares represented by
such proxies.
Section 9. Voting; Elections; Inspectors. Unless otherwise required by law or
provided in the charter documents of the Corporation, each stockholder shall on
each matter submitted to a vote at a meeting of stockholders have one vote for
each shares of stock entitled to vote which is registered in his name on the
record date for the meeting. For the purposes hereof, each election to fill a
directorship shall constitute a separate matter. Shares registered in the name
of another corporation, domestic or foreign, or other legal entity may be voted
by such officer, agent or proxy as the bylaws (or comparable instrument) of such
corporation or other legal entity may prescribe, or in the absence of such
provisions, as the Board of Directors (or comparable body) of such corporation
or other legal entity may determine. Shares registered in the name of a deceased
person may be voted by the executor or administrator of such person's estate,
either in person or by proxy.
All voting, except as required by the charter documents of the Corporation or
where otherwise required by law, may be by a voice vote; provided, however, upon
request of the chairman of the meeting or upon demand therefor by stockholders
holding a majority of the issued and outstanding stock present in person or by
proxy at any meeting a stock vote shall be taken. Every stock vote shall be
taken by written ballots, each of which shall state the name of the stockholder
or proxy voting and such other information as may be required under the
procedure established for the meeting. All elections of directors shall be by
written ballots, unless otherwise provided in the charter documents of the
Corporation.
In advance of any meeting of stockholders, the Chairman of the Board, the
President or the Board of Directors shall appoint one or more inspectors, each
of whom shall subscribe an oath or affirmation to execute faithfully the duties
of inspector at such meeting with strict impartiality and according to the best
of such inspector's ability. Such inspector(s) shall receive the written
ballots, count the votes, make and sign a certificate of the result thereof and
4
<PAGE>
take such further action as may be required of the inspector(s) under the laws
of the state of incorporation of the Corporation. The Chairman of the Board, the
President or the Board of Directors may appoint any person to serve as
inspector, except no candidate for the office of director shall be appointed as
an inspector.
Unless otherwise provided in the charter documents of the Corporation,
cumulative voting for the election of directors shall be prohibited.
Section 10. Conduct of Meetings. The meetings of the stockholders shall be
presided over by the Chairman of the Board, or if the Chairman of the Board is
not present, by the President, or if the President is not present, by the Vice
Chairman of the Board, or if none of the Chairman of the Board, the President
and the Vice Chairman of the Board is present, by a chairman elected at the
meeting. The Secretary of the Corporation, if present, shall act as secretary of
such meetings, or if the Secretary is not present, the Deputy Corporate
Secretary or an Assistant Secretary shall so act; if none of the Secretary, the
Deputy Corporate Secretary and an Assistant Secretary is present, then a
secretary shall be appointed by the chairman of the meeting. The chairman of any
meeting of stockholders shall determine the order of business and, subject to
the requirements of the laws of the state of incorporation of the Corporation,
the procedure at the meeting, including such regulation of the manner of voting
and the conduct of discussion as seem to the chairman in order.
Section 11. Treasury Stock. The Corporation shall not vote, directly or
indirectly, shares of its own stock owned by it, and such shares shall not be
counted for quorum purposes. No other corporation of which the Corporation owns
a majority of the shares entitled to vote in the election of directors of such
other corporation shall vote, directly or indirectly, shares of the
Corporation's stock owned by such other corporation, and such shares shall not
be counted for quorum purposes. Nothing in this Section II shall be construed as
limiting the right of the Corporation to vote stock, including but not limited
to its own stock, held by it in a fiduciary capacity.
Section 12. Action Without Meeting. Unless otherwise provided in the charter
documents of the Corporation, any action permitted or required by law, the
charter documents of the Corporation or these Bylaws to be taken at a meeting of
stockholders, may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and voted
and shall be delivered to the Corporation by delivery to its registered office
in the state of incorporation, its principal place of business, or an officer or
agent of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to the Corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested.
Every written consent shall bear the date of signature of each stockholder who
signs the consent, and no written consent shall be effective to take the
corporate action referred to therein unless, within sixty (60) days of the
earliest dated consent delivered in the manner required by this Section to the
5
<PAGE>
Corporation, written consents signed by a sufficient number of holders to take
action are delivered to the Corporation by delivery to its registered office in
the state of incorporation, its principal place of business, or an officer or
agent of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to the Corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested.
Prompt notice of the taking of corporation action without a meeting by less than
a unanimous written consent shall be given by the Secretary to those
stockholders who have not consented in writing.
Section 13. Business to be Brought Before the Annual Meeting. To be properly
brought before the annual meeting of stockholders, business must be either (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (b) otherwise brought before the
meeting by or at the direction of the Board of Directors, or (c) otherwise
properly brought before the meeting by a stockholder of the Corporation who is a
stockholder of record at the time of giving of notice provided for in this
Section 13 of Article II, who shall be entitled to vote at such meeting and who
complies with the notice procedures set forth in this Section 13 of Article II.
In addition to any other applicable requirements, for ' business to be brought
before an annual meeting by a stockholder of the Corporation, the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the Corporation not less than
120 days prior to the anniversary date of the proxy statement for the preceding
annual meeting of stockholders of the Corporation. A stockholder's notice to the
Secretary shall set forth as to each matter (i) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and address, as
they appear on the Corporation's books, of the stockholder proposing such
business, (iii) the acquisition date, the class and the number of shares of
voting stock of the Corporation which are owned beneficially by the stockholder,
(iv) any material interest of the stockholder in such business, and (v) a
representation that the stockholder intends to appear in person or by proxy at
the meeting to bring the proposed business before the meeting.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at the annual meeting except in accordance with the procedures set
forth in this Section 13 of Article II.
The chairman of the annual meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 13 of Article II, and if the
chairman should so determine, the chairman shall so declare to the meeting and
any such business not properly brought before the meeting shall not be
transacted.
Notwithstanding the foregoing provisions of this Section 13 of Article II, a
stockholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder with
respect to the matters set forth in this Section 13.
6
<PAGE>
ARTICLE III
Board of Directors
------------------
Section 1. Power; Number; Term of Office. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors, and subject to the restrictions imposed by law or the charter
documents of the Corporation, the Board of Directors may exercise all the powers
of the Corporation.
The number of directors that shall constitute the whole Board of Directors shall
be determined from time to time by the Board of Directors (provided that no
decrease in the number of directors which would have the effect of shortening
the term of an incumbent director may be made by the Board of Directors). If the
Board of Directors makes no such determination, the number of directors shall be
not less than three and not more than five. Each director shall hold office
until such director's successor shall have been elected and qualified or until
such director's earlier death, resignation or removal.
Unless otherwise provided in the charter documents of the Corporation, directors
need not be stockholders nor residents of the state of incorporation of the
Corporation.
Section 2. Quorum; Voting. Unless otherwise provided in the charter documents of
the Corporation, a majority of the total number of directors shall constitute a
quorum for the transaction of business of the Board of Directors and the vote of
a majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors.
Section 3. Place of Meetings; Order of Business. The directors may hold their
meetings and may have an office and keep the books of the Corporation, except as
otherwise provided by law, in such place or places, within or without the state
of incorporation of the Corporation, as the Board of Directors may from time to
time determine. At all meetings of the Board of Directors business shall be
transacted in such order as shall from time to time be determined by the
Chairman of the Board, or in the Chairman of the Board's absence by the
President (should the President be a director), or in the President's absence by
the Vice Chairman of the Board, or by the Board of Directors.
Section 4. First Meeting. Each newly elected Board of Directors may hold its
first meeting for the purpose of organization and the transaction of business,
if a quorum is present, immediately after and at the same place as the annual
meeting of the stockholders. Notice of such meeting shall not be required. At
the first meeting of the Board of Directors in each year at which a quorum shall
be present, held next after the annual meeting of stockholders, the Board of
Directors shall elect the officers of the Corporation.
Section 5. Regular Meetings. Regular meetings of the Board of Directors shall be
held at such times. and places as shall be designated from time to time by the
Chairman of the Board or, in the absence of the Chairman of the Board, by the
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<PAGE>
President (should the President be a director), or in the President's absence,
by the Vice Chairman of the Board, or by the Board of Directors. Notice of such
regular meetings shall not be required.
Section 6. Special Meetings. Special meetings of the Board of Directors may be
called by the Chairman of the Board, the President (should the President be a
director) or the Vice Chairman of the Board or, on the written request of any
two directors, by the Secretary, in each case on at least twenty-four (24) hours
personal, written, telegraphic, cable or wireless notice to each director. Such
notice, or any waiver thereof pursuant to Article VII, Section 3 hereof, need
not state the purpose or purposes of such meeting, except as may otherwise be
required by law or provided for in the charter documents of the Corporation or
these Bylaws. Meetings may be held at any time without notice' if all the
directors are present or if those not present waive notice of the meeting in
writing.
Section 7. Nomination of Directors. Only persons who are nominated in accordance
with the following procedures shall be eligible for election as directors,
except as otherwise provided in Section 9 of this " Article III. Nominations of
persons for election to the Board of Directors of the Corporation may be made at
a meeting of stockholders (a) by or at the direction of the Board of Directors
or (b) by any stockholder of the Corporation who is a stockholder of record at
the time of giving of notice provided for in this Section 7 of Article III, who
shall be entitled to vote for the election of directors at the meeting and who
complies with the notice procedures set forth in this Section 7 of Article III.
Such nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered to
or mailed and received at the principal executive offices of the Corporation (i)
with respect to an election to be held at the annual meeting of the stockholders
of the Corporation, 120 days prior to the anniversary date of the proxy
statement for the immediately preceding annual meeting of stockholders of the
Corporation, and (ii) with respect to an election to be held at a special
meeting of stockholders of the Corporation for the election of directors, not
later than the close of business on the 10th day following the day on which such
notice of the date of the meeting was mailed or public disclosure of the date of
the meeting was made, whichever first occurs. Such stockholder's notice to the
Secretary shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a director, all information relating to
the person that is required to be disclosed in solicitations for proxies for
election of directors, or is otherwise required, pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (including the written
consent of such person to be named in the proxy statement as a nominee and to
serve as a director if elected); and (b) as to the stockholder giving the notice
(i) the name and address, as they appear on the Corporation's books, of such
stockholder, and (ii) the class and number of shares of capital stock of the
Corporation which are beneficially owned by the stockholder. At the request of
any officer of the Corporation, any person nominated by the Board of Directors
for election as a director shall furnish to the Secretary of the Corporation
that information required to be set forth in a stockholder's notice of
nomination which pertains to the nominee.
In the event that a person is validly designated as nominee to the Board and
shall thereafter become unable or unwilling to stand for election to the Board
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of Directors, the Board of Directors or the stockholder who proposed such
nominee, as the case may be, may designate a substitute nominee.
Except as otherwise provided in Section 9 of this Article III, no person shall
be eligible to serve as a director of the Corporation unless nominated in
accordance with the procedures set forth in this Section 7 of Article III. The
chairman of the meeting of stockholders shall, if the facts warrant, determine
and declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by the Bylaws, and if the chairman should so determine,
the chairman shall so declare to the meeting and the defective nomination shall
be disregarded.
Notwithstanding the foregoing provisions of this Section 7 of Article III, a
stockholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder with
respect to the matters set forth in this Section 7 of Article III.
Section 8. Removal. Any director or the entire Board of Directors may be
removed, with or without cause by the holders of a majority of the shares then
entitled to vote at an election of directors; provided that, with respect to the
removal without cause of a director or directors elected by the holders of any
class or series entitled to elect one or more directors, only the holders of
outstanding shares of that class or series shall be entitled to vote on such
removal.
Section 9. Vacancies; Increases in the Number of Directors. Unless otherwise
provided in the charter documents of the Corporation, vacancies existing on the
Board of Directors for any reason and newly created directorships resulting from
any increase in the authorized number of directors to be elected by all of the
stockholders having the right to vote as a single class may be filled by the
affirmative vote of a majority of the directors then in office, although less
than a quorum, or by a sole remaining director; and any director so chosen shall
hold office until the next annual election and until such Directors successor
shall have been elected and qualified, or until such Director's earlier death,
resignation or removal.
Section 10. Compensation. Directors and members of standing committees may
receive such compensation as the Board of Directors from time to time shall
determine to be appropriate, and shall be reimbursed for all reasonable expenses
incurred in attending and returning from meetings of the Board of Directors.
Section 11. Action Without a Meeting; Telephone Conference Meetings. Unless
otherwise restricted by the charter documents of the Corporation, any action
required or permitted to be taken at any meeting of the Board of Directors, or
any committee designated by the Board of Directors, may be taken without a
meeting if all members of the Board of Directors or committee, as the case may
be, consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or committee. Such consent
shall have the same force and effect as a unanimous vote at a meeting and may be
stated as such in any document or instrument filed with the Secretary of State
of the state of incorporation of the Corporation.
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Unless otherwise restricted by the charter documents of the Corporation, subject
to the requirement for notice of meetings, members of the Board of Directors or
members of any committee designated by the Board of Directors may participate in
a meeting of such Board of Directors or committee, as the case may be, by means
of a conference telephone connection or similar communications equipment by
means of which all persons participating in the meeting can hear each other, and
participation in such a meeting shall constitute presence in person at such
meeting, except where a person participates in the meeting for the express
purpose of objecting to the transaction of any business on the ground that the
meeting is not lawfully called or convened.
Section 12. Approval or Ratification of Acts or Contracts by Stockholders. The
Board of Directors in its discretion may submit any act or contract for approval
or ratification at any annual meeting of the stockholders, or at any special
meeting of the stockholders called for the purpose of considering any such act
or contract, and any act or contract that shall be approved or be ratified by
the vote of the stockholders holding a majority of the voting power attributable
to the issued and outstanding shares of stock of the Corporation entitled to
vote and present in person or by proxy at such meeting (provided that a quorum
is present) shall be as valid and as binding upon the Corporation and upon all
the stockholders as if it has been approved or ratified by every stockholder of
the Corporation.
ARTICLE IV
Committees
----------
Section 1. Executive Committee. The Board of Directors may, by resolution passed
by a majority of the whole Board of Directors, designate an Executive Committee
consisting of one or more of the directors of the Corporation, one of whom shall
be designated chairman of the Executive Committee. During the intervals between
the meetings of the Board of Directors, the Executive Committee shall possess
and may exercise all the powers of the Board of Directors, except as provided in
Section 6 of this Article IV. The Executive Committee shall also have, and may
exercise, all the powers of the Board of Directors, except as aforesaid,
whenever a quorum of the Board of Directors shall fail to be present at any
meeting of the Board.
Section 2. Audit Committee. The Board of Directors may, by resolution passed by
a majority of the whole Board of Directors, designate an Audit Committee
consisting of one or more of the directors of the Corporation, one of whom shall
be designated chairman of the Audit Committee. The Audit Committee shall have
and may exercise such powers and authority as provided in the resolution
creating it and as determined from time to time by the Board of Directors,
except as provided in Section 6 of this Article IV.
Section 3. Other Committees. The Board of Directors may, by resolution passed
from time to time by a majority of the whole Board of Directors, designate such
other committees as it shall see fit consisting of one or more of the directors
of the Corporation, one of whom shall be designated chairman of each such
committee. Any such committee shall have and may exercise such powers and
authority as provided in the resolution creating it and as determined from time
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to time by the Board of Directors, except as provided in Section 6 of this
Article IV.
Section 4. Procedure; Meetings; Quorum. Any committee designated pursuant to
this Article IV shall keep regular minutes of its actions and proceedings in a
book provided for that purpose and report the same to the Board of Directors at
its meeting next succeeding such action, shall fix its own rules or procedures,
and shall meet at such times and at such place or places as may be provided by
such rules, or by such committee or the Board of Directors. Should a committee
fail to fix its own rules, the provisions of these Bylaws, pertaining to the
calling of meetings and conduct of business by the Board of Directors, shall
apply as nearly as practicable. At every meeting of any such committee, the
presence of a majority of all the members thereof shall constitute a quorum,
except as provided in Section 5 of this Article IV, and the affirmative vote of
a majority of the members present shall be necessary for the adoption by it of
any resolution.
Section 5. Substitution and Removal of Members; Vacancies. The Board of
Directors may designate one or more directors as alternate members of any
committee who may replace any absent or disqualified member at any meeting of
such committee. In the absence or disqualification of a member of a committee,
the member or members present at any meeting and not disqualified from voting,
whether or not constituting a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of the absent or
disqualified member. The Board of Directors' shall have the power at any time to
remove any member(s) of a committee and to appoint other directors in lieu of
the person(s) so removed and shall also have the power to fill vacancies in a
committee.
Section 6. Limitation on Power and Authority of Committees. No committee of the
Board of Directors shall have the power or authority of the Board of Directors
in reference to amending the charter documents of the Corporation (except that a
committee may, to the extent and in the manner authorized by the laws of the
state of incorporation of the Corporation, fix the designations and any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
Corporation or fix the number of shares of any series of stock or authorize the
increase or decrease of the shares of any series) or adopting an agreement of
merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets,
recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution of the Corporation, amending, altering or repealing
these Bylaws or adopting new bylaws for the Corporation, and, unless a
resolution passed by a majority of the whole Board of Directors so provides, no
such committee shall have the power and authority to declare a dividend, to
authorize the issuance of stock or to adopt a certificate of ownership and
merger pursuant to the laws of the state of incorporation of the Corporation.
11
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ARTICLE V
Officers
--------
Section 1. Number, Titles and Tenn of Office. The officers of the Corporation
shall be a Chairman of the Board, a President, Vice Presidents (any one or more
of whom may be designated Executive Vice President or Senior Vice President), a
Treasurer, a Secretary, and such other officers as the Board of Directors may
from time to time elect or appoint (including, but not limited to, a Vice
Chairman of the Board, a General Counsel, a Deputy Corporate Secretary, one or
more Assistant Secretaries and one or more Assistant Treasurers). Each officer
shall hold office until such officer's successor shall be'duly elected and shall
qualify or until such officer's death or until such officer shall resign or
shall have been removed. Any number of offices may be held by the same person,
unless the charter documents of the Corporation provide otherwise. Except for
the Chairman of the Board and the Vice Chairman of the Board, no officer need be
a director.
Section 2. Powers and Duties of the Chairman of the Board. The Chairman of the
Board shall preside at all meetings of the stockholders and of the Board of
Directors; and he shall have such other powers and duties as designated in these
bylaws and as from time to time may be assigned to him by the Board of
Directors.
Section 3. Powers and Duties of the Chief Executive Officer. The Chairman of the
Board shall be the chief executive officer of the Corporation unless the Board
of Directors designates the President as chief executive officer. Subject to the
control of the Board of Directors and the executive conunittee (if any), the
chief executive officer shall have general executive charge, management and
control of the properties, business and operations of the Corporation with all
such powers as may be reasonably incident to such responsibilities; may agree
upon and execute all leases, contracts, evidences of indebtedness and other
obligations in the name of the Corporation and may sign all certificates for
shares of capital stock of the Corporation; and shall have such other powers and
duties as designated in accordance with these Bylaws and as from time to time
may be assigned to the chief executive officer by the Board of Directors.
Section 4. Powers and Duties of the President. Unless the Board of Directors
otherwise determines, the President shall have the authority to agree upon and
execute all leases, contracts, evidences of indebtedness and other obligations
in the name of the Corporation; and, unless the Board of Directors, otherwise
determines, the President shall, in the absence of the Chairman of the Board or
if there be no Chairman of the Board, preside at all meetings of the
stockholders and (should the President be a director) of the Board of Directors;
and the President shall have such other powers and duties as designated in
accordance with these Bylaws ' and as from time to time may be assigned to the
President by the Board of Directors or the Chairman of the Board.
Section 5. Powers and Duties of the Vice Chairman of the Board. The Board of
Directors may assign areas of responsibility to the Vice Chairman of the Board,
and, in such event, and subject to the overall direction of the Chairman of the
Board and the Board of Directors, the Vice Chairman of the Board shall be
responsible for supervising the management of the affairs of the Corporation and
its subsidiaries within the area or areas assigned and shall monitor and review
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on behalf of the Board of Directors all functions within the corresponding area
or areas of the Corporation and each such subsidiary of the Corporation. In the
absence of the President, or in the event of the President's inability or
refusal to act, the Vice Chairman of the Board shall perform the duties of the
President, and when so acting shall have all the powers of and be subject to all
the restrictions upon the President. Further, the Vice Chain-nan of the Board
shall have such other powers and duties as designated in accordance with these
Bylaws and as from time to time may be assigned to the Vice Chairman of the
Board by the Board of Directors or the Chairman of the Board.
Section 6. Vice Presidents. Subject to any restrictions that may be imposed by
the Board of Directors, each Vice President shall at all times possess power to
sign all certificates, contracts and other instruments of the Corporation,
except as otherwise limited in writing by the Chairman of the Board, the
President, or the Vice Chairman of the Board of the Corporation. Each Vice
President shall have such other powers and duties as from time to time may be
assigned to such Vice.President by the Board of Directors, the Chairman of the
Board, the President, or the Vice Chairman of the Board.
Section 7. General Counsel. The General Counsel shall act as chief legal advisor
to the Corporation. The General Counsel may have one or more staff attorneys and
assistants, and may retain other attorneys to conduct the legal affairs and
litigation of the Corporation under the General Counsel's supervision.
Section 8. Secretary. The Secretary shall keep the minutes of all meetings of
the Board of Directors, committees of the Board of Directors and the
stockholders, in books provided for that purpose; shall attend to the giving and
serving of all notices; may in the name of the Corporation affix the seal of the
Corporation to any contract of the Corporation and attest the affixation of the
seal of the Corporation thereto; may sign with the other appointed officers all
certificates for shares of capital stock of the Corporation; shall have charge
of the certificate books, transfer books and stock ledgers, and such other books
and papers as the Board of Directors may direct, all of which shall at all
reasonable times be open to inspection of any director upon application at the
office of the Corporation during business hours; shall have such other powers
and duties as designated in these Bylaws and as from time to time may be
assigned to the Secretary by the Board of Directors, the Chairman of the Board,
the President, or the Vice Chairman of the Board; and shall in general perform
all acts incident to the office of Secretary, subject to the control of the
Board of Directors, the Chairman of the Board, the President, or the Vice
Chairman of the Board.
Section 9. Deputy Corporate Secretary and Assistant Secretaries. The Deputy
Corporate Secretary and each Assistant Secretary shall have the usual powers and
duties pertaining to such offices, together with such other powers and duties as
designated in these Bylaws and as from time to time may be assigned to the
Deputy Corporate Secretary or an Assistant Secretary by the Board of Directors,
the Chairman of the Board, the President, the Vice Chairman of the Board,or the
Secretary. The Deputy Corporate Secretary shall exercise the powers of the
Secretary during that officer's absence or inability or refusal to act.
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Section 10. Treasurer. Subject to any restrictions that may be imposed by the
Board of Directors, the Treasurer shall have responsibility for the custody and
control of all the funds and securities of the Corporation, and shall have such
other powers and duties as designated in these Bylaws and as from time to time
may be assigned to the Treasurer by the Board of Directors, the Chairman of the
Board, the President, or the Vice Chairman of the Board. The Treasurer shall
perform all acts incident to the position of Treasurer, subject to the control
of the Board of Directors, the Chairman of the Board, the President and the Vice
Chairman of the Board; and the Treasurer shall, if required by the Board of
Directors, give such bond for the faithful discharge of the Treasurer's duties
in such form as the Board of Directors may require.
Section 11. Assistant Treasurers. Each Assistant Treasurer shall have the usual
powers and duties pertaining to such office, together with such other powers and
duties as designated in these Bylaws and as from time to time may be assigned to
each Assistant Treasurer by the Board of Directors, the Chairman of the Board,
the President, the Vice Chairman of the Board, or thi Treasurer. Any Assistant
Treasurer may exercise the powers of the Treasurer during that officer's absence
or inability or refusal to act.
Section 12. Action with Respect to Securities of Other Corporations. Unless
otherwise directed by the Board of Directors, the Chairman of the Board, the
President or the Vice Chainnan of the Board, together with the Secretary, the
Deputy Corporate Secretary or any Assistant Secretary shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of security holders of or with respect to any action of security holders
of any other corporation in which this Corporation.may hold securities and
otherwise to exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other corporation.
Section 13. Delegation. For any reason that the Board of Directors may deem
sufficient, the Board of Directors may, except where otherwise provided by
statute, delegate the powers or duties of any officer to any other person, and
may authorize any officer to delegate specified duties of such officer to any
other person. Any such delegation or authorization by the Board shall be
effected from time to time by resolution of the Board of Directors.
ARTICLE VI
Capital Stock
-------------
Section 1. Certificates of Stock. The certificates for shares of the capital
stock of the Corporation shall be in such form, not inconsistent with that
required by law and the charter documents of the Corporation, as shall be
approved by the Board of Directors. Every holder of stock represented by
certificates shall be entitled to have a certificate signed by or in the name of
the Corporation by the Chairman of the Board, President, Vice Chairman of the
Board or a Vice President and the Secretary, Deputy Corporate Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer of the
Corporation representing the number of shares (and, if the stock of the
Corporation shall be divided into classes or series, certifying the class and
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<PAGE>
series of such shares) owned by such stockholder which are registered in
certified form; provided, however, that any of or all the signatures on the
certificate may be facsimile. The stock record books and the blank stock
certificate books shall be kept by the Secretary, or at the office of such
transfer agent or transfer agents as the Board of Directors may from time to
time determine. In case any officer, transfer agent or registrar who shall have
signed or whose facsimile signature or signatures shall have been placed upon
any such certificate or certificates shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued by the
Corporation, such certificate may nevertheless be issued by the Corporation with
the same effect as if such person were such officer, transfer agent or registrar
at the date of issue. The stock certificates shall be consecutively numbered and
shall be entered in the books of the Corporation as they are issued and shall
exhibit the holder's name and number of shares.
Section 2. Transfer of Shares. The shares of stock of the Corporation shall be
transferable only on the books of the Corporation by the holders thereof in
person or by their duly authorized attorneys or legal representatives upon
surrender and cancellation of certificates for a like number of shares. Upon
surrender to the Corporation or a transfer agent of the Corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
Section 3. Ownership of Shares. The Corporation shall be entitled to treat the
holder of record of any share or shares of capital stock of the Corporation as
the holder in fact thereof and, accordingly, shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof,
except as otherwise provided by the laws of the state of incorporation of the
Corporation.
Section 4. Regulations Regarding Certificates. The Board of Directors shall have
the power and authority to make all such rules and regulations as they may deem
expedient concerning the issue, transfer and registration or the replacement of
certificates for shares of capital stock of the Corporation.
Section 5. Lost or Destroyed Certificates. The Board of Directors may determine
the conditions upon which the Corporation may issue a new certificate of stock
in place of a certificate theretofore issued by it which is alleged to have been
lost, stolen or destroyed and may require the owner of such certificate or such
owner's legal representative to give bond, with surety sufficient to indemnify
the Corporation and each transfer agent and registrar against any and all losses
or claims which may arise by reason of the alleged loss, theft or destruction of
any such certificate or the issuance of such new certificate in the place of the
one so lost, stolen or destroyed.
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ARTICLE VII
Miscellaneous Provisions
------------------------
Section 1. Fiscal Year. The fiscal year of the Corporation shall end on the last
day of December of each year.
Section 2. Corporate Seal. The corporate seal shall be circular in form and
shall have inscribed thereon the nairne of the Corporation and the state of its
incorporation, which seal shall be in the charge of the Secretary and shall be
affixed to certificates of stock, debentures, bonds, and other documents, in
accordance with the direction of the Board of Directors, and as may be required
by law; however, the Secretary may, if the Secretary deems it expedient, have a
facsimile of the corporate seal inscribed on any such certificates of stock,
debentures, bonds, contracts or other documents. Duplicates of the seal may be
kept for use by the Deputy Corporate Secretary or any Assistant Secretary.
Section 3. Notice and Waiver of Notice. Whenever any notice is required to be
given by law, the charter documents of the Corporation or under the provisions
of these Bylaws, said notice shall be deemed to be sufficient if given (i) by
telegraphic, cable or wireless transmission (including by telecopy or facsimile
transmission) or (ii) by deposit of the same in a post office box or by delivery
to an overnight courier service company in a sealed prepaid wrapper addressed to
the person entitled thereto at such. person's post office address, as it appears
on the records of the Corporation, and such notice shall be deemed to have been
given on the day of such transmission or mailing or delivery to courier, as the
case may be.
Whenever notice is required to be given by law, the charter documents of the
Corporation or under any of the provisions of these Bylaws, a written waiver
thereof, signed by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
person, including without limitation a director, at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders, directors, or members of a
committee of directors need be specified in any written waiver of notice unless
so required by the charter documents of the Corporation or these Bylaws.
Section 4. Facsimile Signatures. In addition to the provisions for the use of
facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors.
Section 5. Reliance upon Books, Reports and Records. A member of the Board of
Directors, or a member of any committee designated by the Board of Directors,
shall, in the performance of such person's duties, be fully protected in relying
in good faith upon the records of the Corporation and upon such information,
opinion, reports or statements presented to the Corporation by any of the
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Corporation's officers or employees, or committees of the Board of Directors, or
by any other person as to matters the member reasonably believes are within such
other person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
Section 6. Application of Bylaws. In the event that any provisions of these
Bylaws is or may be in conflict with any law of the United States, of the state
of incorporation of the Corporation or of any other governmental body or power
having jurisdiction over this Corporation, or over the subject matter to which
such provision of these Bylaws applies, or may apply, such provision of these
Bylaws shall be inoperative to the extent only that the operation thereof
unavoidably conflicts with such law and shall in all other respects be in full
force and effect.
ARTICLE VIII
Amendments
----------
The Board of Directors shall have the power, to adopt, amend and repeal from
time to time Bylaws of the Corporation, subject to the right of the stockholders
entitled to vote with respect thereto to amend or repeal such Bylaws as adopted
or amended by the Board of Directors.
17
BEFORE THE PUBLIC UTILITIES COMMISSION OF NEVADA
In re SIERRA PACIFIC RESOURCES' ) DOCKET NO.
Acquisition of Portland General )
Electric Company ) PETITION FOR DECLARATORY
) RELIEF
COMES NOW, Sierra Pacific Resources ("SPR") and, pursuant to NAC
Section 703.825, petitions the Public Utilities Commission of Nevada ("PUCN" or
"Commission") for an order declaring that neither NRS Section 704.329 nor this
Commission's order in Docket No. 98-7023 approving the Merger of Nevada Power
Company ("NPC") into Desert Merger Sub, Inc. ("Desert"), a subsidiary of SPR,
confers jurisdiction on the PUCN to approve SPR's proposed acquisition, for
cash, of all of the stock of Portland General Electric Company and PGH II
(collectively"PGE"), both of which are Oregon corporations wholly owned by Enron
Corp. ("Enron"). SPR's petition is based on this pleading, an the attached
memorandum of points and authorities and affidavit in support thereof, and on
any and all evidence or other papers that may be presented at a hearing on this
petition.
FIRST CLAIM FOR RELIEF
1. The petitioner is SPR, a corporation organized and existing under
and pursuant to the laws of the State of Nevada, with its principal place of
business in Reno, Nevada.
2. On or about April 29, 1998, SPR, Sierra Pacific Power Company
("SPPC"), Nevada Power Company ("NPC"), Desert Merger Sub, Inc., ("Desert") and
Lake Merger Sub, Inc. ("Lake"), entered into an agreement and plan of merger
wherein Lake, a wholly owned subsidiary of SPR, merged into SPR with SPR
surviving, and NPC merged into Desert, a wholly owned subsidiary of SPR, with
Desert surviving. Desert subsequently changed its name to NPC. As a result of
<PAGE>
this transaction, NPC became a wholly owned subsidiary of SPR. SPPC remained a
wholly owned subsidiary of SPR.
3. In its compliance order approving this transaction in Docket No.
98-7023, the PUCN ordered:
Before the merger shall be considered fully and finally
approved, Nevada Power Company and Sierra Pacific Power
Company shall take the following actions, consistent with
the terms and conditions of the compliance order:
(k) Agree to refrain from taking action to become
a registered holding company under the Public
Utility Holding Company Act. (See Exhibit 1 at
Section 2.)
The Commission also stated that the compliance order did not constitute
authorization to merge and that failure to comply with the terms of the
compliance order may cause the joint application to be dismissed. Id. at Section
3.
4. In April 1999, SPR and NPC filed an application with the Securities
and Exchange Commission ("SEC") under Section 9(a)(2) of the Public Utility
Holding Company Act ("PUHCA") for an order permitting SPR to acquire NPC and for
an order granting SPR an exemption from registration under Section 3(a) of the
Public Utility Holding Company Act ("PUHCA"). SPPC was not a party to the SEC
application.
5. On April 12, 1999, the PUCN issued an order to show cause ordering
Applicants to appear and produce evidence demonstrating compliance with the
PUCN's compliance order.
6. The SEC issued a notice of SPR's and NPC's application under PUHCA
on May 14, 1999.
7. The PUCN conducted hearings on the order to show cause on May 10,
19, 20, 21, 25, and 28 and June 2 and 8, 1999. On June 9, 1999, the PUCN
intervened in SPR's and NPC's SEC PUHCA application.
<PAGE>
8. After hearing, on June 11, the PUCN adopted and approved a
stipulation authorizing the companies to merge, subject to making certain
filings regarding an independent scheduling administrator, a generation
aggregation tariff, and a generation divestiture plan.
9. As a result of and as part of the PUCN's adoption of the
stipulation, the PUCN withdrew its intervention at the SEC on June 14, 1999, and
stated that it had authorized the parties to merge.
10. On July 26, 1999, the SEC approved SPR's application to acquire 9
NPC under Section 9(a)(2), and granted SPR an exemption from registration under
Section 3(a)(1) of PUHCA.
11. On July 28, 1999, merger articles were filed with the Nevada
Secretary of State and the transaction was fully and finally consummated.
12. On November 5, 1999, SPR and Enron entered into a stock purchase
agreement pursuant to which SPR agreed to purchase from Enron all of the issued
and outstanding stock of PGE, an Oregon corporation, and PGH, an Oregon
corporation (the "PGE Transaction").
13. PGE is a vertically integrated electric utility whose service
territory is wholly and exclusively within the State of Oregon. PGE is regulated
by the Oregon Public Utility Commission ("OPUC"), the Nuclear Regulatory
Commission ("NRC"), the Federal Energy Regulatory Commission ("FERC"), and by no
other agency. PGH is an unregulated Oregon corporation which holds various
benefit plans for PGE.
14. PGE is not subject to the jurisdiction of the PUCN and, after
consummation of the stock purchase agreement, will not be subject to the
jurisdiction of the PUCN since it will not own any equipment or assets in
Nevada, nor will it operate "plant or equipment, or any part of any plant or
equipment within the State for the production, delivery or furnishing to any
other persons heat, gas, coal slurry, light or power in any form." See NRS
Section 704.020.
<PAGE>
15. NRS Section 704.329 provides that any person merging with,
acquiring, or directly or indirectly obtaining control of a public utility in
the state or an entity which holds a controlling interest in such a public
utility shall submit an application to the Commission for authorization of such
proposed transaction. Before authorizing such merger, acquisition, or the
obtaining of control of a Nevada utility, or the obtaining of control of its
holding company, the PUCN must consider the effect of the transaction and find
that it is in the public interest before authorizing it. Id.
16. The PGE Transaction which forms the subject matter of this
petition is not, will not, and does not contemplate any merger, acquisition, or
the obtaining of control (directly or indirectly) over any public utility in
this state or the obtaining of control over a holding company controlling a
public utility in this state. Indeed, the PGE Transaction contemplates SPR's
acquisition, for cash, of a non-jurisdictional electric utility and the
acquisition of control by SPR over a non-jurisdictional utility.
17. SPR is not required to submit an application to the PUCN to
approve the PGE Transaction nor does the PUCN have jurisdiction under NRS
Section 704.329 or any other statute to approve the transaction.
SECOND CLAIM FOR RELIEF
18. Petitioners incorporate all of the allegations of its first claim
for 21 relief as though fully restated herein.
19. As part of the PGE Transaction, SPR will be required to file an
application with the SEC for permission to acquire PGE to file for registration
under the PUHCA. SPR's registration under PUHCA will not impair, impede, or
otherwise frustrate PUCN exercising jurisdiction over SPPC, NPC, or any of their
affiliated transactions.
20. NPC fully complied with and fully and faithfully discharged the
condition precedent to its merger with Desert which was set forth in the
<PAGE>
compliance order in Docket No. 98-7023 "to agree to refrain from taking any
action to become a registered holding company," as evidenced by the PUCN order
in the show cause hearing that all conditions precedent were satisfied, and that
SPR and NPC were authorized to consummate the merger.
21. Neither SPPC nor NPC are parties to or involved in the PGE
Transaction, and NPC's and SPPC's agreement to refrain from taking any action to
become a registered holding company in Docket No. 98-7023 does not otherwise
pertain to the PGE Transaction.
22. Registration under PUHCA by SPR will subject SPR to regulation by
the SEC but it will not impair or impede PUCN jurisdiction over SPPC, NPC, or
their affiliate transactions.
WHEREFORE, SPR prays:
1. That the Commission find, order, adjudge, decree or declare that
the PUCN does not have jurisdiction to review the PGE Transaction wherein SPR
has agreed to acquire, for cash, all of the stock of PGE and PGH II, and as a
result of which PGE and PGH II will become wholly owned subsidiaries of SPR;
2. That the Commission order, adjudge or decree that NPC fully
satisfied and fulfilled its obligation in Docket No. 98-7023 to agree that it
would refrain from taking any action to become a registered holding company, and
that such condition does not apply to the PGE Transaction over which the PUCN
has no jurisdiction.
<PAGE>
Dated this 7th day of January, 2000.
Respectfully submitted,
SIERRA PACIFIC RESOURCES
By /s/ William E. Peterson
-----------------------------------
William E. Peterson
By /s/ John P. Sande, III
-----------------------------------
John P. Sande, III
Jones Vargas
Attorneys for Sierra Pacific Resources
6100 Neil Road
Reno, NV 89511
775/834-5900
775/834-5959 (fax)
[Sierra Pacific Logo] [PGE Logo]
BEFORE THE PUBLIC UTILITY COMMISSION
OF OREGON
UM-_______
Application of Sierra Pacific Resources
to Acquire
Portland General Electric Company
January 18, 2000
<PAGE>
TABLE OF CONTENTS
APPLICATION TO ACQUIRE PORTLAND GENERAL ELECTRIC COMPANY
Appendix - Stock Purchase Agreement
PREPARED DIRECT TESTIMONY
Exhibit 1 - Direct Testimony of Michael R. Niggli
Exhibit 2 - Direct Testimony of Mayln K. Malquist
Attachment MKM-1 - Qualifications of Witness
Attachment MKM-2 - 1999 Operations Report
Attachment MKM-3 - PUHCA Summary
Exhibit 3 - Direct Testimony of Mark A. Ruelle
Attachment MAR-1 - Qualifications of Witness
Exhibit 4 - Direct Testimony of Steven C. Oldham
Attachment SCO-1 - Qualifications of Witness
Exhibit 5 - Supplemental Direct Testimony of Steven C. Oldham
MOTION FOR PROTECTIVE ORDER
<PAGE>
BEFORE THE PUBLIC UTILITY COMMISSION
OF OREGON
UM-_________
APPLICATION OF SIERRA PACIFIC RESOURCES
TO ACQUIRE
PORTLAND GENERAL ELECTRIC COMPANY
JANUARY 18, 2000
SIERRA PACIFIC RESOURCES, INC.
6100 NEIL ROAD
P.O. BOX 10100
RENO, NV 89520-0024
<PAGE>
BEFORE THE PUBLIC UTILITY COMMISSION
OF OREGON
UM-_________
In the Matter of the Application of ) APPLICATION OF SIERRA PACIFIC
Sierra Pacific Resources to Acquire ) RESOURCES TO ACQUIRE
Portland General Electric Company ) PORTLAND GENERAL ELECTRIC
) COMPANY
Sierra Pacific Resources ("Sierra") applies for an order of the
Commission approving Sierra's acquisition of all of the common stock of Portland
General Electric Company ("PGE"). Upon such acquisition, Sierra will acquire the
power to exercise substantial influence over the policies and actions of PGE.
Commission approval is required by ORS 757.511.
A. IN SUPPORT OF ITS APPLICATION, SIERRA STATES AS FOLLOWS:
SIERRA BACKGROUND. Sierra is an experienced operator of regulated
utilities, providing electricity, gas and water services through its
subsidiaries, Sierra Pacific Power Company ("SPPC") and Nevada Power Company
("NPC"). Sierra serves about one million retail customers in the two most
rapidly growing metropolitan areas in the United States. Sierra also provides
reliable electric service to more than 50,000 square miles of largely rural
areas in Nevada and Northern California.
Sierra and its operating utilities are regulated by state utility
commissions in Nevada and California, as well as by the Securities and Exchange
Commission and Federal Energy Regulatory Commission. Sierra's common stock is
publicly traded on the New York Stock Exchange. Sierra and its operating
subsidiaries maintain investment grade credit ratings from Moody's and Standard
& Poor's.
/ / / / /
/ / / / /
PAGE 1 - APPLICATION OF SIERRA PACIFIC RESOURCES TO ACQUIRE
PORTLAND GENERAL ELECTRIC COMPANY
<PAGE>
Sierra's corporate objective is to be a premier transmission,
distribution and energy service company in the western United States, delivering
essential services which enhance the quality of its customers' lives and the
vitality of the communities it serves.
To implement this corporate vision, Sierra's operating subsidiaries
focus on providing the highest quality of customer service. Sierra participates
in the communities it serves as a good corporate citizen through contributions
of time and money to civic and charitable organizations and by being a steward
of the environment.
Sierra is a company with strong commitments to the environment and to
the development of alternative generation resources. As an example, SPPC has
under contract more geothermal power than any utility in the mainland United
States.
SIERRA'S PLAN FOR PGE. Sierra's plan for operating PGE includes no
material change in the way PGE serves its customers. In offering to purchase
PGE, Sierra recognizes the similarities of the three electric utilities,
including mutual focus on providing high quality customer service to rapidly
growing metropolitan populations, as well as to rural areas. Sierra will bring
to PGE's customers additional operating expertise and the benefits of
participating in an integrated electric system. Best practices of the three
utilities will be consolidated as part of Sierra's ongoing program to take
customer service to a higher level. Customers of the three utilities will
benefit from the diverse experience and long history of these utilities. The
most forward-looking programs of each utility will be spread to the others.
SIERRA'S COMMITMENTS. To reflect Sierra's focus on customers and the
public interest, this application proposes a continuation and expansion of the
economic benefits contained in the Commission's approval of the acquisition of
PGE by Enron. These benefits are summarized as follows:
First a commitment to provide PGE customers $9 million per year in
----- savings and/or rate credit until July 2002, as promised by
Enron, and, in addition, to extend this benefit through
PAGE 2 - APPLICATION OF SIERRA PACIFIC RESOURCES TO ACQUIRE
PORTLAND GENERAL ELECTRIC COMPANY
<PAGE>
December 31, 2003, producing an additional $13.5 million
benefit to PGE customers; and
Second A commitment to pay the remaining balance (approximately $80
------ million as of closing the acquisition of PGE by Sierra) of
the sum of $105 million originally promised by Enron.
After payment of acquisition costs, Sierra proposes that PGE customers
receive 100 percent of the allocable net savings resulting from the integration
of utility operations.
Sierra makes the following commitments to the Commission and to PGE's
customers. Sierra will:
1. Operate PGE as a separate operating entity, headquartered in
Portland, Oregon with strong local management, customer service
and operations personnel.
2. Maintain PGE's current high standards of utility operation and
customer service, which are consistent with the performance
standards of SPPC and NPC. PGE will continue to meet the Service
Quality Measures agreed to by PGE in Commission Order 97-196 in
Docket UM 814.
3. Continue PGE's high standards of environmental stewardship and
commitment to developing alternative energy sources.
4. Participate with PGE in its robust involvement in and support of
the communities it serves as a good corporate citizen.
5. Take a leadership role with the Commission to achieve timely
implementation of electricity restructuring SB 1149.
6. Keep generating assets now supporting PGE's regulated utility
business, except for transactions already pending and
transactions that may result from implementing SB 1149.
/ / / / /
PAGE 3 - APPLICATION OF SIERRA PACIFIC RESOURCES TO ACQUIRE
PORTLAND GENERAL ELECTRIC COMPANY
<PAGE>
Sierra also proposes to accept other conditions imposed by the
Commission in the ScottishPower and Enron orders. Although these conditions were
formulated to address issues raised in cases where the acquiring entity was not
subject to domestic regulation, Sierra nevertheless finds these conditions to be
generally acceptable.
EMPLOYEE RELATIONS. Sierra Pacific Resources completed the merger of
SPPC and NPC in July 1999 and, by November 1999, had reached its targeted
workforce without involuntary departures. The two companies recently reached new
contract agreements and have long-standing relationships with the International
Brotherhood of Electrical Workers. All existing labor agreements at PGE will be
honored after completion of the transaction.
SAFETY. Sierra shares with PGE a commitment to providing a safe
electric product for its customers and employees. The companies place a high
priority on educating their customers and training their employees on safety
issues.
B. WITH RESPECT TO THE SPECIFIC REQUIREMENTS OF ORS 757.511, SIERRA
STATES AS FOLLOWS:
SIERRA'S IDENTITY AND FINANCIAL ABILITY
(ORS 757.511(2)(a))
Sierra incorporated under Nevada law on December 12, 1983, originally
as a holding company for SPPC. Today, Sierra has five direct subsidiaries: SPPC,
NPC, Tuscarora Gas Pipeline Company ("TGPC"), Sierra Pacific Energy Company
("SPEC"), and Lands of Sierra, Inc. ("LOS"). SPEC provides a variety of energy
services to residential, commercial and industrial energy consumers. TGPC
provides gas transportation services, with its primary customers being electric
generating plants in Northern Nevada. LOS owns land not used in the utility
businesses.
SPPC and its predecessors have engaged in the electric, gas and water
utility business in and around the city of Reno, Nevada, for over 140 years.
SPPC provides electric service to northern Nevada and northeastern California,
and natural gas and water service in the Reno/Sparks area of Nevada. SPPC
PAGE 4 - APPLICATION OF SIERRA PACIFIC RESOURCES TO ACQUIRE
PORTLAND GENERAL ELECTRIC COMPANY
<PAGE>
provides electricity to approximately 294,000 customers, natural gas to
approximately 105,000 customers, and water service to about 67,000 customers.
Sierra acquired NPC in a merger transaction consummated on July 29,
1999, approved by all appropriate state and federal agencies.
NPC has engaged in the electric utility business in and around the
city of Las Vegas since 1906. Most of NPC's operations are conducted in Clark
County, Nevada, with an estimated service area population of 1,361,700. NPC has
approximately 550,000 retail electric customers.
Sierra's stock is publicly traded on the New York Stock Exchange.
Sierra's financial condition is a matter of public record in its annual and
quarterly reports filed with the Securities and Exchange Commission ("SEC").
Such financial information, and other relevant information about Sierra, may be
reviewed on Sierra's web site. The web site address is
http.//www.SierraPacific.com.
<TABLE>
<CAPTION>
THE BACKGROUND OF THE KEY PERSONNEL ASSOCIATED
WITH THE APPLICANT
(ORS 757.511(2)(b))
Sierra's key personnel include the following:
<S> <C>
Dave Barneby Vice President, Generation
Steve Boss President, Sierra Pacific Energy Company
Jeffrey L. Ceccarelli Vice President, Distribution Services, New Business
Matt H. Davis Vice President, Distribution Services,
Operations & Maintenance
Malyn K. Malquist President and Chief Operating Officer
Michael R. Niggli Chairman and Chief Executive Officer
Steven K. Oldham Vice President, Corporate Development and
Strategic Planning
William E. Peterson Senior Vice President, General Counsel and Secretary
Douglas R. Ponn Vice President, Governmental and Regulatory Affairs
Steve Rigazio Senior Vice President, Energy Delivery
Mark A. Ruelle Senior Vice President and Chief Financial Officer
Mary O. Simmons Controller
Gloria Banks Weddle Vice President, Corporate Services
Mary Jane Willier Vice President, Human Resources
</TABLE>
Messrs. Niggli, Malquist, Ruelle and Oldham have submitted prefiled
direct testimony in this proceeding which sets forth their background
information. All of Sierra's senior management personnel are seasoned utility
PAGE 5 - APPLICATION OF SIERRA PACIFIC RESOURCES TO ACQUIRE
PORTLAND GENERAL ELECTRIC COMPANY
<PAGE>
executives. Biographies of all Sierra executives are available on Sierra's web
site.
Sierra intends that PGE will be operated as a subsidiary of Sierra,
with headquarters and key management personnel in Portland, Oregon. Sierra has
invited Peggy Y. Fowler to continue as President of PGE.
THE SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION
TO BE USED IN THE ACQUISITION
(ORS 757.511(2)(c))
Effective November 5, 1999, Enron Corp. ("Enron") and Sierra executed
a Stock Purchase Agreement ("the Agreement"), a copy of which is attached as the
Appendix hereto, pursuant to which Sierra agreed to purchase, and Enron agreed
to sell, all of the issued and outstanding common stock of PGE for the purchase
price of $2.1 billion, which includes $14 million for a small subsidiary of PGE,
PGH II, Inc. As a result of this transaction, PGE will become a wholly-owned
subsidiary of Sierra, and Sierra will acquire the power to exercise influence
over the policies and actions of PGE. Sierra, SPPC and NPC will also become
affiliates of PGE and PGH II, as defined in ORS 757.015. Sierra has financial
resources sufficient to acquire the common stock of PGE. Sierra has a commitment
from a major bank for the necessary funding, the terms of which are subject to a
confidentiality agreement and may be disclosed only subject to a protective
order.
THE APPLICANT'S COMPLIANCE WITH FEDERAL LAW
IN CARRYING OUT THE ACQUISITION
(ORS 757.511(2)(d))
Sierra will file applications with the SEC, the Federal Energy
Regulatory Commission and the Nuclear Regulatory Commission for the approvals
necessary to consummate the acquisition of PGE. The closing of the transaction
will occur only after all requisite federal approvals have been obtained.
Sierra's acquisition of PGE complies with all requirements of federal law.
/ / / / /
PAGE 6 - APPLICATION OF SIERRA PACIFIC RESOURCES TO ACQUIRE
PORTLAND GENERAL ELECTRIC COMPANY
<PAGE>
WHETHER THE APPLICANT OR THE KEY PERSONNEL ASSOCIATED
WITH THE APPLICANT HAS VIOLATED ANY STATE OR
FEDERAL STATUTES REGULATING THE ACTIVITIES OF PUBLIC UTILITIES
(ORS 757.511(2)(e))
Neither Sierra nor any of its key personnel has violated any state or
federal law regarding the regulation of public utilities.
ALL DOCUMENTS RELATING TO THE TRANSACTION
GIVING RISE TO THE APPLICATION
(ORS 757.511(2)(f))
The Agreement between Enron and Sierra is attached at the Appendix to
this Application. In order to facilitate review of this Application by the
Commission and other interested parties, Sierra, PGE and Enron will provide all
documents related to the transaction in document rooms to be open effective
January 24, 2000, and to remain open for the pendency of this Application. The
document rooms will be open to "qualified persons," as that term is defined in a
protective order which Sierra requests in connection with this application.
Sierra's document room will be at the law offices of Ater Wynne LLP, 222 SW
Columbia Street, Suite 1800, Portland, Oregon 97201. Appointments to use the
Sierra document rooms may be arranged by calling Cassandra Pfister at (503)
226-1191. PGE and Enron's document room will be located at the World Trade
Center, 121 SW Salmon Street, Portland, Oregon 97204. Appointments to use the
PGE and Enron document room may be arranged by calling Lee Martin at (503)
464-8932. On or about January 24, 2000, Sierra will file with the Commission an
index to the contents of the document rooms.
THE APPLICANT'S EXPERIENCE IN OPERATING PUBLIC
UTILITIES PROVIDING HEAT, LIGHT OR POWER
(ORS 757.511(2)(g)) AND
PLAN FOR OPERATING THE PUBLIC UTILITY
(ORS 757.511(2)(h))
Part A of this Application responds to these criteria.
Sierra will bring to PGE the knowledge it has gained in the
restructuring of SPPC and NPC now underway in the State of Nevada. With this
knowledge, and with the knowledge that PGE has gained from its participation in
PAGE 7 - APPLICATION OF SIERRA PACIFIC RESOURCES TO ACQUIRE
PORTLAND GENERAL ELECTRIC COMPANY
<PAGE>
Commission Docket UE 102, PGE will provide leadership in adopting the
administrative rules necessary to implement SB 1149. Sierra and PGE will use
this knowledge to promptly and efficiently implement the restructuring of PGE in
accordance with SB 1149 and the rules adopted by the Commission.
THE SALE AND SIERRA'S PLAN FOR OPERATING PGE
ARE IN THE PUBLIC INTEREST
(ORS 757.511(2)(i))
Based on the foregoing, Sierra believes that its plan for acquiring
and operating PGE is in the public interest and should be approved by the
Commission.
C. WITH RESPECT TO THE SPECIFIC REQUIREMENTS OF OAR 860-02--0200, SIERRA
STATES AS FOLLOWS:
CORPORATE INFORMATION REGARDING SIERRA
(OAR 860-027-0200(1) - 0030(1)(a)-(d))
Sierra is a Nevada corporation with its principal business office at
6100 Neil Road, Reno, Nevada 89520.
Other states in which Sierra is authorized to transact utility
business: Sierra is not authorized to transact utility business, but its
subsidiaries SPPC and NPC are so authorized in Nevada and California.
Name and address of person authorized to receive notices and
communications on behalf of Sierra in respect to the application:
Jonathan A. Ater
Ater Wynne LLP
222 SW Columbia - Suite 1800
Portland, OR 97201-66181
Telephone: (503) 226-1191
Fax: (503) 226-0079
E-mail: [email protected]
Names, titles and addresses of Sierra's principal officers: The names
of Sierra's principal officers are provided elsewhere in this application. The
business addresses of each of these individuals is 6100 Neil Road, Reno, Nevada
89520.
PAGE 8 - APPLICATION OF SIERRA PACIFIC RESOURCES TO ACQUIRE
PORTLAND GENERAL ELECTRIC COMPANY
<PAGE>
EXISTING AND PRO FORMA CAPITAL STRUCTURE
(OAR 860-027-0200 (2))
As shown in Mr. Ruelle's testimony, the capital structure of PGE will
not change as a result of the proposed acquisition.
EFFECT ON BOND RATINGS AND CAPITAL COSTS
(OAR 860-027-0200(3))
Sierra anticipates that Sierra and PGE will retain investment grade
credit ratings. This subject is discussed in the testimony of Mr. Ruelle.
AFFILIATED INTERESTS AND ORGANIZATIONAL STRUCTURE
(OAR 860-027-0200(4))
The testimonies of Messrs. Niggli and Malquist describe the
organizational structure under which Sierra intends to operate its businesses.
ALLOCATION OF MANAGEMENT, PERSONNEL, ETC. BETWEEN
SIERRA'S UTILITY AND NONUTILITY OPERATIONS
(OAR 860-027-0200(5))
The testimonies of Messrs. Niggli, Malquist and Ruelle describe the
method by which the management, personnel, property, income, losses, costs and
expenses will be allocated by Sierra among its utility operations. Sierra's
non-utility operations have line management which is independent of Sierra's
utility subsidiaries.
CHANGES IN POLICY, MANAGEMENT, OPERATIONS OR RATES
(OAR 860-027-0200(6))
Sierra does not plan any material changes in the way PGE provides
electric service to its customers.
/ / / / /
/ / / / /
/ / / / /
/ / / / /
PAGE 9 - APPLICATION OF SIERRA PACIFIC RESOURCES TO ACQUIRE
PORTLAND GENERAL ELECTRIC COMPANY
<PAGE>
PLANS TO CAUSE THE UTILITY TO SELL, EXCHANGE,
PLEDGE OR OTHERWISE TRANSFER ASSETS
(OAR 860-027-0200(7))
Sierra has no plans to cause PGE to sell, exchange, pledge or
otherwise transfer its assets, except with respect to transactions which have
already been announced by PGE or as may later occur in implementing SB 1149.
AGREEMENTS BETWEEN THE UTILITY AND ANY AFFILIATED INTERESTS
(OAR 860-027-0200(8))
There are no existing agreements meeting this description. Any
affiliated interest agreement will be subject to review by appropriate
regulatory commissions.
D. SIERRA REQUESTS PROMPT CONSIDERATION AND APPROVAL OF THIS APPLICATION.
Sierra waives the 19-day review requirement established in ORS
757.311(3). However, Sierra requests that the Commission consider and approve
this application at the earliest practical time and in any event prior to July
1, 2000, for the following reasons:
1. Sierra is prepared to assume the operating and corporate
governance responsibilities for PGE at the earliest possible
time.
2. Sierra and PGE will require at least one year's lead time to
prepare for the implementation of SB 1149 in Oregon. This
includes preparing and filing a rate case with the Commission,
participating in rulemaking and regulatory proceedings, and
implementation of new computer systems necessary for the
effective administration of unbundled electric service.
3. The Commission's prompt approval of this transaction will
facilitate the prompt and favorable approval by other state and
federal regulatory bodies having jurisdiction. Sierra is informed
and believes that Commission approval is a condition precedent to
approval by the SEC.
/ / / / /
PAGE 10 - APPLICATION OF SIERRA PACIFIC RESOURCES TO ACQUIRE
PORTLAND GENERAL ELECTRIC COMPANY
<PAGE>
Sierra requests that the Commission convene a prehearing conference at
the earliest possible date for the purpose of establishing a schedule for this
proceeding, clarifying issues, and exchanging information.
THEREFORE, SIERRA RESPECTFULLY REQUESTS THE COMMISSION'S PROMPT
APPROVAL OF THIS APPLICATION.
Dated: January 18, 2000.
Respectfully submitted,
ATER WYNNE LLP
222 SW Columbia Street - Suite 1800
Portland, OR 97201-6618
Telephone: 503 / 226-1191
Fax: 503 / 226-0079
By: /s/ Jonathan A. Ater
----------------------------------------
Jonathan A. Ater OSB No. 66007
Ronald L. Saxton OSB No. 79376
Kirk H. Gibson OSB No. 85122
Lori Irish Bauman OSB No. 87161
Of Attorneys for Sierra Pacific Resources, Inc.
PAGE 11 - APPLICATION OF SIERRA PACIFIC RESOURCES TO ACQUIRE
PORTLAND GENERAL ELECTRIC COMPANY
<PAGE>
APPENDIX
Stock Purchase Agreement
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
ENRON CORP.
AND
SIERRA PACIFIC RESOURCES
NOVEMBER 5, 1999
<PAGE>
TABLE OF CONTENTS
ARTICLE I
SALE AND PURCHASE OF THE SHARES
Section 1.1 Sale and Purchase of the PGE Shares.................1
Section 1.2 Sale and Purchase of the PGH II Shares..............1
Section 1.3 PGE Purchase Price..................................2
Section 1.4 PGH II Purchase Price...............................2
Section 1.5 Assumption of Enron Merger Payment..................2
ARTICLE II
CLOSING
Section 2.1 Closing.............................................2
Section 2.2 Closing Transactions. .............................2
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Section 3.1 Organization and Qualification......................3
Section 3.2 Subsidiaries........................................3
Section 3.3 Capitalization......................................4
Section 3.4 Authority; Non-Contravention; Statutory Approvals;
Compliance..........................................4
Section 3.5 Reports and Financial Statements....................6
Section 3.6 Absence of Certain Changes or Events................7
Section 3.7 Litigation..........................................7
Section 3.8 Tax Matters.........................................7
Section 3.9 Employee Benefit Plans and Labor Agreement..........8
Section 3.10 Environmental Protection...........................10
Section 3.11 Regulation as a Utility............................12
Section 3.12 Insurance..........................................12
Section 3.13 Status of PGE Nuclear Facility.....................12
Section 3.14 Year 2000 Compliance...............................13
Section 3.15 Contracts with Enron...............................13
Section 3.16 Limitation of Representations and Warranties.......13
i
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Section 4.1 Organization and Qualification.....................14
Section 4.2 Authority, Non-Contravention.......................14
Section 4.3 Availability of Funds..............................15
Section 4.4 Purchase for Investment............................15
Section 4.5 Due Diligence......................................15
Section 4.6 No Knowledge of Breach.............................15
Section 4.7 Regulation as a Utility............................15
ARTICLE V
CONDUCT OF BUSINESS PENDING THE CLOSING
Section 5.1 Ordinary Course of Business........................16
Section 5.2 Dividends and Repurchases..........................16
Section 5.3 Issuance of Securities.............................18
Section 5.4 Charter Documents..................................19
Section 5.5 Acquisitions.......................................19
Section 5.6 No Dispositions....................................19
Section 5.7 Indebtedness.......................................19
Section 5.8 Capital Expenditures...............................19
Section 5.9 Compensation, Benefits.............................19
Section 5.10 Cooperation, Notification..........................20
Section 5.11 Insurance..........................................20
Section 5.12 Permits............................................20
Section 5.13 Nuclear Operations.................................20
Section 5.14 Discharge of Liabilities...........................21
Section 5.15 Contracts..........................................21
Section 5.16 Certain Actions....................................21
Section 5.17 Non-Solicitation...................................22
Section 5.18 Accounting Matters.................................22
ARTICLE VI
ADDITIONAL ARRANGEMENTS
Section 6.1 Access to Information..............................22
Section 6.2 Regulatory Matter..................................23
Section 6.3 Cooperation........................................23
Section 6.4 Public Announcements...............................24
Section 6.5 Employee Benefit Plans.............................24
ii
<PAGE>
Section 6.6 Expenses...........................................26
Section 6.7 No Breach, Etc.....................................27
Section 6.8 Directors' and Officers' Indemnification...........27
Section 6.9 Insurance..........................................27
Section 6.10 Corporate Name.....................................27
Section 6.11 Related Party Contracts............................28
Section 6.12 PUHCA..............................................28
Section 6.13 Tax Matters........................................28
Section 6.14 Evidence of Financing Availability.................31
ARTICLE VII
CONDITIONS
Section 7.1 Conditions to Obligations of Purchaser.............31
Section 7.2 Conditions to Obligations of Seller................32
ARTICLE VIII
TERMINATION
Section 8.1 Termination........................................33
Section 8.2 Procedure and Effect of Termination................34
ARTICLE IX
MISCELLANEOUS
Section 9.1 Non-Survival of Representations, Warranties,
Covenants and Agreements...........................35
Section 9.2 Brokers............................................35
Section 9.3 Notices............................................35
Section 9.4 Miscellaneous......................................36
Section 9.5 Interpretation.....................................36
Section 9.6 Counterparts; Effect...............................37
Section 9.7 Parties in Interest................................37
Section 9.8 Specific Performance...............................37
Section 9.9 Governing Law......................................37
Section 9.10 Disclosure Schedules...............................37
iii
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement"), dated November 5,
1999 is by and between ENRON CORP., an Oregon corporation ("Seller"), and SIERRA
PACIFIC RESOURCES, a Nevada corporation ("Purchase"). Capitalized terms used
herein shall have the meanings ascribed to them in Annex A hereto, unless
otherwise provided. Seller and Purchaser are referred to individually as a
"Party," and collectively as the "Parties."
W I T N E S S E T H :
WHEREAS, Seller owns all of the issued and outstanding common stock,
par value $3.75 per share (the "PGE Shares") of Portland General Electric
Company, an Oregon corporation ("PGE");
WHEREAS, Portland General Holdings, Inc., an Oregon corporation and a
wholly owed subsidiary of Seller ("PGH"), owns all of the issued and outstanding
common stock, par value $ 1.00 per share (the "PGH II Shares") of PGH II, Inc.,
an Oregon corporation ("PGH II");
WHEREAS, Purchaser desires to purchase, and Seller desires to sell,
the PGE Shares, subject in all respects to the provisions of this Agreement; and
WHEREAS, Purchaser desires to purchase, and Seller desires to cause
PGH to sell, the PGH II Shares, subject in all respects to the provisions of
this Agreement.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties hereby agree as follows:
ARTICLE I
SALE AND PURCHASE OF THE SHARES
Section 1.1 Sale and Purchase of the PGE Shares. Upon the terms and
subject to the satisfaction of the conditions contained in this Agreement, at
the Closing, Seller shall sell, transfer and deliver to Purchaser, and Purchaser
shall purchase and accept delivery from Seller of, the PGE Shares.
Section 1.2 Sale and Purchase of the PGH II Shares. Upon the terms and
subject to the satisfaction of the conditions contained in this Agreement, at
the Closing, Seller shall cause PGH to sell, transfer and deliver to Purchaser,
and Purchaser shall purchase and accept delivery from PGH of, the PGH II Shares.
Section 1.3 PGE Purchase Price. The purchase price for the PGE Shares
shall be $2,086,000,000 in cash, which shall be reduced as provided in Section
1.5 and shall be paid as -- provided in Section 2.2(b) (the "PGE Purchase
Price").
1
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Section 1.4 PGH II Purchase Price. The purchase price for the PGH II
Shares shall be $14,000,000 in cash, which shall be paid as provided in Section
2.2(d) (the "PGH II Purchase Price").
Section 1.5 Assumption of Enron Merger Payment. Effective as of the
Closing Date, Purchaser shall assume from Seller, and shall indemnify Seller
for, all obligations in respect of the Enron Merger Payment for the period from
and after the Closing Date. Seller shall continue to be responsible for the
Enron Merger Payment obligations for periods prior to the Closing Date and shall
indemnify Purchaser for all such obligations. The purchase price for the PGE
Shares as set forth in Section 1.3 shall be reduced by an amount equal to the
book value of Seller's obligations remaining under the Enron Merger Payment as
of the Closing Date, which shall be calculated in accordance with the Enron/PGE
Order.
ARTICLE II
CLOSING
Section 2.1 Closing. The closing of the purchase and sale of the
Shares (the "Closing") will take place at the offices of Vinson & Elkins L.L.P.,
2300 First City Tower, 1001 Fannin, Houston, Texas, as soon as reasonably
practicable, not to exceed 10 business days or such lesser number of days as
remain in the then current calendar year, following the date on which the
conditions specified in Article VII (other than the conditions specified in
Sections 7.1 (e) and 7.2(e) which shall be satisfied on the Closing Date) have
been satisfied or waived, unless another time, date and place is agreed to in
writing by the Parties. The date of the Closing is referred to in this Agreement
as the "Closing Date."
Section 2.2 Closing Transactions. At the Closing the following events
shall occur, each event being deemed to have occurred simultaneously with the
other events:
(a) Seller will deliver to Purchaser the PGE Shares by
delivering the certificates representing the PGE Shares duly endorsed
for transfer or accompanied by appropriate stock powers, in favor of
Purchaser;
(b) Purchaser will pay the PGE Purchase Price by wire
transferring such amount, in lawful money of the United States of
America in immediately available funds, to such account as Seller
shall have designated by written notice to Purchaser;
(c) Seller will cause PGH to deliver to Purchaser the PGH II
Shares by delivering the certificates representing the PGH II Shares
duly endorsed for transfer or accompanied by appropriate stock powers,
in favor of Purchaser; and
(d) Purchaser will pay the PGH II Purchase Price by wire
transferring such amount, in lawful money of the United States of
America in immediately available funds, to such account as Seller
shall have designated, on behalf of PGH, by written notice to
Purchaser.
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(e) Purchaser will deliver to Seller documentation regarding
the assumption of the obligations in respect of the Enron Merger
Payment for the period from and after the Closing Date pursuant to
Section 1.5 of this Agreement in form reasonably satisfactory to
Seller.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Purchaser that:
Section 3.1 Organization and Qualification.
(a) Seller and PGH are each corporations duly organized,
validly existing, and in good standing under the laws of the State of
Oregon.
(b) Each of PGE, PGH II and their respective subsidiaries
(i) is a corporation or limited liability company duly organized,
validly existing and in good standing under the laws of its
jurisdiction of organization, (ii) has all requisite power and
authority to own, lease and operate its assets and properties and to
carry on its business as it is now being conducted, and (iii) is duly
qualified, licensed or admitted to do business and is in good standing
to do business in each jurisdiction in which the nature of its
business or the ownership or leasing of its assets and properties
makes such qualification necessary.
Section 3.2 Subsidiaries. Section 3.2 of the Seller Disclosure
Schedule contains a description as of the date hereof of all subsidiaries and
joint ventures of PGE and PGH II, including the name of each such entity, the
state or jurisdiction of its incorporation or organization and PGE's or PGH II's
interest therein, as the case may be. Except as disclosed in Section 3.2 of the
Seller Disclosure Schedule, all of the issued and outstanding shares of capital
stock or membership interests, as the case may be, of each subsidiary of PGE and
PGH II are validly issued, fully paid, nonassessable and free of preemptive
rights and are owned directly or indirectly by PGE or PGH II, as the case may
be, free and clear of any liens, claims, encumbrances, security interests,
equities, charges and options of any nature whatsoever, and there are no
outstanding subscriptions, options, calls, contracts, voting trusts, proxies or
other commitments, understandings, restrictions, arrangements, rights or
warrants, including any right of conversion or exchange under any outstanding
security, instrument or other agreement, obligating any such subsidiary to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of its capital stock or membership interests, as the case may be, or
obligating it to grant, extend or enter into any such agreement or commitment.
Section 3.3 Capitalization.
(a) The authorized capital stock of PGE consists of
100,000,000 shares of PGE Common Stock and 30,000,000 shares of PGE
Preferred Stock. The authorized capital stock of PGH II consists of
10,000 shares of PGH II Common Stock. There are 42,758,877 shares of
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PGE Common Stock issued and outstanding, all of which are owned by
Seller, and 300,000 shares of the 7.75% series of PGE Preferred Stock
issued and outstanding. There are 1,000 shares of PGH II Common Stock
issued and outstanding, all of which are owned by PGH. There are no
shares of capital stock held in the treasury of PGE or PGH II. All of
the outstanding shares of capital stock of PGE and PGH II are duly
authorized, validly issued, fully paid, nonassessable and free of
preemptive rights and are owned free and clear of any liens, claims,
mortgages, encumbrances, pledges, security interests, equities and
charges of any kind. There are no outstanding subscriptions, options,
calls, contracts, voting trusts, proxies or other commitments,
understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding
security, instrument or other agreement, obligating Seller, PGE, PGH
or PGH II to issue, deliver or sell, or cause to be issued, delivered
or sold, shares of the capital stock or other voting securities of PGE
or PGH Il or their subsidiaries or obligating Seller, PGE, PGH or PGH
II to grant, extend or enter into any such agreement or commitment.
(b) As of the date of this Agreement, no bonds, debentures,
notes or other indebtedness of PGE, PGH II or any of their
subsidiaries having the right to vote (or which are convertible into
or exercisable for securities having the right to vote) (together,
"PGE Voting Debt") on any matters on which shareholders may vote are
issued or outstanding nor are there any outstanding options obligating
PGE, PGH II or any of their subsidiaries to issue or sell any PGE
Voting Debt or to grant, extend or enter into any option with respect
thereto.
Section 3.4 Authority; Non-Contravention; Statutory Approvals;
Compliance.
(a) Authority. Seller has all requisite power and authority
to enter into this Agreement and, subject to the Seller Required
Statutory Approvals, to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the
consummation by Seller of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of
Seller and will be duly authorized prior to the Closing by all
necessary corporate action on the part of PGH. This Agreement has been
duly and validly executed and delivered by Seller and, assuming the
due authorization, execution and delivery of this Agreement by
Purchaser, constitutes the legal, valid and binding obligation of
Seller enforceable against Seller, in accordance with its terms.
(b) Non-Contravention. Except as disclosed in Section 3.4(b)
of the Seller Disclosure Schedule, the execution and delivery by
Seller of this Agreement do not, and the consummation of the
transactions contemplated hereby will not, violate, conflict with or
result in a breach of any provision of, or constitute a default (with
or without notice or lapse of time or both) under, or result in the
termination of, or accelerate the performance required by, or result
in a right of payment, termination, cancellation, modification or
acceleration of any obligation under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the
properties or assets of PGE or PGH II or any of their respective
subsidiaries, or, to the knowledge of any of Seller, PGE, PGH II or
any subsidiary of PGE or PGH II, any of PGE's or PGH II's joint
ventures (any such violation, conflict, breach, default, right of
termination, cancellation or acceleration, loss or creation, a "PGE
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Violation") under, any provisions of (i) the articles of
incorporation, bylaws or similar governing documents of Seller, PGE or
PGH II or any of their respective subsidiaries or joint ventures, (ii)
subject to obtaining the Seller Required Statutory Approvals, any
statute, law, ordinance, rule, regulation, judgment, decree, order,
injunction, writ, permit or license of any Governmental Authority
applicable to Seller, PGE, PGH II or any of their respective
subsidiaries or, to the knowledge of any of Seller, PGE, PGH II or any
subsidiary of PGE or PGH II, any of their respective joint ventures or
any of their respective properties or assets, or (iii) subject to
obtaining the third-party consents or other approvals disclosed in
Section 3.4(b) of the Seller Disclosure Schedule (the "PGE Required
Consents"), any note, bond, mortgage, indenture, deed of trust,
license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which Seller, PGE,
PGH II or any of their respective subsidiaries or, to the knowledge of
any of Seller, PGE, PGH II or any subsidiary of PGE or PGH II, any of
their respective joint ventures, is now a party or by which any of
them or any of their respective properties or assets may be bound or
affected, excluding from the foregoing clauses (ii) and (iii) such PGE
Violations as would not have, in the aggregate, a PGE Material Adverse
Effect.
(c) Statutory Approvals. Except as disclosed in Section
3.4(c) of the Seller Disclosure Schedule, no declaration, filing or
registration with, or notice to or authorization, consent, finding by
or approval of, any Governmental Authority is necessary for the
execution and delivery of this Agreement by Seller or the consummation
by Seller of the transactions contemplated hereby, the failure to
obtain, make or give which would have, in the aggregate, a PGE
Material Adverse Effect (the "PGE Required Statutory Approvals"), it
being understood that references in this Agreement to "obtaining" such
PGE Required Statutory Approvals shall mean making such declarations,
filings or registrations; giving such notice; obtaining such consents
or approvals; and having such waiting periods expire as are necessary
to avoid a violation of law.
(d) Compliance. Except as disclosed in Section 3.4(d) of the
Seller Disclosure Schedule or as disclosed in the PGE SEC Reports
filed prior to the date hereof, neither PGE nor PGH II nor any of
their respective subsidiaries nor, to the knowledge of any of Seller,
PGE, PGH II or any subsidiary of PGE or PGH II, any of PGE's or PGH
II's joint ventures, is in violation of, or has been given notice or
been charged with, or, to the knowledge of any of Seller, PGE, PGH II
or any subsidiary of PGE or PGH II, under investigation with respect
to, any violation of, any law, statute, order, rule, regulation,
ordinance or judgment (including, without limitation, any applicable
Environmental Laws) of any Governmental Authority, except for
violations that, in the aggregate, do not have a PGE Material Adverse
Effect. Except as disclosed in Section 3.4(d) of the Seller Disclosure
Schedule, PGE, PGH II, their respective subsidiaries and, to the
knowledge of any of Seller, PGE, PGH II or any subsidiary of PGE or
PGH II, PGE's and PGH II's respective joint ventures have all Permits
necessary to conduct their respective businesses as currently
conducted, except those which the failure to obtain would not, in the
aggregate, have a PGE Material Adverse Effect.
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Section 3.5 Reports and Financial Statements.
(a) PGE SEC Reports and Financial Statements. The filings
required to be made by PGE since January 1, 1997 under the Securities
Act, PUHCA, the Atomic Energy Act, the Exchange Act, applicable Oregon
laws and regulations and the Power Act have been filed with the SEC,
the OPUC, the FERC, or the NRC, as the case may be, and such filings
complied in all material respects with all applicable requirements of
the appropriate act and the rules and regulations thereunder. The PGE
SEC Reports, including without limitation any financial statements or
schedules included therein, at the time filed did not, and any forms,
reports or other documents filed by PGE with the SEC after the date
hereof will not, contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The PGE
Financial Statements have been prepared in accordance with GAAP
(except as may be indicated therein and except with respect to
unaudited statements as permitted by Form 10-Q of the Exchange Act)
and fairly present the consolidated financial position of PGE as of
the respective dates thereof and the consolidated results of
operations and cash flows for the respective periods then ended, as
the case may be, subject, in the case of the interim financial
statements, to normal, recurring audit adjustments.
(b) PGH II Pro Forma Financial Statements. The pro forma
consolidated financial statements of PGH II set forth in Schedule
3.5(b) of the Seller Disclosure Schedule (the "PGH II Pro Form") have
been properly presented to reflect the PGH Contribution and (for 1999
pro forma financial statements) the matters contemplated in Section
6.5(i) of this Agreement. The PGH II Pro Formas fairly present the
information contained therein and reflect all adjustments consisting
of normal recurring entries, which are in the opinion of management
necessary for a fair statement of results. The assumptions used in the
preparation of the PGH II Pro Formas are reasonable, and the
adjustments used therein are appropriate, to give effect to the
transactions referred to therein. The PGH II Pro Formas have been
prepared on the basis of the historical financial statements of the
subsidiaries of PGH II which have been prepared in accordance with
GAAP (except that such subsidiary financial statements do not include
footnote disclosure and are subject, in the case of interim periods,
to normal recurring adjustments) and fairly present the financial
position and results of operations of such entities as of and for the
periods presented.
Section 3.6 Absence of Certain Changes or Events. Except as disclosed
in the PGE SEC Reports filed prior to the date hereof or as disclosed in Section
3.6 or 3.7 of the Seller Disclosure Schedule, since June 30, 1999 with respect
to PGE and its subsidiaries and September 30, 1999 with respect to PGH II and
its subsidiaries (i) PGE, PGH II and their respective subsidiaries have
conducted their business only in the ordinary course of business consistent with
past practice and no event has occurred that has had, and no fact or condition
exists that would have or, to the knowledge of any of Seller, PGE, PGH II or any
subsidiary of PGE or PGH II, is reasonably likely to have, a PGE Material
Adverse Effect, and (ii) none of PGE, PGH II nor any of their respective
subsidiaries has taken any action that would have been prohibited by Article V
hereof had this Agreement been in effect at the time of such action.
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Section 3.7 Litigation. Except as disclosed in the PGE SEC Reports
filed prior to the date hereof or as disclosed in Sections 3.7, 3.8, 3.10 or
3.13 of the Seller Disclosure Schedule, (i) there are no claims, suits, actions
or proceedings pending or, to the knowledge of any of Seller, PGE, PGH II or any
subsidiary of PGE or PGH II, threatened, nor, to the knowledge of any of Seller,
PGE, PGH II or any subsidiary of PGE or PGH II, are there any investigations
pending or threatened against, relating to or affecting PGE, PGH II or any of
their respective subsidiaries, and (ii) there are no judgments, decrees,
injunctions, rules or orders of any court, governmental department, commission,
agency, instrumentality or authority or any arbitrator applicable to PGE, PGH II
or any of their respective subsidiaries, except for any of the foregoing under
clauses (i) and (ii) that individually or in the aggregate would not have a PGE
Material Adverse Effect.
Section 3.8 Tax Matters. Except as disclosed in Section 3.8 of the
Seller Disclosure Schedule and except for such matters as would not have a PGE
Material Adverse Effect: (i) all Tax Returns that are required to be filed on or
before the Closing Date by or with respect to PGE, PGH II or any of their
respective subsidiaries have been or will be duly and timely filed and all such
Tax Returns were (or if such returns have not been filed, will be) true, correct
and complete; (ii) all Taxes that are shown to be due on such Tax Returns have
been or will be timely paid in full; (iii) all Tax withholding requirements
imposed on or with respect to PGE, PGH II or any of their respective
subsidiaries have been satisfied in full in all respects; (iv) there are no Tax
liens upon the assets of PGE, PGH II or any of their respective subsidiaries,
except for liens for Taxes not yet due; (v) no assessment, deficiency or
adjustment has been asserted in writing with respect to any such Tax Return;
(vi) there is not in force any extension of time with respect to the due date
for the filing of any such Tax Return or any waiver or agreement for any
extension of time for the assessment or payment of any Tax due with respect to
the period covered by any such Tax Return; and (vii) none of PGE, PGH II or any
of their respective subsidiaries is a party to any agreement that could obligate
it to make any payments that would not be deductible under Section 280G of the
Code.
Section 3.9 Employee Benefit Plans and Labor Agreement.
(a) Each Benefit Plan is listed in Section 3.9(a) of the
Seller Disclosure Schedule. Seller has made available to Purchaser
true and correct copies of each of the following, to the extent
applicable, with respect to each Benefit Plan: the most recent annual
report (Form 5500) filed with the IRS, the plan document, the trust
agreement, if any, the most recent summary plan description, the most
recent actuarial report, and the most recent determination letter, if
any, issued by the IRS.
(b) Each Benefit Plan has been administered in accordance
with its terms and provisions and in compliance with ERISA, the Code
and any other applicable laws except for such noncompliance as would
not, in the aggregate, have a PGE Material Adverse Effect. Since
September 1, 1999, there has been no material change to any Benefit
Plan.
(c) Each Benefit Plan intended to be qualified under Code
Section 401 satisfies in form the requirements of such section except
to the extent of amendments which are not required by law to be made
until a date after the date hereof.
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(d) There are no actions, suits, or claims pending (other
than routine claims for benefits) or, to the knowledge of any of
Seller, PGE, PGH II or any subsidiary of PGE or with respect to, any
Benefit Plan or its assets that could PGH II, threatened against, or
wit reasonably be expected, in the aggregate, to have a PGE Material
Adverse Effect.
(e) To the knowledge of any of Seller, PGE, PGH II or any
subsidiary of PGE or PGH II, there is no matter pending (other than
routine qualification determination filings) with respect to any
Benefit Plan before the IRS, the Department of Labor, the PBGC or any
other Governmental Authority.
(f) As to each Benefit Plan subject to Title IV of ERISA,
(i) no notice of intent to terminate such Benefit Plan has been given
under Section 4041 of ERISA, (ii) no proceeding has been instituted
under Section 4042 of ERISA to terminate such Benefit Plan, (iii) no
liability to the PBGC has been incurred (other than with respect to
required premium payments), and (iv) the assets of the Benefit Plan
equal or exceed the actuarial present value of the benefit
liabilities, within the meaning of Section 4041 of ERISA, under the
Benefit Plan, based upon reasonable actuarial assumptions and the
asset valuation principles established by the PBGC.
(g) With respect to any employee benefit plan, within the
meaning of Section 3(3) of ERISA, that is not listed in Section 3.9(a)
of the Seller Disclosure Schedule but that is sponsored, maintained,
or contributed to, or has been sponsored, maintained, or contributed
to within six years prior to the date hereof, by Seller or any
Commonly Controlled Entity, (i) no withdrawal liability, within the
meaning of Section 4201 of ERISA, has been incurred, which withdrawal
liability has not been satisfied, and (ii) no liability to the PBGC
has been incurred by any Commonly Controlled Entity, which liability
has not been satisfied.
(h) Except as set forth in Section 3.9(h) of the Seller
Disclosure Schedule, no Benefit Plan provides retiree medical or
retiree life insurance benefits to any Person upon retirement or
termination of employment, other than as required by the provisions of
Sections 601 through 608 of ERISA and Section 4980B of the Code.
(i) None of PGE, PGH II or any of their respective
subsidiaries contributes to or has an obligation to contribute to, and
has not within six years prior to the date of this Agreement
contributed or had an obligation to contribute to, a multiemployer
plan within the meaning of Section 3(37) of ERISA.
(j) The vacation policies of PGE and PGH II provide for
carryover of vacation from one calendar year to the next as described
in Section 3.9(j) of the Seller Disclosure Schedule.
(k) Other than as set forth in or disclosed in Section
3.9(k) of the Seller Disclosure Schedule, the consummation or
announcement of any transaction contemplated by this Agreement will
not (either alone or upon the occurrence of any additional or further
acts or events) result in any (i) payment (whether of severance pay or
otherwise) becoming due from PGE, PGH II or any of their respective
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subsidiaries under any applicable Benefit Plans to any officer,
employee, former employee or director thereof or to the trustee under
any "rabbi trust" or similar arrangement, or (ii) benefit under any
Benefit Plan being established or becoming accelerated, vested or
payable, except for a payment or benefit that would have been payable
under the same terms and conditions without regard to the transactions
contemplated by this Agreement.
(l) To the knowledge of any of Seller, PGE, PGH II or any
subsidiary of PGE or PGH, as of the date hereof, there is no current
labor union representation issue involving employees of PGE or PGH II
or any of their respective subsidiaries, nor does Seller know of any
activity or proceeding of any labor organization (or representative
thereof) or employee group (or representative thereof) to organize any
such employees. Except as disclosed in the PGE SEC Reports or as
disclosed in Section 3.9(l) of the Seller Disclosure Schedule: (i)
neither PGE, PGH II nor any of their respective subsidiaries is a
party to any collective bargaining agreement or other labor agreement
with any union or labor organization; (ii) there is no unfair labor
practice charge or grievance arising out of a collective bargaining
agreement or other grievance procedure against PGE, PGH II or any of
their respective subsidiaries pending, or to the knowledge of any of
Seller, PGE, PGH II or any subsidiary of PGE or PGH II, threatened,
that has, or reasonably may be expected to have, a PGE Material
Adverse Effect; and (iii) there is no strike, dispute, slowdown, work
stoppage or lockout pending, or to the knowledge of any of Seller,
PGE, PGH II or any subsidiary of PGE or PGH II, threatened, against or
involving PGE, PGH II or any of their respective subsidiaries that has
or, reasonably may be expected to have, a PGE Material Adverse Effect.
(m) There is no act, omission or condition that could result
in liability for PGE, PGH II or Purchaser, or any of their respective
subsidiaries, with respect to any plan sponsored, maintained,
contributed to or required to be contributed to by Seller or by any
entity (other than PGE, PGH II or their respective subsidiaries) under
common control with Seller within the meaning of Section 414(b)(c) or
(in) of the Code or Section 4001 of ERISA that would be a Benefit Plan
if it was sponsored, maintained or contributed to or required to be
contributed to by PGE, PGH 11 or any of their respective subsidiaries.
Section 3.10 Environmental Protection.
(a) Compliance. Except as disclosed in Section 3.10 of the
Seller Disclosure Schedule or as disclosed in the PGE SEC Reports,
PGE, PGH II and each of their respective subsidiaries has been and is
in compliance with all applicable Environmental Laws, except where the
failure to be so in compliance would not have a PGE Material Adverse
Effect. Except as disclosed in Section 3.10 of the Seller Disclosure
Schedule or as disclosed in the PGE SEC Reports, neither PGE, PGH II
nor any of their respective subsidiaries has received any written
notice from any Person or Governmental Authority that alleges that
PGE, PGH II or any of their respective subsidiaries is not in
compliance with applicable Environmental Laws, except where the
failure to be so in compliance would not have a PGE Material Adverse
Effect.
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(b) Environmental Permits. Except as disclosed in Section
1.10 of the Seller Disclosure Schedule or as disclosed in the PGE SEC
Reports, each of PGE, PGH II and their respective subsidiaries has
obtained or has applied for all Environmental Permits necessary for
the construction of their facilities and the conduct of their
operations, and all such required Environmental Permits are in good
standing or, where applicable, a renewal application has been timely
filed and is pending agency approval, and PGE, PGH II and their
respective subsidiaries are in compliance with all terms and
conditions of all such Environmental Permit, except where the failure
to obtain or be in such compliance would not have a PGE Material
Adverse Effect. Except as disclosed in Section 3.10 of the Seller
Disclosure Schedule or as disclosed in the PGE SEC Reports, to the
knowledge of any of Seller, PGE, PGH II or any subsidiary of PGE or
PGH II, there are no pending Environmental Permit proceedings or
Environmental Permit renew proceedings that are reasonably likely to
result in the imposition of more stringent terms or conditions in said
Environmental Permits that would have a PGE Material Adverse Effect.
(c) Environmental Claims. Except as disclosed in Section
3.10 of the Seller Disclosure Schedule or as disclosed in the PGE SEC
Reports, there is. no Environmental Claim pending, or to the knowledge
of any of Seller, PGE, PGH II or any subsidiary of PGE or PGH II,
threatened against PGE, PGH II or any of their respective subsidiaries
that, if adversely determined, would have a PGE Material Adverse
Effect.
(d) Orders. Except as disclosed in Section 3.10 of the
Seller Disclosure Schedule or as disclosed in the PGE SEC Reports,
neither PGE, PGH II or any of their respective subsidiaries is subject
to any judicial or administrative orders or decrees pursuant to any
Environmental Law that would have a PGE Material Adverse Effect.
(e) Releases. Except as disclosed in Section 3.10 of the
Seller Disclosure Schedule or as disclosed in the PGE SEC Reports,
there has been no Release of any Hazardous Material that would be
reasonably likely to form the basis of any Environmental Claim against
PGE, PGH II or any subsidiary of PGE or PGH II, except for Releases of
Hazardous Materials the liability for which would not have a PGE
Material Adverse Effect.
(f) Predecessors. Except as disclosed in Section 3.10 of the
Seller Disclosure Schedule or as disclosed in the PGE SEC Reports,
there are no Environmental Claims pending or threatened, or any
Releases of Hazardous Materials that would be reasonably likely to
form the basis of any Environmental Claims with respect to any
predecessor of PGE, PGH II or any subsidiary of PGE or PGH II, that
would have a PGE Material Adverse Effect.
Section 3.11 Regulation as a Utility. PGE is subject to regulation as
a "public utility" by the OPUC pursuant to the law of the State of Oregon and is
subject to regulation as a "public utility" by the FERC pursuant to Part II of
the Power Act. PGE is not subject to regulation as a public utility, public
utility holding company or public service company (or similar designation) by
any other state in the United States or by any foreign country. PGE is a
subsidiary of Seller, which is exempt, pursuant to Section 3 (a)(1) of PUHCA,
and SEC Rule 2, from regulation under PUHCA and the SEC's rules thereunder,
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except Section 9(a)(2) of PUHCA. Neither PGH II or any subsidiary thereof is
subject to regulation as a public utility, public utility holding company or
public service company (or similar designation) by the federal government of the
U.S. or any state or political subdivision thereof or any foreign country.
Section 3.12 Insurance. Each of PGE, PGH II and each of their
respective subsidiaries is, and has been continuously since the later of January
1, 1997 and the date of its formation, insured in such amounts and against such
risks and losses as are customary for companies conducting the respective
businesses conducted by PGE, PGH II and their respective subsidiaries during
such time period. Neither PGE, PGH II nor any of their respective subsidiaries
has received any notice of cancellation or termination with respect to any
material insurance policy. All material insurance policies covering the
respective businesses conducted by PGE, PGH II and their respective subsidiaries
are valid and enforceable policies.
Section 3.13 Status of PGE Nuclear Facility. Except as set forth in
Section 3.13(2) of the Seller Disclosure Schedule, the operation of the PGE
Nuclear Facility and the operations related to decommissioning of the PGE
Nuclear Facility have at all times been conducted in compliance with applicable
health, safety, regulatory and other legal requirements, except where the
failure to be so in compliance would not have a PGE Material Adverse Effect.
Such legal requirements include, but are not limited to, the NRC license for the
Trojan Nuclear Plant pursuant to 10 C.F.R. Part 50, the NRC license for the
Trojan Independent Storage of Spent Nuclear Fuel and High-Level Radioactive
Waste (ISFSI) pursuant to 10 C.F.R. Part 72 and Siting Statutes of the State of
Oregon at ORS 469.320 (formerly Section 4 of Chapter 609, Oregon Laws of 1971)
(the term "PGE Nuclear Facility" includes both the Trojan Nuclear Plant and the
Trojan ISFSI Facility). Except as set forth in Section 3.13(2) of the Seller
Disclosure Schedule, neither the operations of the PGE Nuclear Facility nor the
operations related to decommissioning of the PGE Nuclear Facility are the
subject of any outstanding notices of violation or requests for information from
the NRC or any other agency with jurisdiction over such facility. PGE maintains,
and is in compliance with, emergency plans designed to protect the health and
safety of the public in the event of an unplanned release of radioactive
materials from the PGE Nuclear Facility, and the NRC has determined that such
plans are in compliance with its requirements. Liability insurance to the full
extent required by law for non-operating nuclear facilities and consistent with
Seller's view of the risks inherent in the decommissioning of the PGE Nuclear
Facility remains in full force and effect regarding such facility, and the
amount of such liability insurance has been approved by the NRC. Plans for the
decommissioning of the PGE Nuclear Facility, and for the storage of spent
nuclear fuel, conform with the requirements of applicable law, and PGE has
funded such plans to the extent required by law. The Decommissioning Plan is a
true and correct copy of the decommissioning plan approved by the NRC, which
plan has been amended through Revision 6 as permitted by NRC regulations. The
Trojan co-owners, PGE, the City of Eugene (acting by and through the Eugene
Water & Electric Board) and PacifiCorp (collectively, the "Trojan Co-Owners"),
have severally agreed to fund their shares of all decommissioning costs relating
to Trojan, and neither Seller nor PGE, PGH II or their respective subsidiaries
has any reason to believe that the Trojan Co-Owners will not fund such
decommissioning costs in the future. The Trojan ISFSI final Safety Analysis
Report is a true and correct copy of the safety plan submitted to the NRC in
accordance with NRC requirements. Except as disclosed in Section 3.13 of the
Seller Disclosure Schedule, Seller has no intention of varying PGE's operations
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from those described in the Decommissioning Plan and the Trojan ISFSI SAR and
neither Seller nor PGE has any other material commitments (whether written or
oral) to Governmental Authorities with respect to the PGE Nuclear Facility.
Section 3.14 Year 2000 Compliance. Each of PGE and PGH II has (i)
initiated a review and assessment of all material areas within its and each of
its subsidiaries' business and operations (including those affected by major
suppliers, vendors and customers) that could be adversely affected by the risk
that computer applications used by PGE, PGH II or any of their respective
subsidiaries (or any of their respective major suppliers, vendors and customers)
may be unable to recognize and perform properly date-sensitive functions
involving certain dates prior to and any date after December 31, 1999 (the "Year
2000 Problem"), (ii) developed a plan and timeline for addressing the Year 2000
Problem on a timely basis each as described in the Form 10-Q filed by PGE for
the quarter ended June 30, 1999, and (iii) to date, implemented that plan in
accordance with that timetable. PGE reasonably believes that its
mission-critical internal systems (meaning internal systems that are necessary
for PGE to reliably and safely deliver electric service, which includes embedded
systems) are capable of providing or being adapted to provide uninterrupted
millennium functionality to record, store, process and present calendar dates
falling on or after January 1, 2000 in substantially the same manner and with
the same functionality as such systems record, store, process and present such
calendar dates falling on or before December 31, 1999, other than such
interruptions in millennium functionality that could not, individually or in the
aggregate, reasonably be expected to result in a PGE Material Adverse Effect.
Seller and PGE reasonably believe as of the date hereof that the remaining cost
of adaptations referred to in the foregoing sentence will not exceed the amounts
reflected in the Form 10-Q filed by PGE for the quarter ended June 30, 1999.
Section 3.15 Contracts with Enron. Section 3.15 of the Seller
Disclosure Schedule sets forth, as of the date hereof, a correct and complete
list of all material contracts between PGE, PGH II or any of their respective
subsidiaries and Seller and its subsidiaries (other than any subsidiary of
Seller that is a subsidiary of Seller only by virtue of being a subsidiary of
PGE or PGH II) (the "Related Party Contracts").
Section 3.16 Limitation of Representations and Warranties. EXCEPT FOR
THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS ARTICLE III, SELLER IS NOT
MAKING ANY OTHER REPRESENTATIONS OR WARRANTIES, WRITTEN OR ORAL, STATUTORY,
EXPRESS OR IMPLIED, CONCERNING THE SHARES OR THE BUSINESS, ASSETS, OR
LIABILITIES OF PGE AND PGH II.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Seller that:
Section 4.1 Organization and Qualification. Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of Nevada.
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Section 4.2 Authority, Non-Contravention; Statutory Approvals.
(a) Authority. Purchaser has all requisite power and
authority to enter into this Agreement and, subject to the Purchaser
Required Statutory Approvals, to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and
the consummation by Purchaser of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the
part of Purchaser. This Agreement has been duly and validly executed
and delivered by Purchaser and, assuming the due authorization,
execution and delivery of this Agreement by Seller, constitutes the
legal, valid and binding obligation of Purchaser, enforceable against
Purchaser in accordance with its terms.
(b) Non-Contravention. Except as disclosed in Section 4.2(b)
of the Purchaser Disclosure Schedule, the execution and delivery by
Purchaser of this Agreement do not, and the consummation of the
transactions contemplated hereby will not, violate, conflict with or
result in a breach of any provision of, or constitute a default (with
or without notice or lapse of time or both) under, or result in the
termination of, or accelerate the performance required by, or result
in a right of payment, termination, cancellation, modification or
acceleration of any obligation under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the
properties or assets of Purchaser or any of its subsidiaries or, to
Purchaser's knowledge, any of its joint ventures (any such violation,
conflict, breach, default, right of termination, cancellation or
acceleration, loss or creation, a "Purchaser Violation"), under, any
provisions of (i) the articles of incorporation, bylaws or similar
governing documents of Purchaser or any of its subsidiaries or joint
ventures, (ii) subject to obtaining the Purchaser Required Statutory
Approvals, any statute, law, ordinance, rule, regulation, judgment,
decree, order, injunction, writ, permit or license of any Governmental
Authority, applicable to Purchaser or any of its subsidiaries or, to
Purchaser's knowledge, any of its joint ventures, or any of their
respective properties or assets or (iii) subject to obtaining the
third-party consents or other approvals disclosed in Section 4.2(b) of
the Purchaser Disclosure Schedule (the "Purchaser Required Consents
"), any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument,
obligation or agreement of any kind to which Purchaser or any of its
subsidiaries or, to Purchaser's knowledge, any of its joint ventures,
is now a party or by which any of them or any of their respective
properties or assets may be bound or affected, excluding from the
foregoing clauses (ii) and (iii) such Purchaser Violations that would
not have, in the aggregate, a material adverse effect on the ability
of Purchaser to perform its obligations under this Agreement or
reasonably be expected to delay or otherwise interfere with the
obtaining of the Purchaser Required Statutory Approvals or the Seller
Required Statutory Approvals.
(c) Statutory Approval. Except as disclosed in Section
4.2(c) of the Purchaser Disclosure Schedule, no material declaration,
filing or registration with, or notice to or authorization, consent,
finding by or approval of, any Governmental Authority is necessary for
the execution and delivery of this Agreement by Purchaser or the
consummation by Purchaser of the transactions contemplated hereby (the
"Purchaser Required Statutory Approvals"), it being understood that
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references in this Agreement to "obtaining" such Purchaser Required
Statutory Approvals shall mean making such declarations, filings or
registrations; giving such notice; obtaining such consents or
approvals; and having such waiting periods expire as are necessary to
avoid a violation of law.
Section 4.3 Availability of Funds. Purchaser will have sufficient
funds available to it to pay the Purchase Price on the Closing Date and to
enable Purchaser to timely perform all of its obligations under this Agreement.
Purchaser has delivered to Seller evidence of the availability of such funds,
including copies of binding commitments in form and substance acceptable to
Seller.
Section 4.4 Purchase for Investment. Purchaser is acquiring the Shares
for its own account, for investment only, without a view to distribution, as
that phrase has meaning under the Securities Act and rules and regulations of
the SEC. Purchaser understands that the effect of the representation and
warranty made herein is that the Shares must be held by it indefinitely unless
subsequently registered under the Securities Act or unless an exemption from
registration is available at the time of any proposed sale or other transfer
thereof.
Section 4.5 Due Diligence. Purchaser is experienced in the evaluation
and purchase of companies such as PGE and PGH II. In making the decision to
enter into this Agreement and consummate the transactions contemplated hereby,
Purchaser has relied solely on its own independent investigation of PGE and PGH
II and upon the representations and warranties and covenants in this Agreement.
Section 4.6 No Knowledge of Breach. Purchaser does not know of any
breach of warranty or any misrepresentation by Seller hereunder.
Section 4.7 Regulation as a Utility. As of the date hereof, Purchaser
is exempt from the registration and all other regulations and requirements of
PUHCA and the rules and regulations promulgated thereunder, other than from
Section 9(a)(2) thereof, pursuant to the rules of the SEC under Section 3(a)(1)
of PUHCA. Sierra Pacific Power Company, a wholly-owned subsidiary of Purchaser,
is regulated as a public utility in the States of Nevada and California and in
no other state. Nevada Power Company, a wholly-owned subsidiary of Purchaser, is
regulated as a public utility in the State of Nevada and in no other state.
Except as set forth in this Section 4.7, neither Purchaser nor any "subsidiary
company" or "affiliate" (as each such term is defined in PUHCA) of Purchaser is
subject to regulation as a public utility or public service company (or similar
designation) by any other state in the United States or any foreign country.
Tuscarora Gas Pipeline Company, a wholly-owned subsidiary of Purchaser, is a
general partner in Tuscarora Gas Transmission Company, which is a general
partnership that owns and operates a FERC-regulated interstate natural gas
pipeline.
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ARTICLE V
CONDUCT OF BUSINESS PENDING THE CLOSING
After the date hereof and prior to the Closing or earlier termination
of this Agreement, Seller agrees, except as expressly contemplated or permitted
in this Agreement, or to the extent Purchaser shall otherwise consent in
writing, which consent shall not be unreasonably withheld, as follows:
Section 5.1 Ordinary Course of Business. Seller shall cause PGE, PGH
II and each of PGE's and PGH II's respective subsidiaries to, carry on their
respective businesses in all material respects in the usual, regular and
ordinary course, consistent with past practice, and shall cause PGE, PGH II and
each of their respective subsidiaries to, use all reasonable efforts to (i)
preserve intact their present business organizations and goodwill, preserve the
goodwill and relationships with customers, suppliers and others having business
dealings with them, (ii) subject to prudent management of workforce needs, keep
available the services of their present officers and employees as a group, (iii)
maintain and keep their material properties and assets in as good repair and
condition as at present, subject to ordinary wear and tear, and maintain
supplies and inventories in quantities consistent with past practice, (iv) with
respect to wholesale power and energy trading and transactions, comply with
prudent policies, practices and procedures with respect to risk management and
trading limitations, all to the end that their goodwill and ongoing businesses
shall not be impaired in any material respect at the Closing, and (v) comply
with all applicable laws and orders of Governmental Authorities except for
violations that, in the aggregate, would not have a PGE Material Adverse Effect.
Section 5.2 Dividends and Repurchases.
(a) Restrictions on Dividends and Repurchases. Seller shall
not permit PGE, PGH II or any of PGE's and PGH II's respective
subsidiaries to: (i) declare or pay any dividends on or make other
distributions in respect of any of their capital stock other than (A)
dividends by a direct or indirect wholly-owned subsidiary of PGE or
PGH II to PGE or PGH II, as the case may be, or another direct or
indirect wholly-owned subsidiary of PGE or PGH II, (B) dividends by a
less than a wholly-owned subsidiary of PGE or PGH II consistent with
past practice, (C) dividends on the PGE Preferred Stock outstanding on
the date hereof, (D) dividends on the PGE Common Stock in an amount
equal to the lesser of (x) the aggregate amount of consolidated net
income after income taxes (for this purpose income taxes shall mean
any book provision for income taxes consistent with the manner
reported in the PGE SEC Reports) available to common stock of PGE and
its subsidiaries (for purposes of this Section 5.2, "net income") for
the period from January 1, 1999 through the Closing Date or (y) an
amount equal to the aggregate of $129.1 million for 1999, $142.6
million for 2000 and, if applicable, $143.8 million for 2001
(irrespective of when such dividends are actually declared or paid and
prorated for the year in which the Closing in occurs based upon the
number of days in such year before and after the Closing Date) less,
in the case of (x) or (y), any dividends on the PGE Common Stock
declared and paid by PGE during the period from January 1, 1999 to the
date hereof, and (E) the transactions contemplated by Section 6.5(i) ;
provided, however, that the provisions of this Section 5.2(a)(i) shall
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not limit or restrict payments by any of PGE, PGH II or their
respective subsidiaries to Seller in respect of intercompany payables
or accounts or their liability to Seller on account of PGE or PGH II
and their respective subsidiaries being a member or members of
Seller's affiliated group for federal income tax purposes and, if
applicable, any similar combined or unitary group for state income tax
purposes other than any liability arising by virtue of Treasury
Regulations ss. 1. 1502-6 or any similar state provision (the "Tax
Sharing Payment"); and provided, further, that PGE will not pay
dividends (not including payments in respect of intercompany payables
or accounts or Tax Sharing Payments) in 1999 in an amount in excess of
$129.1 million; (ii) split, combine or reclassify any of PGE's or PGH
II's capital stock or the capital stock of any subsidiary of PGE or
PGH II or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of, or in substitution for, shares
of PGE's or PGH II's capital stock or the capital stock of any
subsidiary of PGE or PGH II; or (iii) redeem, repurchase or otherwise
acquire any shares of A PGE's or PGH II's capital stock or the capital
stock of any subsidiary of PGE or PGH II A other than intercompany
acquisitions of capital stock. For purposes of this Section 5.2(a),
any gain on the sale of the assets referred to in Sections 5.6(6) and
5.6(12) of the Seller Disclosure Schedule shall be excluded from net
income of PGE.
Notwithstanding anything herein to the contrary, any Tax
Sharing Payment to be made by PGE or PGH II with respect to any
taxable period shall not exceed an amount equal to the hypothetical
Tax liability of each such entity with respect to such taxable period
calculated on a separate company basis as if PGE and PGH II were not
members of Seller's A consolidated group or, if applicable, any
combined or unitary state group. If PGE or PGH II makes any Tax
Sharing Payment in respect of Taxes that are calculated on an
estimated basis (an "Estimated Tax Payment") and the aggregate of such
Estimated Tax Payment with respect to a taxable period exceeds the
actual Tax Sharing Payment that would have been payable with respect
to such taxable period, Seller shall pay to Purchaser an amount equal
to such excess; if the amount of the aggregate of such Estimated Tax
Payment with respect to a taxable period is less than the actual Tax
Sharing Payment that would have been payable with respect to such
taxable period, Purchaser shall pay to Seller an amount equal to such
difference.
(b) Stub Period Dividend. At least five business days before
the anticipated Closing Date, Seller will provide Purchaser with
Seller's calculation of the net income of PGE for the period
commencing on the date after the date of the most recent historical
financial statements filed by PGE with the SEC and ending on the
Closing Date (as estimated by Seller with respect to the operations
through the Closing Date and any other portion of such period for
which historical financial information is unavailable) (the "Stub
Period"). In addition to any amount of dividends that may otherwise be
paid to Seller in accordance with the terms of Section 5.2(a) for
periods on or prior to the date of the most recent historical
financial statements filed by PGE with the SEC, Seller may, subject to
the limitations set forth in Section 5.2(a)(i)(D))(y) above, cause PGE
to pay a dividend to it prior to Closing in an amount equal to the
amount of net income reflected in such calculation. If Purchaser
disagrees with Seller's calculation of net income for the Stub Period,
its sole remedy in respect thereof shall be to refer the matter to
PGE's auditors who shall, upon Purchaser's request, provided that such
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request is made to Seller within 15 business days after the Closing
Date, calculate PGE's net income for the Stub Period. The auditor's
sole inquiry under such circumstances will be with respect to the net
income of PGE for the Stub Period. The calculation of PGE's net income
for the Stub Period by its auditors shall be made within 45 days of
such request and shall be final and binding on the Parties. If such
auditors determine that PGE's net income for the Stub Period is more
than 1 % less than the amount calculated by Seller, Seller will pay
the amount of such difference to Purchaser (provided that the amount
of such difference was included in a dividend paid by PGE to Seller
prior to Closing). If such auditors determine that PGE's net income is
more than 1% greater than the amount calculated by Seller, Purchaser
will, subject to the limitations set forth in Section 5.2(a)(i)(D)
above, pay the amount of the difference to Seller. Payments required
pursuant to this Section 5.2(b) will be made within two business days
of the delivery of the auditors report. Purchaser will be responsible
for all out of pocket costs and expenses relating to the accounting
review process unless Seller is determined to have overstated net
income for the Stub Period by an amount equal to or greater than 5% of
the net income reported by Seller for the Stub Period in which case
Seller shall be responsible for such costs and expenses.
Section 5.3 Issuance of Securities. Except as disclosed in Section 5.3
of the Seller Disclosure Schedule, Seller shall not permit PGE, PGH II or any of
PGE's or PGH II's respective subsidiaries to, issue, deliver or sell, or
authorize or propose the issuance, delivery or sale of, any shares of PGE's or
PGH II's capital stock or the capital stock of any subsidiary of PGE or PGH II
or any class or any securities convertible into or exchangeable for, or any
rights, warrants or options to acquire, any such shares of capital stock, other
than issuances by direct or indirect wholly-owned subsidiaries of PGE or PGH II
of securities to PGE or PGH II or to other direct or indirect wholly owned
subsidiaries of PGE or PGH II.
Section 5.4 Charter Documents. Neither PGE nor PGH II shall amend or
propose to amend its certificate or articles of incorporation or by-laws in any
way that would adversely affect the consummation of the transactions
contemplated by this Agreement.
Section 5.5 Acquisitions. Except as disclosed in Section 5.5 of the
Seller Disclosure Schedule, Seller shall not permit PGE, PGH II or any of PGE's
or PGH II's subsidiaries to, acquire or agree to acquire, by merging or
consolidating with, or by purchasing a substantial equity interest in or a
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, association or other business organization or
division thereof, or otherwise acquire or agree to acquire any assets material
to such companies taken as a whole, other than in the ordinary course of
business consistent with past practice, not to exceed $20 million in the
aggregate.
Section 5.6 No Dispositions. Except as disclosed in Section 5.6 of the
Seller Disclosure Schedule, Seller shall not permit PGE, PGH II or any of PGE's
or PGH II's subsidiaries to, sell, lease, license, encumber or otherwise dispose
of, any assets material to such companies taken as a whole, other than in the
ordinary course of business consistent with past practice, not to exceed $20
million in the aggregate.
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Section 5.7 Indebtedness. Except as disclosed in Section 5.7 of the
Seller Disclosure Schedule, Seller shall not permit PGE or PGH II or any of
PGE's or PGH II's subsidiaries to, incur or guarantee any indebtedness
(including any debt borrowed or guaranteed or otherwise assumed, including,
without limitation, the issuance of debt securities or warrants or rights to
acquire debt) other than (a) short-term indebtedness in an amount not to exceed
the amount of indebtedness provided for in PGE's current short term credit
facilities (b) long-term indebtedness incurred in connection with the
refinancing of existing indebtedness either at its stated maturity or at a lower
cost of funds and (c) up to $200 million in additional indebtedness, including
not more than $100 million in additional indebtedness, having maturities of five
years or less from its date of incurrence.
Section 5.8 Capital Expenditures. Except as disclosed in Section 5.8
of the Seller Disclosure Schedule or as required by law, Seller shall not permit
PGE, PGH II or any of PGE's or PGH II's subsidiaries to, make any capital
expenditures, other than (i) capital expenditures previously budgeted for the
remainder of 1999, and (ii) capital expenditures to repair or replace facilities
destroyed or damaged due to casualty or accident (whether or not covered by
insurance to the equivalent state prior to such casualty or accident).
Section 5.9 Compensation, Benefits. Except as disclosed in Section 5.9
of the Seller Disclosure Schedule, Seller shall not permit PGE or PGH II or any
of PGE's or PGH II's subsidiaries to, (a) enter into, adopt, amend or renew
(except as may be required by applicable law), accept assignment of or increase
the amount or accelerate the payment or vesting of any benefit or amount it plan
or other contract, agreement, commitment, arrangement, payable under, any
employee benefit plan or policy maintained by, contributed to or entered into by
PGE, PGH II or any of their respective subsidiaries, or increase, or enter into
any contract, agreement, commitment or arrangement to increase in any manner,
the compensation or fringe benefits, or otherwise to extend, expand or enhance
the engagement, employment or any related rights, of any director, officer or
other employee of PGE or PGH II or any of their respective subsidiaries, except
(i) pursuant to binding legal commitments and (ii) other than with respect to
executive officers of PGE or PGH II (including without limitation Peggy Fowler,
Alvin Alexanderson, Fred Miller and David Carboneau) for whom this clause (ii)
shall not apply, for normal (including incentive) increases, extensions,
expansions, enhancements, amendments or adoptions, renewals or assignments in
the ordinary course of business consistent with past practice that, in the
aggregate, do not result in a material increase in benefits or compensation
expense to PGE, PGH II and their respective subsidiaries taken as a whole or (b)
enter into, amend, accept assignment of or renew any employment, severance,
special pay arrangement with respect to termination of employment or other
similar contract, agreement or arrangement with any director or officer of PGE
or PGH II or any of their respective subsidiaries except, other than with
respect to executive officers of PGE or PGH II (including without limitation
Peggy Fowler, Alvin Alexanderson, Fred Miller and David Carboneau) for whom this
exception shall not apply, in the ordinary course of business consistent with
past practice.
Section 5.10 Cooperation, Notification. Seller shall: (a) confer on a
regular and frequent basis with one or more representatives of Purchaser to
discuss the general status of PGE's and PGH II's ongoing operations; (b)
promptly notify Purchaser of any significant changes in PGE's or PGH II's
business, properties, financial condition or results of operations; and (c)
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advise Purchaser of any change or event that has had or, insofar as reasonably
can be foreseen, is reasonably likely to result in, a PGE Material Adverse
Effect.
Section 5.11 Insurance. Seller shall cause PGE, PGH II and each of
PGE's and PGH II's subsidiaries to, maintain with financially responsible
insurance companies insurance in such amounts and against such risks and losses
as are customary for companies engaged in their respective businesses.
Section 5.12 Permits. Seller shall cause PGE, PGH II and each of PGE's
and PGH II's subsidiaries to use commercially reasonable efforts to maintain in
effect all existing Permits pursuant to which PGE, PGH II or any of their
respective subsidiaries operate.
Section 5.13 Nuclear Operations. Seller shall not permit PGE or any of
its subsidiaries to (i) breach any existing contract or arrangement for the
disposal or storage of spent nuclear fuel or components of the PGE Nuclear
Facility; or (ii) obligate itself to the payment of decommissioning expenses for
the PGE Nuclear Facility, or propose or adopt a budget for such decommissioning
expenses, which exceeds the decommissioning forecast set forth in Section 5.13
of the Seller Disclosure Schedule, by an amount sufficient to produce a PGE
Material Adverse Effect when measured over the life of the payment obligation or
budget for such expenses. Seller shall not permit PGE to engage in, or enter
into the business of undertaking to engage in, the transportation, treatment or
disposal of radioactive waste generated by third parties. To the extent not
prohibited by applicable laws, regulations, facility licenses, permits and
agreements with third parties existing as of the date of this Agreement, at all
times prior to the Closing, Seller shall make available to Purchaser, upon its
request, any existing information relevant to the operation or decommissioning
of the PGE Nuclear Facility, and shall inform Purchaser promptly of any proposed
material changes to the Decommissioning Plan. If Seller is prohibited by
agreement with a third party from providing information to Purchaser, Seller
shall use reasonable efforts (including taking into account Purchaser's
willingness to execute appropriate confidentiality agreements) to obtain the
consent of such third party to the release of such information. In addition,
upon reasonable notice, Seller shall allow access by two individuals designated
by Purchaser, to all portions of the PGE Nuclear Facility, affording those
Persons the same degree of access to facilities and information to the same
extent afforded the Vice President of Nuclear and Thermal Operations. Access by
the individuals selected by Purchaser shall be pursuant to existing procedures
for access to the PGE Nuclear Facility, including any security clearance and
training normally required of PGE nuclear personnel.
Section 5.14 Discharge of Liabilities. Seller shall not permit PGE,
PGH II and each of PGE's and PGH II's subsidiaries to pay, discharge or satisfy
any material claims, liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction, in the ordinary course of business consistent with past practice
(which includes the payment of final and unappealable judgments) or in
accordance with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or the notes
thereto) of such party included in PGE SEC Reports or the September 30, 1999
balance sheet included in the PGE II Pro Formas, as the case may be, or incurred
in the ordinary course of business consistent with past practice.
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Section 5.15 Contracts. Seller shall not permit PGE, PGH II and each
of PGE's and PGH II's subsidiaries to, except in the ordinary course of business
consistent with past practice, (i) to modify, amend, terminate or fail to use
commercially reasonable efforts to renew any material contract to which PGE, PGH
II or any of PGE's or PGH II's subsidiaries is a party or waive, release or
assign any material rights or claims or (ii) to enter into any new material
contracts except as otherwise expressly permitted by this Agreement. For
purposes of the restrictions in this Section 5.15 on modifications, amendments
or terminations of contracts, a contract will be deemed to be a material
contract if the modification, amendment or termination of such contract shall
result in an incremental payment or payments during the 12 month period
immediately following such modification, amendment or termination to any of PGE,
PGH II or their respective subsidiaries of $1.0 million or more, or, in the case
of contracts with a term extending beyond the Closing Date, $5.0 million or more
in the aggregate.
Section 5.16 Certain Actions. Seller will not permit PGE, PGH II or
any of their respective an subsidiaries to adopt a plan of complete or partial
liquidation or resolutions providing for or authorizing such liquidation or a
dissolution, merger, consolidation, restructuring, recapitalization or other
reorganization.
Section 5.17 Non-Solicitation. Seller agrees that, during the period
beginning on the date hereof and ending one year after the Closing Date, neither
it nor any of its subsidiaries (excluding PGE, PGH II and their respective
subsidiaries) will, directly or indirectly, solicit for employment or attempt to
hire or hire for employment any Person who is employed by PGE, PGH II or any of
their respective subsidiaries on the date of this Agreement or at any time prior
to the Closing Date; provided, however, that the restrictions in this Section
5.17 shall not be applicable to any Person that is terminated without cause by
PGE, PGH II or any of their respective subsidiaries after the Closing Date; and,
provided, further, that general advertising of employment opportunities and
posting of employment opportunities on Seller's internal employee bulletin board
shall be permitted hereunder and such activities shall be deemed not to violate
the non-solicitation or attempt to hire provisions of this Section 5.17.
Section 5.18 Accounting Matters. Seller shall not permit PGE, PGH II
or any of their respective subsidiaries to make any material changes in any of
their accounting methods, policies or procedures, including without limitation,
in calculating net income, except as required by law, rule, regulation or GAAP.
In addition, neither Seller, PGE, PGH II or any of their respective subsidiaries
will seek any regulations or rulings from any Governmental Authority regarding
accounting methods, policies or procedures of PGE or its subsidiaries without
the prior written consent of Purchaser.
ARTICLE VI
ADDITIONAL ARRANGEMENTS
Section 6.1 Access to Information. Upon reasonable notice and during
normal business hours, Seller shall cause PGE, PGH II and each of PGE's and PGH
II's respective subsidiaries to, afford to the Purchaser Representatives
reasonable access, during normal business hours throughout the period prior to
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the Closing Date, to all of their properties, books, contracts, personnel,
commitments and records; provided, however, that (A) any such access shall not
interfere unreasonably with the operation of the business of PGE, PGH II or any
of their respective subsidiaries, (B) neither PGE, PGH II nor any of their
respective subsidiaries shall be required to take any action which would
constitute a waiver of the attorney-client privilege and (C) neither PGE, PGH II
nor any of their respective subsidiaries shall be required to supply Purchaser
with any information which PGE, PGH II or any of their respective subsidiaries
is under a legal obligation not to supply. During such period, Seller and
Purchaser shall furnish promptly to the other Party (i) a copy of each report,
schedule and other document filed or received by it or any of its subsidiaries
pursuant to the requirements of the FERC, the NRC, the Department of Justice,
the Federal Trade Commission or any other federal or state regulatory agency or
commission with respect to the transactions contemplated hereby and (ii) all
information concerning themselves, their subsidiaries, directors and officers
and such matters as may be reasonably requested by the other Party in connection
with any filings, applications or approvals required or contemplated by this
Agreement. All documents and information furnished pursuant to this Section 6.1
shall be subject to the Confidentiality Agreement. The Party requesting copies
of any documents from the other Party shall be responsible for all out-of-pocket
expenses incurred by the Party to whom such request is made in complying with
such request, including any cost of reproducing and delivering any required
information.
Section 6.2 Regulatory Matter.
(a) As promptly as practicable but in any event not later
than 120 days after the date of this Agreement, Seller and Purchaser
shall each file with the Federal Trade Commission and the Department
of Justice any notifications required to be filed under the HSR Act
and the rules and regulations promulgated thereunder with respect to
the transactions contemplated hereby. The Parties shall consult with
each other as to the appropriate time of filing such notifications and
shall use their best efforts to make such filings at the agreed upon
time, to respond promptly to any requests for additional information
made by either of such agencies and to cause the waiting periods under
the HSR Act to terminate or expire at the earliest possible date after
the date of filing.
(b) Seller and Purchaser shall cooperate with each other to
(i) promptly (but in any event not later than 75 days after the date
of this Agreement with respect to filings with the OPUC and the Public
Utility Commission of Nevada, 90 days after the date of this Agreement
with respect to filings with the SEC and 120 days after the date of
this Agreement with respect to filings with FERC) prepare and file all
necessary documentation, (ii) effect all necessary applications,
notices, petitions and filings and execute all agreements and
documents, (iii) use their respective best efforts to obtain all
necessary permits, consents, approvals and authorizations of all
Governmental Authorities and (iv) use their respective best efforts to
obtain all necessary permits, consents, approvals and authorizations
of all other parties, in the case of each of the foregoing clauses
(i), (ii), (iii) and (iv), necessary or advisable to consummate the
transactions contemplated by this Agreement (including, without
limitation, the Seller Required Statutory Approvals and the Purchaser
Required Statutory Approvals) or required by the terms of any note,
bond, mortgage, indenture deed of trust, license, franchise, permit,
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concession, contract, lease or other instrument to which PGE, PGH II
or Purchaser or any of their respective subsidiaries is a party or by
which any of them is bound. Each of Seller and Purchaser shall have
the right to review in advance all filings to be made by the other
Party with any Governmental Authority in connection with the
transactions contemplated hereby.
Section 6.3 Cooperation. Subject to the terms and conditions of this
Agreement, each of the Parties hereto will use its respective best efforts to
take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the sale of the Shares pursuant to this Agreement,
including without limitation, using best efforts to ensure satisfaction of the
conditions precedent to each Party's obligations hereunder. Neither of the
Parties hereto will, without the prior written consent of the other Party, take
or fail to take any action, which would reasonably be expected to prevent or
materially impede, interfere with or delay the transactions contemplated by this
Agreement. Purchaser further agrees that it shall not, and shall not permit any
of its subsidiaries to, and Seller further agrees to cause PGE, PGH II and each.
subsidiary of PGE or PGH II not to, enter into any transaction, including any
merger, acquisition, joint venture, disposition, lease, contract or financing,
if the entering into of a definitive agreement relating to or the consummation
of such transaction could reasonably be expected to delay the obtaining of, or
significantly increase the risk of not obtaining, any authorizations, consents,
orders, declarations or approvals of any Governmental Authority necessary to
consummate the transactions contemplated hereby or the expiration or termination
of any applicable waiting period, significantly increase the risk of any
Governmental Authority entering an order prohibiting the consummation of the
transactions contemplated hereby or significantly increase the risk of not being
able to remove any such order on appeal or otherwise.
Section 6.4 Public Announcements. Seller and Purchaser shall cooperate
with each other in the development and distribution of all news releases and
other public information disclosures with respect to this Agreement or any of
the transactions contemplated hereby and, subject to each Party's disclosure
obligations imposed by law or any applicable national securities exchange, (a)
shall consult with each other with respect to any public announcements or
statements and (b) shall not issue any public announcement or statement with
respect to the transactions contemplated by this Agreement that is inconsistent
with any public announcement or statement previously made by either Party
without the consent of the other Party.
Section 6.5 Employee Benefit Plans.
(a) Prior to Closing, Seller shall have caused sponsorship
of the Portland General Holdings, Inc. Pension Plan and Portland
General Holdings, Inc. Voluntary Employees' Beneficiary Association
and any related trusts or other funding vehicles to be transferred to
and assumed by PGH II and PGE and PGH shall thereupon cease to be a
sponsor of such plans. From and after Closing, Seller and Seller's
affiliates and subsidiaries (including PGH) shall have no rights,
duties, responsibilities or liabilities with respect to the Portland
General Holdings, Inc. Pension Plan and Portland General Holdings,
Inc. Voluntary Employees' Beneficiary Association or any related
trusts or other funding vehicles and Purchaser agrees that, pursuant
to their assumption of sponsorship of such plans, PGH II and PGE shall
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assume all rights, duties, responsibilities and liabilities with
respect to such plans, and any related trusts or other funding
vehicles.
(b) The account balances (both vested and unvested) under
the Enron Corp. Savings Plan of the PGE Employees and of any other
individuals whose accounts were transferred into the Enron Corp.
Savings Plan pursuant to the merger into such plan of the Portland
General Holdings, Inc. Retirement Savings Plan shall be transferred to
a qualified defined contribution plan of the Purchaser as soon as
practicable after Closing following receipt from the IRS of
confirmation that such transfer will not adversely affect the
qualified status under applicable provisions of the Code of the Enron
Corp. Savings Plan. Such transfer shall be in cash except that any
outstanding participant loans shall be transferred in kind.
(c) The account balances under the Enron Corp. Employee
Stock Ownership Plan of the PGE Employees shall be distributed to them
in lump sum payments in cash or in kind as soon as practicable after
Closing after receipt by Seller from the IRS of confirmation that
effecting such distributions will not adversely affect the qualified
status of such plan under applicable provisions of the Code.
(d) After Closing, the Enron Corp. Medical Plan for Active
Employees, the Enron Corp. Medical Plan for Inactive Participants, the
Enron Corp. Dental Plan for Active Employees and the Enron Corp.
Dental Plan for Inactive Participants shall thereafter be liable for
and only for the payment of claims incurred prior to Closing by the
PGE Employees and the PGE Former Employees who were covered by such
plans prior to Closing.
(e) From and after Closing, the PGE Employees shall no
longer be permitted to make pre-tax contributions under the Enron
Corp. Flexible Benefit Plan but they shall be permitted to submit
claims against their medical reimbursement and dependent care flexible
spending accounts under such plan through the remainder of the
calendar year including Closing but not for any amounts in excess of
the Closing date balances of such accounts.
(f) For a period of not less than two years following the
Closing Date, Purchaser shall provide or shall cause PGH II and PGE
and their subsidiaries to provide the PGE Employees and the PGE Former
Employees with employee benefits that are not materially less
favorable in the aggregate than those provided (a) immediately prior
to Closing to such individuals under the Benefit Plans disclosed on
Seller's Disclosure Schedule at Section 3.9(a) or (b) to similarly
situated United States employees of Purchaser and its subsidiaries;
provided, however, that the foregoing shall not require the continued
maintenance of or prevent the amendment or termination of any
particular benefit plan except that during such two year period
Purchaser shall provide or cause PGH II and PGE to provide severance
benefits for the PGE Employees in amounts and upon terms and
conditions that are no less favorable than those that were in effect
under the Portland General Holdings, Inc. Involuntary Severance Plan
as in effect on September 5, 1997 and the Portland General Holdings,
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Inc. Outplacement Assistance Plan as in effect on September 5, 1997,
and provided, further, that Purchaser's right to negotiate successor
collective bargaining agreements shall not be limited by this Section
6.5(f).
(g) Each PGE Employee and PGE Former Employee shall be given
credit for all purposes under the Replacement Plans for all service
prior to the Closing with Seller and its affiliates and subsidiaries
(including, specifically, service with PGH, PGH II, PGE and their
affiliates and subsidiaries prior to their acquisition by Seller), to
the extent such credit was given under the Benefit Plans disclosed on
Seller's Disclosure Schedule at Section 3.9(a).
(h) No preexisting condition exclusion or limitation that
was inapplicable under the applicable Benefit Plan immediately prior
to closing shall be applicable with respect to the participation of
any PGE Employee or PGE Former Employee in any Replacement Plan that
is a medical benefit plan, but (i) the medical expenses incurred by a
PGE Employee or PGE Former Employee (or their spouses and dependents)
during the portion of the year prior to Closing shall be counted for
purposes of the annual deductible of any such medical benefit plan to
the extent such expenses were similarly counted under the applicable
Benefit Plan prior to the closing and (ii) the medical expenses paid
by a Benefit Plan of Seller and its affiliates and subsidiaries that
is a medical plan during the year in which Closing occurs for any PGE
Employee or PGE Former Employee (and their spouses or dependents)
shall. be counted for purposes of any annual limits of such medical
benefit plan.
(i) Prior to Closing, Seller shall have caused PGH or Seller
to assume any and all obligations (including benefit liability
obligations and allocated assets) of PGE with respect to and under
each of the Portland General Holdings, Inc. Umbrella Trust for Outside
Directors, the Portland General Holdings, Inc. Umbrella Trust for
Management (jointly, the "Trusts"), the Portland General Holdings,
Inc. Outside Directors' Life Insurance Benefit Plan, the Portland
General Holdings, Inc. Senior Officers' Life Insurance Benefit Plan,
the Portland General Holdings, Inc. Management Deferred Compensation
Plan, the Portland General Holdings, Inc. Outside Directors' Deferred
Compensation Plan, the Portland General Holdings, Inc. Supplemental
Executive Retirement Plan and the Portland General Holdings Inc.
Retirement Plan for Outside Directors (jointly, the "Executive and
Director Plans") and shall have caused the subtrusts in the Trusts to
be adjusted to reflect the transfer from PGE to PGH of liabilities
under the Executive and Director Plans as described above. In
connection with the assumption by PGH or Seller of such obligations,
at or prior to Closing, PGH shall transfer to PGH II and PGH II shall
assume from PGH the $20,607,214 payable to PGE incurred by PGH on July
31, 1999 and all accrued interest thereon and PGE shall release PGH in
respect thereof Section 6.5 of the Seller Disclosure Schedule provides
certain information regarding the regulatory status of the Executive
and Director Plans.
Section 6.6 Expenses. Subject to Section 5.2, Section 6.1, Section
6.15 and Section 8.2, (a) all costs and expenses incurred by Seller, PGE or PGH
II in connection with this Agreement and the transactions contemplated hereby
shall be paid by Seller, and (b) all costs and expenses incurred by Purchaser in
connection with this Agreement and the transactions contemplated hereby shall be
paid by Purchaser.
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Section 6.7 No Breach, Etc. No Party shall, nor shall any Party permit
any of its subsidiaries to, take any action that would or is reasonably likely
to result in a material breach of any provision of this Agreement or in any of
its representations and warranties set forth in this Agreement being untrue on
and as of the Closing Date.
Section 6.8 Directors' and Officers' Indemnification.
(a) Survival of Indemnification. To the fullest extent not
prohibited by law, from and after the Closing Date, all rights to
indemnification now existing in favor of the employees, agents,
directors or officers of PGE, PGH II and their respective subsidiaries
with respect to their activities as such prior to or on the Closing
Date, as provided in their respective articles of incorporation,
bylaws, other organizational documents or indemnification agreements
in effect on the date of such activities or otherwise in effect on the
date hereof, shall survive the Closing and shall continue in full
force and effect for a period of not less than six years from the
Closing Date, provided that, in the event any claim or claims are
asserted or made within such six year period, all such rights to
indemnification in respect of any claim or claims shall continue until
final disposition of such claim or claims.
(b) Successors. In the event Purchaser, PGE, PGH II or any
of their respective successors or assigns (i) consolidates with or
merges into any other Person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets
to any Person, then and in either such case, proper provision shall be
made so that the successors and assigns of Purchaser, PGE or PGH II,
as the case may be, shall assume the obligations set forth in this
Section 6.8.
Section 6.9 Insurance. Purchaser shall cause to be put in place as of
the Closing Date insurance policies covering PGE and PGH II and their respective
subsidiaries to the extent such entities are included in Seller's policies as of
such date. Purchaser shall cause all surety bonds and letters of credit that
Seller or its affiliates (other than PGE, PGH II and their respective
subsidiaries) have entered into or provided on behalf of PGE, PGH II or their
respective subsidiaries and that remain outstanding on the Closing Date to be
replaced as of the Closing Date with no further obligation to Seller or such
affiliates. A list of the types of insurance coverage provided by Seller for PGE
and PGH II and their respective subsidiaries and the surety bonds and letters of
credit entered into or provided on their behalf, in each case as of the date
hereof, is set forth on Schedule 6.9 of the Seller Disclosure Schedule.
Section 6.10 Corporate Name. Purchaser shall not acquire, nor shall
PGE, PGH II or any of PGE's or PGH II's subsidiaries retain, any rights to the
name "Enron" (and all derivations therefrom) and any trademarks, trade names or
symbols related thereto. As soon as reasonably practicable after the Closing
(and in any event, within 60 days after the Closing Date) Purchaser will cause
PGE, PGH II and each of their respective subsidiaries to remove the "Enron" name
(and all derivations therefrom), and all trademarks, trade names and symbols
related thereto from the properties and assets of PGE, PGH II and each of their
respective subsidiaries (including changing all signage relating thereto). In
addition, within 10 business days of the Closing Date, Purchaser will change all
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of the legal names of the subsidiaries of PGE and PGH II to delete from the name
thereof the word "Enron".
Section 6.11 Related Party Contracts. Except as set forth on Schedule
6.11 of the Seller Disclosure Schedule, Seller shall cause all of the Related
Party Contracts, including those entered into after the date of this Agreement,
to be terminated prior to the Closing.
Section 6.12 PUHCA. Purchaser shall comply with any and all
requirements of PUHCA. If Purchaser is required to register under Section 5 of
PUHCA in connection with the transactions contemplated by this Agreement,
Purchaser shall comply with the notification and registration requirements of
Section 5 of PUHCA and the SEC's regulations thereunder. Purchaser shall take
any and all actions necessary to comply with Sections 10 and 11 of PUHCA as such
provisions relate to the integration of the utility assets of Purchaser, its
subsidiaries and PGE.
Section 6.13 Tax Matters.
(a) Consolidated Returns. Seller shall cause to be included
in the consolidated federal income Tax Returns (and in the state
income Tax Returns of any state in which consolidated, combined or
unitary income Tax Returns are filed) of the affiliated group of
corporations of which Seller is the common parent (the "Seller Group")
for any period beginning on or after the date on which PGE was first
included in the consolidated federal income Tax Return of the Seller
Group (the "Beginning Tax Date") and ending on or before the Closing
Date, all items of income, gain, loss, deduction and credit and other
tax items ("Tax Items") of PGE, PGH II and their respective
subsidiaries which are required to be included therein (taking into
account the provisions of Treas. Reg. ss. 1.1502-76(b)(1)(ii)(B)), and
shall cause such Tax Returns to be timely filed with the appropriate
taxing authorities, and shall be responsible for the timely payment
(and entitled to any refund) of all Taxes (except for Taxes resulting
from any transaction not in the ordinary course of business occurring
on the Closing Date after the Closing) due with respect to the periods
covered by such Tax Returns.
(b) Separate Returns. With respect to any Tax Return
covering a taxable period beginning on or after the Beginning Tax Date
and ending on or before the Closing Date that is required to be filed
after the Closing Date with respect to any of PGE, PGH II and their
respective subsidiaries and that is not described in paragraph (a)
above, Purchaser shall cause such Tax Return to be prepared, shall
cause to be included in such Tax Return all Tax Items required to be
included therein, and shall cause such Tax Return to be filed timely
with the appropriate taxing authority. Seller shall provide Purchaser
with the information necessary to prepare all such Tax Returns.
Purchaser shall deliver a copy of each such Tax Return to Seller at
least 30 days prior to the due date for the filing of each such Tax
Return to permit Seller to review and comment on each such Tax Return
prior to filing and shall make such revisions as are reasonably
requested by Seller. Seller shall pay to Purchaser, at least five days
prior to the due date for any such Tax Return, all amounts (except for
Taxes resulting from any transaction not in the ordinary course of
business occurring on the Closing Date after the Closing) which are
shown as due on such Tax Return, and Purchaser shall pay the amount
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shown as due on such Tax Return and remit such amounts to the
appropriate taxing authorities. Seller shall be entitled to any refund
for Taxes for any period covered by any such Tax Return.
(c) Straddle Returns. With respect to any Tax Return
covering a taxable period beginning on or before the Closing Date and
ending after the Closing Date that is required to be filed after the
Closing Date (a "Straddle Period Return") with respect to any of PGE,
PGH II and their respective subsidiaries, Purchaser shall cause such
Tax Return to be prepared, shall cause to be included in such Tax
Return all Tax Items required to be included therein and shall furnish
a copy of such Tax Return to Seller. Seller shall pay to Purchaser at
least five days prior to the due date for the filing of any Straddle
Period Return an amount equal to the portion of the Taxes shown on
such return which relates to the portion of such taxable period ending
on the Closing Date (a"Pre-Closing Straddle Period"). For purposes of
this Section 6.13 (c), in the case of any Taxes that are imposed on a
periodic basis and are payable with respect to a taxable period that
includes (but does not end on) the Closing Date, the portion of such
Tax which relates to the portion of such taxable period ending on the
Closing Date shall (1) in the case of any Taxes other than Taxes based
upon or related to income, receipts, sales or payroll, be deemed to be
the amount of such Tax for the entire taxable period multiplied by a
fraction the numerator of which is the number of days in the taxable
period ending on the Closing Date and the denominator of which is the
number of days in the entire taxable period, and (2) in the case of
any Tax based upon or related to income, receipts, sales or payroll,
be deemed equal to the amount which would be payable if the relevant
taxable period ended on the Closing Date.
(d) Consistency. Any Tax Return to be prepared pursuant to
the provisions of Section 6.13(b) or (c) shall be prepared in a manner
consistent with practices followed in prior years with respect to
similar Tax Returns, except for changes required by changes in law or
fact.
(e) Access to Tax Records. Seller shall grant to Purchaser
(or its designees) access at all reasonable times to all of the
information, books and records relating to PGE, PGH II and their
respective subsidiaries within the possession of Seller or any member
of the Seller Group (including workpapers and correspondence with
taxing authorities), and shall afford Purchaser (or its designees) the
right (at Purchaser's expense) to take extracts therefrom and to make
copies thereof, to the extent reasonably necessary to permit Purchaser
(or its designees) to prepare Tax Returns and to conduct negotiations
with taxing authorities. Purchaser shall grant or cause PGE, PGH II
and their respective subsidiaries to grant to Seller (or its
designees) access at all reasonable times to all of the information,
books and records relating to PGE, PGH II and their respective
subsidiaries within the possession of Purchaser, PGE, PGH II or their
respective subsidiaries (including workpapers and correspondence with
taxing authorities), and shall afford Seller (or its designees) the
right (at Seller's expense) to take extracts therefrom and to make
copies thereof, to the extent reasonably necessary to permit Seller
(or its designees) to prepare Tax Returns and to conduct negotiations
with taxing authorities.
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(f) Transfer Taxes. Purchaser shall be responsible for the
payment of all state and local transfer, sales, use or other similar
Taxes resulting from the transactions contemplated by this Agreement.
(g) No Section 338 Election. No election shall be made under
section 338 of the Code or the corresponding provisions of any state
Tax law with respect to the purchase of the PGE Shares or the PGH II
Shares.
(h) Indemnification for Taxes. From and after the Closing
Date Seller shall protect, defend, indemnify and hold harmless
Purchaser, PGE, PGH II and their respective subsidiaries from any and
all Taxes imposed on PGE, PGH II or any of their respective
subsidiaries (i) for any taxable period beginning on or after the
Beginning Tax Date and ending on or before the Closing Date (except
for Taxes resulting from any transaction not in the ordinary course of
business occurring on the Closing Date after the Closing), (ii) with
respect to any Pre-Closing Straddle Period; or (iii) resulting by
reason of the several liability of PGE, PGH II or any of their
respective subsidiaries for Taxes pursuant to Treas. Reg. ss. 1.1502-6
or any analogous state, local or foreign law or regulation for periods
beginning on or after the Beginning Tax Date and ending on or before
the Closing Date; provided, however, that Seller's liability under
this paragraph shall be reduced with respect to any item to the extent
of the amount for which such item was specifically identified and
reserved in the financial statements referred to in Section 3.5 and
not taken into account in computing any Tax Sharing Payment. Purchaser
shall protect, defend, indemnify and hold harmless Seller and each
member of the Seller Group from any and all other Taxes imposed on
PGE, PGH II or any of their respective subsidiaries.
(i) Tax Proceedings. In the case of any audit, examination
or other proceeding ("Proceeding") with respect to Taxes for which
Seller would be liable pursuant to this Agreement, Purchaser shall
promptly inform Seller, and shall afford Seller, at its expense, the
opportunity to control the conduct of such Proceedings. Seller shall
have the right to initiate any claim for refund, file any amended Tax
Return or take any other action which it deems appropriate with
respect to such Taxes; provided that such action does not adversely
affect Purchaser or PGE, PGH II or the respective subsidiaries of PGE
and PGH II for any taxable year beginning after the Closing Date. Any
Proceeding with respect to Taxes for a period which includes but does
not end on the Closing Date shall be controlled jointly by Seller and
Purchaser.
(j) Tax Sharing Agreements. All tax sharing agreements with
respect to or involving PGE, PGH II and their respective subsidiaries
shall be terminated as of the Closing Date and, after the Closing
Date, PGE, PGH Il and their subsidiaries shall not be bound thereby or
have any liability thereunder.
Section 6.14 Evidence of Financing Availability. If the Closing has
not occurred on or before November 3, 2000, Purchaser will obtain, and will
provide Seller with a copy of, either (i) an extension of the commitment letter
received by Purchaser on the date hereof, a copy of which has been provided to
Seller, providing for a commitment of at least the same amount of financing and
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including funding conditions and other terms and conditions no less favorable
than the terms of the original commitment letter, or (ii) a new commitment
letter or letters that provides for an amount of financing and including funding
conditions and other terms and conditions no less favorable than the terms of
the original commitment letter from a bona fide lender, in the case of each of
(i) and (ii) including a termination date not before May 5, 2001.
ARTICLE VII
CONDITIONS
Section 7.1 Conditions to Obligations of Purchaser. The obligations of
Purchaser to purchase the Shares and to consummate the other transactions
contemplated by this Agreement shall be subject to the fulfillment on or prior
to the Closing Date (or the waiver by Purchaser) of the following conditions:
(a) No Injunction. No preliminary or permanent injunction or
other order, judgment or decree by any federal or state court of
competent jurisdiction that prevents the consummation of the sale of
the Shares contemplated herein shall have been issued and remain in
effect (each Party agreeing to use its best efforts to have any such
injunction, order, judgment or decree lifted), and the sale of the
Shares shall not have been prohibited under any applicable federal or
state law or regulation.
(b) Statutory Approvals. All Seller Required Statutory
Approvals and all Purchaser Required Statutory Approvals shall have
been made or obtained and become Final Orders, and such Final Orders
shall not, in the aggregate, impose terms or conditions that would
have a PGE Material Adverse Effect or a materially adverse effect or
change on the business, condition (financial or otherwise) or results
of operations of the Purchaser, PGE and their respective subsidiaries
taken as a whole.
(c) Performance of Obligations of Seller. Seller shall have
performed and complied with, in all material respects, the covenants
and agreements contained in this Agreement that are required to be
performed and complied with by Seller on or prior to the Closing Date.
(d) Representations and Warranties. The representations and
warranties of Seller set forth in this Agreement shall be true and
correct (i) on and as of the date hereof and (ii) on and as of the
Closing Date with the same effect as though such representations and
warranties had been made on and as of the Closing Date (except for
representations and warranties that expressly speak only as of a
specific date or time other than the date hereof or the Closing Date,
which need only be true and correct as of such date or time) except in
each of clauses (i) and (ii) above for such failures of
representations and warranties to be true and correct (without regard
to any materiality qualifications contained therein) that,
individually or in the aggregate, would not result in a PGE Material
Adverse Effect.
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(e) Closing Certificate. Purchaser shall have received a
certificate from an authorized officer of the Seller, dated the
Closing Date, to the effect that, to such office's, knowledge, the
conditions set forth in Section 7. 1 (c), and Section 7. 1 (d) have
been satisfied.
(f) No PGE Material Adverse Effect. Since the date of this
Agreement, no PGE Material Adverse Effect shall have occurred and be
continuing.
Section 7.2 Conditions to Obligations of Seller. The obligations of
Seller to sell the Shares and to consummate the other transactions contemplated
by this Agreement shall be subject to the fulfillment on or prior to the Closing
Date (or the waiver by Seller) of the following conditions:
(a) No Injunction. No preliminary or permanent injunction or
other order, judgment or decree by any federal or state court of
competent jurisdiction that prevents the consummation of the sale of
the Shares contemplated herein shall have been issued and remain in
effect (each Party agreeing to use its best efforts to have any such
injunction, order, judgment or decree lifted), and the sale of the
Shares shall not have been prohibited under any applicable federal or
state law or regulation.
(b) Statutory Approvals. All Purchaser Required Statutory
Approvals and all Seller Required Statutory Approvals shall have been
made or obtained and become Final Orders, and such Final Orders shall
not impose any liability, loss, cost, expense, restriction,
encumbrance or obligation on Seller or any of its subsidiaries or
affiliates.
(c) Performance of Obligations of Purchaser. Purchaser shall
have performed and complied with, in all material respects, the
covenants and agreements contained in this Agreement that are required
to be performed and complied with by Purchaser on or prior to the
Closing Date.
(d) Representations and Warranties. The representations and
warranties of Purchaser set forth in this Agreement shall be true and
correct (without regard to any materiality qualifications contained
therein) in all material respects on and as of the date hereof and on
and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of the Closing
Date.
(e) Closing Certificate. Seller shall have received a
certificate from an authorized officer of Purchaser dated the Closing
Date, to the effect that, to such officer's knowledge, the conditions
set forth in Section 7.2(c), and Section 7.2(d) have been satisfied.
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ARTICLE VIII
TERMINATION
Section 8.1 Termination.
(a) Mutual Consent. This Agreement may be terminated at any
time prior to the Closing Date by the mutual consent of Seller and
Purchaser.
(b) Permanent Injunction. This Agreement may be terminated
by Seller or Purchaser, if any federal or state court of competent
jurisdiction shall have issued an order, judgment or decree
permanently restraining, enjoining or otherwise prohibiting the
Closing, and such order, judgment or decree shall have become final
and nonappealable.
(c) Termination Date. This Agreement may be terminated by
Seller or Purchaser if the Closing contemplated hereby shall have not
occurred on or before the day that is 12 months from the date of this
Agreement (the "Initial Termination Date"); provided that the right to
terminate this Agreement under this Section 8. 1 (c) shall not be
available to any Party whose failure to fulfill any obligation under
this Agreement has been the cause of, or resulted directly or
indirectly in, the failure of the Closing to occur on or before such
date; and provided, further, that if on the Initial Termination Date
the conditions to the Closing set forth in Sections 7.1(b) or 7.2(b)
shall not have been fulfilled, but all other conditions to the Closing
have been fulfilled or are capable of being fulfilled, then the
Initial Termination Date shall be extended to the day that is 18
months from the date of this Agreement.
(d) Required Statutory Approvals. This Agreement may be
terminated by Purchaser or Seller if any of the Purchaser Required
Statutory Approvals or Seller Required Statutory Approvals, the
receipt of which are conditions to the obligations of Purchaser and
Seller to consummate the Closing as set forth in Sections 7. 1 (b) and
7.2(b), shall have been denied by a final and nonappealable order,
judgment or decree.
(e) Breach by Seller. This Agreement may be terminated by
Purchaser if there has been a violation or breach by Seller of any
covenant, representation or warranty contained in this Agreement which
has resulted in a PGE Material Adverse Effect and such violation or
breach is not cured by the earlier of the Closing Date or the date
sixty (60) days after receipt by Seller of written notice specifying
particularly such violation or breach, and such violation or breach
has not been waived by Purchaser.
(f) Breach by Purchaser. This Agreement may be terminated by
Seller if there has been a material violation or breach by Purchaser
of any covenant, representation or warranty contained in this
Agreement and such violation or breach is not cured by the earlier of
the Closing Date or the date sixty (60) days after receipt by
Purchaser of written notice specifying particularly such violation or
breach, and such violation or breach has not been waived by Seller.
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<PAGE>
(g) Financing. This Agreement may be terminated by Seller if
Purchaser has violated or breached its covenant in Section 6.14, and
such violation or breach has not been waived by Seller.
Section 8.2 Procedure and Effect of Termination. In the event of
termination of this Agreement by either or both of the Parties pursuant to this
Article VIII, written notice thereof shall forthwith be given by the terminating
Party to the other Party, whereupon, if this Agreement is terminated pursuant to
any of Sections 8.1(a) through (d), the liabilities of the Parties hereunder
will terminate, except as otherwise expressly provided in this Agreement, and
thereafter neither Party shall have any recourse against the other by reason of
this Agreement. In the event of a termination of this Agreement pursuant to
Section 8.1 (e), Section 8.1 (f) or Section 8.1 (g), the breaching Party shall
promptly (but no later than five business days after receipt of notice from the
non-breaching Party) pay to the non-breaching Party an amount in cash equal to
all documented out-of-pocket expenses and fees incurred by the non-breaching
Party (including without limitation, fees and expenses payable to all legal,
accounting, financial, public relations and other professional advisors arising
out of, in connection with or related to, the transactions contemplated by this
Agreement). The reimbursement of expenses provided in the immediately preceding
sentence shall be in addition to any rights that any Party may have at common
law or otherwise.
ARTICLE IX
MISCELLANEOUS
Section 9.1 Non-Survival of Representations, Warranties, Covenants and
Agreements. No representation, warranty, covenant or agreement in this Agreement
shall survive the Closing or termination of the Agreement, except the covenants
and agreements contained in Section 1.5 (Enron Merger Payment), Section 5.2(b)
(Stub Period Dividend), Section 5.17 (Non- Solicitation) Section 6.5 (Employee
Benefit Plans), Section 6.6 (Expenses), Section 6.8 (Directors' and Officers'
Indemnification), Section 6.10 (Corporate Name), Section 6.13 (Tax Matters),
Section 8.2 (Procedure and Effect of Termination), and this Article IX, each of
which shall survive in accordance with its terms.
Section 9.2 Brokers. Seller represents and warrants that, except for
Credit Suisse First Boston Corporation and SG Barr Devlin, no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of Seller, PGE or PGH II. Purchaser
represents and warrants that, except for Salomon Smith Barney, no broker, finder
or investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of Purchaser.
Section 9.3 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given (a) if delivered personally, or
(b) if sent by overnight courier service (receipt confirmed in writing), or (c)
32
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if delivered by facsimile transmission (with receipt confirmed), to the Parties,
in each case to the following addresses (or at such other address for a Party as
shall be specified by like notice):
(i) If to Purchaser, to:
Sierra Pacific Resources
6100 Neil Road
Reno, NV 89511
Attn.: General Counsel
Fax: (775) 834-5959
with a copy to:
Skadden, Arps, Slate, Meagher & Flom L.L.P.
919 Third Avenue
New York, NY 10022
Attn.: Sheldon S. Adler
Fax: (212) 735-2000
(ii) If to Seller, to:
James V. Derrick
Executive Vice President and General Counsel
Enron Corp.
1400 Smith Street
Houston, Texas 77002
Fax: (713) 853-3920
with copies to:
Corporate Secretary Keith R. Fullenweider
Enron Corp. Vinson & Elkins L.L.P.
1400 Smith Street 2300 First City Tower
Houston, Texas 77002 1001 Fannin
Fax: (713) 853-3920 Houston, Texas 77002
Fax: (713) 758-2346
Section 9.4 Miscellaneous. This Agreement (including the documents and
instruments referred to herein): (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the Parties, or any of them, with respect to the subject matter hereof
other than the Confidentiality Agreement; (b) shall not be assigned by operation
of law or otherwise by any Party without the prior written consent of the other
Party; and (c) may be modified, amended or supplemented in any manner and at any
time only by a written instrument executed by the Purchaser and Seller. The
invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement,
which shall remain in full force and effect. The Parties hereto shall negotiate
34
<PAGE>
in good faith to replace any provision of this Agreement so held invalid or
unenforceable with a valid provision that is as similar as possible in substance
to the invalid or unenforceable provision.
Section 9.5 Interpretation. When reference is made in this Agreement
to Articles or Sections, such reference shall be to an Article or Section of
this Agreement, as the case may be, unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes and
shall not affect in any way the meaning or interpretation of this Agreement.
Whenever the words "include", "includes", or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation." Whenever reference is made to the "knowledge" of any Person or
entity in this Agreement or to information "known" to any Person or entity in
this Agreement, such terms shall refer to information actually known to the
Person, in a case of an individual, or in the case of a corporation or other
entity, information actually known to an executive officer of such corporation
or entity.
Section 9.6 Counterparts; Effect. This Agreement may be executed in
one or more counterparts, each of which shall be deemed to be an original, but
all of which shall constitute one and the same agreement.
Section 9.7 Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each Party hereto and, except for rights of
Indemnified Parties as set forth in Section 6.8 (Directors' and Officers'
Indemnification) nothing in this Agreement, express or implied, is intended to
confer upon any other Person any rights or remedies of any nature whatsoever
under or by reason of this Agreement.
Section 9.8 Specific Performance. The Parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the Parties hereto shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, this being in addition to any
other remedy to which they are entitled at law or in equity.
Section 9.9 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, other than any
conflict of laws rules thereof that would direct the application of the laws of
another jurisdiction to this Agreement.
Section 9.10 Disclosure Schedules. The Seller Disclosure Schedule and
the Purchaser Disclosure Schedule are collectively referred to herein as the
"Disclosure Schedules". The Disclosure Schedules constitute an integral part of
this Agreement and modify the respective representations, warranties, covenants
or agreements of the Parties contained herein to the extent that such
representations, warranties, covenants or agreements expressly refer
specifically to the applicable section of the Disclosure Schedules. Any and all
statements, representations, warranties or disclosures set forth in the
Disclosure Schedules shall be deemed to have been made on and as of the date of
this Agreement.
35
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to
be executed as of the date first above written.
ENRON CORP.
By /s/ J. Mark Metts
-----------------------------------
J. Mark Metts
Executive Vice President,
Corporate Development
SIERRA PACIFIC RESOURCES
By
------------------------------------
Michael R. Niggli
Chairman and Chief Executive Officer
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to
be executed as of the date first above written.
ENRON CORP.
By
-----------------------------------
J. Mark Metts
Executive Vice President,
Corporate Development
SIERRA PACIFIC RESOURCES
By /s/ Michael R. Niggli
------------------------------------
Michael R. Niggli
Chairman and Chief Executive Officer
<PAGE>
ANNEX A
DEFINITIONS
As used herein, the following terms have the following meanings:
Atomic Energy Act: The Atomic Energy Act of 1954, as amended.
Benefit Plan: Any employee pension benefit plan (whether or not
insured), as defined in Section 3(2) of ERISA, any employee welfare benefit plan
(whether or not insured) as defined in Section 3(l) of ERISA, any plan that
would be employee pension benefit plans or employee welfare benefit plans if
they were subject to ERISA, such as foreign plans and plans for directors, any
stock bonus, stock ownership, stock option, stock purchase, stock appreciation
rights, phantom stock, or other stock plan (whether qualified or nonqualified),
and any bonus or incentive compensation plan sponsored, maintained, contributed
to or required to be contributed to by PGE, PGH II or any of their subsidiaries
for the benefit of any of the present or former directors, officers, employees,
agents, consultants, or other similar representatives; provided, however, that
such term shall not include (a) routine employment policies and procedures
developed and applied in the ordinary course of business and consistent with
past practice, including wage, vacation, holiday, and sick or other leave
policies, (b) workers compensation insurance, and (c) directors and officers
liability insurance.
Code: The Internal Revenue Code of 1986, as amended, or any successor
thereto.
Commonly Controlled Entity: Any corporation, trade, business or entity
under common control with Seller, within the meaning of Section 414(b), (c) or
(m) of the Code or Section 4001 of ERISA.
Confidentiality Agreement: Confidentiality Agreement, dated as of
August 3, 1999, between Seller and Purchaser.
Decommissioning Plan: The PGE Decommissioning Plan relating to PGE
Nuclear Facility as approved by the NRC on April 15, 1996, and revisions
thereto, all of which have been delivered by Seller to Purchaser.
Enron Merger Payment: Seller's obligations set forth in Condition 20
to the Stipulation dated April 29, 1997 adopted by the OPUC and incorporated by
reference into the Enron/PGE Order.
Enron/PGE Order: OPUC's Order dated June 4, 1997 approving Seller's
application to acquire the power to exercise influence over PGE.
Environmental Claim: Any and all administrative, regulatory or
judicial actions, suits, demands, demand letters, directives, claims, liens,
investigations, proceedings or notices of noncompliance or violation by any
Person or entity (including, without limitation, any Governmental Authority)
alleging potential liability (including, without limitation, potential liability
for enforcement costs, investigatory costs, cleanup costs, response costs,
A-1
<PAGE>
removal costs, remedial costs, natural resources damages, property damages,
personal injuries, fines or penalties) arising out of, based on or resulting
from (A) the presence, or Release or threatened Release of any Hazardous
Materials at any location, whether or not owned, operated, leased or managed by
PGE, PGH II or any of their respective subsidiaries or joint ventures, (B)
circumstances forming the basis of any violation, or alleged violation, of any
Environmental Law or (C) any and all claims by any third party seeking damages,
contribution, indemnification, cost recovery, compensation or injunctive relief
resulting from the presence or Release of any Hazardous Materials.
Environmental Laws: All foreign, federal, state and local laws, rules,
regulations, ordinances, orders, judgments, decrees and common law rules
relating to Hazardous Materials relating to pollution or protection of human
health or the environment (including, without limitation, ambient air, surface
water, groundwater, land surface or subsurface strata) as in effect on the date
hereof including, without limitation, laws and regulations relating to Releases
or threatened Releases of Hazardous Materials or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials.
Environmental Permits: Permits required under or pursuant to
Environmental Laws.
ERISA: The Employee Retirement Income Security Act of 1974, as amended
from time to time, or any successor thereto.
Exchange Act: The Securities Exchange Act of 1934, as amended.
FERC: The Federal Energy Regulatory Commission.
Final Orders: A judgment, order or decree of the relevant regulatory
authority that has not been reversed, stayed, enjoined, set aside, annulled or
suspended, with respect to which any waiting period prescribed by law before the
transactions contemplated hereby may be consummated has expired (but without the
requirement for expiration of any applicable rehearing or approval period), and
as to which all conditions to the consummation of such transactions prescribed
by law, regulation or order have been satisfied.
GAAP: Generally accepted accounting principles applied on a consistent
basis.
Governmental Authority: A court, governmental or regulatory body
(including a stock exchange or other self regulatory body) or authority,
domestic or foreign.
Hazardous Materials: Any (A) petroleum or petroleum products or
petroleum wastes (including crude oil or any fraction thereof), radioactive
materials, friable asbestos or friable asbestos-containing material, urea
formaldehyde foam insulation, and transformers or other equipment that contain
dielectric fluid containing polychlorinated biphenyls, (B) chemicals, materials
or substances which are now defined as or included in the definition of
"hazardous substances", "hazardous wastes", "hazardous materials", "extremely
hazardous wastes", "restricted hazardous wastes", "toxic substances", "toxic
pollutants", or words of similar import, under any Environmental Law and (C)
A-2
<PAGE>
other chemicals, materials, substances or wastes, exposure to which is now
prohibited, limited or regulated under any applicable Environmental Law.
HSR Act: The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
IRS: The United States Internal Revenue Service.
Joint venture: Other than with respect to Section 3.2, references to a
"joint venture" of a Person means any corporation or other entity (including
partnerships and other business associations and joint ventures) in which such
Person or one or more of its subsidiaries owns an equity interest that is less
than a majority of any class of the outstanding voting securities but at least
10% of such voting securities.
NRC: The Nuclear Regulatory Commission.
OPUC: The Oregon Public Utilities Commission, and any successor
commission or agency.
Oregon Restructuring Legislation: Senate Bill 1149 that was signed
into law by the Governor of Oregon on July 23, 1999 and regulations or orders
promulgated thereunder.
PBGC: Pension Benefit Guaranty Corporation.
Permits: Any permits, licenses, franchises and other governmental
authorizations, consents and approvals.
Person: An individual, corporation, limited liability company,
partnership, joint venture, bank, trust, unincorporated organization and/or a
government or any department or agency thereof.
PGE Common Stock: Common stock, par value $3.75 per share, of PGE.
PGE Employee: Any individual who is actively employed by any of PGE,
PGH II or any of their subsidiaries as of and after Closing.
PGE Financial Statements: The audited consolidated financial
statements and unaudited interim consolidated financial statements of PGE that
are included in the PGE SEC Reports.
PGE Former Employee: Any individual who is not actively employed by
any of PGE, PGH II, Seller or any of their subsidiaries as of Closing but who
was at some time prior to Closing employed by PGH or PGE or any subsidiary of
PGH or PGE or of any predecessor of any of them and who is as a result of such
prior employment eligible for coverage under one or more Benefit Plans disclosed
on Seller's Disclosure Schedule 3.9(a) and/or one or more of the Replacement
Plans.
PGE Material Adverse Effect: Any change or effect that is materially
adverse to the business, condition (financial or otherwise) or results of
operations of PGE, PGH II and their respective subsidiaries, taken as a whole;
provided, however, that a PGE Material Adverse Effect shall not be deemed to
A-3
<PAGE>
have occurred as a result of changes or effects resulting from (i) general
economic, financial or electric utility conditions in the Pacific Northwest or
nationally, (ii) the announcement or consummation of the transactions
contemplated by this Agreement, (iii) adverse hydro conditions in the Pacific
Northwest or (iv) the Oregon Restructuring Legislation.
PGE Preferred Stock: Cumulative preferred stock, no par value, of PGE.
PGE SEC Reports: Each report schedule, registration statement and
definitive proxy statement, if any, filed by PGE with the SEC since January 1,
1997 and through the date hereof (as such documents have since the time of the
filing been amended).
PGH II Common Stock: Common stock, par value $ 1.00 per share, of PGH
II.
PGH Contribution: The contribution by PGH to PGH II and the assumption
by PGH II from PGH of certain assets and liabilities pursuant to that certain
Contribution and Assumption Agreement between PGH and PGH II dated as of August
31, 1999.
Power Act: The Federal Power Act of 1935, as amended.
PUHCA: The Public Utility Holding Company Act of 1935, as amended.
Purchase Price: The PGE Purchase Price and the PGH II Purchase Price,
taken together.
Purchaser Representatives: The officers, directors, employees,
accountants, counsel, investment bankers, financial advisers and other
representatives of Purchaser chosen by Purchaser to represent Purchaser with
respect to the transactions contemplated by this Agreement.
Release: Any release, spill, emission, leaking, injection, deposit,
disposal, discharge, dispersal, leaching or migration into the atmosphere, soil,
surface water, groundwater or property (indoors or outdoors).
Replacement Plans: The plans maintained by Purchaser and/or PGE or PGH
II and their subsidiaries in accordance with Section 6.5(f) of this Agreement.
SEC: The Securities and Exchange Commission.
Securities Act: The Securities Act of 1933, as amended.
Shares: The PGE Shares and the PGH II Shares, taken together.
Subsidiary: Other than with respect to Section 3.2, references to a
"subsidiary" of a Person means any corporation or other entity (including
limited liability companies, partnerships and other business associations) in
which such Person, directly or indirectly owns outstanding capital stock or
other voting securities having the power, under ordinary circumstances, to elect
A-4
<PAGE>
a majority of the directors or similar members of the governing body of such
corporation or other entity, or otherwise to direct the management and policies
of such corporation or other entity.
Taxes: Any federal, state, county, local or foreign taxes, charges,
fees, levies, or other assessments, including all net income, gross income,
sales and use, ad valorem, transfer, gains, profits, excise, franchise, real and
personal property, gross receipts, capital stock, production, business and
occupation, disability, employment, payroll, license, estimated, stamp, custom
duties, severance or withholding taxes or charges imposed by any governmental
entity, and includes any interest and penalties (civil or criminal) on or
additions to any such taxes.
Tax Return: A report, return or other information required to be
supplied to a governmental Ad entity with respect to Taxes including, where
permitted or required, combined or consolidated returns for any group of
entities that includes PGE, PGH II or any of their respective subsidiaries.
A-5
<PAGE>
SIERRA/Exhibit 1
Niggli/i
BEFORE THE PUBLIC UTILITY COMMISSION
OF OREGON
UM -__________
IN THE MATTER OF THE APPLICATION OF )
SIERRA PACIFIC RESOURCES TO ACQUIRE )
PORTLAND GENERAL ELECTRIC COMPANY )
DIRECT TESTIMONY
OF
MICHAEL R. NIGGLI
FOR
SIERRA PACIFIC RESOURCES
JANUARY 18, 2000
<PAGE>
SIERRA/Exhibit 1
Niggli/1
I. INTRODUCTION AND SUMMARY
Q. PLEASE STATE YOUR NAME AND TITLE.
A. My name is Michael R. Niggli. I am Chairman of the Board and Chief
Executive Officer of Sierra Pacific Resources ("Sierra").
Q. WOULD YOU BRIEFLY DESCRIBE YOUR BACKGROUND AND EXPERIENCE IN THE UTILITY
INDUSTRY?
A. I have nearly 29 years of experience in the utility industry. I joined
Nevada Power Company ("NPC") as President and Chief Operating Officer on
February 2, 1998. Subsequently, I became Chief Executive officer and
Chairman of NPC's Board. On July 28, 1999, when the merger between NPC and
Sierra closed, I became Chairman of the Board of Directors of Sierra, as
well as its Chief Executive Officer.
During my career, I have provided expert testimony on electric and gas
utility matters before numerous regulatory commissions, governmental bodies
and legislative committees at the federal, state and local levels,
including the regulatory commissions of California, Arizona, Louisiana,
Arkansas, Mississippi and the City of New Orleans, the U.S. Department of
the Interior, a subcommittee of the U.S. Senate, the California Energy
Commission, and legislative committees in the state of Wyoming. I have
published several articles on issues pertinent to the electric, gas and
telecommunications industries and have chaired or served on many national
utility industry committees with the Electric Power Research Institute
("EPRI"), Edison Electric Institute ("EEI") and the National Coal Council.
I currently serve on the Board of Directors of EPRI and EEI.
Among my civic activities, I am a member of the board of directors of
the United Way of Southern Nevada, the UNLV Foundation, the Great Basin
National Park Foundation, the Nevada Test Site Foundation, and the Nevada
Development Foundation. I am the chair of United Way's Campaign 2000.
<PAGE>
SIERRA/Exhibit 1
Niggli/2
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. My testimony provides an overview of Sierra Pacific Resources and its
operating utilities, NPC and Sierra Pacific Power Company ("SPPC"). I
describe Sierra's strategic direction and discuss the role proposed for
Portland General Electric ("PGE") in our overall corporate strategy. I also
introduce key members of Sierra's management team, who provide testimony in
support of this application.
II. SIERRA, SPPC AND NPC
Q. PLEASE DESCRIBE THE HOLDING COMPANY, SIERRA PACIFIC RESOURCES, AND ITS
UTILITY SUBSIDIARIES, SIERRA PACIFIC POWER COMPANY AND NEVADA POWER
COMPANY.
A. Sierra Pacific Resources is an exempt utility holding company organized
under the laws of the State of Nevada, publicly traded on the New York
Stock Exchange under the symbol "SRP." With utility headquarters in Reno
and Las Vegas, virtually all of Sierra's assets are dedicated to electric,
gas, and water utility service. In addition to our two operating utility
subsidiaries, NPC and SPPC, Sierra owns an interstate natural gas pipeline,
Tuscarora Gas Pipeline Company, a retail energy marketing business, Sierra
Pacific Energy Company, and a company which holds title to some of our
non-utility properties, Lands of Sierra, Inc.
Sierra's principal subsidiaries, SPPC and NPC, provide electric, gas
and water service to approximately one million retail customers in northern
and southern Nevada and northeastern California. We are committed to
growing our business and to providing outstanding customer service.
Q. PLEASE DESCRIBE SIERRA'S APPROACH TO CUSTOMERS.
A. We pride ourselves on our customer focus and on providing the best service
to our customers. SPPC and NPC have long-standing histories of excellent
customer service even though - or perhaps because - our service areas cover
<PAGE>
SIERRA/Exhibit 1
Niggli/3
over 54,000 mostly rural square miles which, at the same time, include the
fastest growing metropolitan areas in the United States.
Q. PLEASE DESCRIBE SIERRA'S CORPORATE CITIZENSHIP.
A. We recognize that our business success is closely linked with the
performance of our companies and of our employees as corporate citizens,
and the health, vitality and quality of life of the communities we serve.
Sierra Pacific actively encourages employee volunteer activities and
community involvement in activities such as "adopt-a-park" and river
cleanup programs. A combination of employee advocacy and corporate
charitable support builds and maintains strong communities. In addition,
through the Sierra Pacific Foundation, Sierra administers grants that
integrate community needs, employee interests and corporate business
purposes. The Sierra Pacific Foundation supports education, youth programs,
civic improvement projects, the arts and culture, and environmental
programs and organizations. Among other things, the foundation has
inaugurated scholarship programs at the University of Nevada and community
colleges which today support nearly 40 students each year. Sierra and its
employees are collectively the largest supporters of United Way in Nevada.
Q. PLEASE IDENTIFY SIERRA'S KEY PERSONNEL WHO WILL BE ASSOCIATED WITH PGE
FOLLOWING APPROVAL OF THIS APPLICATION.
A. We expect that PGE will be managed and operated by a Portland-based
management team, and we have asked Peggy Y. Fowler to lead that team.
Sierra has an outstanding group of senior executives who will remain
involved in the holding company and provide overall corporate leadership. I
refer the Commission to Sierra's Form 10-K for a description of our senior
management and other corporate matters. I also refer the Commission to our
web site, http://www.SierraPacific.com, for biographies of our senior
management and other information about our company.
<PAGE>
SIERRA/Exhibit 1
Niggli/4
Three of Sierra's senior executives are providing testimony in this
application. They are Malyn Malquist, President and Chief Operating Officer
of Sierra, Mark Ruelle, Senior Vice President and Chief Financial Officer,
and Steve Oldham, Vice President for Corporate Planning and Strategic
Direction. The testimony of each individual includes relevant background
information.
III. STRATEGIC DIRECTION
Q. HOW DOES SIERRA VIEW ITSELF IN THE POST-RESTRUCTURING WORLD?
A. We're bullish on the business of delivering energy and energy services to
our customers. Our corporate purpose is to deliver essential services which
enhance the quality of our customers' lives and the vitality of the
communities we serve. At Sierra, we are demonstrating that a utility can
consistently and reliably meet the challenges of extraordinary growth while
maintaining its financial strength. Put bluntly, we understand the utility
business, we're good at it, and we're in it for the long term.
Q. WHAT LED TO SIERRA'S DECISION TO PURCHASE PGE?
A. Our strategic goal is to provide best practices utility service to our
customers while growing as a company. The transaction with PGE makes sound
business sense because, with the acquisition, Sierra will own operating
utilities in three of the major expanding metropolitan areas in the West.
PGE is a well-managed utility with technical and management expertise that
fits with the existing Sierra organization and our operating utilities in
Reno and Las Vegas. Further, as discussed by Mr. Ruelle, this acquisition
allows Sierra to redeploy capital which has previously been invested in
Nevada generation resources, which we are selling.
/ / / / /
/ / / / /
<PAGE>
SIERRA/Exhibit 1
Niggli/5
Q. HOW WILL THE COMPANY BE ORGANIZED AND MANAGED?
A. PGE will join NPC and SPPC as utility subsidiaries of the holding company,
Sierra Pacific Resources. Sierra will become a registered (rather than
exempt) holding company under the Public Utility Holding Company Act of
1935. We will maintain PGE as a separate operating company. The
headquarters for PGE's utility operations will remain in Portland, just as
SPPC is headquartered in Reno and NPC in Las Vegas.
As Mr. Malquist explains, we intend to form a service company to
comply with expectations of the Securities and Exchange Commission
Q. WHAT IS SIERRA'S PLAN FOR OPERATING PGE AFTER THE CLOSE OF THIS
TRANSACTION?
A. Mr. Malquist addresses this question in his testimony. I want to make
clear, however, that we intend to build on PGE's current strengths and to
provide the highest possible level of customer service to PGE's customers.
As Mr. Malquist explains, both SPPC and NPC provide high-quality, reliable,
low-cost distribution service to our customers in Nevada. Our strategic
focus is on the utility business, and we are committed to doing it well.
Q. PLEASE DESCRIBE THE FINANCIAL DETAILS OF THE PROPOSED TRANSACTION,
INCLUDING THE PURCHASE AGREEMENT AND SIERRA'S PLANS FOR FINANCING THE
TRANSACTION.
A. Mr. Ruelle addresses these issues in his testimony. However, I can say
without hesitation that Sierra has the financial ability to complete this
transaction and to provide for the long-term continued operation of PGE as
an outstanding electric service provider to its customers.
Q. WHAT ARE SIERRA'S PROPOSALS FOR ACHIEVING REGULATORY APPROVAL OF THIS
TRANSACTION?
A. I will summarize what Mr. Oldham discusses in great detail in his
testimony. Essentially, we propose to provide PGE's customers with positive
financial and policy benefits on top of the base of benefits they already
<PAGE>
SIERRA/Exhibit 1
Niggli/6
are receiving as a result of Portland General's merger with Enron. In the
near-term, we are guaranteeing PGE's customers an additional $13.5 million
by extending the Enron cost-of-service savings rate benefit for 18 months,
through the end of 2003. Savings could well exceed this in the years after
2003, and we are asking that the Commission adopt a matching principle
under which we will include in our rates the necessary costs we incur to
achieve savings, but hold PGE customers harmless if savings are less than
related costs, a result we do not anticipate. We also bring to PGE's
customers, and to the Commission, our experience in the practical details
of implementing restructuring in two other states, and our commitment to
implement Oregon's restructuring policy, expressed in SB 1149, in a timely
and effective manner.
Q. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes, it does.
<PAGE>
SIERRA/Exhibit 2
Malquist/i
BEFORE THE PUBLIC UTILITY COMMISSION
OF OREGON
UM -__________
IN THE MATTER OF THE APPLICATION OF )
SIERRA PACIFIC RESOURCES TO ACQUIRE )
PORTLAND GENERAL ELECTRIC COMPANY )
DIRECT TESTIMONY
OF
MALYN K. MALQUIST
FOR
SIERRA PACIFIC RESOURCES
JANUARY 18, 2000
<PAGE>
SIERRA/Exhibit 2
Malquist/1
Q. PLEASE STATE YOUR NAME AND TITLE.
A. I am Malyn K. Malquist. I am President and Chief Operating Officer of
Sierra Pacific Resources ("Sierra"). I am responsible for all operations at
both Sierra Pacific Power Company ("SPPC") and Nevada Power Company ("NPC")
Q. WHAT IS YOUR BACKGROUND?
A. I was elected President and Chief Executive Officer of SPPC on January 14,
1998, and was elected Chairman of the Board of SPPC and Sierra on February
24, 1998. I assumed my current position upon consummation of the merger of
SPPC and NPC on July 28, 1999. My background in the utility industry is
described in more detail in Attachment MKM-1.
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. I explain how Sierra plans to operate PGE as a separate operating utility
with strong local management, operations personnel and customer service. I
also describe Sierra's existing successful utility operations, as the best
evidence of our capabilities to operate PGE and of our commitment to
safety, reliability, customer service and satisfaction, environmental
responsibility and excellent labor relations.
Q. WHAT IS YOUR PLAN FOR OPERATING PGE?
A. We plan to operate PGE as an independent operating entity, but to take full
advantage of operating efficiencies, integration of functions and expertise
among our three utilities. We recognize that PGE is a well-run utility, and
our plans do not entail significant changes in PGE's management or
operations. We expect that PGE will continue to meet all of the Service
Quality Standards agreed to by PGE in Commission Order 97-196.
In addition, Sierra brings the knowledge we have gained in industry
restructuring initiatives now underway in Nevada and California. With this
knowledge, together with PGE's experience from its own Customer Choice
pilot program, we expect to take a leading role in implementing SB 1149
restructuring in Oregon.
<PAGE>
SIERRA/Exhibit 2
Malquist/2
Q. COMMUNITY AND EMPLOYEE SAFETY IS A CRITICAL ISSUE IN OREGON. PLEASE
DESCRIBE SPPC'S AND NPC'S SAFETY RECORD IN NEVADA.
A. We have outstanding safety records and strong accident prevention programs
in both of our Nevada operations. We also provide our customers and the
general public with information they need to live safely with electricity.
Every employee has safety as a priority. I report to Sierra's Board of
Directors regularly regarding safety issues.
Attachment MKM-2 includes charts from the 1999 Operations Report,
which I presented to the Board in November 1999. The report shows a marked
decrease in recordable accidents over the past several years, even as new
customer connections increased. We intend to bring this emphasis on safety
to PGE, in support of PGE's already excellent safety performance and
culture.
Q. PLEASE DISCUSS THE RELIABILITY OF SIERRA'S DISTRIBUTION AND TRANSMISSION
SYSTEMS.
A. We recognize that reliable electric service is essential for all of our
customers: industrial, commercial and residential. We invest heavily in the
planning, design, operation and maintenance of our transmission and
distribution systems. Attachment MKM-2 shows the number and duration of
forced outages in the SPPC and NPC systems during the period 1996 to 1999.
We intend to use our expertise to reinforce PGE's excellent reliability
performance.
Q. PLEASE DISCUSS YOUR APPROACH TO CUSTOMER SERVICE.
A. Even as we strive to become a larger, integrated utility company, we
recognize that the delivery of utility service is fundamentally a local
enterprise. We believe that our employees must be present in the
communities we serve and that they must be readily available to our
customers. If one of our customers experiences an outage, has a question
about a bill, or wants to increase electric service to support a business
expansion, we are committed to having the personnel in that community to
provide a prompt, complete and courteous response.
<PAGE>
SIERRA/Exhibit 2
Malquist/3
This philosophy has become so internalized at Sierra that every
employee's compensation, whether management or bargaining unit, is tied to
customer service performance. We measure and report customer satisfaction
quarterly and base annual incentive pay in large part on whether we have
met our customer satisfaction goals.
Q. DOES SIERRA HAVE A CORPORATE PHILOSOPHY WITH RESPECT TO ENERGY EFFICIENCY
AND RENEWABLE RESOURCE DEVELOPMENT?
A. Absolutely. At SPPC, geothermal power plays a significant role in our
day-to-day operations. SPPC has under contract more geothermal power than
any utility in the mainland United States. We have also recently made a
substantial donation of equipment and intellectual property to the Desert
Research Institute to support continued investigation into the technical
and economic efficiencies of photovoltaic generation of electricity. With
respect to energy conservation activities, we have worked hard to
mainstream our demand-side programs into our regular customer service and
assistance programs. In operating PGE, we expect that we will work within
the system benefit charge framework of SB 1149 to promote energy efficiency
and alternative resource development. We fully support PGE's early
initiatives to offer green power options to its customers.
Q. WHAT ARE SIERRA'S COMMITMENTS WITH RESPECT TO PRESERVING AND RESTORING THE
ENVIRONMENT?
A. We recognize that utility operations can affect the environment and that we
have a responsibility to minimize any adverse impacts and to mitigate those
which we cannot avoid. Sierra has an outstanding environmental record with
state and federal environmental agencies. Sierra's Board of Directors has
adopted principles of environmental management which set a very high
standard for all of us to achieve.
Besides complying with the many local, state and federal environmental
regulations which affect our operations, we actively seek new, innovative
ways to protect and enhance the environment. Examples of Sierra's
<PAGE>
SIERRA/Exhibit 2
Malquist/4
environmental commitment include our support of compressed natural gas as a
clean burning alternative to gasoline and diesel and projects to restore
vital wetlands.
In addition to our electric and natural gas operations, SPPC provides
water service to some 65,000 customers in the Reno-Sparks area. As a
result, we are sensitive to the stringent environmental requirements
relating to drinking water and protective of our primary water resource,
natural flows from the Truckee River system (including Lake Tahoe). We have
invested heavily in both state-of-the-art treatment facilities and a
federally approved settlement to manage the environmental health of the
Truckee River, so that our customers may enjoy a reliable and safe water
supply.
Q. TO YOUR KNOWLEDGE, HAS SIERRA, ITS AFFILIATES OR ANY OF ITS KEY PERSONNEL
VIOLATED ANY STATE OR FEDERAL STATUTES RELATING TO THE ENVIRONMENT OR
REGULATING THE ACTIVITIES OF PUBLIC UTILITIES (ORS 757.511(2)(e))?
A. No. To the contrary, as shown in my testimony and elsewhere in the
materials submitted to the Commission, Sierra has a strong record as good
corporate citizens.
Q. ARE ANY SIERRA EMPLOYEES REPRESENTED BY UNIONS?
A. Yes. Our bargaining unit employees include field operators, technicians,
electricians, servicemen, meter readers, and machinists, as well as office
personnel, including clerks and customer service representatives.
Q. PLEASE SHARE WITH US YOUR VIEWS ON UNION AND NON-UNION EMPLOYEES.
A. In my view, the provision of utility services - electricity, gas or water -
is part of the life support system of our society. We must invest in our
employees and their working environment to assure delivery of the highest
quality service possible. To achieve this, we must recruit capable people,
provide them with appropriate and continuing training, create a safe and
happy place to work, communicate openly and regularly, and pay a
competitive and decent wage. These are the principles by which we have
<PAGE>
SIERRA/Exhibit 2
Malquist/5
achieved success at Sierra. We know these are important cultural values at
PGE and in Oregon. We intend to support and maintain those values as we
take on the stewardship of PGE
Q. DO YOU EXPECT TO COMBINE ANY CUSTOMER SERVICE OR OTHER CORPORATE FUNCTIONS?
A. Yes. We expect to form a service company to provide a variety of financial
and customer accounting functions for the three operating utilities. The
details of this proposal are still being worked out and will be part of our
filing with the Securities and Exchange Commission ("SEC"), which is to be
made in early February 2000. We will provide a copy of that filing to the
Commission and also provide a copy in the document room which we are
establishing in Portland. The formation of a service company does not
contemplate a major transfer of PGE employees to Reno or Las Vegas. Service
company personnel may reside at each operating company and report to the
operating management. We intend to build on the strengths of each of our
operating companies and to provide strong local management and services in
all of our service areas.
Q. WHY ARE YOU FILING A SERVICE COMPANY PROPOSAL WITH THE SEC?
A. With the acquisition of PGE, Sierra will become a registered holding
company, as that term is defined in the Public Utilities Holding Company
Act of 1935 ("PUHCA"). This means that, among other things, the SEC will
regulate Sierra's acquisition of any securities, utility assets, or any
interest in any business. One of the SEC's expectations is that certain
common functions be provided through a service company, with the costs
allocated among operating utilities in accordance with approved allocation
methods. Sierra must obtain SEC approval of the formation of its proposed
service company The provisions of the PUHCA are described in more detail in
the attached briefing paper (Attachment MKM-3) issued by the federal
Congressional Research Service and printed from the web site of the
Committee for the National Institute for the Environment.
/ / / / /
/ / / / /
<PAGE>
SIERRA/Exhibit 2
Malquist/6
Q. ARE YOU FAMILIAR WITH THE SAFETY, RELIABILITY AND CUSTOMER SERVICE
CONDITION UNDER WHICH PGE ALREADY OPERATES AS A RESULT OF ITS MERGER WITH
ENRON?
A. Yes, I am.
Q. WOULD SIERRA ACCEPT A SIMILAR CONDITION?
A. Yes. We would accept the same condition. PGE's program is complete and
assures PGE's customers a high quality distribution service. We see no need
to revisit this condition in connection with this application, and we fully
expect that PGE will continue to meet those conditions under Sierra's
ownership.
Q. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes.
<PAGE>
SIERRA/EXHIBIT 2
MALQUIST/MKM-1
QUALIFICATIONS OF WITNESS
MALYN K. MALQUIST
My name is Malyn K. Malquist. I am the President and Chief Operating
Officer of Sierra Pacific Resources, and President and Chief Executive Officer
of both Sierra Pacific Power Company and Sierra Pacific Resources.
I received a Bachelor of Arts Degree in 1976 from Brigham Young
University. In 1978, I received a Master of Business Administration Degree, also
from Brigham Young University.
I joined San Diego Gas and Electric Company ("SDG&E") in 1978 as a
financial planner. I held numerous positions a SDG&E, including Assistant to the
Group Vice President of Finance, Supervisor of Financial Planning, Supervisor of
Cash Management and Banking Relations, Manager of Financial Services, Director
of Information Services and Director of Finance and Assistant Treasurer. I was
promoted to Treasurer in January 1990, and was made a Vice President of SDG&E in
January 1993.
In March 1994, I accepted the position of Senior Vice President and
Chief Financial Officer of Sierra Pacific Resources and Sierra Pacific Power
Company. In August, 1996, I was named Senior Vice President, Distribution
Services Business Group, for Sierra Pacific Power Company. I was named Chairman,
President, and Chief Executive Officer of Sierra Pacific Resources and Sierra
Pacific Power Company in 1998. I was appointed to my current positions with the
close of the merger with Nevada Power in July, 1999.
In addition to my professional affiliations, I sit on the Board of
Directors and serve as vice president for finance for the Nevada Area Council of
Boy Scouts of America; Board of Directors for the Forum for a Common Agenda;
Board of Directors for the United Way, and trustee for the University of Nevada
foundation.
<PAGE>
SIERRA/EXHIBIT 2
MALQUIST/MKM-2
[Nevada Power Company Logo] [Sierra Pacific Logo]
1999 Operations Report
Sierra Pacific Resources
Board of Directors Meeting
November 15 and 16, 1999
<PAGE>
SIERRA/Exhibit 2
Malquist/MKM-2
New Customer
Connections - Electric
[chart showing number of hookups for SPPC and PGE per year from 1994 to 1999]
<PAGE>
SIERRA/Exhibit 2
Malquist/MKM-2
Safety Measurement
OSHA Recordable Accidents
[chart showing number of OSHA recordable accidents for SPPC and PGE per year
from 1993 to 1999]
<PAGE>
SIERRA/Exhibit 2
Malquist/MKM-2
Annual Forced Outages
[chart showing the number of outages for SPPC and PGE per year from 1996 to
1999]
<PAGE>
SIERRA/Exhibit 2
Malquist/MKM-2
Average Outage
Duration - Sustained
[chart showing the number of minutes for outages for SPPC and PGE per year from
1996 to 1999]
<PAGE>
SIERRA/Exhibit 2
Malquist/MKM-2
Eastern District Fires
o 1.41 Million Acres Burned (Aug. - Sept.)
o 11 Crews (51 Employees)
o 179 Poles
o Estimated at $850,000
o 54 Pieces of Equipment Utilized
o Major Customers Affected
- Newmont Gold
- Diamond Plastics
- Tonkin Springs Mine
- Coastal Chemical
- Getchel Mine
o 10 Separate Circuits Affected (10 fires)
<PAGE>
SIERRA/Exhibit 2
Malquist/MKM-2
Las Vegas' "100 Year Storm"
July 8, 1999
o Rain
- Average annual rainfall is 4.1 inches; approximately 3.2 inches
recorded in 24 hour period
o Damage
- County officials estimate damage at $20.5 million
- Estimated Nevada Power cost: $300,000
o Outages
- Minor impact to T&D system: momentary outages - 81, sustained outages
- 38
- Only 8 distribution lockouts occurred
- Approximately 15,600 customers affected; last customer restored outage
time: 106 minutes
<PAGE>
SIERRA/Exhibit 2
Malquist/MKM-2
Northwest Reno Natural Gas Outage
September 1, 1999
o Sierra Pacific experienced a loss of pressure in a portion of the Reno gas
distribution system on 9/1/99, beginning at about 7:30 a.m.
o The loss of pressure was caused by a closed valve in the distribution
system, which restricted gas flow on an unusually cold morning
o 5,500 customers were affected, primarily residential
o Day 1: the affected area was shut down and isolated from the rest of the
distribution system
Day 2: 30% of the customers were back in service as restoration work began.
Day 3: 60% of the customers were back in service. The remaining 40% were
contacted with restoration information via door hangar
Day 9: 90% of the customers were back in service
o The restoration effort required the assistance of 12 local contractors and
Southwest Gas
o At peak there were 50 to 60 people in the field performing safety checks on
appliances and re-lighting pilot lights. The restoration effort continued
around the clock, and was supported by dozens of other Sierra Pacific
employees.
o There were no safety-related incidents as a result of the outage
o Estimated cost: $300,000
<PAGE>
ATTACHMENT MKM-3
[NIE Logo] [CRS Logo]
Electric Utility Restructuring
Briefing Book
Major Provisions of the
Public Utility Holding Company Act
REGISTRATION. All holding companies must either register under section 5 of the
Act or seek an exemption from the Act's provisions.
DEFINITION. A "holding company" is generally a company that owns ten percent or
more of the voting stock of a "public-utility company." A "public-utility
company" is an electric or gas utility company. An "electric utility company" is
generally a company that owns or operates facilities used to generate, transmit,
or distribute electric energy for sale. A "gas utility company" is generally a
company that owns or operates facilities used to distribute gas at retail.
EXEMPTIONS. The Securities and Exchange Commission (SEC) must exempt holding
companies that meet any of five defined categories, unless it finds the
exemption "detrimental to the public interest or the interest of investors or
consumers." These categories encompass any holding company that (1) operates
predominantly within a single state; (2) is predominantly an operating
public-utility company and operates in a single state and contiguous states; (3)
is primarily not in the public-utility business; (4) is only temporarily a
holding company; or (5) is not principally a public utility business within the
United States. Other sections of the Act provide more limited exemptive relief.
INTEGRATION AND SIMPLIFICATION. Section 11 requires the integration and
simplification of holding company systems. Section 11(b)(1) requires that each
registered holding company be limited to a single "integrated public-utility
system," i.e., a group of related operating properties within a confined
geographic region susceptible to local management. Nonutility businesses can be
acquired and retained only if they are "reasonably incidental, or economically
necessary or appropriate" to the operations of the integrated public-utility
system. Section 11(b)(2) requires the elimination of unnecessary corporate
complexities and inequitable voting power among security holders.
ISSUANCE AND ACQUISITION OF SECURITIES AND ASSETS. Section 7 of the Act
prescribes standards for the type and amount of securities for the registered
holding company and its subsidiaries. In particular, section 7(d) requires that
a security be reasonably adapted to the earning power of the issuing company and
to the capital structure of the company and the holding-company system.
Registered holding companies and their subsidiaries must also obtain SEC
approval before acquiring any securities, utility assets, or any other interest
in any business.
1 of 2
<PAGE>
UTILITY ACQUISITIONS. Any person (including an exempt holding company) who is an
affiliate of a holding company or of a public-utility company, must obtain SEC
approval before it becomes an affiliate of another public-utility company.
SERVICE COMPANY REGULATION. Service, sale and construction contracts between
system service companies and associate companies in the same holding company
system must be performed "economically and efficiently for the benefit of such
associate companies at cost, fairly and equitably allocated among such
companies."
OTHER AFFILIATE TRANSACTIONS. Registered holding companies may not borrow or
receive any extension of credit or indemnity from any system public utility
company (i.e., "upstream loans"). The SEC also has rulemaking authority over
other types of affiliate transactions such as intra-system loads; declaration
and payment of dividends; acquisition, retirement or redemption of a company's
own securities; disposal of assets and securities; solicitation of proxies in
connection with holding company and subsidiary company securities; and books,
records, disclosures of interest, duration of contracts, and similar matters
concerning affiliate transactions.
COORDINATION WITH STATE REGULATORY AUTHORITIES. A major purpose of the Holding
Company Act was to facilitate state regulation. Section 6(b), for example,
exempts the issuance of certain securities by subsidiary companies if approved
by a state commission, subject to the SEC's authority to impose additional terms
and conditions. Section 9(b) also exempts certain security and utility asset
acquisitions from the provisions of section 10 where approved by a state
commissions. In addition, the SEC may not authorize the issuance of securities
or the acquisition of assets unless the applicant has complied with state laws.
SECURITIES AND EXCHANGE COMMISSION. The Regulation of Public-Utility Holding
Companies. June, 1995. Pp. 16-19.
For information on Federal Energy Regulatory Commission (FERC) jurisdiction, see
the Federal Power Act (FPA).
THIS BRIEFING BOOK WAS COMPILED BY THE CONGRESSIONAL RESEARCH SERVICE. THE CNIE
HAS MADE THESE REPORTS AVAILABLE TO THE PUBLIC AT LARGE, BUT THE CRS IS NOT
AFFILIATED WITH THE CNIE OR THE NATIONAL LIBRARY FOR THE ENVIRONMENT.
RETURN TO CRS ELECTRIC UTILITY RESTRUCTURING BRIEFING BOOK
THIS PAGE WAS LAST UPDATED ON MAY 11, 1998
2 of 2
<PAGE>
SIERRA/Exhibit 3
Ruelle/i
BEFORE THE PUBLIC UTILITY COMMISSION
OF OREGON
UM -__________
IN THE MATTER OF THE APPLICATION OF )
SIERRA PACIFIC RESOURCES TO ACQUIRE )
PORTLAND GENERAL ELECTRIC COMPANY )
DIRECT TESTIMONY
OF
MARK A. RUELLE
FOR
SIERRA PACIFIC RESOURCES
JANUARY 18, 2000
<PAGE>
SIERRA/Exhibit 3
Ruelle/1
Q. Please state your name and title.
A. I am Mark A. Ruelle. I am Senior Vice President, Chief Financial Officer
and Treasurer of Sierra Pacific Resources ("Sierra"). I hold the same
positions with Sierra Pacific Power Company ("SPPC") and Nevada Power
Company ("NPC"), the two operating utility subsidiaries of Sierra.
Q. WHAT ARE YOUR PRINCIPAL RESPONSIBILITIES WITH SIERRA PACIFIC RESOURCES?
A. I have overall responsibility for all financial matters of Sierra and its
subsidiaries.
Q. PLEASE DESCRIBE YOUR BACKGROUND AND EXPERIENCE IN THE ENERGY INDUSTRY.
A. I have held my current positions since March 1, 1997. I was with Western
Resources, and its subsidiary, Westar Energy, in various executive
capacities between 1987 and 1997. I was president of Westar Energy at the
time I assumed my responsibilities at Sierra. Attachment MAR-1 provides
additional background information.
Q. HAVE YOU TESTIFIED BEFORE OTHER UTILITY REGULATORY BODIES?
A. Yes. I have testified on many occasions in regulatory proceedings.
Q. PLEASE OUTLINE THE ORGANIZATION OF YOUR TESTIMONY.
A. My testimony is organized in three parts: First, I describe the structure
and terms of the transaction between Sierra and Enron Corp. ("Enron") for
the purchase and sale of Portland General Electric Company ("PGE"). Second,
I discuss Sierra's financial capacity for the transaction. Third, I discuss
certain financial accounting matters related to the transaction.
STRUCTURE AND TERMS OF THE TRANSACTION
Q. WHAT IS THE LEGAL STRUCTURE OF THE TRANSACTION?
A. Sierra is acquiring from Enron 100 percent of the common stock of PGE. In
simple terms, Sierra is stepping into Enron's shoes.
/ / / / /
/ / / / /
<PAGE>
SIERRA/Exhibit 3
Ruelle/2
Q. WHAT WILL BE THE RESULTING FORM OF THE COMBINED ORGANIZATION?
A. Sierra will have three utility operating subsidiaries: PGE, SPPC and NPC.
Sierra also has several other subsidiaries, identified in Mr. Niggli's
testimony.
Q. IS SIERRA A PUBLICLY-TRADED COMPANY?
A. Yes. Sierra's common shares are traded on the New York Stock Exchange.
Q. WHAT CONSIDERATION DID SIERRA AGREE TO PAY ENRON?
A. Sierra agreed to pay Enron a total of $2.1 billion, of which a small
fraction - $14 million - was allocated for the purchase of a company called
PGH II. As part of the purchase price, Sierra has agreed to assume, and
relieve Enron from, the remaining financial obligations to PGE's ratepayers
arising under Order 97-196 of this Commission.
Q. WHY WAS THE TRANSACTION IN CASH, INSTEAD OF SECURITIES?
A. Enron indicated to us that it was only interested in an all-cash
transaction.
Q. PLEASE DESCRIBE HOW THE TRANSACTION WITH ENRON WAS CONDUCTED?
A. Sierra was contacted by Enron's investment banker, who inquired whether we
would be interested in acquiring PGE. We reviewed preliminary information
about PGE, conducted due diligence, and made an offer which Enron accepted.
We signed a Stock Purchase Agreement on November 5, 1999.
Q. HOW DID SIERRA DETERMINE THE PURCHASE PRICE TO OFFER ENRON?
A. Sierra considered three primary determinants of value: (1) the strategic
fit that PGE brings to Sierra; (2) the fundamental value of PGE, based on
its current and projected financial performance; and (3) a price that Enron
would accept. Combining those three factors, we arrived at the agreed-upon
price.
Q. PLEASE DISCUSS THE STRATEGIC FIT THAT PGE BRINGS TO SIERRA.
A. The strategic fit of PGE and Sierra is also discussed by the other Sierra
witnesses, but I will point out the following:
/ / / / /
<PAGE>
SIERRA/Exhibit 3
Ruelle/3
1. Sierra's focus is on the regulated utility business. This is a
business we know well, do a good job with, and believe has a strong
long-term future.
2. Our business focus is the western United States.
3. Both SPPC and NPC are utilities with solid operating histories, good
customer satisfaction, constructive regulatory relations and good
management. PGE is similarly endowed. The combination of these
companies will allow us to build on our mutual strengths.
4. There will be opportunities to develop long-term efficiencies through
economies of scale and elimination of redundancies.
5. With PGE, we share a strong commitment to preservation of the
environment and the use of alternative generation.
6. The timing of this opportunity coincides with Sierra's intended sale
of its Nevada generation plants and provides us a prudent way to
re-deploy the proceeds from the sale of those plants.
7. The transaction lets us grow our business, which has been one of our
strategic objectives.
Q. HOW DID SIERRA ESTIMATE THE FUNDAMENTAL VALUE OF PGE?
A. During our due diligence, we examined PGE's asset base and financial
performance in considerable detail. We reviewed PGE's forecasts of expected
financial performance, and we prepared our own independent forecasts. We
determined, based on our due diligence and analysis, that PGE had
fundamental value to us at the purchase price we agreed to.
Q. DOES SIERRA REQUIRE SHAREHOLDER APPROVAL FOR THE TRANSACTION?
A. No.
/ / / / /
/ / / / /
<PAGE>
SIERRA/Exhibit 3
Ruelle/4
FINANCIAL CAPACITY OF SIERRA
Q. DOES SIERRA HAVE THE FINANCIAL ABILITY TO COMPLETE THIS TRANSACTION?
A. Yes, without question. In fact, we have in hand a firm financing commitment
for the entire amount of the transaction from a leading commercial bank.
This commitment has a confidentiality provision, such that I can identify
the bank or the terms of the financing only subject to a protective order.
But I can say that the terms are indicative of Sierra's position as a
financially strong company with the capability of completing this purchase.
Sierra's lending commitment reflects not only our ability to close the
transaction, but that we are perceived by the financial community as having
the long-term financial stability necessary to achieve our objectives.
Q. DOES SIERRA INTEND THAT BANK DEBT WILL BE THE LONG-TERM SOURCE OF FUNDS FOR
THIS TRANSACTION?
A. No. The bank commitment assures Enron, PGE and this Commission that we will
close the transaction upon receiving final regulatory approval. Over time,
however, the bank debt will be reduced by a combination of redeployment of
cash proceeds from the sale of Nevada generating plants and the issuance of
debt and equity securities at the holding company level.
Q. DOES SIERRA HAVE, AND WILL IT HAVE, SUFFICIENT EARNINGS AND CASH FLOW TO
ENJOY ACCESS TO THE CAPITAL MARKETS?
A. Yes, unquestionably.
Q. WHAT ARE SIERRA'S CURRENT CREDIT RATINGS?
A. Sierra and its operating subsidiaries hold investment grade ratings from
both Moody's and Standard and Poor's.
Q. HOW WILL THIS TRANSACTION LIKELY AFFECT PGE'S CREDIT RATINGS?
A. We fully expect PGE's credit ratings to remain at strong investment levels.
/ / / / /
<PAGE>
SIERRA/Exhibit 3
Ruelle/5
Q. PLEASE COMMENT ON THE ANNOUNCEMENTS IN NOVEMBER 1999 THAT MOODY'S AND
STANDARD & POOR'S WERE REVIEWING CREDIT RATINGS FOR SIERRA, ITS
SUBSIDIARIES, AND PGE.
A. These announcements were made on November 8 and 9, immediately following
the public announcement of Sierra's proposed acquisition of PGE. In a
transaction of this size, we think it is commonplace for the ratings
agencies to signal their intention to review the transaction and its
implications. To date, neither rating agency has made any change to the
ratings of either Sierra or PGE. While we cannot predict what the ratings
agencies may do in the future, we are confident that the combination of
Sierra and PGE will result in a financially strong company, and we believe
that the financial community will come to appreciate this.
Q. DOES SIERRA PROPOSE TO ISSUE ANY NEW SECURITIES OF PGE TO FINANCE THIS
TRANSACTION?
A. No. All of the proposed financing will be at the holding company level.
Q. WHAT WILL HAPPEN TO PGE'S OUTSTANDING DEBT?
A. Nothing. PGE's debt obligations will remain in place, as this transaction
protects the existing corporate structure of PGE.
Q. WILL SIERRA MAINTAIN A SEPARATE CREDIT RATING FOR PGE?
A. Yes. We propose to maintain at least Moody's and Standard & Poor's ratings
for PGE's debt, and for its preferred stock if more than $50 million is
outstanding.
Q. WILL SIERRA MAINTAIN PGE'S EQUITY CAPITAL?
A. Yes. Sierra proposes to maintain PGE's equity capital at 48 percent or
more, subject to Commission approval.
Q. WILL THERE BE ANY CHANGE IN PGE'S CAPITAL STRUCTURE IN CONNECTION WITH THE
ACQUISITION?
A. No. The Commission may rely on PGE's most recent filings for evidence of
PGE's capital structure.
<PAGE>
SIERRA/Exhibit 3
Ruelle/6
Q. WILL PGE ISSUE DEBT IN THE FUTURE?
A. Perhaps, as necessary to support PGE's own capital structure and investment
activities. However, any future debt obligations of PGE will be subject to
regulatory approval.
Q. WILL SIERRA'S FINANCING ACTIVITIES BE SUBJECT TO REGULATION?
A. Yes. In connection with its acquisition of PGE, Sierra will become a
registered holding company under the Public Utility Holding Company Act,
and its financing activities will be subject to regulation by the
Securities and Exchange Commission ("SEC"). In addition, state regulatory
commissions, including the Oregon Commission , will continue to have
authority to regulate PGE's rates, tariffs, and conditions of service. As
Mr. Oldham explains in his testimony, Sierra is prepared to agree to
conditions which assure the Commission that we will not argue that federal
jurisdiction preempts Oregon's review of PGE regulatory matters.
FINANCIAL ACCOUNTING FOR THE TRANSACTION
Q. HOW WILL SIERRA ACCOUNT FOR THE TRANSACTION?
A. In accordance with GAAP and APB 16, Sierra will account for the acquisition
using the purchase method of accounting, which is the only permissible
method.
Q. WILL THIS ACCOUNTING TREATMENT PRODUCE GOODWILL, AND IF SO, HOW MUCH?
A. Under purchase accounting, the difference between the purchase price and
"fair value" becomes goodwill. In a transaction of this kind, fair value
for accounting purposes is closely tied to the book value of PGE's assets.
While the precise amount cannot be determined until closing, it appears
that the goodwill in this transaction will be about $1.1 billion. Of
course, in real terms, Sierra has paid a fair value for PGE based on arm's
length negotiations between a willing buyer and a willing seller. The
concept of goodwill is an accounting convention.
/ / / / /
/ / / / /
<PAGE>
SIERRA/Exhibit 3
Ruelle/7
Q. WHERE WILL GOODWILL BE RECORDED AND HOW WILL IT BE AMORTIZED?
A. The goodwill will be recorded in Sierra's books. We propose to amortize it
over 40 years, consistent with other transactions of this nature. We will
allocate and charge the annual amortization of the goodwill to the
operating utilities based on approved allocation standards and
methodologies.
Q. WILL THIS GOODWILL CAUSE PGE'S RATES TO INCREASE?
A. No. As described by Mr. Oldham, Sierra proposes to protect PGE's customers
from any adverse effects of this transaction.
Q. HOW WILL SIERRA RECOVER THE GOODWILL?
A. Assuming cost of service regulation sets prices to our customers that
include all of the efficiencies and savings that we are able to achieve
with this acquisition, the transaction makes sense for Sierra and its
shareholders only if the cost of service also includes the costs we have
incurred and will incur in the future to achieve those savings. On a test
year basis, the costs to achieve savings are the annual amortization of
goodwill, severance costs and other acquisition-related expenditures
(collectively "acquisition costs"). This term is also used in Mr. Oldham's
testimony, where he explains our rate proposals. Our proposals provide for
us to recover our investment over time in a way that protects PGE's
customers.
Q. HOW DO YOU PROPOSE TO PROTECT PGE'S CUSTOMERS?
A. Sierra is proposing a "hold harmless" provision, such that if net savings
are not sufficient to cover acquisition costs, then Sierra will absorb
those costs and protect PGE's customers from having to incur any of them.
We are only able to recover our acquisition costs to the extent of achieved
savings.
Q. WILL SIERRA MAINTAIN PGE'S ACCOUNTING RECORDS AT PGE'S HOME OFFICE IN
PORTLAND?
A. Yes. We will maintain PGE's corporate and financial records separately,
given that PGE is a stand-alone corporate entity. Sierra maintains all of
its financial records in a computerized financial system. We propose to
<PAGE>
SIERRA/Exhibit 3
Ruelle/8
integrate PGE's financial system with Sierra's, and to maintain all of our
financial records such that they can be accessed by company personnel and
regulatory officials at each of our utility headquarters. We can assure the
Commission that PGE's records will always be readily available in Portland.
Q. HOW WILL SIERRA ACCOUNT FOR INTERCOMPANY TRANSACTIONS?
A. Mr. Oldham discusses Sierra's proposals for various conditions to be
attached to the Commission's order in this proceeding. Those conditions
explain how we will deal with intercompany transactions.
Q. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes.
<PAGE>
SIERRA/EXHIBIT 3
RUELLE/MAR-1
QUALIFICATIONS OF WITNESS
MARK A. RUELLE
My name is Mark A. Ruelle. I am Senior Vice President, Chief Financial
Officer, and Treasurer for Sierra Pacific Resources and Sierra Pacific Power
Company. My business address is 6100 Neil Road, Reno, Nevada.
I hold a B.A. in economics and an M.A. in public utility economics and
regulation from the University of North Dakota. In addition, I taught
undergraduate economics courses at the University of North Dakota and at
Washburn University in Topeka, Kansas.
I am responsible for the finance, treasury, investor relations and
accounting areas, including the direction of financial strategy.
I have worked in the utility industry for about 12 years. Prior to
joining Sierra Pacific, I worked for Western Resources, Inc., the company doing
business as Kansas Gas & Electric Company; the Kansas Power and Light Company;
Westar; and formerly, the Gas Service Company.
During my tenure at Western and its affiliates, I worked as a rate
economist; manager of financial analysis; director of corporate finance; vice
president of corporate development and strategic planning; and as president of
the unregulated energy operations, Westar Energy and Westar Gas Marketing. I
also worked briefly at MDU Resources Group while in graduate school. During my
time at Western Resources, I worked in nearly all aspects of mergers and
acquisitions, in and outside of the utility industry.
<PAGE>
SIERRA/Exhibit 4
Oldham/i
BEFORE THE PUBLIC UTILITY COMMISSION
OF OREGON
UM -__________
IN THE MATTER OF THE APPLICATION OF )
SIERRA PACIFIC RESOURCES TO ACQUIRE )
PORTLAND GENERAL ELECTRIC COMPANY )
DIRECT TESTIMONY
OF
STEVEN C. OLDHAM
FOR
SIERRA PACIFIC RESOURCES
JANUARY 18, 2000
<PAGE>
SIERRA/Exhibit 4
Oldham/1
Q. PLEASE STATE YOUR NAME AND TITLE.
A. My name is Steven C. Oldham. I am Vice President of Corporate Planning and
Strategic Development for Sierra Pacific Resources ("Sierra").
Q. WOULD YOU BRIEFLY DESCRIBE YOUR BACKGROUND AND EXPERIENCE IN THE UTILITY
INDUSTRY?
A. I have worked in the utility industry for over 23 years, holding numerous
positions in the accounting, finance, transmission, corporate planning and
regulatory arenas. I assumed my current position upon Sierra's merger with
Nevada Power Company ("NPC").
I have testified in numerous proceedings before the Public Utilities
Commission of Nevada ("PUCN"), the California Public Utilities Commission
("CPUC"), and the Federal Energy Regulatory Commission ("FERC").
Attachment SCO-1 is a statement of my credentials.
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. The purpose of my testimony is to explain the commitments Sierra makes and
the conditions we will support to ensure that our acquisition of PGE not
only presents no harm to PGE customers, but provides a positive monetary
benefit of at least $13.5 million and a policy benefit of our firm support
of SB 1149.
Sierra's acquisition of PGE does not present the risks or
uncertainties that the Commission has faced in other recent acquisition
proccedings. Sierra is a long- established, multi-service utility company
with many years of operating and regulatory experience in multiple
jurisdictions. As reflected in the testimony of other Sierra witnesses,
Sierra is a domestically regulated, financially strong company with a good
record of utility operations and customer service.
/ / / / /
/ / / / /
<PAGE>
SIERRA/Exhibit 4
Oldham/2
Q. PLEASE DESCRIBE SIERRA'S PROPOSALS WITH RESPECT TO PGE'S RATES.
A. Sierra recognizes that PGE's customers are the beneficiaries of substantial
rate credits made available in connection with the Commission's approval of
the PGE/Enron transaction. We are committed to honor and propose to extend
those benefits. Sierra makes the following commitments with respect to PGE
rates:
1. ENRON BENEFITS PRESERVED. PGE and Sierra will honor the economic
benefits to PGE customers created as a result of the PGE/Enron merger,
as described in paragraphs 19 and 20 of the Stipulation attached to
OPUC Order 97-196. These benefits are summarized as follows:
(a) A commitment to provide PGE customers $9 million per year in
savings and/or a rate credit until July 2002.
(b) The remaining balance (approximately $80 million as of closing
the acquisition of PGE by Sierra) of the sum of $105 million, to
be paid in accordance with paragraph 20 of the Stipulation until
the entire amount is paid.
2. ADDITIONAL RATE BENEFIT TO PGE CUSTOMERS. Sierra will extend the $9
million annual rate benefit through December 31, 2003, thus producing
an additional $13.5 million in assured benefits for PGE customers.
3. TIMELY IMPLEMENTATION OF SB 1149. Sierra is committed to the prompt
and effective implementation of SB 1149 and will support all
reasonable efforts of the Commission and other interested parties to
achieve implementation of SB 1149 on or before October 1, 2001. We
anticipate that SB 1149 rates will be based on a 2002 test year.
/ / / / /
<PAGE>
SIERRA/Exhibit 4
Oldham/3
4. SB 1149 RATE PRINCIPLES. At an appropriate time in advance of the
implementation of SB 1149, Sierra will propose SB 1149 rates for PGE
that carry out the following principles:
(a) In PGE's rate filings after approval of this transaction (as
described in paragraphs (c) and (d) below), PGE and the
Commission will apply the principle that costs expended to
achieve savings should be matched with the saving themselves. For
purposes of this transaction, the costs to achieve
acquisition-related savings will include the annual amortization
of the goodwill associated with the acquisition and any
transition costs, such as severance or new systems, appropriately
included in the particular test period (collectively "acquisition
costs").
(b) In PGE's rate filing to implement SB 1149, the Commission will
establish a base line revenue requirement for use in applying the
matching principle.
(c) If PGE's rate filing to implement SB 1149 includes more than $9
million in cumulative savings from the base line revenue
requirement for the 2002 test year, the Commission will include
test year acquisition costs if matched by savings.
(d) In the first PGE rate filing with a test period subsequent to
2003, the matching principle shall be applied without regard to
the $9 million guarantee. To the extent that Sierra can show that
ongoing annual savings exceed ongoing acquisition costs, such
ongoing acquisition costs will be recognized for ratemaking
purposes, except that in no event shall acquisition costs
<PAGE>
SIERRA/Exhibit 4
Oldham/4
included for the test year exceed savings. PGE's customers will
realize 100 percent of the allocable net savings in excess of
acquisition costs.
Q. DOES SIERRA ANTICIPATE THAT THERE WILL BE SAVINGS IN EXCESS OF ACQUISITION
COSTS?
A. Yes. In considering the purchase of PGE, Sierra estimated that, by 2003, it
could achieve over $42 million in annual savings across the three operating
utilities. This is well in excess of estimated ongoing acquisition costs,
about $30 million per year system-wide. After public announcement of the
transaction, Sierra asked Deloitte Consulting ("Deloitte") to review our
estimates. Deloitte has advised us that Sierra's estimates of savings are
reasonably attainable, in light of industry experience and our intended
approach to integration.
Q. PLEASE EXPLAIN HOW SIERRA EXPECTS TO ACHIEVE THESE SAVINGS.
A. Our estimates are just that, which is to say that we do not yet have
specific operating or integration plans. However, in developing our
estimates, Sierra looked at opportunities (a) to reduce duplication of
functions in various corporate support areas (for example, corporate
planning and information services), (b) to forego investments which would
be duplicative (for example, customer information systems), and (c) to
achieve operating efficiencies by the application of best practices among
our operating units. To date, we have not assigned any specific dollar
amounts for operating efficiencies. We will be working with PGE to
determine how to integrate our various utility operations.
Q. PLEASE DESCRIBE PGE'S SHARE OF ACQUISITION COSTS.
A. These costs will include a portion of the annual amortization of goodwill,
allocated to PGE as explained by Mr. Ruelle. They also may include costs
incurred directly by PGE such as severance pay or early retirement of
technology, if properly included in the test year under consideration. For
rate purposes, however, acquisition costs will not include the initial
<PAGE>
SIERRA/Exhibit 4
Oldham/5
transaction-related costs, such as expenditures for bankers, attorneys, and
the regulatory process. Such transaction-related costs will have been
expensed as incurred before PGE's next contemplated test period - 2002.
Q. HOW WILL YOU MEASURE AND VERIFY ANNUAL ACQUISITION COSTS?
A. Costs incurred at the utility level are reflected on the books and records
of the utility. Costs incurred at the holding company level are reflected
on the holding company's books and records, then allocated and charged to
the utility, based on accepted allocation standards and methodologies,
subject to audit.
Q. HOW WILL YOU IDENTIFY AND VERIFY ANNUAL COST OF SERVICE SAVINGS?
A. We will use the baseline established by the Commission in PGE's 2002 test
year rate case for purposes of measuring savings. Verification will follow
the normal procedures of a general rate proceeding. We are following a
similar procedure in Nevada to measure and verify savings, and we will be
working with the regulatory commission to establish agreed-upon
measurements and reporting.
Q. PLEASE DESCRIBE SIERRA'S PROPOSALS FOR OTHER CONDITIONS OF APPROVAL OF
SIERRA'S APPLICATION.
A. Because Sierra and its utility subsidiaries are domestically regulated,
with a long history, little about Sierra is unknown. The Commission can
comfortably rely on Sierra's history and regulatory environment.
Nevertheless, we are proposing that the Commission adopt for Sierra a set
of conditions similar to those imposed on Enron and Scottish Power.
In the following questions and answers, I will describe the various
conditions to which we are prepared to agree. While these proposed
conditions are substantively equivalent to those imposed by the Commission
in the Enron and Scottish Power orders, we have rephrased some to
correspond more closely to our operating and financial practices, to
clarify the intent of the provision, or to reflect SB 1149.
<PAGE>
SIERRA/Exhibit 4
Oldham/6
Q. WHAT CONDITIONS DOES SIERRA PROPOSE IN THE AREAS OF FINANCE AND ACCOUNTING?
A. Sierra proposes the following financial and accounting conditions:
o PGE shall maintain separate ratings for its debt and for its preferred
stock, if more than $50 million is outstanding.
o PGE shall not make any distribution to Sierra that will reduce PGE's
common equity capital below 48 percent of PGE's total capital without
Commission approval. PGE's total capital is defined as common equity,
preferred equity and long-term debt. The Commission Staff, PGE and
Sierra may re-examine this minimum common equity percentage as
financial conditions change and may request that it be adjusted.
o Sierra and PGE agree that the allowed return on common equity and
other costs of capital will not rise as a result of the acquisition
transaction. These capital costs refer to the costs of capital used
for purposes of rate setting, avoided cost calculations, affiliated
interest transactions, least cost planning, and other regulatory
purposes.
o Sierra and PGE shall provide the Commission, upon request, access to
books and records of Sierra and PGE that are reasonably calculated to
lead to information regarding PGE, including, without limitation,
Board of Director's Minutes, and information provided to common stock,
bond, or bond rating analysts. Nothing in this condition shall be
deemed to be a waiver of Sierra's or PGE's right to seek protection of
the information under a protective order issued by the Commission or a
waiver of Sierra's or PGE's right to object to production of
information on the grounds that the request is overly broad, unduly
<PAGE>
SIERRA/Exhibit 4
Oldham/7
burdensome or outside the scope of the Commission's regulatory
jurisdiction.
o Unless such a disclosure is unlawful, Sierra shall notify the
Commission of:
(a) Its intention to transfer more than 5 percent of PGE's retained
earnings to Sierra over a six-month period, at least 60 days
before such a transfer begins.
(b) Its intention to declare a special cash dividend from Sierra, at
least 30 days before declaring each such dividend.
(c) Its most recent quarterly common stock cash dividend payment from
PGE within 30 days after declaring each such dividend.
o PGE's accounting records shall be maintained (a) separate or separable
from those of Sierra and other Sierra affiliates and (b) readily
available to the Commission in Portland, Oregon.
o Sierra and PGE (a) agree not to assert in any future proceedings that
the provisions of the Public Utility Holding Company Act of 1935
("PUHCA") and/or Ohio v. FERC shall preempt the Commission's
jurisdiction over affiliated interest transactions, and (b) explicitly
waive any such defense in any proceeding.
Q. WHAT CONDITIONS DOES SIERRA PROPOSE IN THE AREA OF INTER-JURISDICTIONAL
ALLOCATIONS?
A. Sierra's multi-service, multi-jurisdictional operations have necessitated
the development of a comprehensive system for both direct charges and
allocations of administrative and general expenses. Thus, Sierra proposes:
o Unless otherwise agreed in a particular case, or modified by the
Commission in a future order, Sierra will allocate expenses among its
<PAGE>
SIERRA/Exhibit 4
Oldham/8
affiliates using the allocation methods contained in NARUC's standard
cost allocation manual, for interstate expenses, and the modified
Massachusetts method (as adopted by the PUCN) for other purposes.
o To determine the reasonableness of allocation factors used by Sierra
or its affiliates to assign costs to PGE and amounts subject to
allocation, the Commission or its agents may audit the accounts of
Sierra and any of its subsidiaries which are the bases for allocations
to PGE. Sierra agrees to cooperate fully with such Commission audits.
Q. WHAT CONDITIONS DOES SIERRA PROPOSE IN THE AREA OF AFFILIATE TRANSACTIONS?
A. Sierra proposes the following conditions for affiliate transactions:
o PGE and Sierra agree to comply with all Commission requirements
regarding affiliated interest transactions, including the timely
filing of applications and reports.
o PGE and Sierra shall provide the Commission access to books of
account, as well as all documents, data, and records of their
affiliated interests, which pertain to direct charges paid by PGE to
such affiliates and transactions between PGE and all of its
affiliates.
o Within 45 days of the end of each calendar six-month period for the
three full years after approval, beginning with the first full six
months after closing the Sale, PGE shall file detailed semi-annual
reports with the Commission regarding:
(a) employee transfers, permanent and temporary (temporary is defined
as more than three months but less than one year for purposes of
this condition, and less than 50 percent of time in the aggregate
<PAGE>
SIERRA/Exhibit 4
Oldham/9
over any two-year period), between PGE and Sierra or any Sierra
affiliates;
(b) consulting and training activities conducted by both PGE and
Sierra personnel for the other entity; and
(c) gas commodity sales, pipeline capacity releases, electric power
exchanges and sales, and competitive ancillary electric service
sales between PGE and any other Sierra company.
Q. WHAT CONDITIONS DOES SIERRA PROPOSE RELATED TO A FORMAL CODE OF CONDUCT FOR
TRANSACTIONS AND RELATIONSHIPS BETWEEN PGE AND ITS AFFILIATES?
A. We understand that as part of implementing SB 1149, the Commission will be
adopting a code of conduct for Oregon's investor-owned utilities.
Accordingly, it is unclear to us that the conditions implemented in the
past two transactions should apply. However, to facilitate timely
Commission review and approval of this application, Sierra proposes that
the order in this proceeding include the code of conduct provision to which
Scottish Power agreed, as follows:
If Sierra, either directly or through an affiliate, intends to
market generation services or ancillary services to retail customers
within PGE's Oregon service territory in competition with other
providers, PGE shall notify the Commission prior to marketing such
services for the purpose of establishing conditions to preclude anti-
competitive behavior. Such conditions shall be similar to those set
forth in Order No. 97-196, except as modified by the Commission.
Q. WHAT CONDITIONS DOES SIERRA PROPOSE RELATED TO QUALITY OF SERVICE
COMMITMENTS, INCLUDING RELIABILITY AND CUSTOMER SERVICE MEASURES?
A. As Mr. Malquist explains, PGE's current service quality is excellent. Post-
transaction, PGE shall continue to perform under the service quality
<PAGE>
SIERRA/Exhibit 4
Oldham/10
measures described in UM 814, "Proposed Stipulation for Service Quality
Measures," and adopted in Order No. 97-196. The measures for 2000 shall be
those adopted in December 1999.
Q. THE PUCN DEALT WITH SIMILAR ISSUES IN APPROVING THE SIERRA/NPC MERGER. WHAT
REGULATORY STANDARD GOVERNS THE ADJUDICATION OF MERGERS IN NEVADA?
A. The statutory standard in Nevada, broadly stated, requires that PUCN find
that a proposed transaction is in the public interest. Once filed, an
application for approval of a merger or other change in control must be
acted upon within 180 days. Otherwise, the transaction is deemed approved
as filed.
The PUCN has issued a regulation defining the term "public interest"
as it applies to electric utilities. Loosely following the FERC's merger
standard, the PUCN has declared that a proposed merger transaction must not
adversely impact either competition, customers or regulation.
Q. WHAT DID SIERRA AND NPC PROPOSE IN THEIR MERGER APPLICATION TO MEET THE "NO
ADVERSE IMPACT" STANDARD?
A. The companies prepared an application showing that the transaction would
not have an adverse impact on competition, customers or ratepayers. That
being done, the companies established for themselves and designed a plan to
satisfy a more stringent test: that the transaction actually encourage the
development of effective competition, that customers receive a net benefit
from the transaction, and that the regulatory process - especially industry
restructuring - be advanced with the transaction. We are confident that, as
proposed in Sierra's application, our acquisition of PGE will produce net
benefits for PGE customers.
Q. WHAT PROPOSALS DID THE COMPANIES OFFER IN NEVADA TO ENHANCE THE DEVELOPMENT
OF EFFECTIVE COMPETITION?
/ / / / /
<PAGE>
SIERRA/Exhibit 4
Oldham/11
A. The companies proposed that, upon completion of their merger, they would
divest substantially all of their Nevada generation assets. Divestiture
would be accomplished via a two-staged auction process, with units bundled
and sold to multiple owners. The companies proposed to reinvest divestiture
proceeds in additional transmission and distribution infrastructure. The
companies proposed to work with the Commission and interested parties to
develop an acceptable transmission proposal.
Q. WHAT PROPOSALS DID THE COMPANIES OFFER TO BENEFIT NEVADA CUSTOMERS?
A. The companies proposed that as a general matter, all merger-related costs
should be recovered from merger-related savings. As filed, the companies'
rate plan included a freeze in general rates through January 1, 2000, a
revenue-neutral unbundling docket, with rates from that case frozen for an
additional two years. The companies proposed that, two years following the
commencement of retail open access, they would file a rate case and adjust
revenue requirements based on cost of service and experienced costs. The
companies would receive above-the- line treatment for merger-related costs
(including goodwill), in exchange for an annual earnings report and sharing
equally with customers of earnings above 12 percent return on equity.
Q. HOW DID THE PUCN RESPOND TO THE COMPANIES' PROPOSALS?
A. The PUCN accepted many components of the proposal, but modified some
aspects, especially the rate plan.
The PUCN conditioned merger approval on a commitment from Sierra that
it would divest its Nevada generation assets. The use of divestiture
proceeds, up to book value, was at the discretion of Sierra. Sierra was
required to, and now has filed, a divestiture plan with PUCN (and with
FERC), which included an ISA proposal and a proposed generation service
tariff.
/ / / / /
/ / / / /
<PAGE>
SIERRA/Exhibit 4
Oldham/12
The PUCN adopted the following modified rate plan:
o A general rate case for SPPC and NPC to establish the total revenue
requirement for each bundled electric utility. All merger-related
costs and savings were to be removed from the test period and results
of operations.
o Unbundle costs into service components, and allocate the total revenue
requirement to each service component using the PUCN's approved
unbundling study.
o Use the unbundled revenue requirement to design and implement rates
for noncompetitive services - i.e., distribution-only and "provider of
last resort" service.
o Implement rates on commencement of retail open access and freeze such
rates until January 1, 2003.
o Transaction, transition and goodwill costs to be deferred and assigned
or allocated to specific service components (e.g., generation,
transmission, distribution, common).
o At the end of the rate freeze, the companies must make a showing that
these costs were prudently incurred and that merger-related savings
exceeded merger-related costs. If successful in making this showing,
the companies may include annual recovery of such deferrals allocable
to noncompetitive (provider of last resort and distribution) services
in the regulated revenue requirement.
o Any after-tax gain realized from generation divestiture must first go
to stranded cost recovery. Any unused gain may then be used to offset
that portion of goodwill allocable to generation.
/ / / / /
<PAGE>
SIERRA/Exhibit 4
Oldham/13
o The PUCN also imposed some accounting and reporting requirements,
including the development and use of a single accounting system
capable of performing automated jurisdictional allocations, and
reflecting the PUCN's rules for affiliate service. The accounting
system was to be developed after consultation with the PUCN's Staff.
The companies were ordered to maintain a clear separation between
regulated and non-regulated companies, present recorded results of
operations by FERC account showing adjustments and allocations, and to
file an agreement for services for common or shared services.
The companies' hold-harmless commitment to quality of service, which
included both reliability and customer service, was accepted. The PUCN
promised to establish techniques for monitoring safety and reliability as
part of its restructuring efforts, but encouraged the companies to assist
in the development of appropriate reliability benchmarks based upon
historical data. The companies are also to provide regularly to the PUCN's
Consumer Division the results of its customer satisfaction surveys.
Q. WHAT IS THE STATUS OF SPPC AND NPC'S COMPLIANCE WITH THE PUCN'S ORDER
APPROVING THE SIERRA/NPC MERGER?
A. The transaction required the regulatory approval of PUCN, SEC and FERC. All
approvals for the merger have been obtained, and the merger was consummated
on July 29, 1999. The companies filed a divestiture plan on April 15, 1999,
setting forth drafts of such key documents as the Offering Memorandum, Sale
Agreements, buy-back agreements, a generation tariff and transmission
proposals. The final Offering Memorandum and accompanying documents were
filed in a revised divestiture plan on October 15, 1999. In a stipulation
resolving issues related to the divestiture plan, Sierra reaffirmed its
commitment to participate in FERC's rulemaking regarding regional
<PAGE>
SIERRA/Exhibit 4
Oldham/14
transmission organizations ("RTOs"), in which proceeding FERC has now
issued a final order, commonly referred to as Order 2000. Sierra is
actively investigating participating in one or more RTOs.
Sierra and NPC filed their restructuring compliance plans on April 1,
1999, and their unbundling studies on April 30th. The PUCN conducted
hearings on the revenue requirement phase of both SPPC's and NPC's plans in
November, resulting in Interim Orders setting the revenue requirement for
distribution-only service for SPPC and NPC. SPPC's rate design case was
heard in late November, 1999, and NPC's is being heard in January. We
expect final orders for all phases of both proceedings prior to March 1.
Q. YOUR OREGON RATE PROPOSAL DIFFERS IN SOME DETAIL FROM THAT WHICH YOU
OFFERED IN NEVADA OR THAT WHICH WAS APPROVED BY THE PUCN. PLEASE EXPLAIN.
A. There is no single right approach for a post-acquisition rate proposal. In
this case, we are committed to honoring and extending the rate benefits now
enjoyed by PGE customers from the Enron transaction, which are structured
differently than in Nevada. Common to our proposals in both jurisdictions
is that:
o we are committed to providing immediate, measurable short-term
benefits for customers,
o we are committed to implement restructuring,
o if we achieve measurable savings for our customers, we are entitled to
recover our transaction-related costs, and
o stockholders have an opportunity for a reasonable return on their
investment.
Q. DO YOU CONTEMPLATE DIVESTING PGE'S GENERATION ASSETS?
A. No, except for transactions already announced by PGE and transactions which
may occur as part of the implementation of SB 1149.
<PAGE>
SIERRA/Exhibit 4
Oldham/15
Q. WILL PGE'S GENERATION RESOURCES BE COMBINED WITH OR USED TO SERVE CUSTOMERS
IN SPPC'S AND NPC'S SERVICE TERRITORIES?
A. We do not intend to integrate power supply divisions or jointly dispatch
generation. Under FERC and SEC requirements, any power sales transactions
among Sierra affiliates must be at market prices or other approved charging
methodology. Our intent is that PGE be operated and regulated as a
stand-alone company, with its revenue requirement based on its own
distribution, transmission and generation costs, plus PGE's allocable share
of corporate and service company costs, with such allocations being made
pursuant to SEC approval and based on industry and NARUC standard
methodologies. We recognize that implementation of SB 1149 will require the
unbundling of costs into various categories and that rates for unbundled
services will reflect the costs associated with the particular service.
Q. ARE YOU FAMILIAR WITH OREGON'S RECENTLY ENACTED RESTRUCTURING LEGISLATION?
A. Yes, I am. As part of our due diligence review for this transaction, we
spent considerable time reviewing and evaluating SB 1149. I understand that
its major provisions require:
o direct access for PGE's and PacifiCorp's commercial and industrial
customers no later than October 1, 2001;
o choice for residential customers of PGE and PacifiCorp among a
cost-of-service option, a market-based rate option, and a green power
option no later than October 1, 2001;
o choice for small commercial customers (as well as other classes as the
Commission determines) of a cost-of-service option;
o clear communication to all customers as to the price and content of
their energy options;
/ / / / /
<PAGE>
SIERRA/Exhibit 4
Oldham/16
o a systems benefit charge to ensure continued investment in new energy
efficiency measures, new renewable resources, and new low-income
weatherization programs;
o a charge to fund a low-income bill payment assistance fund;
o unbundling of major categories of cost for utilities;
o comparability and nondiscrimination with respect to distribution
services;
o continued consumer-protection regulation of energy service suppliers;
o the adoption of Commission policies and decisions to frame the future
structure of the electric market in Oregon; and
o the promulgation by the Commission of rules for implementing various
aspects of direct access and the other provisions of the bill.
Q. BASED ON YOUR EXPERIENCES IN NEVADA AND CALIFORNIA, DO ANY ASPECTS OF
OREGON'S RESTRUCTURING PROCESS TROUBLE OR CONCERN SIERRA?
A. No. Sierra supports the Commission's restructuring efforts and views
Oregon's approach as consistent with our objectives. We also recognize that
restructuring efforts may differ in detail, as each jurisdiction strives
for an appropriate balance of interests among its various constituents. We
are prepared to be creative and flexible as we approach the SB 1149
discussions.
Q. CAN YOU PROVIDE US A SUMMARY OF SIERRA'S REGULATORY EXPERIENCE IN NEVADA
AND CALIFORNIA?
A. Yes. Exhibit 5 is my supplemental direct testimony which discusses general
regulatory issues in Nevada and California.
Q. ARE YOU FAMILIAR WITH THOSE PROVISIONS OF SB 1149 THAT RELATE TO THE
BONNEVILLE POWER ADMINISTRATION ("BPA")?
/ / / / /
<PAGE>
SIERRA/Exhibit 4
Oldham/17
A. Generally, yes. I understand that the bill provides the Commission with the
authority to:
o require PGE to enter into a contract to purchase power from the BPA
under its subscription process, with recovery by PGE of any costs
relating to this purchase, including potentially stranded costs; and
o suspend implementation of the provisions of the bill if proceeding
with implementation could impair the ability of Oregon utilities to
qualify to purchase power from the BPA on behalf of their residential
and small farm customers.
Q. IS SIERRA COMMITTED TO THE RESIDENTIAL EXCHANGE PROGRAM OR THE PURCHASE OF
BPA POWER TO BRING THE BENEFITS OF BPA POWER TO PGE'S RESIDENTIAL AND SMALL
FARM CUSTOMERS?
A. Absolutely. Not only is this the law, but we are committed to support the
efforts PGE has made over the years to retain benefits of the BPA power
system for its residential and small farm customers.
Q. DOES THIS COMPLETE YOUR TESTIMONY?
A. Yes, it does.
<PAGE>
SIERRA/EXHIBIT 4
OLDHAM/SCO-1
QUALIFICATIONS OF WITNESS
STEVEN C. OLDHAM
My name is Steven C. Oldham. I am Vice President of Corporate
Development and Strategic Planning for Sierra Pacific Power Company. My business
address is 6100 Neil Road, Reno, Nevada.
I am a graduate of the University of Utah, with a Bachelor of Science
Degree in Accounting. From October 1976 through 1984, I was employed by Sierra
in various accounting and regulatory positions, including the development of
marginal and embedded cost of service studies, jurisdictional cost allocation
studies, rules regulating the interconnection of alternative generation
companies to the electric system, compliance filings under PURPA, and the
implementation of FERC transmission wheeling rates for both firm and non-firm
customers.
In 1984, I was promoted to Manager of Construction Management Systems.
This position directed the continued development, operation, and administration
of the Company's construction cost management system, and the administration and
presentation of the annual construction budget.
In 1986, I was promoted to Manager of Corporate Planning. In addition
to the management of the construction budget, I was given responsibility for the
administration of the annual O&M budget. Additional responsibilities include the
presentation and implementation of the corporate goals and objectives, the
continued development and presentation of the Company's five-year financial
forecast, the issuance of securities related to the Company's financing
requirements, the continued development and maintenance of the Company's
financial software systems and, finally, the development of all economic
analyses used in support of management decision making.
In February 1990, I was promoted to Manager of Economic and Financial
Services, managing all of the Company's financial requirements, including cash
management, corporate taxes, and financial forecasting.
In October 1990, I was promoted to Acting Treasurer and Director of
Finance and in May 1991, I was elected Treasurer and Director of Finance. In
that position, I was responsible for accounting, regulatory, and financial
management activities for Sierra Pacific Power Company.
In July 1994, I was elected to the position of Vice President,
Regulation and Treasurer by the Board of Directors. In this position, I was
responsible for regulatory affairs, financial management activities and
merger-related items for Sierra. In December 1995, I was elected Vice President
for Information Service, Telecommunications and Redesign. In November 1996, I
was elected by the Board of Directors to my current position as Vice President
of the Transmission Services Business Group and Strategic Development. I have
responsibility for the strategic plans of the company, as well as the operation,
regulatory compliance and overall management of the transmission line of
business.
<PAGE>
SIERRA/EXHIBIT 5
OLDHAM/I
BEFORE THE PUBLIC UTILITY COMMISSION
OF OREGON
UM-__________
IN THE MATTER OF THE APPLICATION OF )
SIERRA PACIFIC RESOURCES TO ACQUIRE )
PORTLAND GENERAL ELECTRIC COMPANY )
SUPPLEMENTAL DIRECT TESTIMONY
OF
STEVEN C. OLDHAM
FOR
SIERRA PACIFIC RESOURCES
JANUARY 18, 2000
<PAGE>
SIERRA/EXHIBIT 5
OLDHAM/1
Q. PLEASE STATE YOUR NAME AND TITLE.
A. My name is Steven C. Oldham. I am Vice President of Corporate Planning and
Strategic Development for Sierra Pacific Resources ("Sierra").
Q. WHAT IS THE PURPOSE OF THIS SUPPLEMENTAL TESTIMONY?
A. This testimony is to provide the Oregon Public Utilities Commission
("Commission") with background regarding the ratemaking environment in
which Sierra currently operates in California and Nevada. I provide a brief
regulatory history for both of Sierra's regulated utilities, Sierra Pacific
Power Company ("SPPC") and Nevada Power Company ("NPC"), as well as an
overview of the major ratemaking policies applicable to both our Nevada
(electric, gas and water) and California (electric only) service
territories.
Q. PLEASE DESCRIBE THE MAJOR RATEMAKING PRINCIPLES HISTORICALLY APPLICABLE TO
YOUR RETAIL ELECTRIC OPERATIONS IN NEVADA.
A. Three ratemaking elements are key to the historical setting of rates for
retail electric service in Nevada: general rates, energy rates, and rate
design. Each is addressed in order below. I discuss the significant impacts
of industry restructuring on these historical ratemaking practices later in
my testimony.
General Rates: As established by statute and regulation, general
(non-energy) rates for retail electric service are based on twelve months
historical results of operations. The 12-month historic test period may be
updated by up to 90 days to reflect certified expenditures and revenues.
Any request to change general rates must be decided within 180 days of
application (30 days for notice, plus a suspension of the effective date
for the requested change of up to 150 days).
Energy Rates: Energy rates for retail electric service are established
separately from general rates. Historically, energy rates for retail
electric service have been set using a deferred energy accounting. As
applied in Nevada, deferred accounting revolves around a mandatory annual
<PAGE>
SIERRA/EXHIBIT 5
OLDHAM/2
(with an optional semi-annual) filing to update fuel and purchased power
costs. In each update proceeding, the base tariff energy rate ("BTER") is
adjusted to reflect the most recent annual energy costs. Any difference
between the revenues collected using the previously established BTER and
the prior period's actual energy costs are amortized and collected over the
subsequent 12 months. Deferred energy accounting is elective, although once
authorized to use deferred accounting, a utility cannot opt out of the
process without prior Commission approval.
Rate Design: By regulation, retail electric rates in Nevada must be
set using a marginal cost methodology applied by customer class. As a
result, changes in sales mix (e.g., consumption by customer class) can
result in increases or decreases in revenues, irrespective of changes in
total consumption.
Q. PLEASE DESCRIBE SPPC'S CURRENT RETAIL ELECTRIC RATE STRUCTURE IN NEVADA.
A. In 1994, SPPC agreed as part of a settlement in a three-service (water, gas
and electric) general rate case and electric deferred energy case to
increase its base electric rates by $6.5 million and decrease deferred
energy rates by approximately $17.6 million. Those rates remained in effect
through July, 1995, when, as part of a stipulation resolving Sierra's
unconsummated merger with Washington Water Power ("WWP"), SPPC refunded an
additional $9 million to electric customers, discontinued deferred energy
accounting, and moved to a stipulated incentive rate plan. After the
collapse of the WWP merger, the incentive rate plan was renegotiated. Thus
in 1997, an additional electric refund of $13 million was issued, along
with a reduction in general rates of $7.1 million. The stipulated incentive
mechanism, which survives through today, is based on a freeze of both
general and energy rates at least through January 1, 2000, with an annual
<PAGE>
SIERRA/EXHIBIT 5
OLDHAM/3
earnings review and annual sharing of earnings above a target (not
authorized) return on equity of 12 percent.
Q. HAS NPC OPERATED UNDER A SIMILAR INCENTIVE RATEMAKING MECHANISM?
A. No. NPC's retail electric rates are based on traditional rate of return
regulation, coupled with deferred energy accounting.
Q. HOW WILL RETAIL ELECTRIC RATES IN NEVADA BE ESTABLISHED GOING FORWARD?
A. As I describe in more detail below, an essential element of the state's
most recent restructuring legislation ("S.B. 438") is a three-year cap on
bundled (i.e., distribution, transmission, customer service and generation
service) retail electric rates. The protections of the rate cap apply only
to customers of the so-called Provider of Last Resort ("PLR"). Through the
transition period to full retail open access (March 1, 2000 through March
1, 2003), SPPC and NPC are required to provide bundled service to PLR
customers, either through their distribution utility or through a separate
PLR-only affiliate. With the exception of the processing of NPC's final
deferred energy cases (described more fully below), the cap was established
at present rate revenues as of June 1, 1999.
A nuance in the legislation designates SPPC and NPC as the exclusive
providers of PLR service through July 1, 2001. After that date, it is hoped
that the retail market will be sufficiently developed that other entities
may wish to seek authority to provide PLR service. The legislative rate cap
would apply to all providers of PLR service through March 1, 2003.
In addition to establishing a three-year cap on bundled retail
electric rates, S.B. 438 abolished the use of deferred energy accounting
after October 1, 1999. As mentioned above, SPPC has not used deferred
energy accounting since 1995 and so was not itself impacted by this
provision. NPC was impacted, however, and filed its annual deferred
accounting case on July 15, 1999, and its final deferred energy filing on
<PAGE>
SIERRA/EXHIBIT 5
OLDHAM/4
September 30, 1999. S.B. 438 explicitly provides for an adjustment of the
rate cap to recognize the implementation of rates resulting from these
final deferred energy dockets.
Q. PLEASE DESCRIBE THE MAJOR RATEMAKING PRINCIPLES APPLICABLE TO YOUR RETAIL
ELECTRIC OPERATIONS IN CALIFORNIA.
A. SPPC's electric service territory extends into portions of eastern
California, predominantly around the Tahoe Basin. This territory is subject
to the jurisdiction of the CPUC with respect to rates, standards of
service, siting of and necessity for local generation and transmission
facilities, as well as utility accounting, issuance of securities and
related matters. Historically, the CPUC has utilized three types of rate
adjustment mechanisms in overseeing jurisdictional electric operations: the
General Rate Case ("GRC), an incentive ratemaking process called Electric
Rate Adjustment Mechanism ("ERAM"), and an Energy Cost Adjustment Clause
("ECAC") proceeding.
Q. WHAT PROCESSES AND PRINCIPLES GOVERNED THE SETTING OF YOUR CURRENT RETAIL
ELECTRIC RATES IN CALIFORNIA?
A. As part of a settlement approved by the CPUC in the WWP merger case, SPPC
agreed to freeze its general and energy rates, and to discontinue ERAM and
ECAC ratemaking. Later, pursuant to California's restructuring legislation,
SPPC was required to reduce its residential rates by 10 percent, timed to
coincide with retail open access. SPPC also filed its Direct Access
Implementation Plan, which ultimately included recovery of the 10 percent
mandated rate reduction through the State's Rate Reduction Bond mechanism.
/ / / / /
/ / / / /
/ / / / /
<PAGE>
SIERRA/EXHIBIT 5
OLDHAM/5
RESTRUCTURING: CALIFORNIA
Q. CAN YOU BRIEFLY DESCRIBE THE PROCESS FOLLOWED IN CALIFORNIA FOR
RESTRUCTURING THE RETAIL ELECTRICITY MARKET?
A. With an emphasis on brevity, yes. On December 20, 1995, the CPUC issued an
order announcing the majority proposal for restructuring the electric
industry beginning January 1, 1998. The proposal was subject to the
approval of the Governor, the Legislature, and the FERC. The CPUC plan
required the creation of an Independent System Operator ("ISO") to
efficiently operate the state's transmission system and ensure comparable
access for power suppliers. It also required the establishment of a Power
Exchange ("PX") for direct customer access to alternate suppliers, phased
in over time. In addition, performance-based ratemaking was to be applied
to remaining monopoly services (e.g., distribution), while stranded costs
were to be recovered through a separate competitive transition charge on
customers' bills.
On September 24, 1996, the Governor of California signed into law a
bill that incorporated these basic tenents. It provided for the
restructuring of the electric industry beginning January 1, 1998, included
creation of the ISO and PX, established performance-based ratemaking for
regulated distribution services, and allowed for the recovery of stranded
costs through a separate transition charge. On May 6, 1997, the CPUC issued
an order implementing the restructuring bill, but extending the date for
direct access to March 31, 1998.
Beginning on that date, SPPC has offered all its California customers
direct retail access. Customers may choose to continue to take service from
SPPC at its tariffed rates, or elect to purchase energy from marketers or
to buy directly from generators.
/ / / / /
/ / / / /
<PAGE>
SIERRA/EXHIBIT 5
OLDHAM/6
RESTRUCTURING: NEVADA
Q. CAN YOU BRIEFLY DESCRIBE THE STATUS OF THE NEVADA ELECTRIC INDUSTRY
RESTRUCTURING PROCESS?
A. Nevada's electric restructuring process began in earnest in 1997 with the
passage of A.B. 366. Thereafter the PUCN instituted an all-encompassing
investigatory docket aimed at generating the rules for implementing
restructuring. Two years later, some significant issues were as yet
unresolved, and some remained largely unaddressed. Therefore, in 1997 the
Legislature revisited the restructuring process in S.B. 438. Many
provisions of the original statute were streamlined or clarified, and some
processes were legislatively resolved.
Q. WHAT WAS THE ORIGINAL DESIGN OF NEVADA'S ELECTRIC RESTRUCTURING PROCESS?
A. A.B. 366 continues to provide the framework for retail competition in the
electric and gas markets in Nevada. As passed in 1997, A.B. 366 mandated
full retail open access to all customer classes as of December 31, 1999.
Under A.B. 366, traditional bundled electric service was broken into two
broad categories of service: non-competitive ("NCS") and potentially
competitive services ("PCS"). The statute designated distribution service
and Provider of Last Resort service as NCS, and generation and aggregation
of energy supply as PCS. All other components of service (e.g., metering,
billing customer service) remained subject to classification by the PUCN.
A.B. 366 provided that Nevada's vertically integrated electric
utilities could provide only NCS, pursuant to rates, terms and conditions
regulated by the PUCN. PCS services could only be provided by licensed
non-utility Alternative Sellers. The rates, terms and conditions for PCS
might still be subjected to some form of regulatory oversight, however,
depending on the extent to which the market for any particular PCS service
is effective. The statute also provided that all potentially competitive
<PAGE>
SIERRA/EXHIBIT 5
OLDHAM/7
services were deemed fully competitive, and thus not subject to continued
regulatory oversight, no later than October 1, 2001.
On October 21, 1997, the PUCN issued an order stating its intended
process for addressing and implementing the various aspects of A.B. 366.
The PUCN conducted workshops on unbundling, designating components of
service as either NCS or PCS, determining the non-price terms and
conditions for NCS and PCS, establishing licensing requirements for
alternative sellers, defining affiliate requirements, and setting standards
for consumer protection. The recovery of stranded costs and suggested means
of providing PLR service were also briefly addressed in the early
workshops.
Q. HOW DID THE 1999 LEGISLATURE COME TO REVIEW AGAIN THE ELECTRIC
RESTRUCTURING PROCESS?
A. In early February 1999, the PUCN recommended to the state legislature that
the start date for competition be delayed to allow more time for
consideration of issues as a result of restructuring. The revised start
date was also intended to recognize complications that might arise due to
Year 2000 systems modifications. Thus first and foremost, S.B. 438 delayed
the start date for retail open access to March 2000, as requested by the
PUCN.
Thematically, S.B. 438 focuses on the transition to retail open
access, providing interim solutions and protections for customers. S.B. 438
requires that SPPC and NPC assume the provider of last resort function
through at least March 1, 2003, but allows SPPC and NPC to provide PLR
service through the distribution utility (rather than a special-purpose
affiliate), at least through July, 2001. S.B. 438 establishes the revenue
requirement to be used in setting rates non-competitive services, and
imposes a three- year cap on bundled retail rates for all PLR customers.
S.B. 438 makes clear that long- term contracts with qualifying facilities
<PAGE>
SIERRA/EXHIBIT 5
OLDHAM/8
must be honored to the extent that they cannot be mitigated. Finally, S.B.
438 provides for the calculation and recovery of revenue shortfalls created
by the elimination of interclass rate subsidies.
Q. WHAT IS THE CURRENT STATUS OF RESTRUCTURING IN NEVADA?
A. Both SPPC and NPC have completed the unbundling process, using the PUCN's
26 components of traditional electric service. In addition to generation
and aggregation service, customer services, metering and billing have been
deemed potentially competitive services. All non-price terms and conditions
for distribution-only service have been established. The PUCN has issued an
Interim Order regarding the revenue requirement to be used in setting
distribution-only rates. A final order that encompasses the results of
recent hearings on rate design for distribution-only service is expected in
late January or February 2000.
Q. WHAT MAJOR ISSUES HAVE YET TO BE RESOLVED?
A. Several significant issues still remain unresolved at the PUCN level, most
notably rules for recovering past (stranded) costs, whether and to what
extent the distribution company can self-provide PCS services, whether and
how SPPC and NPC can recover the costs of funding the proposed Mountain
West ISA, and adjudication of the divestiture plan. The FERC has yet to
decide some important pending issues as well, including the proper pricing
of generation within SPPC and NPC's load pockets as well as the structure,
price and non-price terms and conditions of transmission service through
the proposed Mountain West ISA.
Q. DOES THIS COMPLETE YOUR SUPPLEMENTAL TESTIMONY?
A. Yes.
<PAGE>
BEFORE THE PUBLIC UTILITY COMMISSION
OF OREGON
UM-__________
IN THE MATTER OF THE APPLICATION OF )
SIERRA PACIFIC RESOURCES TO ACQUIRE )
PORTLAND GENERAL ELECTRIC COMPANY )
MOTION FOR PROTECTIVE ORDER
JANUARY 18, 2000
<PAGE>
BEFORE THE PUBLIC UTILITY COMMISSION
OF OREGON
UM-__________
In the Matter of the Application of )
Sierra Pacific Resources to Acquire ) MOTION FOR PROTECTIVE ORDER
Portland General Electric Company )
Sierra Pacific Resources ("Sierra") moves for a protective order in
connection with its application to acquire Portland General Electric. OAR
860-012-0035(1)(k) provides that the Administrative Law Judge may, for good
cause shown, issue the standard protective order approved by the Commission.
Sierra requests an addition to the standard protective order (1) for protection
of computerized data and (2) to allow Sierra to organize a document room in
which all of the documents related to the transaction will be made available.
Sierra anticipates that parties may intervene in this docket and
engage in discovery seeking sensitive and proprietary information, such as
Sierra's financial records and projections, strategic plans, and information
relating to employees. Sierra Pacific will be exposed to competitive injury if
it is forced to make unrestricted disclosure of its confidential business
information.
OAR 860-011-000(3) provides that the Oregon Rules of Civil Procedure
("ORCP") govern these proceedings. ORCP 37C(7) provides that an order may be
entered limiting discovery of "trade secret or other confidential research,
development, or commercial information." Sierra requests the entry of the
standard protective order to protect such information by limiting disclosure to
specified persons, and requiring those persons to use the information only for
purposes of this proceeding.
/ / / / /
/ / / / /
PAGE 1 - MOTION FOR PROTECTIVE ORDER
<PAGE>
PROTECTION OF COMPUTERIZED RECORDS
Sierra requests that the following provision relating to computerized
data be added to the standard protective order:
"Any physical media containing computer software which are
delivered to a party and which are designated confidential
shall be returned to the party designating it confidential
at the conclusion of the proceeding. The party returning the
media shall sign a certificate affirming that the
programming on the media has been erased from any storage
facility internal to that party's own computer facilities."
This provision will specifically protect against unauthorized copying
of computerized data.
SIERRA DOCUMENT ROOM
Sierra requests that the protective order be amended to permit Sierra
to organize a document room containing all of the documents relating to the
transaction. The document room will include documents designated "confidential"
under the standard protective order, as well as non-confidential documents. The
document room will be accessible to all "qualified persons," as that term is
defined in paragraph 3 of the standard protective order.
The creation of the document room supersedes paragraph 6 of the
standard protective order, which provides that, when feasible, confidential
information should be "delivered to counsel." Paragraph 6 contemplates that the
presiding officer may order that confidential information be made available at a
designated time and place. Sierra hereby requests that the presiding officer
authorize Sierra to make confidential information available in its document
room, rather than deliver it to counsel. Because the document room will contain
all materials relevant to the transaction, it will facilitate prompt review by
any qualified person. A central repository for documents is desirable and
efficient because Sierra has gathered a large volume of documents relevant to
the transaction.
As Sierra states in its Application to Acquire Portland General
Electric, the document room will be open on January 24, 2000 and will remain
open during the pendency of the Application. The document room will be located
PAGE 2 - MOTION FOR PROTECTIVE ORDER
<PAGE>
at the law offices of Ater Wynne LLP, 222 SW Columbia Street, Suite 1800,
Portland, Oregon 97201. Appointments to access the document room may be made by
contacting Cassandra Pfister at (503) 226-1191.
For the foregoing reasons, Sierra requests the entry of a standard
protective order with the addition of the provisions relating to computer data
and relating to a document room.
Dated: January 18, 2000.
Respectfully submitted,
ATER WYNNE LLP
222 SW Columbia Street, Suite 1800
Portland, OR 97201-6618
Telephone: (503) 226-1191
Of Attorneys for Sierra Pacific Resources
By: /s/ Jonathan A. Ater
----------------------------
Jonathan A. Ater OSB No. 66007
Ronald L. Saxton OSB No. 79376
Kirk H. Gibson OSB No. 85122
Lori Irish Bauman OSB No. 87161
PAGE 3 - MOTION FOR PROTECTIVE ORDER
January 13, 2000
VPN-001-00
Trojan Nuclear Plant/ISFSI
Dockets 50-344/72-17
Licenses NPF-1/SNM-2509
U. S. Nuclear Regulatory Commission
Document Control Desk
Washington, DC 20555
Planned Purchase by Sierra Pacific Resources (SPR)
--------------------------------------------------
of Common Stock of Portland General Electric Company (PGE)
----------------------------------------------------------
PGE is the operator of and owner of a 67.5 percent interest in the Trojan
Nuclear Plant (TNP) and the Trojan Independent Spent Fuel Storage Installation
(ISFSI) located on the west bank of the Columbia River in Columbia County,
Oregon. As such, PGE is one of the holders of Facility Operating License No.
NPF-1 for the TNP and Material License No. SNM-2509 for the Trojan ISFSI. The
TNP license was amended to a possession-only license on May 5, 1993, removing
PGE's authority to operate TNP. The TNP is permanently defueled and cannot be
operated, nor can fuel be placed in the reactor under the terms of the license.
On April 15, 1996, the Commission issued its order approving the TNP
Decommissioning Plan and authorized the decommissioning of the TNP. PGE has
accomplished a great deal of the work to decommission TNP, including the removal
of the four steam generators, the pressurizer, and the reactor vessel. Excluding
the spent fuel, PGE has now removed and disposed of more than 99 percent of the
radioactivity at TNP.
As reported by telephone message to Mr. Robert S. Wood, NRC, on November 8,
1999, and as subsequently discussed with Mr. Wood in a November 10, 1999,
telephone conversation, PGE's parent company, Enron Corp. (Enron), and SPR
announced on November 8, 1999, their intent that SPR purchase all of the issued
and outstanding common stock of PGE. SPR, a Nevada corporation, is based in
Reno, Nevada and is the parent company of Sierra Pacific Power, also based in
Reno, and Nevada Power Company, based in Las Vegas, Nevada. The purchase is
subject to certain conditions, including obtaining appropriate governmental
approvals that do not impose terms or conditions that would have a material
adverse effect or change on the business condition (financial or otherwise) or
results of operations of PGE or SPR. This includes approvals by the Federal
Energy Regulatory Commission (FERC), the Securities and Exchange Commission
(SEC), and the Oregon Public Utility Commission (OPUC). SPR intends to register
<PAGE>
VPN-001-00
January 13, 2000
Page 2 of 8
- ----------------
with the SEC as a public utility holding company under the Public Utility
Holding Company Act, which requires the consent of the Public Utilities
Commission of Nevada. The transaction between Enron and SPR is not subject to
shareholder approval by either company. Regulatory approvals are expected to be
received by the second half of 2000. By this letter PGE requests the
Commission's consent to the planned stock purchase to the extent necessary under
Sections 81, 101, and 184 of the Atomic Energy Act, and under 10 CFR 50.80, 10
CFR 72.50, and 10 CFR 30.34.
We understand that the NRC, pursuant to its recent decision in In Re Kansas Gas
and Electric Company et. al., 49 NRC 441 (June 18, 1999), is no longer as a
general matter conducting antitrust reviews under 10 CFR 50.33a as a part of its
review of post construction license transfers. Furthermore, because TNP is
permanently shut down and in the process of being decommissioned it is no longer
capable of producing power for industrial or commercial purposes within the
meaning of Section 103 of the Atomic Energy Act. Therefore, antitrust review
under 10 CFR 50.33a would not in any event be required.
As shown below, the planned stock purchase will not affect PGE's qualifications
as a holder of the TNP or Trojan ISFSI licenses and is otherwise consistent with
applicable provisions of law, NRC regulations, and Commission orders.
A. PGE's Current Corporate Organization
PGE is a wholly owned subsidiary of Enron Corp.1 PGE is an Oregon corporation
engaged principally in the generation, transmission, distribution, and sale of
electric energy in Oregon.
PGE serves more than 700,000 retail customers in Oregon. PGE is an "electric
utility" as defined in the Commission's regulations at 10 CFR 50.2. PGE also
sells electric energy at wholesale to, and transmits electric energy in
interstate commerce for, other electric utilities under rate schedules approved
by the FERC.
PGE's utility operations are subject to regulation by the OPUC under Oregon law.
Among other things, the OPUC regulates PGE's retail rates and charges, issuances
of securities (other than short-term debt securities), services, facilities,
classification of accounts, and transactions with affiliated interests.
A more complete description of the businesses of PGE and Enron is found in each
company's most recent Forms 10-K and 10-Q filed with the SEC, which are included
as Enclosures (1) and (2). The names, addresses, and citizenship of the current
members of the Board of Directors and principal officers of PGE are included as
Enclosure (3) to this letter. The current members of the Board of Directors and
principal officers of PGE are U.S. citizens.
- ---------------
1 By order dated March 6, 1997, the NRC approved a merger between Enron Corp.
and Portland General Corporation, PGE's parent company prior to the merger. PGE
informed the NRC of the consummation of this merger by letter dated July 8, 1997
(VPN-051-97). The remaining OPUC open issues described in PGE's July 8, 1997,
letter were closed by subsequent PGE filings with the OPUC dated September 2,
1997, and December 1, 1997, and OPUC's order dated January 28, 1999.
<PAGE>
VPN-001-00
January 13, 2000
Page 3 of 8
- ----------------
B. The Stock Purchase
On November 5, 1999, Enron and SPR entered into a Stock Purchase Agreement
providing for the purchase by SPR from Enron of all of the issued and
outstanding common stock of PGE, subject to certain conditions, including the
approval of the NRC. A copy of the Stock Purchase Agreement is included as
Enclosure (4) to this letter. SPR, a Nevada corporation, is the parent holding
company for Nevada Power Company and Sierra Pacific Power Company, providing
electric service to approximately 843,000 customers throughout Nevada and
northeastern California. Its service area is one of the fastest growing in the
United States. Additional information about the business of SPR is described in
SPR's Forms 10-K and 10-Q filed with the SEC, which are included as Enclosure
(5). The purchase will not affect PGE's status as a regulated public electric
utility in the State of Oregon.
After SPR's purchase of PGE stock, PGE will continue to be an NRC licensee of
TNP and the Trojan ISFSI and no transfer of the TNP possession-only license or
ISFSI material license will result from the purchase. Control of the
possession-only license for TNP and material license for the Trojan ISFSI now
held by PGE and its co-owners will remain with PGE and the same co-owners, and
will not be affected by the purchase. SPR's address is 6100 Neil Road, Reno,
Nevada, 89511.
C. SPR's Purchase of PGE Stock Will Not Adversely Affect PGE's Qualifications
as a Holder of the NRC Licenses for the TNP or the Trojan ISFSI and is
Otherwise Consistent with Applicable Provisions of Law, Regulations, and
Commission Orders.
Pursuant to 10 CFR 50.80, 10 CFR 72.50, and NRC guidance (including the NRC's
Final Policy Statement on the Restructuring and Economic Deregulation of the
Electric Utility Industry, effective October 20, 1997), and the NRC's reviews of
and consent to a number of corporate restructurings concerning licensees, the
NRC has focused on three specific areas:
(1) Financial Qualifications - Whether the restructuring will materially
affect the availability of funds to carry out activities under the NRC
licenses for the TNP and the Trojan ISFSI.
(2) Technical Qualifications and Organizational Control and Authority -
Whether the restructuring will prevent PGE from maintaining adequate
technical qualifications and organizational control and authority over
the TNP and the Trojan ISFSI.
(3) Foreign Interests - Whether the restructuring will result in PGE
becoming owned, controlled, or dominated by an alien, a foreign
corporation, or a foreign government.
As described below, a review of the impact of the stock purchase on each of
these three areas demonstrates that the planned purchase will be consistent with
applicable provisions of law, regulations, and orders of the Commission.
<PAGE>
VPN-001-00
January 13, 2000
Page 4 of 8
- ----------------
(1) Financial Qualifications - The Planned Stock Purchase Will Not Materially
Affect the Availability of Funds to Carry Out Licensed Activities.
On April 15, 1996, the Commission issued its order approving the TNP
Decommissioning Plan and authorizing decommissioning of the TNP. As described in
the TNP Decommissioning Plan, each TNP co-owner separately collects and assures
the availability of funds for decommissioning. PGE's funds are collected through
rates and deposited to external trust funds. The Commission's order approving
the TNP Decommissioning Plan was based, among other things, on the NRC Staff's
review of the TNP Decommissioning Plan issued December 18, 1995, and the NRC's
December 1995 Safety Evaluation Report (SER) for the decommissioning of TNP.
Section 10 of the SER, "Financial Assurance," reviewed the TNP co-owners' plans
to assure that decommissioning funds will be available in the amount and at the
time needed. The conclusion was reached in Subsection 10.3 that
"... this plan complies with the relevant provisions of 10
CFR 50.75 and 50.82 and, therefore, the plan offers
reasonable assurance that funds will be available to
decommission TNP in a manner that protects the public health
and safety."
The planned purchase of PGE stock does not change the basis for this conclusion.
This conclusion was based in part on the Staff's finding that the OPUC currently
allows PGE to collect decommissioning costs from electric rates charged to
customers, and on a letter of credit to be obtained by PGE pursuant to the TNP
Decommissioning Plan. In its Order No. 95-322, entered March 29, 1995, on Docket
UE-88, a copy of which is included as Enclosure (6), the OPUC approved PGE's
decommissioning and funding plans for inclusion in the rate base. More
specifically, the OPUC stated:
"In this order, we also approve funds to decommission Trojan
and to pay for the transition to shutdown. Decommissioning
costs are the costs of physically dismantling the plant and
packaging and storing the radioactive components and spent
fuel. Transition costs are the operations and maintenance
(O&M) and administrative and general (A&G) costs associated
with plant closure."2
- ---------------
2 OPUC Order No. 95-322, entered March 29, 1995, Docket No. UE 88, Page 3. The
order also provides a disallowance of $37.5 million in certain capital
expenditures, which PGE recorded as an after-tax charge to income in 1995. In
addition, litigation is still pending in state courts, on the OPUC's authority
to grant recovery of a return on PGE's investment in Trojan under Oregon law.
This issue is also the subject of a ballot measure for the November 2000 general
election. Because the outcome of these issues would not be affected by the
planned stock purchase, they are not discussed here.
<PAGE>
VPN-001-00
January 13, 2000
Page 5 of 8
- ----------------
Further, the Order also noted with respect to the TNP Decommissioning Plan that
"PGE has submitted a decommissioning plan for approval by
the Nuclear Regulatory Commission (NRC). We approve PGE's
plan subject to our review and monitoring of costs. There
are a great many unknowns as regards decommissioning, and we
need to retain the flexibility to modify PGE's plan if
circumstances change significantly."3
As previously stated, the planned stock purchase requires the prior approval of
the OPUC, and PGE will remain subject to the jurisdiction of the OPUC with
respect to, among other things, retail rates. PGE's plans to submit its request
for OPUC consent to the purchase, and when that occurs PGE will provide a copy
of that request to the NRC. The stock purchase will also be subject to the prior
approval of the FERC, and any future changes in PGE's wholesale or transmission
rates would be subject to FERC review and approval, as well.
Notably, for purposes of complying with 10 CFR 50.33(f), the stock purchase will
not change PGE's status as an "electric utility." 10 CFR 50.2 defines "electric
utility" as follows:
"...any entity that generates or distributes electricity and
which recovers the cost of this electricity, either directly
or indirectly, through rates established by the entity
itself or by a separate regulatory authority. Investor-owned
utilities, including generation or distribution
subsidiaries, public utility districts, municipalities,
rural electric cooperatives, and State and Federal agencies,
including associations of any of the foregoing, are included
within the meaning of 'electric utility.'"
As noted above, the stock purchase will not alter the recovery by PGE of its
operational costs for licensed activities or funding of decommissioning through
rates established by the OPUC, and PGE will continue to be an investor-owned
utility. Thus, pursuant to 10 CFR 50.33(f), PGE is exempt from further financial
qualifications review as an electric utility.
The required funding assurance for operating and decommissioning of the ISFSI
will also continue to be provided and remain unaffected by SPR's stock purchase
of PGE. The TNP Decommissioning Plan also addresses the availability of funds
for the operation and subsequent decommissioning of the Trojan ISFSI. This was
specifically addressed in the SER in connection with the NRC's issuance of the
Trojan ISFSI license in March 1999. The NRC's SER states in Section 13,
"Decommissioning Evaluation,"
"The staff has determined that the financial assurance
mechanisms submitted by the applicant are sufficient to
- ---------------
3 Id. at pages 3 and 4.
<PAGE>
VPN-001-00
January 13, 2000
Page 6 of 8
- ----------------
provide reasonable assurance that adequate funds will be
available to decommission the facility so that the site will
ultimately be available for unrestricted use for any private
or public purpose. The staff, therefore, concluded that the
financial assurance mechanisms in the decommissioning
funding plan comply with 10 CFR Part 72."4
The financial assurance mechanisms on which this finding was based have not
changed since the NRC issued its SER in March 1999.
In summary, SPR's purchase of PGE stock will not materially affect the
availability of funds to carry out licensed activities for the TNP and the
Trojan ISFSI.
(2) Technical Qualifications - SPR's Stock Purchase from Enron Does Not Prevent
PGE from Maintaining Adequate Technical Qualifications and Organizational
Control and Authority Over the TNP and the Trojan ISFSI.
The stock purchase will not adversely affect the management of PGE's activities
licensed by the NRC. PGE will continue as one of the holders of the NRC licenses
for and the operator of the TNP and the Trojan ISFSI after the stock purchase.
PGE will remain as a discrete and wholly separate entity, functioning in
essentially the same fashion as prior to the stock purchase, with PGE continuing
to be headquartered in Portland, Oregon. The purchase does not change PGE's
senior management team, except that PGE's Chief Executive Officer, Ken L.
Harrison, has announced that, while he strongly supports the transaction, at the
completion of the stock purchase he intends to resign.
The TNP Decommissioning Plan approved by the Commission describes the TNP
organization in place to decommission the TNP and Trojan ISFSI, including key
TNP management positions and other personnel utilized to perform technical and
administrative tasks required during TNP decommissioning and Trojan ISFSI
operations and decommissioning. The stock purchase does not change this part (or
any other part) of the TNP Decommissioning Plan, nor does it involve any plan to
change any of the individuals assigned to the key management or technical and
administrative positions at the TNP or the Trojan ISFSI.
In summary, SPR's stock purchase from Enron does not prevent PGE from
maintaining adequate technical qualifications and organizational control and
authority over the TNP and the Trojan ISFSI.
- ---------------
4 NRC SER accompanying Materials License No. SNM-2509 dated March 31, 1999.
Finding F13.3 at page 13-2.
<PAGE>
VPN-001-00
January 13, 2000
Page 7 of 8
- ----------------
(3) Foreign Interests - SPR's Purchase of PGE Stock from Enron Will Not Result
in PGE Becoming Owned, Controlled, or Dominated by an Alien, a Foreign
Corporation, or a Foreign Government.
When the purchase is effective, SPR will become the holder of all of the issued
and outstanding common stock of PGE. SPR is not foreign-owned, controlled or
dominated. Based on information made available to PGE from SPR and SPR's
records, as of December 1, 1999, the percentage of shares of SPR stock held by
foreign accounts is less than one percent. The names, addresses, and citizenship
of the current members of the Board of Directors and principal officers of SPR
are included as Enclosure (7) to this letter. The current members of the Board
of Directors and principal officers of SPR are U.S. citizens.
In summary, SPR's purchase of PGE stock from Enron will not result in PGE
becoming owned, controlled or dominated by an alien, a foreign corporation, or a
foreign government.
D. Environmental Consideration
The stock purchase meets the categorical exclusion set forth in 10 CFR
51.22(c)(21). Therefore, pursuant to 10 CFR 51.22(b), no environmental impact
statement or environmental assessment is required.
E. Restricted Data
No restricted data is presented in this request for consent of stock purchase.
PGE will continue to limit access to restricted data pursuant to 10 CFR 50.37.
F. Conclusion
In conclusion, SPR's purchase of PGE stock from Enron will not affect PGE's
qualifications as a holder of NRC licenses and is consistent with applicable
provisions of law, regulations, and orders issued by the Commission.
As one of the holders of Facility Operating License No. NPF-1 for the TNP and
Material License No. SNM-2509 for the Trojan ISFSI, PGE respectfully requests
that the Commission consider and consent to the planned stock purchase prior to
July 1, 2000, which is the same schedule PGE is requesting from the OPUC. PGE
will notify the NRC upon completion of SPR's purchase of the PGE stock from
Enron.
Sincerely,
/s/ Stephen M. Quennoz
----------------------------------------
Stephen M. Quennoz
Vice President Nuclear
and Thermal Operations
<PAGE>
VPN-001-00
January 13, 2000
Page 8 of 8
- ----------------
Enclosures:
- ----------
(1) PGE's most recent 10-K for the year ended December 31 1998, and 10-Q for
the quarterly period ended September 30, 1999
(2) Enron's most recent 10-K for the year ended December 31, 1998, and 10-Q for
the quarterly period ended September 30, 1999
(3) Names, addresses, and citizenship of the current members of the Board of
Directors and principal officers of PGE
(4) Purchase Agreement
(5) SPR's most recent 10-K for the year ended December 31, 1998, and 10-Q for
the quarterly period ended September 30, 1999
(6) OPUC Order No. 95-322, entered March 29, 1995, in Docket UE-88
(7) Names, addresses and citizenship of the current members of the Board of
Directors and principal officers of SPR
c: J. B. Hickman, NRC, NRR (w/o)
R. S. Wood, NRC, NRR
T. J. Kobetz, NRC, NMSS, SFPO (w/o)
Regional Administrator, NRC Region IV
David Stewart-Smith, OOE
Vicki Erickson, SPR
Sam Behrends, LeBoeuf, Lamb, Greene & MacRae, L.L.P.
Leonard Rawicz, Skadden, Arps, Slate, Meagher, & Flom, L.L.P.
[Map of SPPC Service Area]
[Map of Nevada Power Service Area]
[Map of PGE Service Area]
[Map of Combined Service Area]
Sierra Pacific Resources
|
|
|------- Sierra Pacific Power Company
|
|------- Nevada Power Company
|
|------- Tuscarora Gas Pipeline Company
|
|------- Sierra Energy Company d/b/a e-three
|
|------- Lands of Sierra, Inc.
|
|------- Sierra Pacific Energy Company
Portland General Electric Company
|
|------- 121 SW Salmon Street Corporation
|
|------- Portland General Transport Corporation
|
|------- Salmon Springs Hospitality Group
PGH II, Inc.
|
|
|------- Columbia-Willamette Development Company
|
|------- Enron MicroClimates Inc.
|
|------- Portland General Distribution Company
|
|------- Portland General Operations Company, Inc.
|
|------- Tule Hub Services Company
|
|------- Columbia-Pacific Distribution Services Company, LLC
|
|------- Enron Distribution Services Company, LLC
|
|------- Portland Energy Solutions Company, LLC
Sierra Pacific Resources
|
|
|------- Sierra Pacific Power Company
|
|------- Nevada Power Company
|
|------- Tuscarora Gas Pipeline Company
|
|------- Sierra Energy Company d/b/a e-three
|
|------- Lands of Sierra, Inc.
|
|------- Sierra Pacific Energy Company
|
|
|------- Portland General Electric Company
| |
| |------- 121 SW Salmon Street Corporation
| |
| |------- Portland General Transport Corporation
| |
| |------- Salmon Springs Hospitality Group
|
|
|------- PGH II, Inc.
|
|------- Portland General Operations Company, Inc.
|
|------- Portland General Distribution Company
|
|------- Columbia-Willamette Development Company
|
|------- Enron MicroClimates Inc.
|
|------- Portland Energy Solutions Company, LLC
|
|------- Tule Hub Services Company
|
|------- Enron Distribution Services Company, LLC
|
|------- Columbia-Pacific Distribution Services Company, LLC
ANALYSIS OF THE ECONOMIC IMPACT OF
A DIVESTITURE OF THE
GAS OPERATIONS OF SIERRA PACIFIC RESOURCES
January 31, 2000
<PAGE>
TABLE OF CONTENTS
PAGE
I. EXECUTIVE SUMMARY.....................................................1
II. STUDY APPROACH AND ASSUMPTIONS........................................6
III. IMPACT ON NEWGASCO...................................................13
A. NewGasCo Organization Assumptions...........................13
B. Annual Cost Increases.......................................17
C. Capital Cost Increases......................................21
D. Transition Cost Increases...................................23
E. Total Lost Economies........................................24
IV. OTHER CUSTOMER IMPACTS...............................................24
V. EFFECT ON REMAINING ELECTRIC CUSTOMERS...............................25
i
<PAGE>
ANALYSIS OF THE ECONOMIC IMPACT OF
A DIVESTITURE OF THE
GAS OPERATIONS OF SIERRA PACIFIC RESOURCES
PHB Hagler Bailly was engaged on behalf of counsel for Sierra Pacific Resources
(SPR) to conduct an analysis of the economic impact of divesting the natural gas
business and assets from its wholly owned subsidiary, Sierra Pacific Power
Company (Sierra Pacific, or SPPC). This analysis was conducted in connection
with SPR's application to the Securities and Exchange Commission (SEC, or
Commission) to retain its gas business and assets.
PHB Hagler Bailly is a management and economic consulting firm providing
services to energy and network industries. PHB Hagler Bailly has extensive
experience in energy utility strategy, organization and operations. For this
engagement, PHB Hagler Bailly applied its 1) extensive experience with energy
utilities; 2) knowledge of utility operations, including experience with
management and organization, staffing levels and operational benchmarking; and
3) an understanding of the business and organization of Sierra Pacific, as
provided in part by the management and staff of SPR.
I. EXECUTIVE SUMMARY
The purpose of this study is to identify and quantify the potential economic
impact resulting from the divestiture of the natural gas business and assets
held by Sierra Pacific Power Company (Sierra Pacific), a wholly-owned subsidiary
of SPR, if so directed by the SEC. This economic impact is referred to as
"economic losses" or "lost economies." The merger of SPR with Portland General
Electric (PGE) will result in SPR being considered a registered holding company
under the Public Utility Holding Company Act of 1935 (PUHCA). PUHCA generally
requires that registered holding companies limit their utility businesses to a
single integrated electric or gas utility, but not both. However, PUHCA allows
registered holding companies to retain additional integrated utility operations
(i.e., a natural gas utility business could be retained in addition to the
incumbent electric utility business) if certain requirements are satisfied, as
stated in PUHCA Section 11 (b) (1) Clauses A, B, and C.
This study addresses the requirements of Clause A, under which the SEC may
permit a registered holding company to continue to control an additional
integrated public-utility system provided that the Commission finds that: 1) the
additional system cannot be operated as an independent system without the loss
of substantial economies and 2) that the losses could be avoided by the
1
<PAGE>
retention of control of the additional system by the holding company. This study
quantifies the results of divesting Sierra Pacific's natural gas business and
assets into a stand-alone company (referred to as "NewGasCo") which would serve
Sierra Pacific's natural gas customers at a level of service, quality and safety
comparable to the level currently served by Sierra Pacific.
PHB Hagler Bailly analyzed the likely impacts of divesting Sierra Pacific's gas
business and assets into NewGasCo by assessing the labor, infrastructure and
other impacts on a bottom-up functional basis. The incremental expenses and
capital costs associated with a forced divestiture, or lost economies, were then
assessed from three perspectives: 1) the impact on the natural gas business'
customers and shareholders; and 2) the impact on Sierra Pacific's remaining
electric customers; and 3) other customer impacts.
A. IMPACT ON NEWGASCO SHAREHOLDERS AND CUSTOMERS
1. Impact on Shareholders
The effects on shareholders were calculated by assuming that there would be no
regulatory relief to compensate for the increased costs resulting from the
divestiture of Sierra Pacific's natural gas business. As a guide to determining
whether the economic consequences of a forced divestiture upon NewGasCo, as well
as the remaining electric business, are substantial under PUHCA Section 11 (b)
(1) Clause A, the SEC has historically relied upon its ruling in Engineers
Public Service Company, in which the Commission adopted four ratios to measure
the economic losses associated with divestiture. These measures are the
projected economic losses as a percentage of: 1) gas operating revenues; 2) gas
operating revenue deductions; 3) gross gas income; and 4) net gas income.
Further, based upon its prior decisions, the Commission has set unofficial
hurdles for these ratios of: 6.78% of gas operating revenues; 9.72% of gas
operating revenue deductions; 25.44% of gross gas income; and 42.46% of net gas
income.
This study concludes the economic losses associated with divestiture of Sierra
Pacific's natural gas business would be significant, quantified to be
approximately $15.7 million. Under the scenario in which NewGasCo's shareholders
are not allowed to recover the lost economies and associated income taxes
through regulator-approved rate adjustments, the impact on shareholders is
significant. NewGasCo's economic losses, when presented in terms of the four
ratios discussed above, would be nearly twice as great as the percentages
presented to the Commission by Engineers Public Service. The projected impacts
of the lost economies on Sierra Pacific's shareholders are shown in Table I-1.
2
<PAGE>
Table I-1
ANNUAL SHAREHOLDER IMPACT OF LOST ECONOMIES
Lost Economies as a Percent of:
Total Gas Operating Revenues 15.8%
Total Gas Operating Revenues Deductions 18.7%
Gross Gas Income 100.1%
Net Gas Income 149.0%
In Table I-1, Total Gas Operating Revenue is the sum of all natural gas revenues
for the 12 months ending December 31, 1998 for Sierra Pacific's natural gas
segment. Total Gas Operating Revenue Deductions include all purchased gas,
operations and maintenance expenses, administrative and general expenses,
depreciation, interest, taxes other than income taxes and other income
deductions. Gross Gas Income is the difference between Total Gas Operating
Revenue and Total Gas Operating Revenue Deductions. Net Gas Income is Gross Gas
Income minus income taxes.
2. Impact on Customers
Alternatively, assuming that NewGasCo is allowed by state regulators to increase
its rate revenue to recover increased costs resulting from divestiture,
NewGasCo's natural gas customers will see an overall rate increase of about
16.5%, as shown in Table I-2. The projected impact on customers, includes lost
economies of $15.7 million plus an additional $700,000 in associated income
taxes, yielding total economic losses of $16.4 million.
Table I-2
ANNUAL GAS CUSTOMER IMPACT OF LOST ECONOMIES
Revenue
Pre-Spin-Off $ 99,531,525
Post-Spin-Off $ 115,941,202
Increase $ 16,409,677
Percent Increase 16.5%
3
<PAGE>
B. IMPACT ON SIERRA PACIFIC'S REMAINING ELECTRIC CUSTOMERS
In addition to the foregoing impacts relating to the natural gas business,
divesting Sierra Pacific's natural gas business would result in a rate increase
of about 0.72 percent to Sierra Pacific's remaining electric customers. The
analysis underlying this conclusion assumed that state regulators would allow
the pass-through to the Company's electric customers of electric business unit
lost economies, as well as associated income taxes. Under this case, Sierra
Pacific's electric customers would realize economic losses of about $4 million,
as shown in Table I-3. This impact is primarily due to: 1) the expense
associated with additional electric business unit employees being required to
support functions that previously were provided jointly for Sierra Pacific's
utility business units; 2) increases in the allocation of certain fixed costs
which were previously allocated among Sierra Pacific's utility business units;
and 3) the capital cost associated with the transfer of assets, as well as the
acquisition of new assets, into the electric rate base.
Table I-3
ANNUAL ELECTRIC CUSTOMER IMPACT OF LOST ECONOMIES
Rate Revenue Remaining Sierra Pacific
Electric Customers
Pre-Spin-Off $ 560,417,869
Post-Spin-Off $ 564,464,284
Increase $ 4,046,415
Percent Increase .072%
In addition to the impact on Sierra Pacific's remaining electric customers,
Sierra Pacific also is a water utility in the Reno-Sparks area of Northern
Nevada. The water utility shares in the efficiencies of combined utility
operations and would also be impacted by lost economies. The impact of the
divestiture of Sierra Pacific's natural gas business and assets on the remaining
water utility would be approximately $2.1 million in operations and maintenance
expenses and approximately $51,000 in incremental capital additions.
C. OTHER CUSTOMER IMPACTS
Finally, significant portions of Sierra Pacific's current customers receive
electric, gas, and water utility services on a combined basis, for which they
pay a single bill. These customers would incur increased personal costs such as
postage on separate envelopes and any costs associated with writing additional
checks to remit payment to two utilities rather than one. In addition, a
4
<PAGE>
non-quantifiable impact involves the confusion to many customers resulting from
doing business with two utilities instead of one. Increased postage expense to
customers is shown in Table I-4.
Table I-4
OTHER ANNUAL CUSTOMER IMPACTS
Postage $ 416,438
D. Conclusion
PHB Hagler Bailly's analysis indicates that, in all likelihood, the forced
divestiture of Sierra Pacific's natural gas business and assets would result in
the realization of significant operational inefficiencies affecting NewGasCo's
shareholders and/or customers and Sierra Pacific's remaining electric customers.
NewGasCo would realize incremental costs associated with labor and other
resources, because it would no longer be able to share these resources with
Sierra Pacific's electric and water segments. Overall, PHB Hagler Bailly's
identified economic losses to NewGasCo of approximately $16.4 million. When
applied to Sierra Pacific's operating revenue, operating revenue deductions, and
gross and net income statistics, the economic losses quantified by PHB Hagler
Bailly greatly exceed the unofficial thresholds applied by the Commission.
Additionally, Sierra Pacific's remaining electric business will realize
increased costs of about $4.0 million, for combined economic losses of about
$20.4 million.
Based on the foregoing analysis, spinning-off Sierra Pacific's natural gas
business and assets would be to the detriment of SPR's shareholders and/or its
gas and electric customers.
5
<PAGE>
II. STUDY APPROACH AND ASSUMPTIONS
A. STUDY APPROACH
The objective of this study was to estimate the economic losses, or lost
economies, that would result from the divestiture of Sierra Pacific's natural
gas business. Economic losses are increased costs that would be incurred by
shareholders and/or customers because, as a stand-alone company, NewGasCo would
be unable to share in the economies of scope and/or scale that are available as
part of combined utility operations. Divestiture of Sierra Pacific's natural gas
business will result in increased costs in certain areas of operations to
NewGasCo and will also result in increased costs to Sierra Pacific's electric
business, as numerous efficiencies associated with combined utility operations
would be lost. Additionally, Sierra Pacific's water business would experience
increased costs, as it received the benefits of sharing services with the gas
and electric businesses.
PHB Hagler Bailly's quantification of the lost economies associated with the
divestiture of Sierra Pacific's natural gas business and assets was based on a
detailed "build-up" of the NewGasCo's cost structure. PHB Hagler Bailly analyzed
NewGasCo's business needs on a function-by- function basis, identifying labor,
infrastructure, and other costs. The analysis also identified and quantified the
impact of divestiture on Sierra Pacific's remaining electric and water
businesses.
PHB Hagler Bailly relied on its knowledge and expertise regarding utility
processes, organization and staffing and familiarity with various operational
benchmarks. PHB Hagler Bailly also relied upon knowledge and data provided by
SPR and Sierra Pacific through numerous interviews with functional managers and
the review of accounting and other reports. The SPR personnel providing input
and analyses into this study included employees with experience in all major
aspects of utility operations and corporate support.
Specifically, PHB Hagler Bailly with Sierra Pacific management and staff applied
a 10-step methodology.
1. A baseline was set, from which the economic losses resulting from
divestiture of Sierra Pacific's natural gas business and assets would be
measured. This baseline included:
a. Numbers of employees for each of Sierra Pacific's functional areas,
including the specification of employees working exclusively on
electric, gas and water business. "Shared" employees, or employees that
work on two or more aspects of Sierra Pacific's lines of business, were
allocated to the electric, gas or water businesses on a full time
equivalent (FTE) basis using the allocation factors applied by Sierra
Pacific for rate cases and other regulatory proceedings. Sierra
Pacific's baseline staffing levels were based on the Company's 1999
budget, which reflecting the efficiency gains and savings associated
with the first year of the merger between SPR and Nevada Power.
6
<PAGE>
b. Baseline labor costs were developed by applying Sierra Pacific's 1999
fully loaded average labor cost (i.e., including the costs of benefits
and pension) to the staffing levels. Labor costs were also assigned as
expense or capital on a functional basis, determined using Sierra
Pacific's historical allocations for capitalized labor.
c. Baseline non-labor costs were developed for the various non-labor cost
categories (e.g., transportation; materials; purchased materials;
contract labor and outside services; travel, lodging and meals; and
other expenses) used by Sierra Pacific and tracked at a responsibility
area (i.e., functional) level.
d. Baseline capital and the level of plant-in-service was based on Sierra
Pacific's accounting records following the uniform system of accounts
as prescribed by FERC and Sierra Pacific's cost of service methodology.
2. "Stand-alone" staffing requirements were determined for NewGasCo as well as
the staffing requirements for Sierra Pacific's remaining combination
electric and water company. Stand- alone staffing levels were determined
through the application of PHB Hagler Bailly experience with utility
operations, organization and staffing levels; industry benchmarks, and
input from Sierra Pacific's functional area managers, spanning corporate
and administrative functions, as well as the work force involved in field
operations
3. Incremental labor costs were determined by comparing the costs of the
stand-alone NewGasCo with the baseline labor costs for Sierra Pacific's gas
business. NewGasCo's incremental labor costs were also assigned to expense
or capital categories.
4. Non-labor costs were determined by identifying the resources needed by a
stand-alone local distribution company (LDC). This identification was
completed based on PHB Hagler Bailly's experience with utility
infrastructure and operations. The areas of NewGasCo's non- labor
requirements included: buildings and facilities, vehicles and equipment,
information systems, telecommunications systems, outside services, and a
board of directors. PHB Hagler Bailly then estimated the costs
(distinguishing between capital and expenses) on a bottom-up basis for each
of these areas.
5. Non-labor expenses were netted against the 1999 budget charges to Sierra
Pacific's gas business for each of the non-labor cost areas, to ensure that
these expenses were incremental. The 1999 non-labor expenses budgeted to
Sierra Pacific's gas business which would remain fixed following a
divestiture (e.g., fixed IT costs) were then allocated to the Company's
remaining electric and water businesses based on re-calculated allocation
factors applicable to the electric and water businesses alone.
6. Non-labor capital requirements were netted against Sierra Pacific's net gas
plant in service for the relevant account, to ensure that capital
requirements were incremental. Capital requirements affected accounts such
as intangible plant; structure and improvements; tools, shop and garage
equipment; and communications equipment. The net gas plant in service
7
<PAGE>
was then allocated to the Company's remaining electric and water businesses
based on re- calculated allocation factors applicable to the electric and
water businesses alone.
7. Depreciation was calculated for NewGasCo's additional capital by category
of capital addition, based on the depreciation rates used by Sierra Pacific
for ratemaking purposes. Depreciation for these capital additions was
netted against the depreciation charges to Sierra Pacific's gas business
for each of the capital additions, to ensure that these depreciation
expenses were incremental.
8. Other costs were identified and quantified, such as the costs for
additional postage and potentially increasing uncollectibles associated
with stand-alone LDCs.
9. Increases in capital costs for NewGasCo were estimated by assessing and
quantifying the cost of equity and debt for a stand-alone LDC with
NewGasCo's characteristics. Increased capital costs resulting from required
capital additions were also included. NewGasCo's capital costs were netted
against the capital costs attributable to Sierra Pacific's gas business, to
ensure that these costs were incremental.
10. Total lost economies were calculated by summing the various costs cited
above and applied to ratios generally considered by the SEC.
B. GENERAL STUDY ASSUMPTIONS
This study has applied several key assumptions in determining the lost economies
resulting from Sierra Pacific divesting itself of its natural gas business.
1. SPR's natural gas business and operations are comprised of the business and
operations conducted by Sierra Pacific only. Sierra Pacific's gas business
and operations are engaged in the purchase, transmission, distribution,
sale and transportation of natural gas in the Reno- Sparks area of northern
Nevada. At year-end 1998, Sierra Pacific had approximately 105,200 natural
gas customers, composed of 95,500 residential customers, 9,600 commercial
customers, and 100 industrial customers.
a. Sierra Pacific's natural gas business 1998 total gas operating
revenues were $99,531,525.
b. Sierra Pacific natural gas business 1998 total gas operating revenue
deductions were $83,854,133.
c. Sierra Pacific natural gas business 1998 gross gas operating income
was $15,677,392.
d. Sierra Pacific natural gas business 1998 net gas operating revenue was
$10,534,969.
2. This study assumed that, if required, SPR would spin-off its Sierra Pacific
natural gas business into a stand-alone gas company, independent of SPR.
8
<PAGE>
The new company is referred to as "NewGasCo." NewGasCo would provide
service to the residential, commercial and industrial customers formerly
served by Sierra Pacific. NewGasCo would need to meet state and federal
regulatory requirements, plan to survive in an increasingly competitive
energy market, and continue to provide services to its customers in a safe
and reliable manner.
3. NewGasCo would need to have human and capital resources reflecting the
requirements associated with a stand-alone LDC of its size. Human resources
would include a board of directors, executives, management and staff
covering the full range of functional areas needed to plan, manage and
operate an LDC with NewGasCo's geographic and operating characteristics. In
addition to human resources, operation of NewGasCo would require a building
and facilities, various operational and administrative computer systems,
vehicles, and materials and supplies.
4. Development of NewGasCo would require the transfer of certain Sierra
Pacific resources to NewGasCo. These would include human and capital
resources that were previously dedicated exclusively to the gas business
and operations at Sierra Pacific. In addition, resources currently shared
by Sierra Pacific's electric, gas and water business (which would remain
with Sierra Pacific's electric and water businesses) would need to be
acquired by NewGasCo.
5. The transfer of human and capital resources which were, as part of Sierra
Pacific, dedicated to the natural gas line of business would be treated as
cost transfers and not represent incremental costs. The acquisition of
resources, which would be needed by NewGasCo as a stand-alone company,
would represent incremental costs.
6. The economic losses developed in this study were based on the level of
business efficiency in place at SPR in 1999, as reflected in SPR's 1999
budget. SPR's 1999 budget for Sierra Pacific reflects the efficiencies and
savings achieved to date related to the merger between SPR and Nevada Power
Company in 1998. Additional efficiencies and savings are expected to result
from the merger of SPR with Portland General Electric Company (PGE), which
will result in lower costs to Sierra Pacific. Inclusion of these cost
savings (into the baseline for projecting economic losses) would result in
greater economic losses associated with the divestiture of Sierra Pacific's
natural gas business and assets than are reported in this study.
SPECIFIC STUDY ASSUMPTIONS
1. Labor Assumptions:
a. The current organizational structures, business practices and levels
of efficiency were used as the basis for NewGasCo's organization and
staffing levels.
b. Employees were assumed to be transferred from Sierra Pacific to
NewGasCo at the same level of compensation, pension and benefits.
9
<PAGE>
c. Incremental employees were assumed to be compensated at the same levels
as those associated with similar functions at Sierra Pacific.
d. Re-negotiation of any labor contracts was assumed to be minimal.
2. Board of Director Assumptions: NewGasCo would need a stand-alone Board of
Directors similar in size and composition to the Board currently in place
at SPR. Board-related costs would also be similar to Board-related costs at
Sierra Pacific, discounted for a smaller sized company with a narrower
scope of operations.
3. Outside Services: Requirements for certain outside services (such as the
annual financial audit performed by an independent external auditor,
transfer agent services, certain legal services, safety training, and human
resource and benefit consulting) would have to be provided on a stand-alone
basis to NewGasCo. The cost of such services would reflect NewGasCo's scope
and size.
4. Building and Facilities Assumptions:
a. NewGasCo would need a single facility location, which would house its
corporate staff as well as its field staff responsible for gas
operations in the Reno-Sparks area.
b. This facility would house corporate, field, and customer service
employees, include parking and paved areas for NewGasCo-owned and
employee vehicles, and garage and warehouse space.
c. The size of the facility would be based on the space requirements for
NewGasCo employees, as well as the associated garage, warehouse and
parking and paving requirements.
d. The facility would be leased at a cost based on lease per square foot
rates in the Reno- Sparks area.
e. Furniture and office and computer equipment that is used by personnel
transferred from Sierra Pacific to NewGasCo would also be transferred
to NewGasCo. Garage equipment dedicated to Sierra Pacific's gas
business would be transferred to NewGasCo.
f. Additional office and computer equipment would be acquired for
incremental NewGasCo employees. Additional garage equipment associated
with shared garage functions would need to be acquired by NewGasCo.
5. Vehicle Assumptions:
a. Sierra Pacific's specialized gas vehicles or vehicles assigned to the
gas business would be transferred to NewGasCo.
10
<PAGE>
b. NewGasCo would need to acquire general-use pick-up trucks to be used by
field operations personnel, such as meter readers and customer service
personnel. The number of additional vehicles required are related to
functional area staffing levels.
c. Operations and maintenance costs for vehicles were based on the
historic rates for Sierra Pacific on a functional use and vehicle
category basis. Vehicle O&M rates included vehicle depreciation.
6. Information Systems Assumptions:
a. NewGasCo would need to procure Information System (IS) capabilities
equivalent to that it currently receives as part of Sierra Pacific.
NewGasCo's information systems would need to support the requirements
associated with finance and accounting, human resources, payroll, work
management, inventory and purchasing functions, field services, meter
reading and customer services.
b. NewGasCo would license an Enterprise Resource Planning (ERP) system
which would address the IS requirements associated with accounting,
human resource, payroll, inventory and purchasing.
c. NewGasCo would license a Customer Information System (CIS) which would
store and allow access to customer records, be integrated with
customer billing and be used extensively by NewGasCo's Telephone
Center personnel. NewGasCo would also acquire a high-speed printer for
billing.
d. NewGasCo would license mapping software and then purchase the relevant
geographic data to form a Geographic Information System (GIS).
e. NewGasCo would license a Work Management System (WMS) to manage
planning and dispatch associated with construction and operations. The
WMS would interface with NewGasCo's CIS and GIS.
f. NewGasCo would acquire hand-held meter reading devices and license
software to interface with CIS.
g. NewGasCo would acquire additional computers and printers for the needs
of its incremental staff.
7. Telecommunications Assumptions:
a. NewGasCo would meet its radio dispatch needs by entering into a
shared-service agreement for this service with the State of Nevada and
other utilities and municipal authorities.
11
<PAGE>
b. NewGasCo would need access to dialtone, 800 services, cellular
service, paging and leasing and maintenance for telephone systems.
c. NewGasCo would need a telecommunications backbone comprised of various
data and supervisory circuits, including gas control telecom.
d. NewGasCo would incur other telephone costs, such as yellow page
publishing costs and internet-related cost.
8. Depreciation Assumptions: NewGasCo's capital assets and capitalized labor
would be depreciated at the rates currently used in regulatory proceedings
by Sierra Pacific.
9. Other Cost Assumptions:
a. NewGasCo would incur increased costs of postage.
b. NewGasCo, as a stand-alone LDC, would have a higher rate of
uncollectibles than a combination utility providing electric, gas and
water services.
10. Capital Expenditure and Cost Assumptions:
a. Sierra Pacific assets which are dedicated to its natural gas line of
business would be transferred to NewGasCo and not represent an
incremental cost. NewGasCo would need to acquire several incremental
assets consisting of: 1) the costs associated NewGasCo's building,
facilities, furniture and equipment; 2) vehicle purchases; and 3)
capitalized labor.
b. The divestiture of NewGasCo was assumed to be a tax-free spin-off to
the existing shareholders. This would involve the incorporation of
NewGasCo, transfer of gas-related assets to NewGasCo, and distribution
of shares to current shareholders.
c. NewGasCo would not be able to issue Two-County Tax Exempt debt, and
would have higher leverage as it would not be bound by the rules
associated with that debt.
d. For regulatory purposes, NewGasCo's cost of equity would be similar to
the cost it earns under the regulatory framework currently applied to
Sierra Pacific in Nevada.
e. The cost of debt for NewGasCo is based on the current yield for
25-year debentures for an investment grade corporation, assuming an
investment rating of "BBB+."
f. The spin-off of NewGasCo is based on an asset transfer at the net book
value of the existing gas assets attributable to Sierra Pacific's
natural gas business plus additional capital expenditures.
12
<PAGE>
g. Working capital costs following divestiture are assumed to be the same
as pre-spin-off rates.
11. Transition Cost Assumptions:
a. This study assumed that the transition from Sierra Pacific to NewGasCo
would require financial transaction costs and professional fees, such
as legal fees. This study did not include moving, retraining and "cost
to achieve" costs in transition costs. Inclusion of these costs would
increase the transition costs presented in this study.
b. Divestiture would be structured to avoid material federal or state
income tax events. The future tax obligations of NewGasCo and the
remaining electric business would be based on the stand-alone future
tax obligations of the independent entities and would not be
materially effected by the spin-off itself.
c. Investment banking fees related to debt issuance were estimated to be
approximately 0.875 percent of the total debt amount. Investment
banking fees related to stock issuance was estimated to be 1.5 percent
of the total equity issuance amount.
d. Transaction costs associated with recapitalization were included with
transition costs. These costs were amortized over 25 years and include
the issuance of new debt and common stock for NewGasCo.
III. IMPACT ON NEWGASCO
A. NEWGASCO ORGANIZATION ASSUMPTIONS
The organizational structure of NewGasCo reflects the needs of providing service
to its customers, in meeting mandatory legal and regulatory requirements and in
conducting business following industry and generally accepted business
practices. Organizational structure is a primary determinant of the level of
staffing for NewGasCo, which determines labor costs.
SPR's budgeted 1999 for about 3,190 employees in 1999. Approximately 1,090 of
these employees were dedicated to specific work activities at Sierra Pacific and
about 1,720 employees jointly support both Sierra Pacific and Nevada Power.
About 955 of these common employees were allocated to Sierra Pacific for cost
and ratemaking purposes, with the remainder allocated to Nevada Power. Of Sierra
Pacific's total FTEs of about 1,818, approximately 955 (or about 50%) employees
are involved exclusively in electric work, including but not limited to work
activities in electric generation, electric system transmission, electric system
operations and maintenance. One of Sierra Pacific's functional areas works
exclusively in the Company's water business, accounting for approximately 75
employees, or 4 % of the Company's total employees. No Sierra Pacific functional
area is exclusively dedicated to gas operations, although some employees within
13
<PAGE>
certain functional areas work exclusively on gas matters. In 1999, Sierra
Pacific had budgeted for approximately 160 employees for its natural gas line of
business.
Following divestiture, NewGasCo would no longer be able to realize the
efficiencies gained through the SPR-Nevada Power merger and through Sierra
Pacific's combined utility operations. Considerable organizational adjustment
would be required for NewGasCo, as it would need to ensure that many of the
services previously provided jointly with the electric and water businesses are
now provided on a stand-alone basis. These include adjustments to the field
organizations as well as to corporate functions.
Sierra Pacific's current structure provided the basic structure for the NewGasCo
organization. In addition, management representing each of Sierra Pacific's
functional areas was consulted for input concerning the requirements for a
stand-alone NewGasCo. Also, experience with utility benchmarks and industry
practices were taken into account.
This study adopted the following organizational structure for NewGasCo. NewGasCo
would be headed by a president who would also be NewGasCo's chief executive
officer. The CEO would report directly to the Board of Directors and would have
six direct reports (five of which would be executive officers): chief financial
officer (CFO); chief operating officer (COO); vice president of marketing and
customer service; General Counsel; vice president of gas supply and
transmission; and director of internal audit.
1. The CFO function would be responsible for accounting, finance, information
technology, human resources, strategic development, and various areas of
corporate support.
a. The accounting function would be responsible for the integrity of
NewGasCo's books and records, budgeting, payroll, accounts payable,
fixed assets and tax. Sierra Pacific had 45 people in this function in
1999. NewGasCo would require 22 people to perform the various
accounting activities. Sierra Pacific's remaining electric and water
businesses would need 40 people for this function.
b. Finance, insurance and forecasting involves the management of
investments, cash and disbursements, as well as financial planning,
risk management, insurance and shareholder relations. Sierra Pacific
had approximately 14 people in this function in 1999. NewGasCo would
require 10 people to perform the various financial forecasting and
insurance activities. Sierra Pacific's remaining electric and water
businesses would need 15 people for this function.
c. Information technology (IT) is responsible for the development and
maintenance of the full range of information systems and
telecommunications networks, including application development,
infrastructure standards, security, user training, and the
telecommunication network. In 1999 Sierra Pacific employed 70 people in
its IT function. NewGasCo would require 14 employees and Sierra
Pacific's remaining electric and water businesses would need 68 people
to meet their IT requirements.
14
<PAGE>
d. Human resources includes labor relations, organizational development,
training, the development of compensation and benefits plans,
ensurance of compliance with employee-related regulations and
maintenance of employee-related information systems. The number of
NewGasCo's employees drives the staffing of the human resources
department. In 1999 Sierra Pacific employed 23 people in the human
resources function. NewGasCo would require 4 employees and Sierra
Pacific's remaining electric and water businesses would need 22 people
to meet human resources functional requirements.
e. Supply chain management is responsible primarily for materials,
purchasing and fleet services. In 1999 Sierra Pacific employed 75
people in supply chain management. NewGasCo would require 11 employees
and Sierra Pacific's remaining electric and water businesses would
need 67 people to meet these requirements.
f. Administrative services include facilities planning and maintenance,
record management, reprographics, mailroom and supplies. In 1999
Sierra Pacific employed 48 people in its administrative support
function. NewGasCo would require 11 employees and Sierra Pacific's
remaining electric and water businesses would need 48 people to meet
these requirements.
g. Land services include rights of way, land planning and acquisition,
and land surveys. In 1999 Sierra Pacific employed 23 people in its
land services function. NewGasCo would require 3 employees and Sierra
Pacific's remaining electric and water businesses would need 21 people
to meet these requirements.
h. Strategic development assists the CFO and CEO in strategic planning
and the evaluation of new corporate opportunities. In 1999 Sierra
Pacific employed 8 people in its strategic development function.
NewGasCo would require 1 employee and Sierra Pacific's remaining
electric and water businesses would need 8 people to meet these
requirements.
2. The COO function would be responsible for the operating activities of
NewGasCo, which would include planning, maintenance and construction.
a. Gas distribution operations and maintenance involves ongoing
improvements to existing gas facilities. In 1999 Sierra Pacific
employed 90 people some of whom were engaged in water and electric
operations and management. NewGasCo would require 51 employees and
Sierra Pacific's remaining electric and water businesses would need 59
people to meet these requirements.
b. New business involves construction, planning, design and inspection of
newly installed gas facilities. In 1999 Sierra Pacific employed 71
people in its new business function. NewGasCo would require 27
employees and Sierra Pacific's remaining electric and water businesses
would need 57 people to meet these requirements.
15
<PAGE>
c. Dispatch involves prioritizing gas field activities in response to
customer and systems needs. In 1999 Sierra Pacific employed 22 people
in gas distribution and maintenance. NewGasCo would require 19
employees and Sierra Pacific's remaining electric and water businesses
would need 22 people to meet these requirements.
3. The MARKETING AND CUSTOMER SERVICE function would be responsible for
marketing, meter reading, billing and collections and NewGasCo's telephone
center.
a. Marketing and corporate communications involves the research, analysis
and programs associated with market and customer segments, as well as
media, public and employee publications. In 1999 Sierra Pacific
employed 19 people in this function. NewGasCo would require 9
employees and Sierra Pacific's remaining electric and water businesses
would need 19 people to meet these requirements.
b. Retail business involves interaction with customers and economic
development as well as new product development. In 1999 Sierra Pacific
employed 19 people in this function. NewGasCo would require 2
employees and Sierra Pacific's remaining electric and water businesses
would need 17 people to meet these requirements.
c. Meter reading involves the collection of meter data from customer
premises. In 1999 Sierra Pacific employed 51 people in this function.
NewGasCo would require 12 employees and Sierra Pacific's remaining
electric and water businesses would need 49 people to meet these
requirements.
d. Meter services involve the calibration of meters, test and meter
repair. In 1999 Sierra Pacific employed 26 people in this function.
NewGasCo would require 4 employees and Sierra Pacific's remaining
electric and water businesses would need 22 people to meet these
requirements.
e. Telephone center is the area in which NewGasCo will handle incoming
and outgoing customer calls as well as support of field operations. In
1999 Sierra Pacific employed 58 people in this function. NewGasCo
would require 15 employees and Sierra Pacific's remaining electric and
water businesses would need 53 people to meet these requirements.
f. Customer service support involves IT support for the telephone center
as well as support for major accounts. In 1999 Sierra Pacific employed
14 people in this function. NewGasCo would require 7 employees and
Sierra Pacific's remaining electric and water businesses would need 14
people to meet these requirements.
g. Billing and Collections would be responsible for obtaining payments
for accounts in arrears or investigating billing related problems. In
1999 Sierra Pacific employed 36 people in this function. NewGasCo
16
<PAGE>
would require 8 employees and Sierra Pacific's remaining electric and
water businesses would need 34 people to meet these requirements.
4. GENERAL COUNSEL would responsible for two areas.
a. Legal counsel and claims performs legal services regarding claims, and
environmental and other legal issues. In 1999 Sierra Pacific employed
24 people in this function. NewGasCo would require 5 employees and
Sierra Pacific's remaining electric and water businesses would need 21
people to meet these requirements.
b. Rates and governmental and regulatory affairs would be responsible for
interfacing with governmental and regulatory agencies and would be
responsible for coordinating rate filings with regulatory commissions.
In 1999 Sierra Pacific employed 21 people in this function. NewGasCo
would require 5 employees and Sierra Pacific's remaining electric and
water businesses would need 20 people to meet these requirements.
5. GAS SUPPLY AND TRANSMISSION would be responsible for the procurement of gas
supply, the selection of financial instruments to hedge gas prices, the
control of the utility's gas infrastructure, and contract management of gas
transmission. Sierra Pacific currently includes this function as part of
its overall resource management function. The employees in Sierra Pacific's
resource management function engaged in gas supply and transmission would
be transferred to NewGasCo.
6. INTERNAL AUDIT would report to the board of directors, providing
independent audits for the audit committee. In 1999 Sierra Pacific employed
5 people in this function. NewGasCo would require 2 employees and Sierra
Pacific's remaining electric and water businesses would need 4 people to
fulfill internal audit requirements.
B. ANNUAL COST INCREASES
The incremental annual costs associated that would be incurred by NewGasCo as a
result of the forced spin-off of Sierra Pacific's natural gas business into
NewGasCo is shown in Table III-1.
17
<PAGE>
Table III-1
ANNUAL COST INCREASES TO GAS COMPANY
Labor Costs $ 6,097,092
Board of Director - Related $ 498,786
Outside Services $ 2,469,596
Building and Facilities $ 798,206
Vehicles & Equipment $ 208,200
Information Systems $ 1,233,297
Telecommunications $ 541,622
Depreciation $ 1,206,719
Postage $ 271,770
Uncollectibles $ 492,229
Total Annual Cost Increase $ 13,817,517
1. Labor costs represent the largest single cost increase resulting from the
spin-off of NewGasCo. Based on the assumptions and analyses relating to
NewGasCo's organization and staffing requirements, NewGasCo would require
257 employees, or 99 more full time equivalent employees than are currently
allocated to Sierra Pacific's gas line of business. These incremental
employees would cost approximately $6.1 million in terms of additional
operations and maintenance expenses incurred by NewGasCo. The breakdown of
incremental employees and associated labor cost is shown in Table III-2.
18
<PAGE>
<TABLE>
<CAPTION>
Table III-2
SUMMARY OF INCREMENTAL LABOR COSTS
Function Incremental Incremental
Employees (O&M) Labor
Cost
<S> <C> <C> <C>
CEO
Executive Officers 5 $ 655,812
CFO
Accounting 17 $ 951,510
Administrative Services 6 $ 240,976
Finance, Insurance & Forecasting 9 $ 548,448
Human Resources 2 $ 109,593
Information Technology 6 $ 356,618
Supply Chain Management 3 $ 66,292
Land Services - $ -
Strategic Development - $ 15,088
------ -----------
42 $ 2,288,525
COO
Distribution Operation and Maintenance 13 $ 884,297
New Business 6 $ -
System Maintenance, Dispatch & Trouble Operations 9 $ 663,786
------ -----------
28 $ 1,548,183
Marketing & Customer Service
Marketing and Corporate Communications 7 $ 400,648
Customer Service Telephone and Support 6 $ 359,560
Meter Reading 4 $ 200,408
Meter Service - -
Billing & Collections - -
Retail Business Function - -
------ -----------
17 $ 960,616
General Counsel
Government & Regulatory Affairs 3 $ 144,855
General Counsel 2 $ 292,937
------ -----------
5 $ 437,793
Internal Audit 1 $ 106,385
Gas Supply and Transmission 1 $ 99,779
------ -----------
Total 99 $ 6,097,092
</TABLE>
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<PAGE>
a. Incremental increases in employees results from the duplication of
many job activities that were jointly provided to two or more of
Sierra Pacific's three lines of business. Functional areas with
significant gains of incremental employees are: areas of corporate
administration such as accounting; gas distribution and operations,
which is a primary area of field operations; and customer service.
b. NewGasCo will continue to benefit from the geographic density of its
gas service area, which is limited to the Reno-Sparks area. NewGasCo's
staffing performance was benchmarked against other stand-alone gas
companies on the basis of customers per employee (a generally accepted
measure of efficiency), as shown in Table III-3.
<TABLE>
<CAPTION>
Table III-3
COMPARISON OF CUSTOMERS PER EMPLOYEE
Gas Utility Number of Number of Customers per
Distribution Employees Employee
Customers
<S> <C> <C> <C>
Sierra Pacific - Gas (Estimate) 105,000 158 665
NewGasCo 105,000 257 409
CTG Resources 140,411 611 230
Southern Connecticut Gas 148,273 532 279
Intermountain Gas Co 166,973 307 544
Yankee Energy Systems 180,476 673 268
Northwest Natural 477,400 1303 366
Piedmont Natural Gas 506,632 1,983 255
Boston Gas 515,218 1,532 336
Questar Gas Company 570,000 2338 224
Washington Gas Light 798,739 2,484 322
Southwest Gas Corp 1,234,000 2429 508
</TABLE>
2. NewGasCo's incremental Board of Directors cost reflects the need to
maintain an independent oversight body.
3. NewGasCo's incremental costs associated with outside services would be
approximately $2.5 million, the majority of which is associated with the
costs of independent legal counsel and filing requirements of a regulated
utility.
20
<PAGE>
4. NewGasCo would require approximately 81,000 square feet in work space,
composed of space needs for corporate offices, a telephone call center,
field ready-rooms, warehouse space and garage space. In addition, NewGasCo
would need parking areas and roadways. The costs for stand-alone
facilities, caused in large part by additional space requirements resulting
from the need for dedicated services and incremental employees, exceed the
portion of Sierra Pacific's building and facilities costs assigned to its
gas line of business.
5. The incremental costs associated with vehicles reflect the operations and
maintenance costs associated with supporting a larger staff and expanded
work responsibilities.
6. Incremental costs associated with Information Systems and
Telecommunications reflect the greater costs associated with acquiring
necessary information and telecommunications systems on a stand-alone
basis, even when those systems are procured on an outsourced or more
efficient basis.
a. Incremental information systems costs would be $1.2 million, composed
of licensing costs.
b. Incremental telecommunications costs would be $542,000, composed of
recurring maintenance of an IT backbone and the radio dispatch system,
and also usage based telecommunications costs.
7. Increased depreciation costs reflect the depletion of incremental capital
added by NewGasCo. The incremental cost of depreciation was determined by
applying Sierra Pacific's depreciation rates to each of asset class.
8. Postage cost increases would result from the duplication of bill mailings
associated with Sierra Pacific's current combined utility customers.
9. Uncollectibles represents an area of increased costs in a stand-alone gas
company scenario. Sierra Pacific's very low uncollectible rate for its
combined utility customers in the Reno- Sparks area would increase when
applied to NewGasCo alone, resulting in an incremental uncollectible cost
of nearly $500,000.
C. CAPITAL COST INCREASES
The capital cost for the potential spin-off will increase as a result of
NewGasCo's increased asset base, lower debt ratio and the anticipated increased
cost of debt.
21
<PAGE>
1. NewGasCo's asset base would increase by approximately $11.6 million, as
shown in Table III-4. NewGasCo would realize a decrease in net plant
associated with facilities, as it would no longer be allocated a portion of
the costs of Sierra Pacific's buildings and improvements.
Table III-4
INCREMENTAL CAPITAL ADDITIONS
Gas
IT $ 9,907,121
Facilities $ (1,667,647)
Telecom $ 1,360,875
Office and Garage $ 30,000
Labor $ 993,848
Transportation $ 1,002,308
Total $ 11,626,505
2. The cost of debt for NewGasCo would be higher than the cost of debt
associated with Sierra Pacific's natural gas business. NewGasCo would not
be able to finance debt issuances at the same cost as Sierra Pacific.
Borrowing cost would be approximately 1.2 percent higher than for Sierra
Pacific. This increase is due the inability of NewGasCo to issue Two-County
Tax Exempt debt.
3. A comparison of the costs of equity, debt and the weighted average cost of
capital (WACC) is shown for Sierra Pacific and NewGasCo in Table III-5.
22
<PAGE>
Table III-5
CAPITAL COST COMPARISON
Sierra Pacific NewGasCo Increase
(Decrease)
Capital Cost Components
Cost of Equity 12.00% 12.00% 0.00%
Cost of Debt 6.85% 7.97% 1.12%
WACC Parameters
Debt Financing 54.85% 50.00% -4.85%
Tax Rate 35.00% 35.00% 0.00%
WACC 7.86% 8.59% 0.73%
4. The impact of capital costs on NewGasCo is approximately $1.8 million per
year as shown in Table III-6.
<TABLE>
<CAPTION>
Table III-6
TOTAL CAPITAL COST LOST ECONOMIES
Equity Debt Total Cost
<S> <C> <C> <C>
Resulting from Increase in Capital Cost $ 627,796 $ 159,218 $ 787,014
Resulting from New Capital Expenditure $ 697,590 $ 301,156 $ 998,746
Total $ 1,325,386 $ 460,373 $ 1,785,759
</TABLE>
D. TRANSITION COST INCREASES
The divestiture of Sierra Pacific's natural gas business into a stand-alone
NewGasCo would be a complex legal and financial undertaking that would involve
substantial transition costs. These costs would include legal and financial
advisory fees, investment banking fees, and the services of independent
accountants, actuaries and other consultants. Transition costs were determined
based on fee schedules for the professional services, costs incurred in other
divestitures and input from external bankers. The breakdown of NewGasCo's
transition costs is shown in the Table III-7.
23
<PAGE>
Table III-7
TRANSITION COSTS
Total Cost Annualized
Legal Fees $ 750,000 $ 30,000
Debt Issuance $ 471,926 $ 18,877
Stock Issuance $ 809,015 $ 32,361
Benefits Consulting $ 40,000 $ 1,600
Consulting Support $ 250,000 $ 10,000
Total $2,320,941 $ 92,838
E. TOTAL LOST ECONOMIES
The sum of increased annual costs, increased capital costs and amortized
transition costs yields total lost economies of about $15.7 million per year.
Recovery of the foregoing lost economies in a general rate proceeding would also
require an increase to recover income taxes associated with the lost economies.
This effect would result from additional income tax requirements associated with
the equity-financed portion of additional assets and the taxes associated with
the incremental equity costs associated with the asset base transferred from
Sierra Pacific to NewGasCo. Incremental income taxes would be $714,000. The
total quantified impact on the revenue requirements of NewGasCo would be $16.4
million.
IV. OTHER CUTOMER IMPACTS
In addition to the foregoing lost economies relating to the NewGasCo and
potentially their customers, customers of the NewGasCo will experience other
impacts.
1. Sierra Pacific customers in the Reno-Sparks area who received combined
electric, gas and water services would have to incur additional costs in
check writing and postage. In 1999, Sierra Pacific provided combined
utility service to approximately 105,000 customers. These customers would
have to mail two payments to two separate utilities, at a cost of
approximately $416,000.
2. Several non-quantifiable impacts would also result from the spin-off of
Sierra Pacific's natural gas business. Notably, customers will have to
provide access to meters and other facilities to two utilities instead of
one.
24
<PAGE>
V. EFFECT ON REMAINING ELECTRIC CUSTOMERS
Divesting Sierra Pacific's natural gas businesses into NewGasCo will also have
an effect on the Company's remaining electric and water business and customers.
The majority of gas customers in the Reno-Sparks area of northern Nevada (the
only area in which Sierra Pacific provides natural gas service) also receive
electric and water service from the Company. Thus, in addition to the
efficiencies associated with corporate and administrative functions, such as
accounting and finance, many aspects of operations and customer service are also
provided jointly to the electric, gas and water lines of business in the
Reno-Sparks area.
Divesting Sierra Pacific of its natural gas business would result in losing the
efficiencies associated with sharing these employees. In order to meet the
requirements associated with its electric and water businesses, Sierra Pacific
would need to continue to employee many of the employees that were previously
shared with the gas business. Costs which were previously allocated to the
electric, gas and water lines of business before the spin-off NewGasCo, would be
allocated to the electric and water businesses alone subsequent to NewGasCo's
spin-off. The increased cost to Sierra Pacific's remaining electric business is
the result of:
1. Increased labor costs resulting from the elimination of shared job
functions in operations, corporate services, telephone center and corporate
governance.
2. Increased outside service costs resulting from the elimination of the
allocation of costs associated with services such as benefits planning and
audit.
3. Increased building and facilities costs, as sharing of facilities with the
gas business would be eliminated.
4. Increased vehicles and equipment cost resulting from additional vehicle
purchases required for meter readers and field service representative
supporting the electric business.
5. Increased information systems costs, as sharing of IT with the gas business
would be eliminated.
6. Increased telecommunications costs, notably with regard to the elimination
of joint usage of radio dispatch.
7. Increased depreciation costs reflecting the transfer of previously common
assets to the electric business.
8. Increased postage costs since the electric business would be required to
mail individual bills to its customers.
25
<PAGE>
The total increased cost to Sierra Pacific's remaining electric customers is
shown in Table V-1.
Table V-1
ANNUAL COST INCREASES TO ELECTRIC COMPANY
Labor Costs $ 1,996,083
Board of Directors $ 34,413
Outside Services $ 221,084
Building and Facilities Costs $ 458,089
Vehicles & Equipment $ 63,370
Information Systems $ 265,013
Telecommunications $ 148,923
Depreciation $ 242,903
Postage $ 132,049
Capital Cost $ 352,074
Uncollectibles $ -
Transition Costs $ -
Total Annual Separation Costs $ 3,914,001
Sierra Pacific's remaining electric business would also experience an increase
in income taxes of $132,000. Including the income tax impact, the total lost
economies for Sierra Pacific's remaining electric business would be $4.0
million.
26
SALOMON SMITH BARNEY
- --------------------
A member of Citigroup
CONFIDENTIAL
- ------------
November 5, 1999
The Board of Directors
Sierra Pacific Resources
6226 West Sahara Avenue
Las Vegas, Nevada 89102
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to Sierra Pacific Resources ("Sierra") of the consideration to be paid by
Sierra pursuant to the terms and subject to the conditions set forth in the
Stock Purchase Agreement, dated November 5, 1999 (the "Agreement"), between
Enron Corp. ("Enron") and Sierra. As more fully described in the Agreement,
Sierra will purchase from Enron all of the outstanding shares of the common
stock, par value $3.75 per share, of Portland General Electric Company, a wholly
owned subsidiary of Enron ("PGE"), and Sierra will purchase from Portland
General Holdings, Inc., a wholly owned subsidiary of Enron, all of the
outstanding shares of the common stock, par value $1.00 per share, of PGH II,
Inc. ("PGH II" and, together with PGE, the "PGE Entities"), for a total purchase
price of $2.1 billion in cash (the "Aggregate Consideration" and, such
transaction, the "Stock Purchase"), subject to adjustment as specified in the
Agreement.
In arriving at our opinion, we reviewed the Agreement and held discussions with
certain senior officers, directors and other representatives and advisors of
Sierra and certain senior officers and other representatives of Enron and the
PGE Entities concerning the businesses, operations and prospects of the PGE
Entities. We examined certain available business and financial information
relating to the PGE Entities as well as certain financial forecasts and other
information and data relating to the PGE Entities which were provided to or
otherwise discussed with us by the managements of Sierra, Enron and the PGE
Entities, including information relating to certain strategic implications and
operational benefits anticipated to result from the Stock Purchase. We reviewed
the financial terms of the Stock Purchase as set forth in the Agreement in
relation to, among other things, the financial condition and historical and
projected earnings and other operating data of the PGE Entities and the
capitalization of the PGE Entities. We considered, to the extent publicly
available, the financial terms of certain other similar transactions recently
effected which we considered relevant in evaluating the Stock Purchase and
analyzed certain financial, stock market and other publicly available
information relating to the businesses of other companies whose operations we
considered relevant in evaluating those of the PGE Entities. We also evaluated
the potential pro forma financial impact of the Stock Purchase on Sierra. In
addition to the foregoing, we conducted such other analyses and examinations and
considered such other financial, economic and market criteria as we deemed
appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed by
or discussed with us. With respect to financial forecasts and other information
and data provided to or otherwise reviewed by or discussed with us, we have been
advised by the respective managements of Sierra, Enron and the PGE Entities that
such forecasts and other information and data were reasonably prepared on bases
<PAGE>
SALOMON SMITH BARNEY
- --------------------
A member of Citigroup
The Board of Directors
Sierra Pacific Resources
November 5, 1999
Page 2
reflecting the best currently available estimates and judgments of the
respective managements of Sierra, Enron and the PGE Entities as to the future
financial performance of the PGE Entities and the best currently available
estimates and judgments of the management of Sierra as to the strategic
implications and operational benefits (including the amount, timing and
achievability thereof) anticipated to result from the Stock Purchase. We have
assumed, with your consent, that in the course of obtaining the necessary
regulatory approvals for the Stock Purchase no limitations, restrictions or
conditions will be imposed that would have a material adverse effect on Sierra
or the PGE Entities or the contemplated benefits of the Stock Purchase to
Sierra. We have not made or been provided with an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise of the PGE
Entities nor have we made any physical inspection of the properties or assets of
the PGE Entities. We express no view as to, and our opinion does not address,
the relative merits of the Stock Purchase as compared to any alternative
business strategies that might exist for Sierra or the effect of any other
transaction in which Sierra might engage. Our opinion is necessarily based upon
information available to us, and financial, stock market and other conditions
and circumstances existing and disclosed to us, as of the date hereof.
Salomon Smith Barney Inc. has acted as financial advisor to Sierra in connection
with the Stock Purchase and will receive a fee for such services, a significant
portion of which is contingent upon the consummation of the Stock Purchase. We
also will receive a fee upon the delivery of this opinion. We have in the past
provided investment banking services to Sierra and Enron unrelated to the
proposed Stock Purchase, for which services we have received compensation. We
and our affiliates will be participating in the financing of the Stock purchase,
for which services we and our affiliates also will receive compensation. In
addition, we and our affiliates (including Citigroup Inc. and its affiliates)
may maintain relationships with Sierra, Enron and their respective affiliates.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of directors of Sierra in its evaluation of the
proposed Stock Purchase and may not be relied upon by any third party. Our
opinion may not be published or otherwise used or referred to, nor shall any
public reference to Salomon Smith Barney Inc. be made, without our prior written
consent.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the Aggregate Consideration to be paid by
Sierra in the Stock Purchase is fair, from a financial point of view, to Sierra.
Very truly yours,
/s/ Salomon Smith Barney Inc.
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Release No. / , 2000
- --------------------------------------------
)
In the Matter of )
)
Sierra Pacific Resources )
6100 Neil Road )
Reno, Nevada 89511 )
)
and )
)
Portland General Electric Company )
121 SW Salmon Street )
Portland, Oregon 97204 )
)
(70- ) )
)
- --------------------------------------------)
Sierra Pacific Resources ("Sierra Pacific"), an exempt
intrastate holding company under the Public Utility Holding Company Act (the
"Act"), and Portland General Electric Company ("PGE") (collectively, the
"Applicants"), a wholly-owned public utility subsidiary company of Enron Corp.
("Enron"), an exempt holding company pursuant to Section 3(a)(1) of the Act
under Rule 2 thereof, have filed an Application/Declaration on Form U-1
requesting authorization for Sierra Pacific to acquire all of the issued and
outstanding stock of PGE and of PGH II, Inc. ("PGH II"), an indirect subsidiary
of Enron and an affiliate of PGE engaged in developing energy-related
enterprises (the "Transaction").
Sierra Pacific currently owns all of the common stock of two
electric utility companies: Sierra Pacific Power Company ("SPPC") and Nevada
Power Company ("Nevada Power"). SPPC provides electric service in northern
Nevada and northeastern California, as well as natural gas and water service in
the Reno and Sparks area of Nevada. Nevada Power provides electric service in
<PAGE>
Clark County, Nevada, with limited service provided to the Federal Department of
Energy in Nye County, Nevada. As a result of the Transaction, PGE and PGH II
will become direct subsidiaries of Sierra Pacific and affiliates of SPPC and
Nevada Power. PGE provides electric service in the northwestern area of Oregon.
PGH II is engaged in developing energy-related enterprises in northwestern
Oregon, none of which currently generate material revenue.
The Transaction will be governed by the terms of a Stock
Purchase Agreement dated as of November 5, 1999 (the "Stock Purchase
Agreement"), by and among Sierra Pacific and Enron. Pursuant to the Stock
Purchase Agreement, Sierra Pacific will acquire from Enron all of the
outstanding common stock of PGE and PGH II for a consideration of $2.1 billion.
The Applicants seek an order of the Commission that Sierra Pacific's acquisition
of PGE and PGH II satisfies the requirements of Sections 9(a)(2) and 10 of the
Act. The Applicants also request approval to retain various non-utility
businesses subsequent to the Transaction. Following the Transaction, Sierra
Pacific will register with the Commission as a holding company pursuant to
Section 5 of the Act.
The Applicants further request the Commission approve under
Sections 6 and 7 and the rules thereunder certain financing arrangements
associated with the Transaction. Sierra Pacific anticipates it will finance most
of the consideration required to consummate the Transaction through the use of
short-term debt, such as commercial paper, money market notes and/or bank loans.
After the Transaction is consummated, Sierra Pacific plans to pay off part of
the outstanding short-term debt with the proceeds of the sale of the electric
generation assets of SPPC and Nevada Power, as required under state
restructuring proceedings, and to further reduce holding company debt through
issuance of additional common stock. Sierra Pacific then plans to refinance
within one year of the Commission's final order in this proceeding with one or
more forms of long-term debt authorized by the Commission.
The Application and any amendments thereto are available for
public inspection through the Commission's Office of Public Reference.
Interested persons wishing to comment or request a hearing should submit their
views in writing by _______, 2000, to the Secretary, Securities and Exchange
Commission, Washington, D.C. 20549, and serve a copy on Sierra Pacific and PGE
at the addresses specified above. Proof of service (by affidavit or, in case of
an attorney at law, by certificate) should be filed with the request. Any
request for hearing shall identify specifically the issues of fact or law that
are disputed. A person who so requests will be notified of any hearing, if
ordered, and will receive a copy of any notice or order issued in the
<PAGE>
matter. After said date, the Application/Declaration, as filed or as amended,
may be granted and/or permitted to become effective.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz
Secretary
