As filed with the Securities and Exchange Commission on June 14, 2000
File No. 70-9619
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------
AMENDMENT NO. 2
TO
FORM U-1 APPLICATION OR DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
--------------------------------------------
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)
--------------------------------------------
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)
--------------------------------------------
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.
Paul B. Silverman, Esq. 1875 Connecticut Avenue, N.W.
William C. Weeden Washington, D.C. 20009
Skadden, Arps, Slate,
Meagher & Flom LLP Adam Wenner, Esq.
1440 New York Avenue, N.W. Vinson & Elkins L.L.P.
Washington, D.C. 20005 1455 Pennsylvania Avenue, NW
Washington, DC 20004
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Table of Contents
Page
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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...................................17
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.....................................29
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...................................31
(a) Section 11(b)(1) - Single Integrated
Public Utility System................31
(i) Physical Interconnection......37
(ii) Coordination..................47
(iii) Single Area or Region.........50
(iv) Localized Management,
Efficient Operation, and
Effective Regulation..........52
Retention and Acquisition of
Non-Utility Businesses........53
Retention of the SPPC Gas System.....55
(b) Section 11(b)(2) - Structure and
Voting Power.........................57
b. Section 10(c)(2)....................................58
3. Section 10(f)..............................................60
B. Financing of the Acquisition......................................60
1. Overview of the Financing Request..........................61
2. Parameters for Financing Authorization.....................65
3. Description of Specific Types of Financing.................66
a. Short-Term Debt.....................................66
b. Long-Term Debt......................................67
(i) Terms of Sierra Pacific Indenture............68
(ii) Terms of Borrowings from Banks
and Other Financial Institutions.............70
(iii) Terms of Money Market Notes and
Similar Instruments..........................70
c. Other Securities....................................70
d. Interest Rate Risk Management Devices...............71
4. Amortization of Goodwill...................................71
5. Filing of Certificates of Notification.....................72
Item 4. Regulatory Approval......................................................72
A. Antitrust Considerations..........................................73
B. Atomic Energy Act.................................................73
C. Federal Power Act.................................................73
D. Nevada PUC........................................................74
E. Oregon PUC........................................................74
Item 5. Procedure................................................................74
Item 6. Exhibits and Financial Statements........................................75
a. Exhibits..........................................................75
b. Financial statements..............................................77
Item 7. Information as to Environmental Effects..................................80
</TABLE>
Sierra Pacific Resources and Portland General Electric Company hereby amend
and restate their Application/Declaration on Form U-1 in File No. 70-9619
as follows:
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 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)
-----------
(1) On March 16, 2000, the Public Utilities Commission of Nevada
("Nevada PUC") issued a Declaratory Order, attached as Exhibit D-2,
concluding that the Nevada PUC does not have jurisdiction to review
the Transaction. However, as described more fully in the concurrent
Application/Declaration requesting approval to form Sierra Pacific
Resources Services Company ("Sierra Pacific Services") (File
70-9621), 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 concurrent
Application/Declaration will supplant the earlier proposed
agreement in the Nevada PUC docket.
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, 1999.
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, 1999, Sierra Pacific's
operating revenues on a consolidated basis were approximately $1.3 billion,
of which $9.1 million are attributable to non-utility activities.
Consolidated assets of Sierra Pacific and its subsidiaries at December 31,
1999, were approximately $5.2 billion, of which approximately $3.8 billion
consisted of net utility plant and equipment. At December 31, 1999, Sierra
Pacific's consolidated net income was $51.7 million.
Sierra Pacific's principal executive office is located at
6100 Neil Road, Reno, Nevada 89511. At December 31, 1999, Sierra Pacific
and its subsidiaries employed 3,250 employees, of which 1,430 were employed
by SPPC and 1,677 by Nevada Power.
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, 1999, 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 302,000 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 110,000
customers and provides water service to about 71,000 customers.
For the year ended December 31, 1999, SPPC's utility
operating revenues on a consolidated basis were approximately $764 million,
resulting in a net income of approximately $66 million. SPPC had total
assets for 1999 of $2,096,476,000. During 1999, 83.9% of SPPC's revenues
were from retail sales of electricity, natural gas and water in Nevada,
5.1% from retail sales of electricity in California and 9.9% from wholesale
sales of electricity and gas. SPPC's 1999 electric and gas operating
revenues, which totaled $709 million, were comprised of its electric
business ($609 million, or 86%) and its natural gas business ($100 million,
or 14%). Of these 1999 electric and gas operating revenues, $644 million,
or 91% were from sales in Nevada and $65 million, or 9% were from sales in
California. In addition SPPC's water business operating revenues were $54.3
million. As of December 31, 1999, 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 1999, the peak electric demand experienced by SPPC
was 1470 megawatts ("MW"). SPPC served this demand, plus a reserve margin,
with a combination of the following: (i) 1,045 MW of power generated by
plants owned by SPPC, (ii) 564 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/oil
(61.5%), coal (37.7%) and hydro (0.8%).
As of December 31, 1999, 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 $100.2
million in 1999 operating revenues, or 14% of total SPPC operating
revenues. SPPC has contracted for firm winter-only and annual natural gas
supplies with Canadian 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 1999, SPPC's total local gas distribution supply
requirements were 13.4 million decatherms and its electric generating fuel
requirements were 31.6 million decatherms. As of December 31, 1999, SPPC
owned and operated 1,439 miles of three-inch equivalent natural gas
distribution lines.
SPPC also serves approximately 71,000 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. At December 31,
1999, SPPC owned approximately $280 million in water assets, with total
water production of 24.97 billion gallons. SPPC experienced during 1999 a
peak day send-out of water of 133.1 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 to approximately 566,700 customers in
Clark County, 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 2,335 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. During 1999, the peak demand experienced
by Nevada Power was 3,993 MW. Nevada Power served this demand, plus a
reserve margin, with a combination of its owned and 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 1999, 53% of the energy generated by Nevada Power's plants came from
coal-fired stations and 47% from natural gas-fired stations.
At December 31, 1999, Nevada Power owned approximately 1,753
miles of electric transmission facilities (a portion of that under shared
ownership), 142 transmission and distribution substations, and a
distribution system consisting of approximately 3,162 overhead pole line
miles and 9,852 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, 1999, Nevada Power's utility
operating revenues on a consolidated basis were approximately $977 million,
resulting in a net income of approximately $52 million. Consolidated assets
of Nevada Power and its subsidiaries at December 31, 1999, were
approximately $3.4 billion, of which approximately $2.4 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. More detailed information
concerning Nevada Power is contained in Nevada Power's Annual Report on
Form 10-K for the year ended December 31, 1999, 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
$13.3 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 1999, SPPC was the largest customer of TGTC, contributing
95% of TGTC's revenues of $19.3 million. 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
energy-related products and services in commercial and industrial markets
both inside and outside SPPC's service territory. The products offered by
e.three include: technology and efficiency improvements to lighting,
heating, ventilation and air-conditioning equipment; installation or
retrofit of controls and power quality systems; energy performance
contracting; end-use services; and on-going energy monitoring and
verification services. e-three also recently entered into a 50% Nevada
limited liability company, e-three Custom Energy Solutions LLC, with a
subsidiary of Nevada Power for the purpose of selling and implementing
energy-related performance contracts and similar services in southern
Nevada.
3. Sierra Pacific Communications: Sierra Pacific Communications ("SPC") was
created to examine and pursue telecommunications opportunities that
leveraged existing skill sets of installing and deploying pipe and wire
infrastructure. SPC presently has fiber optic assets deployed in the cities
of Reno and Las Vegas. SPC filed an application with the Federal
Communications Commission (the "FCC") on February 18, 2000, seeking an FCC
determination of "Exempt Telecommunications Company" status under Section
34 of PUHCA. The FCC did not issue an order denying SPC's application
within sixty days of the application filing date. Pursuant to 47 C.F.R. ss.
1.5004, in such event an application is deemed granted with no further
action by the FCC.
4. 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.
5. Sierra Pacific Energy Company: Sierra Pacific Energy Company ("SPEC")
was formed to market a package of technology and energy-related products
and services in Nevada. For the year ended December 31, 1999, SPEC incurred
net losses of $3.6 million.
Absent the revenues and assets of Tuscarora, the Sierra
Pacific non-utility subsidiaries constitute 7.82 percent of the
consolidated assets, 0.66 percent of the consolidated revenues and (13.71)
percent of the consolidated net income of Sierra Pacific.
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.
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.
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.
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 719,000 customers in northwestern Oregon. PGE also sells
electric power at wholesale. A map of PGE's electric service area is
attached as Exhibit E-3.
PGE owns 1,998 MW of generating capability in hydroelectric
(31%), coal-fired (32%), and gas-fired (37%) plants. During 1999, the peak
electric demand experienced by PGE was 3,544 MW, which was served by a
combination of PGE's owned generation capability and 1,085 MW of firm and
short-term power purchases. PGE's electric generation was provided by
hydroelectric (27%), natural gas (26%), and coal (47%).
At December 31, 1999, PGE's electric transmission facilities
consisted of approximately 1,426 overhead pole line miles wholly owned,
approximately 566 overhead pole line miles jointly owned, and 49
substations. Its electric distribution facilities consisted of
approximately 8,762 overhead pole line miles, 5,651 underground cable
miles, and 120 substations.
For the year ended December 31, 1999, PGE's utility
operating revenues on a consolidated basis were approximately $1.4 billion,
resulting in net income of approximately $128 million. Consolidated assets
of PGE at December 31, 1999, were approximately $3.2 billion, of which
approximately $1.9 billion consisted of net electric plant and equipment.
PGE wholly-owns the following subsidiaries:
121 SW Salmon Street Corporation - An Oregon corporation leasing PGE's
headquarters complex at the World Trade Center 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, 1999, PGE employed
approximately 2,787 employees.
More detailed information concerning PGE is contained in
PGE's Annual Report on Form 10-K for the year ended December 31, 1999,
which is incorporated herein by reference as Exhibit G-7.
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. PGH II holds a 99% ownership interest in the following limited
liability companies:
Columbia-Pacific Distribution Services Company, LLC - An Oregon limited
liability company, currently inactive, established to provide operation and
maintenance services for utility distributions systems.
Enron Distribution Services Company, LLC - A Delaware limited liability
company, currently inactive, established to hold investments in
transmission and distribution services companies to be acquired.
Portland Energy Solutions Company, LLC - An Oregon limited liability
company established to develop opportunities in district heating and
cooling in downtown Portland, Oregon.
PGH II also wholly-owns the following subsidiaries that
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 a 1% interest in Columbia-Pacific Distribution Services Company,
LLC, Enron Distribution Services Company, LLC, and Portland Energy
Solutions Company, LLC, each of which are described above.
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.
For the year ended December 31, 1999, PHG II's total assets
were $1,560,000, its revenues were $54,000, and its net income was
($2,894,000). This represents 0.05 percent of PGE's consolidated assets,
0.00 percent of its consolidated revenue and (2.32) percent of its
consolidated net income.
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 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 Inc. ("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 719,000 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.
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 time frame 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 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 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 time frame 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 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 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.
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.................................................... $ 45,000
Legal fees and expenses .......................................... 5,000,000
Investment bankers' fees and expenses............................. 9,200,000
Consultants and other (public relations, regulatory support,
accounting support, travel, etc.)................................. 5,755,000
-----------
TOTAL (estimated) ........................................ $20,000,000
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.
6, 7 and rules Issuance of securities by Sierra Pacific following
thereunder consummation of the Transaction.
9(a), 10 and Acquisition by Sierra Pacific of common stock of PGE and
rules thereunder PGH II.
8, 11(b)(1) Retention by Sierra Pacific of the operations of the gas
and rules system of SPPC and of various non-utility businesses.
thereunder
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;
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 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 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)
------------
(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 reve nues for 1998.
(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).
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 have filed
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 and the applicable waiting period under the HSR Act expired
without further review. 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 classes, will be opened to retail competition as early as March 1,
2000. See Nev. Revised Stat. ss.ss. 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 ("ISO")
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 2000. 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 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 $2.02 billion in cash for all the issued and outstanding
common stock of PGE and PGH II and assume Enron's approximate $80 million
merger payment obligation. 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 conducted 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, dated November 5, 1999, to
the effect that, as of such date, the aggregate consideration to be paid by
Sierra Pacific in the Transaction was fair, from a financial point of view,
to Sierra Pacific, 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 opinion of Salomon Smith Barney is attached
hereto as Exhibit I-1 and incorporated herein by reference.
In rendering its opinion, Salomon Smith Barney performed a
number of analyses in connection with its analysis of the aggregate
consideration, including: a comparison of certain financial, stock market,
and other publicly available data of PGE and PGH II with selected
comparable companies and selected precedent transactions; discounted cash
flow analyses of PGE and PGH II; and analysis 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.
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 $20
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 foregoing 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.
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.
-----------
(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.
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, 20.8 percent. However,
by June 30, 2001, 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, 100 percent of which will reduce debt of the
consolidated company; (b) proceeds from divestiture of non-core assets, or
some combination of common equity and divestiture of non-core assets, which
together would be approximately equivalent to the issuance of $260 million
in terms of impact on Sierra Pacific's equity ratio; (c) issuance of up to
$600 million of hybrid securities; and (d) increased retained earnings
realized from the combined operations of Sierra and PGE aggregating
approximately $80 million in 2000 and $100 million in 2001. 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. Moreover, as the table
in Item 3.B. indicates, the common equity ratios of the operating companies
will be at least 40 percent at all times following the Transaction. The
Commission has approved common equity to total capitalization ratios as low
as 27.6 percent. Northeast Utilities, supra.
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, 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 of the term
"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 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
Early in its administration of the Act, the Commission
construed Section 11(b)(1) to restrict significant geographic expansion by
holding company systems. This limitation was not an absolute principle, but
rather the product of specific facts and circumstances. As underlying
conditions have changed, so too has the Commission's treatment of Section
11(b)(1). Such pragmatic flexibility has characterized the Commission's
administration of the Act generally over time. In its own words, 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
-----------
(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).
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)
When considering the evolving concept of system integration
under Section 11(b)(1), it is important to bear in mind the unchanging
purpose underlying that concept. As set forth in Section 1(b)(4) of the
Act, Section 11(b)(1) was intended to address a "growth and extension of
holding companies [that] bears no relation to economy of management and
operation or the integration and coordination of related operating
properties . . . ." See also Northeast Utilities, supra at n. 13 (noting
that Section 1(b) identifies "the expansion of holding company systems
without regard to the integration and coordination of related utility
properties" as a specific abuse arising out of the holding company
structure that the Act was intended to correct); Centerior Energy Corp.,
Holding Co. Act Release No. 24073 (Apr. 29, 1986) (hereinafter Centerior).
The Commission has sometimes referred to this phenomenon as "scatteration"
and has emphasized that its elimination is a means to an end, and not an
end in itself. Thus the Commission has found that an "analysis of the Act
and a study or our function under Section 11 in light of the preamble to
the Act . . . make it clear that integration and the elimination of
scatteration is not an end in itself but rather that it is required under
the Act in order to eliminate various abuses and evils which are inherent
in scatteration." In re Central U.S. Utilities Co., et al., Holding Co. Act
Release No. 2588 (March 1, 1941). The problem to be solved through
integration was one of "unbridled and unsound expansion of utility holding
companies controlling utilities scattered from coast to coast . . . . These
systems were not based upon any rational pattern of utility system
structure, but rather were an exercise in empire building based primarily
on financial considerations and financial maneuvering." American Electric
Power Co., Inc., Holding Co. Act Release No. 20633 (July 21, 1978)
(emphasis added).
----------
(6) Rust v. Sullivan, 500 U.S. 173 (1991) [hereinafter Rust]; American
Trucking 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.
The Commission's principal policy concern in connection with
system integration has been the potential disparity between purely
financial considerations and the efficient coordination of utility systems
and their operation. The solution to the problem - integration - is
necessarily an evolving concept because what constitutes a "rational
pattern of utility system structure" must change as the industry evolves.
For this reason, Section 11 is not intended to impose "rigid concepts" but
rather creates a "flexible" standard designed "to accommodate changes in
the electric utility industry." UNITIL Corp., Holding Co. Act Release No.
25524 (Apr. 24, 1992) [hereinafter UNITIL]. The point is driven home in
Section 2(a)(29)(A), which expressly directs the Commission to consider the
"state of the art" in analyzing whether a system is not to large to lose
the benefits of "localized management, efficient operation, and the
effectiveness of regulation . . . ." The same section requires the
Commission to look to "normal conditions", an inherently evolving concept,
when determining whether a system may be "economically operated as a single
coordinated system . . . ." Past decisions interpreting integration
standards in light of the "state of the art" that obtained in the past thus
do not rigidly constrain the Commission when it confronts issues of the
present. 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 restructuring of the U.S. electric utility
industry has further reshaped the concept of integration. This is because
from the perspective of the past these developments could be viewed as a
type of intentional "disintegration" mandated by regulatory and statutory
changes. In implementing the transmission access requirements of the Energy
Policy Act of 1992, FERC required in its Order Nos. 888(9) and 889(10) that
-----------
(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).
electric utilities functionally unbundle their transmission and generation
operations. At a minimum this means that utilities owning both generation
and transmission facilities must utilize transmission services under a
tariff of general applicability; must separate rates for wholesale
generation, transmission and ancillary services; and must rely on the same
electronic information network relied on by their transmission customers.
Many recent state laws further encourage this "disintegrative" tendency by
mandating competitive resource procurement and retail electric competition,
and the functional separation (and, in some states, divestiture) of
generation from transmission and distribution operations.
While these developments may appear disintegrative from the
perspective of the past, viewed from the present they represent the
emergence of market prices as the primary integrative mechanism for
electric utility systems. Rapid developments in technology and the
emergence of the power marketing and energy trading businesses have
facilitated efficient and competitive low-cost electric markets. Open
access to transmission services means that all utilities are integrated to
some degree both de facto and de jure. Indeed, in requiring open access,
federal law now prohibits the restricted forms of interconnection that
would have been considered the norm in 1935.
The new practices and procedures for integrating a
disaggregated electric utility industry are found in the practices of
Independent System Operators and in the FERC's recent rulemaking regarding
RTOs.(11) Perhaps the most notable of these developments is the evolution of
RTOs, which are intended to 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 member entities with both the
requisite physical and economic means to integrate their systems.
-----------
(11) Regional Transmission Organizations, Order No. 2000, 89 FERCP. 61,285
(Dec. 20, 1999), reprinted at 65 Fed. Reg. 810 (Jan. 6, 2000).
In light of these changes, SEC Staff has recommended that
the Commission "respond realistically to the changes in the utility
industry and interpret more flexibly each piece of the integration
requirement."(12) As always, the ultimate criteria in judging whether the
Act's integration requirements have been met is whether the proposed
outcome "will lead to a recurrence of the evils the Act was intended to
address."(13) The Applicants submit that it is not even remotely possible
that their proposed arrangements described below could encourage or lead to
the evils produced by scatteration and that, accordingly, there is no basis
to conclude that those arrangements would not satisfy the Act's integration
requirements.
-----------
(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.
Integration Standards
Before the Commission will find that a proposed merger of
two separate systems will result in an integrated public utility system, an
applicant must satisfy four statutory standards created by Section
2(a)(29)(A):
(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
(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)). In a world of vertically-integrated utility monopolies
subject to constrained transmission access, the arrangements that will
satisfy this test will vary substantially from those characteristic of a
world dominated by functional unbundling, competition, open transmission
access, and the comprehensive interconnection of utility systems. Finally,
as noted above Section 10(c)(1) does not require the Commission to find
that a transaction "compl[ies] to the letter with section 11", only that it
is not "detrimental" to carrying out it provisions. Madison Gas, supra at
1343. In any event, as discussed below Applicants believe the Transaction
meets each of these standards.
(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 use of such
paths is now standard procedure in the industry and has received strong
encouragement by Congress in the Energy Policy Act of 1992 and FERC actions
implementing that statute.
Even prior to these recent developments, the Commission
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 supra;
UNITIL, supra; see also Conectiv, Inc., Holding Co. Act Release No. 26832
(Feb. 25, 1998); C&T Enterprises, Inc., Holding Co. Act Release No. 26973
(Feb. 5, 1999). These cases firmly stand for the proposition that utilities
can satisfy the interconnection requirements of Section 2(a)(29) through
use of another party's transmission lines. For example, in Centerior,
supra, the Commission accepted a plan to interconnect two systems through
third-party transmission lines which would be available only to the extent
that such use of the lines did not impair the transmission rights of others
under a comprehensive power pool transmission agreement. The Commission
accepted Centerior's reliance on third-party lines based on a demonstration
that its use of those lines would not interfere with the rights of any
other parties and that the lines would be available to it when 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, given that such pools provide
access to interconnecting pool participants' transmission facilities. See,
e.g., UNITIL, supra; Conectiv, supra.
Sierra Pacific similarly 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)
-----------
(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.
With regard to open-access reservation of capacity, because
of the high availability of transmission paths connecting both PGE with
SPPC and SPPC with Nevada Power, 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 will be substantial because it is significantly more expensive
to reserve transmission capacity on a long-term (i.e., 24 hours/day, 365
days/year), firm basis than to purchase transmission capacity for only
those hours when 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
unavailable will not affect the ability of the Applicants and load serving
entities to meet load obligations. This is because SPPC, Nevada Power and
PGE each have access to sufficient generation capacity to serve their
entire load obligation requirements. The transmission paths that Applicants
propose to utilize to integrate the systems simply enable load serving
entities in the Applicants' control areas to engage in a process of
economic dispatch in which they substitute cheaper power from generation
resources located in an affiliated company's control area for more
expensive power generated in their own control area. The occasional
unavailability of the transmission path is potentially an economic, but not
a reliability, issue.
The following simplified schematic shows the interconnections
among various entities in the region:
SCHEMATIC OF TRANSMISSION PATHS BETWEEN PGE, SPPC AND NEVADA POWER
[GRAPHIC?OMITTED]
1. PACIFIC DC INTERTIE - INTERCONNECTING PGE AND NEVADA POWER
PGE will interconnect with Nevada Power through the 500 kV
Pacific Direct Current ("DC") Intertie running from The Dalles, Oregon
through Nevada to a point 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 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 TRANSMISSION PATH USING PACIFIC DC INTERTIE
[GRAPHIC?OMITTED]
2. ALTURAS LINE - INTERCONNECTING PGE AND SPPC
The PGE system will be interconnected 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. The following schematic sets forth the elements of
this interconnection.
SCHEMATIC OF TRANSMISSION PATH USING ALTURAS LINE
[GRAPHIC?OMITTED]
Two features of this path deserve further discussion. First,
certain California entities have asserted in a current proceeding at the
FERC 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. This strategy will produce substantial
savings, with very little impact on transmission capability. Sierra Pacific
has determined on the basis of publicly available data that 360 MW of
non-firm capacity has been available on the path connecting PGE to SPPC
during approximately 95% of the hours of the year, and that up to 50 MW has
been available during 98% of the hours. There is no reason to believe that
these levels of availability will be reduced significantly at any time in
the foreseeable future. This transmission path offers even greater
availability when transmitting power in the opposite direction, i.e., from
SPPC to PGE. As discussed above, 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 enhances the
economic dimension of the Applicants' integrated system.
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 100 MW of non-firm transmission capacity has been available
to transmit power from SPPC to Nevada Power on this path during
approximately 96% of the hours of the year and during 97% of the hours to
transmit power from Nevada Power to SPPC.(16) The following schematic shows
this path.
-----------
(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.
(16) Moreover, in cases where the path is constrained in one direction,
typically it is fully available in the other direction.
SCHEMATIC OF TRANSMISSION PATH USING PACIFICORP EAST
[GRAPHIC?OMITTED]
To summarize, the PGE, SPPC and Nevada Power systems will
interconnect 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 transmission paths
offering high levels of availability. Specifically, (i) the transmission
path between PGE to SPPC over the Alturas Line has been available
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 Commission precedent. As
discussed above, the Commission has found in several prior cases that
holding companies are able to integrate their systems through the use of
interconnecting third-party lines. See Northeast Utilities, supra;
Centerior, 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 power pools to satisfy the physical
interconnection requirement. In such situations the Commission has focused
on the actual ability of the holding company systems to access third-party
transmission lines and has found that so long as there is an ability to use
third-party lines, those paths are sufficient to satisfy the physical
interconnection requirement. These conditions are equivalent in substance
to the arrangements being proposed by the Applicants. For example, in
Centerior, supra, the applicants proposed to interconnect through a
third-party line under multi-party transmission agreement that made the
line available so long as their use did "not materially interfere with
purposes" of the agreement, i.e., the facilitation of pool-wide transfers
of power. This conditional use represents the functional equivalent of a
non-firm right. On the basis of technical studies submitted by the
applicants, the Commission found that "under normal conditions" their
facilities could be operated as a single coordinated and interconnected
system. See also UNITIL, supra.
The Applicants similarly will use a collection of
transmission access rights representing current standard techniques for
operating a single interconnected and coordinated system economically under
normal conditions. The interconnecting transmission paths between the
Sierra Pacific operating companies will be accessible pursuant to the
relevant transmission owner's OATT on file at FERC. Under these tariffs,
transmission owners are required to provide open access to their
transmission lines to all parties requesting service. It is critical to
note that these parties include the transmission line owners themselves.
FERC's comparable service requirements mean that transmission facility
owners must offer transmission service to others under the same terms and
conditions as they supply it to themselves. So long as capacity is
available, transmission owners may not deny any party the right to use the
paths, and transmission facility owners do not have any prior claim to
access by virtue of their ownership rights when capacity is not available.
This means that each party using transmission service stands on equal
footing with every other party and will choose a mixture of firm and non-
firm service depending on its assessment of the economically most favorable
alternatives.
To elaborate further, Order No. 888 requires 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 long-term
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 OATT. Pursuant to an OATT, market participants have a
federally-mandated right to acquire either a firm or a non-firm path to
transfer power between utility systems. All parties, including transmission
facility owners, reserve transmission services electronically through the
owner's Open Access Same-Time Information System ("OASIS") mandated by FERC
Order No. 889. Service is reserved for a specific amount of power and for a
specific period of time, which may be as short an one hour or as long as
several years. Service can also be reserved on a firm or non-basis. In all
cases, a party will reserve service on the basis of terms and conditions
that, in its business judgment, represent the economically and
operationally preferable alternative.
Generators reserve transmission service through a
transmission providers the provider's Internet OASIS site. Each provider
must post on its OASIS all its available transmission capacity ("ATC") --
what it has available to sell -- for both long-term and short-term
reservations. A party that determines it needs transmission service will
first check the OASIS listings to ensure sufficient ATC is available for
the required time period on each leg of the transfer. It will then place
its reservation electronically.(17) The request is submitted by inputting it
directly into the OASIS site.(18) The transmission provider must respond to
the request within the time period specified under the OATT -- the longer
the term of the reservation, the longer the allowed response time. Within
the time allowed, the transmission provider must either accept the
reservation or provide a reason permitted under the OATT for denying the
request.(19) Reserving transmission capacity is an on-going, normal, day-
to-day operation which is adjusted as circumstances warrant to ensure
optimal system operations.(20)
-----------
17 The transaction takes place through the Internet, which means that
the process is executed through computers integrated into a single
communica tions network linking all system participants. The party
seeking transmis sion services places a "query" on the OASIS site
for the transmission path, amount of transmission capacity, and the
transmission period desired. The OASIS software will perform a
search and produce information listing the transmission available
within those parameters.
18 Long-term reservations, i.e., those lasting one year or more, must
be made at least 60 days in advance of the start date but can be
requested and confirmed prior to the 60 day period. Short-term,
non-firm reservations can be made on shorter notice: monthly
reservations are made on 60 days notice; daily, on 48 hours notice
and hourly, by noon of the day before.
19 Other than rejections for technical non-compliance of the request
with the terms of the OATT, the transmission provider, in general,
may only reject a reservation request because of insufficient
transmission capacity to fulfill the request in the amount and for
the time period specified. Requests rejected on grounds of
technical non-compliance may be corrected and resubmitted.
20 Under the OATT, most transmission providers allow users to
"rollover" a long-term reservation, which in effect gives the user
a right of first refusal on future reservations of transmission
capacity when the long-term reservation expires.
OATTs establish a hierarchy of service -- and a
corresponding variation in cost. "Firm" service is the most reliable. It is
available on a long-term (i.e., one year or more), monthly, weekly or daily
basis. A transmission provider may "cut" (i.e., refuse to initiate or
curtail use of the transmission for energy deliveries notwithstanding the
firm reservation) only when a threat to system reliability appears, i.e.,
in emergency situations. All users of firm service -- including the
transmission facility owner with respect to its "native load" -- must
receive equal treatment when service is cut.
Like every other market participant, Sierra Pacific will
utilize this system to integrate and optimize its post-Transaction system.
Sierra Pacific believes that its plan to integrate its 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 industry. The choice to rely, in
part, on a non-firm contract path does not affect Sierra Pacific's ability
to interconnect its system physically. As described above, up to 50 MW of
non-firm transmission capacity on the Alturas path will be available to
Sierra Pacific 98% of the time, and up to 360 MW of capacity will be
available 95% of the time. 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 generation capacity to serve their individual loads. The real
effect of Applicants' reliance on a combination of firm and non-firm paths
is to ensure that integration of the post-Transaction Sierra Pacific system
will be significantly more economic and flexible. Indeed, under present
standards this entire operational plan represents what Section 2(a)(29) of
the Act refers to as the "normal conditions" for the economic operation of
a single interconnected system.
Moreover, Sierra Pacific intends to enhance the
interconnection of its post-Transaction system through participation in RTO
West. 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. Specifically, SPPC,
Nevada Power and PGE have entered into a Memorandum of Understanding with
Avista Corporation, Montana Power and Puget Sound Energy to study the
formation of a for-profit independent transmission company ("ITC") that
would acquire and operate the transmission facilities currently owned by
the participating companies. If the Applicants determine that the creation
of the ITC is economically feasible, the ITC would join RTO West, an ISO
being formed to integrate the transmission systems of utilities operating
in eight states in the Pacific Northwest.(21) Thus, the entire post-
Transaction Sierra Pacific system will be within one physically integrated
RTO, which is consistent with the requirements of Section 2(a)(29)(A).
-----------
(21) Sierra Pacific intends to file by October 15, 2000, a request for
FERC approval of the RTO West and ITC proposals. Even if the
Applicants determine that creation of the ITC is not an
economically viable option, it is currently anticipated that SPPC,
Nevada Power, and PGE will join RTO West or determine whether
participation in multiple RTOs is appropriate. At this preliminary
state, Sierra Pacific expects PGE would join RTO West and that SPPC
and Nevada Power would join a second RTO with utilities in the
Central Southwest. Nonetheless, it is expected that these RTOs
would be contiguous with one another, thereby permitting
interconnection through inter-RTO coordination.
In sum, the post-Transaction Sierra Pacific system will be
"physically interconnected" through third-party transmission owners. These
interconnections will be established on the basis of contract paths typical
of today's interconnected electric utility system. The Commission
previously has accepted applicants' reliance on contract paths and
participation in power pools to satisfy the interconnection requirements.
It is important to note in this connection that there is no specific
requirement under the Act that these contract paths be established through
firm contracts; moreover, there is no reason under the Act to require the
use of such contracts if interconnection can be achieved effectively and
more economically through non-firm contracts. Applicants believe that their
interconnection plans conform in all material respects with this precedent
and that, as a result, Sierra Pacific's post-Transaction will satisfy the
interconnection requirements of Section 2(a)(29)(A).
(ii) Coordination
Sierra Pacific will coordinate the economic dispatch of its
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, traditional joint dispatch of the
post-Transaction system would be impossible because 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 Commission's established standards in this respect
strongly reflect the essential characteristics of the vertically-integrated
utility monopolies that dominated the industry from 1935 until the recent
past. However, Section 2(a)(29)(A) in relevant part requires only that
systems be "economically operated" and "coordinated;" it does not establish
specific structural or operational requirements for utility systems. As
more states move down the path toward retail competition, with some states
eliminating vertically-integrated monopolies through significant
divestiture of generating assets (as Nevada has done), and as the growth of
liquidity in wholesale markets continues, coordination though market
operations, and not through joint dispatch, will be the primary means of
achieving the efficiency of operations formerly effected 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
economic dispatch, as well as through RTOs, which will coordinate
generation maintenance schedules and generation dispatch for system
reliability purposes.
Accordingly, Applicants believe that under current
circumstances the Act's coordination requirement is satisfied if utilities
are able to achieve efficiencies through such measures as coordinated power
service operations that do not necessarily involve joint dispatch in the
traditional sense; 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 pertains to it, Applicants believe the coordination
of utilities in the current marketplace must be achieved through these
market and contractual arrangements rather than through historical joint
dispatch.
While Applicants wish to highlight current practices in the
industry, it is important to note that this is not a matter of first
impression. Nearly a decade ago, the Commission found that the coordination
requirement could be satisfied even where a system's generating units are
not jointly dispatched and even where 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 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 case, however, did the participating holding
companies commit to joint dispatch of the plants or to coordinating the
output of the plants with the rest of their systems. Rather, the consortium
participants were to take output from the shared facilities only where it
was available and/or economical from the perspective of the individual
owner. The Commission 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) where the owner holding companies relied on their own market
criteria rather than dispatch procedures and protocols to utilize the
facilities in question on a joint basis.
Moreover, in applying the integration standard, the
Commission consistently has looked beyond the coordination of generation
and transmission within a system and considered the coordination of other
activities, including 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 an operating committee coordinating not only central
dispatching but also of construction programs, maintenance of records and
necessary reports, and other interrelated operations); 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.(22) 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. The Contract Paths described above will contribute to
facilitating these coordinating activities.
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 combined company will operate its
transmission systems pursuant to a OATT 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 that the relevant RTO tariffs
provide for reciprocity to prevent "pancaked" rates for use of the combined
company's system.
----------
(22) Once divestiture is complete, SPPC and Nevada Power will rely
completely on the wholesale power market to meet their loads.
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. 70-9621,
seeking authorization to form Sierra Pacific Services, a service company
for the Sierra Pacific system, Sierra Pacific will consolidate and carry
out the accounting functions of the combined company through a single
system. A single team, operating out of one or more locations will manage a
single accounting organization. Sierra Pacific will, as set forth in the
concurrent Application/Declaration, achieve additional integration of the
combined system through coordinated information system networks, customer
service, procurement, organizational structures for power purchases, energy
delivery, and customer relations, 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." The Act clearly recognizes the relative
nature of this issue. While it does not define "area" and "region," the
term "single area or region" clearly does not confine a system's operations
to a small geographic area or a single state. On the contrary, the statute
specifies no specific size limitation but rather provides, as long
recognized by the Commission, that practical considerations must inform the
question of size, including the system's effect, if any, on the "advantages
of localized management, efficient operation, and the effectiveness of
regulations"(23) in light of "the state of the art and the area or region
effected."
----------
(23) 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").
Moreover, the SEC Staff have 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. 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.(24) 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 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).
----------
(24) 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.
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 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 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.(25) 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.(26)
----------
(25) 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).
(26) See Exemption of Acquisition by Registered Public-Utility Holding
Companies of Securities of Non-Utility Companies Engaged in Certain
Energy-Related and Gas-Related Activities, Holding Co. Act Release
No. 26667 (Feb. 14, 1997).
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 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.(27)
----------
(27) 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).
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
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 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 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.
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 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).
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"). To the extent the terms and conditions of such
financing transactions are not yet finalized, the Applicants request the
Commission reserve jurisdiction over those aspects of the financing
request.
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 incurred to fund the
Transaction consideration 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 or the proceeds
from the divestiture of certain non-core assets. Sierra Pacific then plans
to refinance within the Authorization Period the remaining balance of this
short-term debt with one or more forms of long-term debt and hybrid
securities 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.
Immediately following the acquisition of PGE, Sierra Pacific
contemplates it will have a consolidated common equity ratio of 20.8
percent as a result of the issuance of $2.1 billion of holding company
debt, assuming that none of the sales of its Nevada generating facilities
will have closed by the time of the Transaction. However, by June 30, 2001,
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, 100
percent of which will reduce debt of the consolidated company;(28) (b)
proceeds from divestiture of certain non-core assets, or some combination
of common equity and divestiture of such non-core assets, which together
would be approximately equivalent to the issuance of $260 million in terms
of impact on Sierra Pacific's equity ratio; (c) issuance of up to $600
million of hybrid securities;(29) and (d) increased retained earnings
realized from the combined operations of Sierra and PGE aggregating
approximately $80 million in 2000 and $100 million in 2001. Based on
present expectations, Sierra Pacific believes that these actions, in
combination with increases in retained earnings from operations, will
increase its consolidated common equity to 30 percent within 24 months
following the Transaction.
--------------
(28) Of the $1 billion asset-sale proceeds, approximately $570 million
will be used to pay down acquisition debt at the holding company
level, approxi mately $190 million will be used to pay down debt
currently held by SPPC, and approximately $270 million will be used
to pay down debt currently held by Nevada Power.
(29) These hybrid securities will be either mandatorily convertible
securities or trust originated preferred securities, depending on
market conditions. Such mandatorily convertible securities would be
either preferred stock or long-term, unsecured debt securities of
Sierra Pacific which will convert to common equity no longer than
three years following the date of issue. Such trust originated
preferred securities would be issued by a special purpose financing
subsidiary of Sierra Pacific, the common securities of which will
be owned by Sierra Pacific. The sole purpose of the special purpose
entity would be to issue the trust originated preferred securities
and lend the proceeds thereof to Sierra Pacific. Such request is
consistent with the Commission's recent order in Southern Co.,
Holding Co. Act Release No. 27134 (Feb. 9, 2000). The Applicants
further request the Commission reserve jurisdiction with respect to
the terms and conditions of such hybrid securities.
Sierra Pacific's goal is to achieve a consolidated common
equity ratio of 30 percent or better as quickly as possible consistent with
balancing the needs of all stakeholders and to reduce its consolidated debt
ratio to 60% or lower and would hope to do so before two years after
consummation of the Transaction. Applicants note the Commission has
approved ratios of consolidated common equity to total capitalization
ratios as low as 27.6 percent. Northeast Utilities, supra. Applicants
believe in light of the steps to be taken by Sierra Pacific in the year
immediately following the acquisition to increase its consolidated common
equity as outlined above, it is entirely proper that Sierra Pacific 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 December 31, 1999, and the pro
forma consolidated capital structure of Sierra Pacific, PGE, and PGH II as
of the same date:
<TABLE>
<CAPTION>
Sierra Pacific Capital Structure
(dollars in thousands)
SIERRA PACIFIC (A) (B) (C) (D)
CONSOLIDATED 12/31/99 12/31/00 3/31/01 6/30/01 6/30/01 12/31/01
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Equity $1,477 34.5% $1,541 20.8% $1,556 22.9% $1,571 24.5% $1,831 28.6% $1,860 28.6%
Preferred Stock $287 6.7% $323 4.4% $323 4.7% $323 5.0% $923 14.4% $923 14.2%
Total Debt $2,514 58.8% $5,543 74.8% $4,926 72.4% $4,514 70.4% $3,654 57.0% $3,719 57.2%
------ ----- ------ ------ ------ ------ ------ ------ ------ ----- ------ ------
Total Capitalization $4,279 100% $7,407 100% $6,805 100% $6,408 100% $6,408 100% $6,503 100%
SPPC
Common Equity $674 41.8% $702 42.9% $593 42.1% $523 41.4% $523 41.4% $539 42.0%
Preferred Stock $99 6.1% $99 6.0% $99 7.0% $99 7.8% $99 7.8% $99 7.7%
Total Debt $898 52.0% $834 51.0% $719 50.9% $640 50.7% $640 50.7% $646 50.4%
------ ------ ------ ------ ------ ------ ------ ------ ------ ----- ---- -----
Total Capitalization $1,610 100% $1,635 100% $1,409 100% $1,262 100% $1,262 100% $1,283 100%
NEVADA POWER
Common Equity $823 37.2% $1,031 45.8% $816 43.2% $674 40.7% $674 40.7% $689 40.6%
Preferred Stock $189 8.5% $195 8.7% $195 10.3% $195 11.8% $195 11.8% $195 11.5%
Total Debt $1,203 54.3% $1.024 45.5% $878 46.5% $786 47.5% $786 47.5% $815 48.0%
------ ----- ------ ------ ------ ----- ------ ----- ------ ----- ---- -----
Total Capitalization $2,215 100% $2,250 100% $1,889 100% $1,655 100% $1,655 100% $1,699 100%
PGE
Common Equity $1,041 50.3% $1.041 49.9% $1,029 49.4% $1,017 48.9% $1,017 48.9% $992 48.0%
Preferred Stock $30 1.4% $30 1.4% $30 1.4% $30 1.4% $30 1.4% $30 1.5%
Total Debt $999 48.3% $1,017 48.7% $1,024 49.2% $1,031 49.6% $1,031 49.6% $1,045 50.5%
------ ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total Capitalization $2,070 100% $2,088 100% $2,083 100% $2,078 100% $2,078 100% $2,067 100%
TOTAL COMBINED COMPANY (EQUITY IS SUM OF SPPC, NEVADA POWER AND PGE)
--------------------------------------------------------------------
Common Equity $2,538 47.5% $2,774 32.1% $2,438 31.7% $2,214 31.4% $2,214 32.6% $2,220 32.4%
Preferred Stock $287 5.4% $323 3.7% $323 4.2% $323 4.6% $923 13.6% $923 13.5%
Total Debt $2,514 47.1% $5,543 64.1% $4,926 64.1% $4,514 64.0% $3,654 53.8% $3,719 54.2%
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total Capitalization $5,339 100% $8,641 100% $7,686 100% $7,052 100% $6,792 100% $6,823 100%
SIERRA PACIFIC
CONSOLIDATED 12/31/02
<C> <C>
Common Equity $1,991 30.0%
Preferred Stock $923 13.9%
Total Debt $3,713 56.0%
------ ------
Total Capitalization $6,627 100%
SPPC
Common Equity $565 42.0%
Preferred Stock $99 7.3%
Total Debt $683 50.7%
------ -----
Total Capitalization $1,346 100%
NEVADA POWER
Common Equity $726 40.7%
Preferred Stock $195 10.9%
Total Debt $864 48.4%
------ -----
Total Capitalization $1,785 100%
PGE
Common Equity $983 48.0%
Preferred Stock $30 1.5%
Total Debt $1,036 50.6%
------ -----
Total Capitalization $2,049 100%
TOTAL COMBINED COMPANY (EQUITY IS SUM OF SPPC, NEVADA POWER AND PGE)
--------------------------------------------------------------------
Common Equity $2,274 32.9%
Preferred Stock $923 13.4%
Total Debt $3,713 53.7%
------ -----
Total Capitalization $6,910 100%
ASSUMPTIONS
(A) PGE Acquisition closes 12/31/00
(B) First 60% of generation assets divested
(C) Remaining 40% of generation assets divested (no common equity or trust preferred stock issued)
(D) Combined result of: divestiture of remaining 40% of generation assets; issuance of $260 million in common
equity ($18.00/share) or combination of asset sales and common equity; and issuance of $600 million in
hybrid securities ($18.00/share)
</TABLE>
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 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 500 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 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; (ii) to refinance short-term debt originally incurred to raise
all or a portion of the Transaction consideration; or (iii) for general
corporate purposes.
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 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 or
certain non-core assets with the balance refinanced within the
Authorization Period through long-term debt or other securities or proceeds
from the divestiture of certain non-core assets. 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 $300 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 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 three 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 Item 3.B.2 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 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 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 8, 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. On May 9, 2000, Sierra Pacific issued
$300 million of notes under the shelf registration.(30) Proceeds from this
issuance were utilized to retire the remaining balance of short-term debt
incurred to complete the merger of Sierra Pacific and Nevada Power Company.
Sierra Pacific currently anticipates no further issuance under the existing
shelf registration.(31) Rather, Sierra Pacific expects to file a new
universal shelf registration with the Commission for the issuance of
long-term debt securities authorized pursuant to this
Application/Declaration and may continue to utilize the Sierra Pacific
Indenture for any such issuance. The Sierra Pacific Indenture, attached
hereto as Exhibit K-1, 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.
------------
(30) Unrelated to the issuance under the Indenture, Sierra Pacific also
issued $300 million of floating rate notes on April 20, 2000. From
the proceeds of this issuance, $100 million was invested in Nevada
Power to reduce debt and strengthen Nevada Power's capitalization
and $200 million was used to reduce short term debt at the holding
company level incurred to complete the merger of Sierra Pacific and
Nevada Power.
(31) To the extent such issuance is made under the shelf registration,
however, the issuance would be subject to the aggregate $2.1
billion limit on short-term and long-term debt and to the
parameters of the Commission's financ ing authorization.
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 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.
(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 Item 3.B.2 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 three 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 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. AMORTIZATION OF GOODWILL
Sierra Pacific expects that the Transaction will result in
the amortization of goodwill equal to the excess of consideration to be
paid to Enron over the net value of assets acquired. Sierra Pacific
estimates this goodwill to be approximately $845 million, which will be
amortized at the holding company level over a forty year period.
Accordingly, Sierra Pacific estimates a reduction in net income associated
with this amortization of approximately $21 million per year. As this
merger-related accounting adjustment will be recorded by Sierra Pacific, it
will not affect the cash flow associated with the utility subsidiaries and
there will be no need to pay dividends out of unearned surplus.
5. 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 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 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.(32) 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.
-----------
(32) The Transaction is not subject to approval of the California PUC as
SPPC's utility operations in California will not be affected by the
Transaction.
A. ANTITRUST CONSIDERATIONS
The HSR Act and the rules promulgated thereunder prohibit
the consummation of 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.
After the Applicants submitted their HSR Act filings, jurisdiction to
review the Transaction was cleared to the DOJ, which subsequently closed
its investigation of the Transaction without further action and the HSR Act
waiting period expired on May 3, 2000.
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.
Sierra Pacific and PGE jointly requested FERC approval of the Transaction
on March 3, 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 70-9621), 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 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 June 2, 2000, the requisite notice under
Rule 23 with respect to the filing of this Application, such notice to
specify a date not later than June 27, 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*
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*
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, 1999 (File No. 1-8788, filed March 28, 2000, and
incorporated herein by reference)
G-2 Sierra Pacific's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000 (File No. 1-8788, filed May 15, 2000, and
incorporated herein by reference)
G-3 SPPC's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (File No. 0-508, filed March 28, 2000, and
incorporated herein by reference)
G-4 SPPC's Quarterly Report on Form 10-Q for the quarter ended March
31, 2000 (File No. 0-508, filed May 15, 2000, and incorporated
herein by reference)
G-5 Nevada Power's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (File No. 2-28348, filed March 28, 2000, and
incorporated herein by reference)
G-6 Nevada Power's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000 (File No. 2-28348, filed May 15, 2000, and
incorporated herein by reference)
G-7 PGE's Annual Report on Form 10-K for the fiscal year ended December
31, 1999 (File No. 1-5532-99, filed March 3, 2000, and incorporated
herein by reference)
G-8 PGE's Quarterly Report on Form 10-Q for the quarter ended March 31,
2000 (File No. 1-5532-99, filed May 11, 2000, 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*
K-1 Sierra Pacific Indenture
B. FINANCIAL STATEMENTS.
FS-1 Sierra Pacific Consolidated Balance Sheet as of December 31, 1999
(previously filed with the Commission in Sierra Pacific Annual
Report on Form 10-K for the year ended December 31, 1999 (Exhibit
G-1 hereto), filed March 28, 2000, File No. 1-8788, and
incorporated herein by reference)
FS-2 Sierra Pacific Consolidated Balance Sheet as of March 31, 2000
(previously filed with the Commission in Sierra Pacific Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000 (Exhibit
G-2 hereto), filed May 15, 2000, File No. 1-8788, and incorporated
herein by reference)
FS-3 Sierra Pacific Consolidated Statement of Income for the 12 months
ended December 31, 1999 (previously filed with the Commission in
Sierra Pacific Annual Report on Form 10-K for the year ended
December 31, 1999 (Exhibit G-1 hereto), filed March 28, 2000, File
No. 1-8788, and incorporated herein by reference)
FS-4 Sierra Pacific Consolidated Statement of Income for the 3 months
ended March 31, 2000 (previously filed with the Commission in
Sierra Pacific Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000 (Exhibit G-2 hereto), filed May 15, 2000, File No.
1-8788, and incorporated herein by reference)
FS-5 PGE Consolidated Balance Sheet as of December 31, 1999 (previously
filed with the Commission in PGE Annual Report on Form 10-K for the
year ended December 31, 1999 (Exhibit G-7 hereto), filed March 3,
2000, File No. 1-5532-99, and incorporated herein by reference)
FS-6 PGE Consolidated Balance Sheet as of March 31, 2000 (previously
filed with the Commission in PGE Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000 (Exhibit G-8 hereto), filed May
11, 2000, File No. 1-5532-99, and incorporated herein by reference)
FS-7 PGE Consolidated Statement of Income for the 12 months ended
December 31, 1999 (previously filed with the Commission in PGE
Annual Report on Form 10-K for the year ended December 31, 1999
(Exhibit G-7 hereto), filed March 3, 2000, File No. 1-5532-99, and
incorporated herein by reference)
FS-8 PGE Consolidated Statement of Income for the 3 months ended March
31, 2000 (previously filed with the Commission in PGE Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000 (Exhibit
G-8 hereto), filed May 11, 2000, File No. 1-5532-99, and
incorporated herein by reference)
FS-9 Pro Forma Combined Financial data for Sierra Pacific and PGE**
*Previously filed
**To be filed by amendment
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.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned Applicants have duly caused this
pre-effective Amendment No. 1 to their Application/Declaration on Form U-1
to be signed on their behalf by the undersigned thereunto duly authorized.
SIERRA PACIFIC RESOURCES:
By: /s/ William E. Peterson Date: 6/14/00
-------------------------------- -------
Name: William E. Peterson
Title: Senior Vice President, General Counsel and Corporate Secretary
Portland General Electric Company:
By: /s/ Alvin L. Alexanderson Date: 6/14/00
------------------------------------- -------
Name: Alvin L. Alexanderson
Title: Senior Vice President, General Counsel, Secretary
