As filed with the Securities and Exchange Commission on
November 5, 1999
File No. 70-09521
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM U-1
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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SCANA Corporation
1426 Main Street
Columbia, South Carolina 29201
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(Name of company filing this statement
and address of principal executive office)
SCANA Corporation
1426 Main Street
Columbia, South Carolina 29201
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(Name of top registered holding company parent)
Kevin B. Marsh
H. Thomas Arthur
SCANA Corporation
1426 Main Street
Columbia, South Carolina 29201
Telephone: (803) 217-9000
Facsimile: (803) 217-9336
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(Names and addresses of agents for service)
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The Commission is also requested to send copies
of any communication in connection with this matter to:
William S. Lamb
Sheri E. Bloomberg
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 W. 55th Street
New York, New York 10019
Telephone: (212) 424-8000
Facsimile: (212) 424-8500
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TABLE OF CONTENTS
Page
Item 1. DESCRIPTION OF THE PROPOSED MERGER....................................1
A. Introduction......................................................1
1. General Request...............................................1
2. Overview of the Mergers.......................................2
B. Description of the Parties to the Mergers.........................4
1. SCANA.........................................................4
a. SCANA Public Utility Companies............................5
i. SCE&G...............................................5
I. SCE&G's Electric Utility Operations.............6
II. SCE&G's Gas Utility Operations..................7
ii. GENCO.................................................7
b. SCANA Non-Utilities.......................................8
i. South Carolina Fuel Company, Inc....................8
ii. South Carolina Pipeline Corporation.................8
iii. SCANA Energy Marketing, Inc.........................9
iv. SCANA Propane Gas, Inc. ............................9
v. SCANA Propane Storage, Inc. ........................9
vi. SCANA Communications, Inc..........................10
vii. ServiceCare, Inc. ...........................10
viii. Primesouth, Inc. ...........................10
ix. SCANA Resources, Inc. ...........................10
x. SCANA Development Corporation......................10
xi. SCANA Petroleum Resources, Inc.....................11
2. PSNC.........................................................11
a. PSNC's Non-Utilities.....................................13
i. Sonat Public Service Company L.L.C.................13
ii. Clean Energy Enterprises, Inc......................13
iii. Cardinal Pipeline Company, LLC.....................13
iv. Pine Needle LNG Company, LLC.......................14
v. PSNC Blue Ridge Corporation........................14
vi. PSNC Cardinal Pipeline Company.....................15
vii. PSNC Production Corporation........................15
C. Description Of The Mergers.......................................15
1. Background ................................................15
2. Merger Agreement.............................................19
3. Financing the Mergers........................................20
D. Management and Operations of SCANA and PSNC Following
the Mergers......................................................20
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Item 2. Fees, Commissions and Expenses.......................................21
Item 3. Applicable Statutory Provisions......................................21
A. Legal Analysis...................................................22
1. Section 10(b)................................................23
a. Section 10(b)(1).........................................24
i. Interlocking Relations..............................24
ii. Concentration of Control............................25
b. Section 10(b)(2).........................................29
i. Fairness of Consideration...........................29
ii. Reasonableness of Fees..............................31
c. Section 10(b)(3).........................................33
i. Capital Structure...................................33
ii. Protected Interests.................................35
2. Section 10(c)................................................38
a. Section 10(c)(1).........................................38
i. Section 8 Analysis..................................38
ii. Section 11 Analysis - Integration...................39
I. Integrated Electric Utility System..............39
II. Integrated Gas Utility System...................40
iii. Section 11 Analysis - Retention of Gas Utility
System..............................................43
iv. Section 11 Analysis - Retention of Non-Utility
Businesses..........................................50
b. Section 10(c)(2).........................................59
3. Section 10(f)................................................61
Item 4. Regulatory Approvals.................................................61
Item 5. Procedure............................................................62
Item 6. Exhibits and Financial Statements....................................62
A. Exhibits.........................................................62
B. Financial Statements.............................................65
Item 7. Information as to Environmental Effects..............................66
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The Applicant hereby amends and restates its Application-Declaration as
follows:
Item 1. DESCRIPTION OF THE PROPOSED MERGER
A. Introduction
This Application-Declaration seeks approvals relating to the proposed
acquisition of Public Service Company of North Carolina, Incorporated, a North
Carolina corporation ("PSNC"), by SCANA Corporation, a South Carolina
corporation ("SCANA"), pursuant to which PSNC will become a wholly owned
subsidiary company of SCANA. Following consummation of the proposed acquisition,
SCANA will register with the Securities and Exchange Commission (the "SEC" or
the "Commission") as a holding company under Section 5 of the Public Utility
Holding Company Act of 1935 (the "Act"). SCANA is currently a holding company
exempt from all provisions of the Act except Section 9(a)(2) and Section 10
under Section (3)(a)(1) pursuant to Rule 2 of the Act.
On July 30, 1999, SCANA filed a separate Application-Declaration relating
to certain financing activities and intrasystem services issues arising under
the Act in connection with proposed acquisition (the "Financing
Application-Declaration"). On August 31, 1999, the Commission issued and
published the requisite notice under Rule 23 with respect to the filing of this
Application-Declaration and the Financing Application-Declaration.
1. General Request
Pursuant to Sections 9(a)(2) and 10 of the Act, SCANA hereby requests
authorization and approval of the Commission to acquire the issued and
outstanding common stock of PSNC, and thereby acquire PSNC. SCANA also hereby
requests that the Commission
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approve the retention by SCANA of the businesses, investments and non-utility
activities of SCANA and PSNC.
2. Overview of the Mergers
Pursuant to an Amended and Restated Agreement and Plan of Merger (the
"Merger Agreement"), dated as of February 16, 1999 and amended and restated as
of May 10, 1999 by and among PSNC, SCANA, New Sub I, Inc., a South Carolina
corporation and a wholly owned subsidiary company of SCANA ("New Sub I"), and
New Sub II, Inc., a South Carolina corporation and a wholly owned subsidiary
company of SCANA ("New Sub II"), New Sub I will be merged with and into SCANA
with SCANA as the surviving corporation (the "First Merger"), and PSNC will be
merged with and into New Sub II with New Sub II as the surviving corporation
(the "Preferred Second Merger", and together with the First Merger, the
"Mergers")./1/ As a result of the Preferred Second Merger, PSNC, a public
utility company for purposes of the Act, will become a wholly owned subsidiary
company of SCANA.
In the Preferred Second Merger, each share of PSNC common stock outstanding
immediately prior to the effective time of the Preferred Second Merger will be
converted into the right to elect either (i) $33.00 in cash or (ii) a number of
shares of SCANA common stock equal to the PSNC exchange ratio. This election is
subject to the limitation that no more than 50% of
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/1/ The Merger Agreement also provides that in the event it is not possible to
consummate the Preferred Second Merger, the parties would, subject to
certain conditions, carry out an "alternative merger" transaction in which
PSNC would be merged directly into SCANA's existing public utility company,
South Carolina Electric & Gas Company ("SCE&G"). The request for approval
made herein concerns only the Preferred Second Merger, as the alternative
merger is not subject to the jurisdiction of this Commission. Therefore,
this Application-Declaration will refer only to the Preferred Second
Merger.
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the aggregate consideration paid to all PSNC shareholders may be in cash. The
PSNC exchange ratio will vary depending upon the average market price of SCANA
common stock over a 20 trading-day period, but is subject to the limitation that
PSNC shareholders who elect to receive SCANA common stock will receive no more
than 1.45 and no less than 1.02 shares of SCANA common stock for each share of
PSNC common stock.
In the First Merger, each share of SCANA common stock outstanding
immediately prior to the effective time of the First Merger will be converted
into the right to receive either (i) $30 in cash or (ii) one share of SCANA
common stock, subject to the requirement that SCANA pay $700 million in cash in
the aggregate as consideration in the Mergers. The First Merger will not involve
the acquisition of any securities of a public utility company; therefore it will
not require any approval from the Commission under the Act.
As discussed in more detail in Item 1.C. below, the boards of directors and
managements of SCANA and PSNC believe that the Mergers will help position their
combined companies to become one of the premier distribution companies for
energy and other services in the southeastern region by increasing financial
flexibility and providing strategic growth opportunities that will benefit both
companies and their shareholders, customers and employees in a manner that
neither company could achieve on its own. The SCANA and PSNC boards of directors
have approved the Merger Agreement and related transactions.
In addition to the approvals by the SCANA and PSNC boards of directors, the
First Merger requires approval by the holders of two-thirds of the shares of
SCANA common stock and the Preferred Second Merger requires approval by holders
of a majority of the shares of
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PSNC common stock. Also, the affirmative vote of a majority of the shares of
SCANA common stock present and voting at a special meeting of SCANA shareholders
is required to approve the issuance of SCANA common stock in connection with the
Preferred Second Merger, provided that a majority of all outstanding shares of
SCANA common stock is voted at the meeting. At duly called special meetings held
on July 1, 1999, the requisite approvals by SCANA shareholders for the First
Merger and the issuance of SCANA common stock in connection with the Preferred
Second Merger were obtained, and the requisite approval of PSNC shareholders for
the Preferred Second Merger was obtained.
In addition to said shareholder approvals, certain federal and state
regulatory approvals must be obtained from the Federal Communications Commission
(the "FCC") and the North Carolina Utilities Commission (the "NCUC"). The
Preferred Second Merger must also receive clearance under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "HSR Act"), and such clearance was
received on September 26, 1999 when the applicable waiting period under the HSR
Act expired.
B. Description of the Parties to the Mergers
1. SCANA
SCANA was incorporated on October 10, 1984 and is a holding company within
the meaning of the Act. SCANA common stock has no par value and is listed and
traded on the New York Stock Exchange (the "NYSE") under the symbol "SCG". As of
May 12, 1999, 103,572,623 shares of SCANA common stock were outstanding.
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As of and for the year ended December 31, 1998, SCANA had total assets of
$5.281 billion, net utility assets of $3.787 billion, total operating revenues
of $1.632 billion, and net income of $115 million. SCANA neither owns nor
operates any physical properties. As of December 31, 1998, SCANA employed, in
conjunction with its subsidiaries, a total of 4,697 full-time employees.
SCANA has thirteen direct, wholly owned subsidiary companies which are
engaged in functionally distinct operations as described below. It also has
investments in two limited liability company joint ventures. SCANA holds all of
the outstanding voting securities of two public utility companies within the
meaning of the Act, South Carolina Electric & Gas Company ("SCE&G") and South
Carolina Generating Company, Inc. ("GENCO").
a. SCANA Public Utility Companies
i. SCE&G
SCE&G is a regulated public utility company engaged in the generation,
transmission, distribution and sale of electricity and in the purchase and sale
of natural gas in South Carolina. SCE&G's electric service area extends into 24
counties covering more than 15,000 square miles of the central, southern and
southwestern portions of South Carolina. SCE&G's service area for natural gas
operations encompasses all or part of 31 of the 46 counties in South Carolina
and covers more than 21,000 square miles. SCE&G's service area for electric and
gas operations has a population of approximately 2.3 million people, and
predominant industries in the areas served by SCE&G include: synthetic fibers;
chemicals; fiberglass; paper and wood; metal fabrication; stone, clay and sand
mining and processing; and textiles. In addition
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to its electric and gas utility businesses, SCE&G also operates a bus service
providing transportation throughout Columbia, South Carolina.
SCE&G owns eighteen electric generation facilities with a combined net
generating capacity of 3,772 kilowatts. SCE&G also owns several commercial
office buildings, service center buildings and storage facilities. SCE&G owns 61
motor coaches used in the operation of the Columbia, South Carolina transit
system.
SCE&G is subject to the jurisdiction of the South Carolina Public Service
Commission ("SCPSC"), the Nuclear Regulatory Commission (the "NRC") and the
Federal Energy Regulatory Commission ("FERC") pursuant to the Federal Power Act.
I. SCE&G's Electric Utility Operations
SCE&G's electric transmission system is part of an interconnected grid
extending over a large part of the southern and eastern portions of the United
States. SCE&G, Virginia Power Company, Duke Power Company, Carolina Power &
Light Company, Yadkin, Incorporated and Santee Cooper (formerly The South
Carolina Public Service Authority) are members of the Virginia-Carolinas
Reliability Group, one of several geographic divisions within the Southeastern
Electric Reliability Council. SCE&G is also interconnected with Georgia Power
Company, Savannah Electric & Power Company, Oglethorpe Power Corporation and
Southeastern Power Administration's Clark Hill Project.
SCE&G purchases all of the electric generation of Williams Station, owned
by GENCO, under a Unit Power Sales Agreement that has been approved by the FERC.
Williams Station has a generating capacity of 580 megawatts.
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In 1998, SCE&G's electric sales revenues totaled $1.219 billion.
Residential sales of electricity accounted for 42% of SCE&G's electric sales
revenues; commercial sales for 30%; industrial sales for 19%; sales for resale
for 3%; and all other sales for 6%. SCE&G recorded a net increase during 1998 of
13,542 electric customers, increasing its total number of electric customers to
517,447.
II. SCE&G's Gas Utility Operations
SCE&G's gas system consists of approximately 11,963 miles of distribution
mains and related service facilities. SCE&G has propane air peak shaving
facilities that can supplement its supply of natural gas by gasifying propane to
yield the equivalent of 102 million cubic feet per day. These facilities can
store the equivalent of 430 million cubic feet of natural gas.
In 1998, SCE&G's gas sales revenues totaled $230 million. Residential sales
accounted for 43% of gas sales revenues; commercial sales for 31%; and
industrial sales for 26%. SCE&G recorded a net increase during 1998 of 4,255 gas
customers, increasing its total number of gas customers to 256,842.
ii. GENCO
GENCO owns and operates the Williams Station generating facility in Goose
Creek, South Carolina, and sells electricity solely to SCE&G. GENCO is subject
to regulation under the Federal Power Act.
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b. SCANA Non-Utilities
i. South Carolina Fuel Company, Inc.
South Carolina Fuel Company, Inc. ("South Carolina Fuel") acquires, owns
and provides financing for SCE&G's nuclear fuel, fossil fuel and sulfur dioxide
emission allowance requirements.
ii. South Carolina Pipeline Corporation
South Carolina Pipeline Corporation ("Pipeline Corporation") is engaged in
the purchase, transmission and sale of natural gas on a wholesale basis to both
distribution companies and industrial customers in 40 counties throughout South
Carolina. Pipeline Corporation operates completely within South Carolina, and
its gas system consists of approximately 1,919 miles of transmission pipeline
that connect its resale customers' distribution systems with transmission
systems of Southern Natural Gas Company ("Southern Natural") and
Transcontinental Gas Pipe Line Corporation ("Transco"). Pipeline Corporation,
through a wholly owned subsidiary, owns and operates a 62-mile, six-inch propane
pipeline that connects SCANA Propane Storage, Inc.'s propane storage facility
with Dixie Pipeline Company's system, which traverses central South Carolina.
Pipeline Corporation also owns two liquified natural gas ("LNG") liquification
and storage facilities, one located near Charleston, South Carolina and the
other in Salley, South Carolina. To meet the requirements of its high priority
natural gas customers during periods of maximum demand, Pipeline Corporation
supplements its supplies of natural gas using these two LNG facilities.
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Pipeline Corporation supplies the natural gas for SCE&G's gas distribution
system. Other resale customers include municipality and county gas authorities
and gas utility companies. The industrial customers of Pipeline Corporation are
primarily engaged in the manufacturing or processing of ceramics, paper, metal,
food and textiles.
iii. SCANA Energy Marketing, Inc.
SCANA Energy Marketing, Inc. ("Energy Marketing") markets electricity,
natural gas and other light hydrocarbons, primarily in the southeastern United
States. Energy Marketing also markets natural gas in Georgia's deregulated
natural gas market and provides energy-related risk management services to
producers and consumers. In 1996, the FERC approved Energy Marketing's
application to become a power marketer, allowing Energy Marketing to buy and
sell large blocks of electric capacity in wholesale markets.
iv. SCANA Propane Gas, Inc.
SCANA Propane Gas, Inc. ("SCANA Propane Gas") purchases, delivers and sells
propane within the southeastern United States. On September 29, 1999, SCANA
announced that it intends to sell its retail propane assets, including SCANA
Propane Gas, to Suburban Propane L.P. ("Suburban Propane").
v. SCANA Propane Storage, Inc.
SCANA Propane Storage, Inc. ("SCANA Propane Storage") owns and operates a
60 million gallon underground propane storage facility near York, South Carolina
and leases cavern storage space to industries, utilities and others. On
September 29, 1999, SCANA announced that it also intends to sell SCANA Propane
Storage to Suburban Propane.
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vi. SCANA Communications, Inc.
SCANA Communications, Inc. ("SCI") owns and operates a 500-mile fiber optic
telecommunications network and an 800 MHZ radio service network within South
Carolina. In addition, SCI provides tower site construction, management and
rental services in South Carolina and Georgia. SCI also has investments in
Powertel, Inc., ITC Holding Company, Inc., ITC DeltaCom, Inc., and Knology
Holdings, Inc., which are companies providing telecommunications services in the
southeastern United States.
vii. ServiceCare, Inc.
ServiceCare, Inc. ("ServiceCare") is engaged in providing energy-related
products and services beyond the energy meter. Its primary businesses involve
providing homeowners with service contracts on their home appliances and home
security monitoring.
viii. Primesouth, Inc.
Primesouth, Inc. ("Primesouth") is engaged in power plant management and
maintenance services.
ix. SCANA Resources, Inc.
SCANA Resources, Inc. ("SCANA Resources") is a vehicle by which SCANA makes
initial investments in new, energy-related business opportunities and start-up
ventures.
x. SCANA Development Corporation SCANA
Development Corporation is presently in liquidation. This entity was
previously engaged in the sale of real estate.
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xi. SCANA Petroleum Resources, Inc.
SCANA Petroleum Resources, Inc. is in liquidation following the sale of its
oil and gas properties.
2. PSNC
PSNC, a North Carolina corporation incorporated in 1938, is a public
utility company certificated to serve a 31-county area in North Carolina. PSNC
transports, distributes and sells natural gas to approximately 340,000
residential, commercial and industrial customers in 95 cities and communities in
North Carolina. In connection with its natural gas distribution business, PSNC
promotes, sells and installs both new and replacement cooking, water heating,
laundry, space heating, cooling and humidity control natural gas appliances and
equipment. PSNC, through a subsidiary that is not a public utility company, also
provides conversion and maintenance services for natural gas-fueled vehicles in
selected cities in and beyond its franchised territory. It also participates in
non-public utility company businesses and joint ventures in areas such as
natural gas brokering and supply services.
PSNC common stock has a par value of $1 per share and is listed and traded
on the NYSE under the symbol "PGS." As of and for the fiscal year ended
September 30, 1998, 20,274,332 shares of PSNC common stock were outstanding, and
PSNC had total assets of $618,753,000, operating revenues of $330,672,000 and
net income of $24,837,000. As of May 11, 1999, PSNC had approximately 1,000
employees.
PSNC owns 750 miles of transmission pipelines, which range from 2 to 24
inches in diameter, and 6,727 miles of distribution mains that connect its
distribution systems with the
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Texas to New York pipeline transmission system of Transco. Most of these
transmission pipelines and distribution mains are located on right-of-ways held
under easement, license or permit. PSNC also owns 18 commercial office
buildings, a measurement operations building, a building that houses training
and engineering, 11 service center buildings, 15 service buildings, and an
energy control building. One of the service buildings houses training
facilities, and another service building is jointly occupied by a natural
gas-fueled vehicle conversion facility. PSNC also leases six commercial office
buildings for company use.
PSNC is subject to regulation by the NCUC. PSNC's regulated transportation,
distribution and sale of natural gas take place in its 31-county certificated
service territory, which includes Raleigh, Durham and the Research Triangle area
of north central North Carolina, Gastonia, Concord and Statesville in the
central area of the state, and Asheville, Hendersonville and Brevard in the
western area. Over 2.5 million people reside in PSNC's certificated territory,
and during the past three fiscal years, PSNC has added approximately 39,900
residential, 5,000 commercial, and 100 industrial customers to its natural gas
transmission and distribution systems. These 45,000 new customers have resulted
in a compound annual growth rate of 5.1% for PSNC over the three-year period.
PSNC's diversified industrial customer base includes manufacturers of textiles,
chemicals, ceramics and clay products, glass, automotive products, minerals,
pharmaceuticals, plastics, metals, electronic equipment, furniture and a variety
of food and tobacco products.
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a. PSNC's Non-Utilities
i. Sonat Public Service Company L.L.C.
Sonat Public Service Company L.L.C. ("Sonat Public Service") is a joint
venture started in December 1996 by PSNC Production Corporation ("PSNC
Production"), a wholly owned subsidiary of PSNC, and Sonat Marketing Company
L.P. ("Sonat Marketing"), a subsidiary of Sonat Inc. As its capital contribution
to the venture, PSNC Production transferred its gas brokering activities to
Sonat Public Service, and Sonat Public Service now provides nonregulated energy
products and services to approximately 500 industrial and commercial accounts in
the mid-Atlantic region. PSNC Production and Sonat Marketing each own a 50%
share of Sonat Public Service.
ii. Clean Energy Enterprises, Inc.
Clean Energy Enterprises, Inc. ("Clean Energy"), a wholly owned subsidiary
of PSNC, converts vehicles to operate on natural gas or other alternative fuels.
Clean Energy also operates fueling stations in Raleigh and Gastonia, and advises
customers on the installation and operation of natural gas fueling stations.
iii. Cardinal Pipeline Company, LLC
In March 1994, PSNC and a subsidiary of Piedmont Natural Gas Company, Inc.
("Piedmont") formed Cardinal Pipeline Company, LLC ("Cardinal") in order to
construct and operate a 24-inch, 37.5-mile natural gas pipeline (the "Cardinal
Pipeline")./2/ The Cardinal Pipeline extends from Wentworth to near Haw River,
North Carolina, where it interconnects with PSNC
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/2/ Although not a public utility company for purposes of the Act, Cardinal is
a utility for purposes of state regulation and is currently under the
jurisdiction of the NCUC.
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and Piedmont. It was placed into service on December 31, 1994, and provides 130
million cubic feet per day of additional firm capacity (70 million cubic feet
per day for PSNC and 60 million cubic feet per day for Piedmont). When Cardinal
Pipeline was placed into service, PSNC owned 64.5% of Cardinal.
In 1995, PSNC, Piedmont, Transco and North Carolina Natural Gas Corporation
("NCNG") formed Cardinal Extension Company, LLC ("Cardinal Extension") to
purchase and extend the Cardinal Pipeline by 67.5 miles. Eventually, Cardinal
Extension will become part of Cardinal, and PSNC, which contributed its 64.5%
interest in Cardinal to the new project, will own approximately 33% of the
resulting company through a subsidiary.
iv. Pine Needle LNG Company, LLC Pine Needle
LNG Company, LLC ("Pine Needle") was formed by subsidiaries of Transco,
Piedmont, NCNG, Amerada Hess, PSNC and the Municipal Gas Authority of Georgia to
own and operate an LNG storage facility in North Carolina. The facility will
have a storage capacity of four billion cubic feet with vaporization capability
of 400 million cubic feet per day. PSNC's subsidiary that invested in Pine
Needle, PSNC Blue Ridge Corporation ("Blue Ridge"), made its required capital
contribution of $9,058,000 on May 3, 1999 and owns 17% of Pine Needle. PSNC has
contracted to use 25% of the facility's gas storage capacity and withdrawal
capabilities.
v. PSNC Blue Ridge Corporation
As noted above, Blue Ridge is a subsidiary used solely to make a capital
contribution to, and hold PSNC's equity interest in, Pine Needle.
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vi. PSNC Cardinal Pipeline Company
PSNC Cardinal Pipeline Company is a subsidiary created solely to make a
construction loan to, and hold PSNC's equity interest in, Cardinal Extension and
eventually in Cardinal.
vii. PSNC Production Corporation
PSNC Production was formed in 1981 to engage in the exploration for, and
production of, natural gas. In response to new business opportunities being
created by the restructuring of the natural gas industry, PSNC Production began,
in 1990, to limit its business to non-regulated gas brokering and sales to large
commercial and industrial customers that could obtain transportation from PSNC
and other local distribution companies ("LDCs"). In 1994, PSNC Production sold
the last of its interests in production properties. In December 1996, PSNC
Production sold a 50 percent interest in its marketing business to Sonat
Marketing in order to create Sonat Public Service.
C. Description Of The Mergers
1. Background
Over the past several years SCANA has carefully monitored developments in
the electric and natural gas utility industries, with particular emphasis on the
growth of competition in the southeastern region of the United States. As a
result of these efforts, SCANA decided to pursue a regionally-based, customer
service oriented growth strategy that involves both expanding its service
options for its customers to include such services as appliance repair, home
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security and telecommunications, and increasing its customer base through
increased marketing efforts in areas with open access and through possible
acquisitions.
PSNC has also carefully followed recent developments in the electric and
natural gas utility industries that have substantially increased competition in
such industries, particularly the pressures on small and medium-sized utility
companies to compete as effectively as larger utility companies. As a result,
PSNC began to develop strategic plans to respond to such an evolving and
competitive environment as it affected PSNC, and engaged and authorized Morgan
Stanley & Co. Incorporated, its financial advisor, to explore strategic
alternatives and possible business combinations. PSNC's management concluded
that PSNC's competitive position and growth prospects in this new environment
would be significantly enhanced by, among other things, increasing the scale of
its operations and the size of its customer base.
After considering possible business combinations with several companies,
the PSNC board of directors, on February 16, 1999, by a unanimous vote, approved
the Merger Agreement with SCANA and the transactions contemplated thereby and
authorized the execution of the Merger Agreement. On February 16, 1999, the
SCANA board of directors, by the affirmative vote of twelve directors with one
dissent, approved the Merger Agreement with PSNC and the transactions
contemplated thereby and authorized the execution of the Merger Agreement.
Following the meetings of their boards of directors, PSNC and SCANA executed the
Merger Agreement on February 16, 1999 and publicly announced the proposed
Mergers on February 17, 1999.
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The board of directors and management of SCANA believe that the Mergers
will help position SCANA to become one of the premier distribution companies for
energy and other services in the southeastern region by increasing its financial
flexibility and providing strategic growth opportunities that will benefit
SCANA, its shareholders, customers and employees, including:
o Expansion Potential and Broader Customer Base. PSNC brings to the
combined companies approximately 340,000 additional natural gas retail
distribution customers. The acquisition of PSNC will increase SCANA's
domestic retail customer base to approximately 1.3 million customers
in the southeastern region, including fast growing areas of North
Carolina. SCANA and its shareholders and employees will be able to
participate in these growing markets through PSNC, a company with
which customers in North Carolina are familiar. In addition, following
the Preferred Second Merger, SCANA's natural gas customer base will be
more diverse, expanding from its traditional majority industrial gas
customer base by adding PSNC's residential and small commercial
customer base, which accounted for approximately 50% of PSNC's
throughput in fiscal 1998.
o Increased Customer Products and Services. The combination with PSNC
will enable the combined companies to offer their customers access to
more comprehensive products and services than either company alone
could offer. The retail natural gas experience and expertise of PSNC
will complement the electricity, natural gas and telecommunications
assets, experience and expertise of SCANA, giving the combined
companies improved capabilities in the delivery of a more complete
range of products and services for all of their customers.
o Financial Strength and Benefits. The Mergers should enhance SCANA's
ability to compete in the utility market as a growth-oriented company.
Following the Mergers, SCANA will have increased its revenues to
approximately $2 billion annually and its customer base to approximate
1.3 million. As a result, SCANA should enjoy an increased cash flow
for reinvestment or growth in the competitive energy and services
delivery businesses. SCANA should also benefit from the long-term
financial stability of a larger company.
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o Operating Efficiencies. As a result of the Preferred Second Merger,
SCANA should benefit from operating efficiencies obtained from
economies of scale and should be able to make more efficient use of
advanced information systems.
The board of directors and management of PSNC believe that the Mergers will
join two companies with complementary operations as well as a common vision of
the future of the retail and wholesale energy markets in the southeastern region
of the United States. As a result of utility deregulation and the increasing
competitive pressures faced by electric and natural gas utility companies, the
PSNC board believes that in order to succeed in such a market, PSNC must be an
efficient, low cost supplier of energy and allied services with a diverse
customer base. The Mergers are expected to allow PSNC to achieve these goals and
to provide substantial strategic and financial benefits to the shareholders of
PSNC, as well as to its employees and the customers that it serves. The PSNC
board believes that such benefits include:
o Strategic Position. The combination of the companies' complementary
expertise and infrastructure, including PSNC's natural gas
distribution business in North Carolina and SCANA's diversified
electric, natural gas and telecommunications businesses throughout the
southeastern United States will provide the combined company with the
size and scope to be an effective participant in the emerging and
increasingly competitive electric and natural gas utility markets.
o Cost Competitive. Both PSNC and SCANA are amongst the most efficient
providers of their respective services within the states in which they
operate. The Mergers will enable the combined company to create
efficiencies through which the new company will be able to provide
even more cost-effective services to customers.
o New Products and Services. The combined company will use its
distribution channels to market a portfolio of energy-related services
throughout the southeastern region. The Mergers will create a company
with the ability to develop and market competitive new products and
services and to provide integrated energy solutions for its customers.
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o Increased Financial Strength and Customer Base. The combined company
will be financially stronger and will have a broader customer base
than PSNC or SCANA as independent entities. Based on the 1998 results
for PSNC and SCANA, the total annual revenues for the combined company
will be approximately $2 billion. In addition, the combined company
will serve approximately 517,000 electric customers in South Carolina
and more than 750,000 natural gas customers in South Carolina, North
Carolina and Georgia.
2. Merger Agreement
The Merger Agreement provides for a two-step merger transaction. In the
First Merger, New Sub I will be merged with and into SCANA and SCANA will
survive. In the Preferred Second Merger, PSNC will be merged with and into New
Sub II and New Sub II will survive. As a result of the Preferred Second Merger,
PSNC will become a wholly owned subsidiary company of SCANA.
In exchange for each share of PSNC common stock outstanding immediately
prior to the effective time of the Preferred Second Merger, PSNC shareholders
will be given the option to receive either (i) $33.00 in cash, subject to the
limitation that a maximum of 50% of the aggregate consideration to be paid to
PSNC shareholders may be paid in cash, or (ii) a number of shares of SCANA
common stock as determined in accordance with the PSNC exchange ratio (which may
be as low as 1.02 or as high as 1.45, depending on the average market price of
SCANA common stock over a 20 trading-day period). In exchange for each share of
SCANA common stock outstanding immediately prior to the effective time of the
First Merger, SCANA shareholders will be given the option to receive either (i)
$30.00 in cash or (ii) one share of SCANA common stock, subject to the
requirement that SCANA pay $700 million in cash in the aggregate as
consideration in the Mergers. The amount of cash available for payment to SCANA
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shareholders will be the portion of the $700 million remaining after PSNC
shareholders make their choice with respect to the form of consideration they
receive.
3. Financing the Mergers
Before completing the Mergers, the management of SCANA will evaluate
various sources and methods of financing to fund the consideration required to
finance the Mergers (the total amount of approximately $700 million). SCANA
currently anticipates that the full amount will be financed at the holding
company level through external sources. Sources of financing that SCANA is
considering include commercial and investment banks, institutional lenders and
public securities markets./3/ Methods of financing that SCANA may consider
include commercial paper, bank lines of credit and debt and preferred securities
of various maturities and types. The management of SCANA believes that SCANA
will have access to many sources and types of short-term and long-term financing
at reasonable rates. As a result of this financing, the consolidated
capitalization of SCANA after the Mergers will consist of approximately 39.6%
common equity and 60.4% long-term debt and preferred stock.
D. Management and Operations of SCANA and PSNC Following the Mergers
Following consummation of the Preferred Second Merger, the SCANA board of
directors will be expanded to include Charles E. Zeigler, Jr., the current
Chairman, President and Chief Executive Officer of PSNC, and two additional
persons presently serving as members of the PSNC board of directors. After PSNC
is merged into New Sub II, Mr. Zeigler will be President
- ----------
/3/ On November 1, 1999, SCANA filed a shelf-registration statement on Form S-3
covering $1,000,000,000 in medium-term notes. It is expected that some of
these securities will be sold in order to assist in financing the Mergers.
- ----------
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and Chief Operating Officer of the surviving corporation and each other
subsidiary of SCANA whose primary operations are located in North Carolina. Mr.
Zeigler will also be one of the three members of SCANA's Office of the Chairman
(the other two members will be (i) the Chairman, President and Chief Executive
Officer of SCANA and (ii) the President and Chief Operating Officer of SCE&G).
Also following consummation of the Preferred Second Merger, the corporate
headquarters of the surviving corporation will be relocated to Columbia, South
Carolina.
Item 2. Fees, Commissions and Expenses
Commission Registration Fees $ 805,200
Accountant's Fees 500,600
Legal Fees and Expenses 2,125,500
Shareholder Communication and proxy solicitation expenses 2,144,700
Investment bankers' fees and expenses 6,100,000
Miscellaneous 276,800
-----------
Total $11,952,800
The total fees, commissions and expenses expected to be incurred by SCANA
in connection with the Mergers are estimated to be approximately $11,952,800.
Item 3. Applicable Statutory Provisions
The following sections of the Act and the Commission's rules thereunder are
or may be directly or indirectly applicable to the proposed transaction:
Sections of the Transactions to which section or rule is or may
Act be applicable:
- --------------- -----------------------------------------------
4, 5 Registration of SCANA as a holding company following the
consummation of the Preferred Second Merger
9(a)(2), 10 Acquisition by SCANA of PSNC common stock
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11(b) Retention by SCANA of the businesses, investments and
non-utility activities of SCANA and PSNC.
To the extent that other sections of the Act or the Commission's rules
thereunder are deemed applicable to SCANA's acquisition of PSNC, such sections
and rules should be considered to be set forth in this Item 3.
A. Legal Analysis
Section 9(a)(2) of the Act makes it unlawful, without approval of the
Commission under Section 10, "for any person . . . to acquire, directly or
indirectly, any security of any public utility company, if such person is an
affiliate . . . of such company and of any other public utility or holding
company, or will by virtue of such acquisition become such an affiliate." Under
the definition set forth in Section 2(a)(11)(A) of the Act, an "affiliate" of a
specified company means "any person that directly or indirectly owns, controls,
or holds with power to vote, 5 per centum or more of the outstanding voting
securities of such specified company."
SCANA is currently the beneficial owner of 100% of the voting stock of two
public utility companies, SCE&G and GENCO. PSNC is also a public utility company
as defined in Section 2(a)(5) of the Act. Because SCANA will, as a result of the
Preferred Second Merger, acquire more than five percent of the outstanding
voting securities of a third public utility company, PSNC, SCANA must obtain the
approval of the Commission for the Preferred Second Merger under Sections
9(a)(2) and 10 of the Act. The statutory standards to be considered by the
Commission in determining whether to approve the proposed transaction are set
forth in Sections 10(b), 10(c) and 10(f) of the Act.
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As set forth more fully below, the Preferred Second Merger complies with
all of the applicable provisions of Section 10 of the Act and should be approved
by the Commission because:
o the Preferred Second Merger will not create detrimental interlocking
relations or a concentration of control;
o the consideration to be paid in the Preferred Second Merger is fair
and reasonable;
o the Preferred Second Merger will not result in an unduly complicated
capital structure for the SCANA system;
o the Preferred Second Merger is in the public interest and the
interests of investors and consumers;
o the Preferred Second Merger is consistent with Sections 8 and 11 of
the Act;
o the Preferred Second Merger tends towards the economical and efficient
development of an integrated public utility system; and
o the Preferred Second Merger will comply with all applicable state
laws.
1. Section 10(b)
Section 10(b) provides that if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)(2)
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 interests 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 such acquisition is not reasonable or does not bear
a fair relation to the sums invested in or the earning capacity of the
utility assets to be acquired or the utility assets underlying the
securities to be acquired; or
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(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 interests of investors or consumers or the
proper functioning of such holding company system.
a. Section 10(b)(1)
i. Interlocking Relations
Under Section 10(b)(1), the Commission shall approve an acquisition unless
the Commission finds that "such acquisition will tend towards interlocking
relations. . . ." By its nature, any merger of previously unrelated companies
results in new links and relations between the companies. Northeast Utilities,
Holding Co. Act Release No. 25221 (Dec. 21, 1990), as modified, Holding Co. Act
Release No. 25273 (March 15, 1991), aff'd sub nom. City of Holyoke v. SEC, 972
F.2d 358 (D.C. Cir. 1992) ("interlocking relationships are necessary to
integrate [the two merging entities]"). These links, however, are not the types
of interlocking relations targeted by Section 10(b)(1), which was primarily
aimed at preventing business combinations unrelated to operating
efficiencies./5/ SCANA's acquisition of PSNC in the Preferred Second Merger is
related to operating efficiencies and does not create the type of interlocking
relations targeted by Section 10(b)(1). The Merger Agreement provides for the
board of directors of SCANA, after completion of the Preferred Second Merger, to
be composed of members drawn from the boards of directors of both SCANA and
PSNC. Upon completion of the Preferred Second Merger, Charles Zeigler, the
current Chairman, President and Chief Executive Officer of PSNC, and two
- ----------
/5/ See Section 1(b)(4) of the Act (finding that the public interests of
consumers are adversely affected "when the growth and extension of holding
companies bears no relation to economy of management and operation or the
integration and coordination of related operating properties. . . .").
- ----------
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<PAGE>
other persons presently serving on the PSNC board of directors will become
members of the board of directors of SCANA. This is necessary to integrate PSNC
fully into the SCANA system and will therefore be in the public interest and in
the interests of investors and consumers by facilitating the management of SCANA
as an integrated and economically efficient energy services company. Forging
such relations is beneficial to the protected interests under the Act and is not
prohibited by Section 10(b)(1).
ii. Concentration of Control
Section 10(b)(1) is intended to prevent utility acquisitions that would
result in "huge, complex and irrational systems", and to avoid "an excess of
concentration and bigness" while preserving opportunities for the "economies of
scale, the elimination of duplicate facilities and activities, the sharing of
production capacity and reserves and the generally more efficient operations"
afforded by the coordination of local utilities into an integrated system.
American Electric Power Co., 46 S.E.C. 1299, 1307 (1978). In applying Section
10(b)(1) to utility acquisitions, the Commission must determine whether the
acquisition will create "the type of structures and combinations which the Act
was specifically directed [to prohibit]." Vermont Yankee Nuclear Corp., 43
S.E.C. 693, 700 (1968).
SCANA's acquisition of PSNC pursuant to the Preferred Second Merger will
not result in a "huge system" and will avoid the "excess of concentration and
bigness" at which Section 10(b)(1) is aimed at preventing. The Commission has
recognized that there is, per se, no limit to the size of a transaction which
may be approved. See Centerior Energy Corp., Holding Co. Act Release No. 24073
(April 29, 1986) ("determination of whether to prohibit enlargement of a
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system by acquisition is to be made on the basis of all the circumstances, not
on the basis of size alone"). SCANA's acquisition of PSNC will create a system
that is comparable to or smaller than other systems which have been approved by
the Commission. On a pro forma basis, giving effect to the proposed acquisition
as of December 31, 1998, SCANA and PSNC would have combined assets of $6.409
billion, total operating revenue of $1.932 billion for the twelve months ended
December 31, 1998, approximately 517,000 electric utility customers and more
than 750,000 gas utility customers. The Commission has approved acquisitions
involving registered holding companies with much larger operating public utility
systems (See Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993)
(approving the acquisition of Gulf State Utilities, with combined assets at the
time of acquisition in excess of $21 billion); The Southern Company, Holding Co.
Act Release No. 24579 (Feb. 12, 1988) (approving the acquisition of Savannah
Electric and Power Company to create a system with assets of $20 billion and
3.25 million customers); Ameren Corporation, Holding Co. Act Release No. 26809
(Dec. 30, 1997) (approving the merger of Union Electric Company and CIPSCO to
create a registered system with assets of $8.9 billion and operating revenues of
approximately $3.1 billion)) and has not had a problem with mergers creating
holding companies that are similar to the size that SCANA will be upon
completion of the Preferred Second Merger (See Conectiv, Inc., Holding Co. Act
Release No 26832 (Feb. 25, 1998) (approving the merger of Delmarva Power & Light
Company and Atlantic Energy, Inc. to create holding company system with assets
of $5.75 billion and operating revenues of $2.24 billion); New Century Energies,
Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997) (approving the merger of
Public Service Company of Colorado and
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Southwestern Public Service Company to create holding company system with assets
of $7 billion and operating revenues of $3 billion)).
SCANA's acquisition of PSNC pursuant to the Preferred Second Merger will
also not have a negative effect on competition. In analyzing the impact of the
Preferred Second Merger on competition, it is important to recognize that there
is no overlapping service territory for the public utility system operations of
SCANA and PSNC. In addition, there are numerous, large competitors who are
sophisticated players in the market and regulatory environment where SCANA and
PSNC operate. The following chart provides a comparison of certain major
regional utility companies in the southeastern region and demonstrates that,
after the Preferred Second Merger is completed, although SCANA will be more
competitive than it is today, it will not be comparatively large and would not
have market power in the region.
- --------------------------------------------------------------------------------
Utility Companies Comparison Chart (for the fiscal year ended 12/31/1998)
- --------------------------------------------------------------------------------
Operating
Revenues Net Income Total Assets
($ in millions) ($ in millions) ($ in millions)
- --------------------------------------------------------------------------------
Southern Company $11,403 $ 977 $36,192
Duke Energy $17,610 $1,252 $26,806
Dominion Resources/6/ $ 6,086 $ 535 $17,517
- --------------------------------------------------------------------------------
- ----------
/6/ Dominion Resources has entered into an agreement to merge with Consolidated
Natural Gas Company, a gas utility holding company with, for the fiscal
year ended 12/31/1998, operating revenue of $2.706 billion, net income of
$238 million and assets of $6.362 billion.
- ----------
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- --------------------------------------------------------------------------------
Utility Companies Comparison Chart (for the fiscal year ended 12/31/1998)
- --------------------------------------------------------------------------------
Carolina Power & Light/7/ $ 3,130 $ 399 $ 8,347
SCANA (pro forma) $ 1,932 $ 202 $ 6,409
- --------------------------------------------------------------------------------
In comparison to other regional gas utility companies, the combined SCANA and
PSNC gas operations, on a pro forma basis, will have approximately $710 million
in operating revenues and $735 million in assets. In comparison, Columbia Energy
Group (formerly Columbia Gas), for the fiscal year ended December 31, 1998, had
$1.929 billion in operating revenues and $6.968 billion in assets; AGL Resources
(formerly Atlanta Gas Light), for the fiscal year ended September 30, 1998, had
$1.339 billion in operating revenues and $1.982 billion in assets and Piedmont
Natural Gas, for the fiscal year ended October 31, 1998, had $765 million in
operating revenues and $1.163 billion in assets. Importantly, as noted above, a
number of large, regional electric utility companies have also entered into
agreements to acquire gas utility companies of similar or larger size than PSNC.
Overall, SCANA's acquisition of PSNC will not create a "complex and irrational
system", but will create a company focused on competitive prices and high
quality reliable customer service.
Finally, the Commission should note that although the Preferred Second
Merger is not a jurisdictional transaction under the Federal Power Act or
Natural Gas Act and therefore
- ----------
/7/ Carolina Power & Light has subsequently acquired North Carolina Natural
Gas, a gas utility company operating in North Carolina with, for the fiscal
year ended 9/30/1998, operating revenue of $232 million, net income of $17
million and assets of $271 million. Carolina Power & Light has also entered
into an agreement to acquire Florida Progress Corp., an electric and gas
utility with, for the fiscal year ended December 31, 1998, $3.6 billion in
operating revenues, $281 million in net income and $6.2 billion in total
assets.
- ----------
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<PAGE>
does not require the approval of the FERC,/8/ its impact on competition and/or
the public interest will be subject to review on both the federal and state
level. On or about August 27, 1999, each of SCANA and PSNC filed a Pre-merger
Notification and Report Form with the Antitrust Division of the Department of
Justice ("DOJ") and the Federal Trade Commission (the "FTC") pursuant to the HSR
Act, and on September 26, 1999, the applicable waiting period for both SCANA and
PSNC under the HSR Act expired. On the state regulatory level, SCANA's
acquisition of PSNC must be approved by the NCUC. Following consummation of the
Mergers, SCE&G will continue to be subject to regulation with respect to rates
and other corporate matters by the SCPSC, and PSNC will continue to be subject
to regulation with respect to rates and other corporate matters by the NCUC, in
each case in order to protect the interests of consumers and the public.
b. Section 10(b)(2)
i. Fairness of Consideration
Section 10(b)(2) requires the Commission to determine whether the
consideration to be given by SCANA to the holders of PSNC common stock in
connection with the Preferred Second Merger is reasonable, and whether it bears
a fair relation to the investment in, and earning capacity of, the utility
assets underlying the PSNC common stock being acquired. Market prices at which
securities are traded have always been strong indicators as to values. As shown
in the table below, the quarterly price data, high and low, for PSNC common
stock provides support
- ----------
/8/ In TUC Holding Company, Holding Co. Act Release No. 26749 (Aug. 1, 1997),
the Commission approved a transaction that similarly did not require
approval by the Federal Energy Regulatory Commission. In the case of TUC,
however, the companies did have overlapping service territory.
- ----------
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that the consideration of approximately $33.00 (depending on the operation of
the exchange ratio) for each share of PSNC common stock is fair.
- --------------------------------------------------------------------------------
PSNC
High Low Dividends
- --------------------------------------------------------------------------------
1997
First Quarter $19 $17 3/8 $0.22
Second Quarter 20 16 3/4 0.23
Third Quarter 21 7/8 18 3/4 0.23
Fourth Quarter 24 3/8 19 7/16 0.23
- --------------------------------------------------------------------------------
1998
First Quarter 22 7/8 19 1/8 0.23
Second Quarter 22 3/16 19 7/8 0.24
Third Quarter 24 1/2 19 1/8 0.24
Fourth Quarter 26 1/16 21 9/16 0.24
- --------------------------------------------------------------------------------
1999
First Quarter 29 15/16 22 5/16 0.24
- --------------------------------------------------------------------------------
On February 12, 1999, the last business day before the date on which SCANA and
PSNC entered into the Merger Agreement, the closing price per share of PSNC
common stock as reported on the NYSE-Composite Transactions was $22 5/8.
In addition to such quantitative evidence that the consideration being
offered to holders of PSNC common stock is fair, the consideration being offered
to holders of PSNC common stock is also the product of extensive and vigorous
arms-length negotiations between SCANA and PSNC. These negotiations were
preceded by months of due diligence, analysis and
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evaluation of the assets, liabilities and business prospects of the respective
companies. See SCANA Registration Statement on Form S-4 (Exhibit C-1 hereto).
Internationally-recognized investment bankers for SCANA and PSNC have reviewed
extensive information concerning the companies and analyzed that information
using a variety of valuation methodologies. Morgan Stanley & Co. Incorporated
provided an opinion to PSNC which states that the consideration to be received
by holders of PSNC common stock pursuant to the Merger Agreement was fair from a
financial point of view to the holders of PSNC common stock. Morgan Stanley's
analyses are attached hereto. See Opinion of Morgan Stanley & Co. Incorporated
(Exhibit G-1). In addition, although not directly addressing the issue under
consideration by the Commission, it is worth noting that PaineWebber
Incorporated provided an opinion to SCANA that the financial terms of the
Mergers, taken as a whole, were fair to the holders of SCANA common stock.
PaineWebber's analyses are also attached hereto. See Opinion of PaineWebber
Incorporated (Exhibit G-2).
In light of the analysis of all relevant factors, including the benefits
that may be realized as a result of the Preferred Second Merger, SCANA believes
that the consideration being offered to holders of PSNC common stock in
connection with the Preferred Second Merger bears a fair relation to the sums
invested in, and the earning capacity of, the utility assets of PSNC.
ii. Reasonableness of Fees
SCANA believes that the overall fees, commissions and expenses incurred and
to be incurred in connection with the Mergers are reasonable and fair in light
of the size and complexity of the Mergers relative to other transactions and the
anticipated benefits of the
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Mergers to the public, investors and consumers; that they are consistent with
recent precedent; and that they meet the standards of Section 10(b)(2).
As set forth in Item 2 of this Application/Declaration, SCANA expects to
incur a combined total of approximately $11,952,800 in fees, commissions and
expenses in connection with the Mergers. By contrast, American Electric Power
Company and Central and South West Corporation have represented that they expect
to incur total transaction fees and regulatory processing fees of approximately
$53 million, including financial advisory fees of approximately $31 million, in
connection with their proposed merger.
The Applicant believes that the estimated fees and expenses in this matter
bear a fair relation to the value of PSNC and the strategic benefits to be
achieved by the Mergers, and that the fees and expenses are fair and reasonable
in light of the complexity of the Mergers. See Northeast Utilities, Holding Co.
Act Release No. 25548 (June 3, 1992), modified on other grounds, Holding Co. Act
Release No. 25550 (June 4, 1992) (noting that fees and expenses must bear a fair
relation to the value of the company to be acquired and the benefits to be
achieved in connection with the acquisition). Based on the closing price of
SCANA stock on May 12, 1999, the Preferred Second Merger would be valued on an
equity basis at approximately $679 million and both of the Mergers would be
valued on an equity basis at roughly $3.3 billion. The estimated fees and
expenses that SCANA will incur in connection with both Mergers total
$11,952,800, which represents approximately 1.76% of the value of the
consideration to be paid by SCANA to the shareholders of PSNC and .3 % of the
value of the entire transaction. These percentages are consistent with
percentages previously approved by the Commission. See, e.g.,
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Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993) (fees and
expenses represented approximately 1.7% of the value of the consideration paid
to the shareholders of Gulf States Utilities); Northeast Utilities, Holding Co.
Act Release No. 25548 (June 3, 1992) (approximately 2% of the value of the
assets to be acquired).
c. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether SCANA's
proposed acquisition of PSNC pursuant to the Preferred Second Merger will unduly
complicate SCANA's capital structure or be detrimental to the public interest,
the interest of investors or consumers or the proper functioning of SCANA.
i. Capital Structure
The capital structure of SCANA after the Mergers will not be unduly
complicated. In connection with the Mergers, SCANA will issue additional shares
of SCANA common stock to be exchanged for existing shares of SCANA common stock
and PSNC common stock. Additionally, the $700 million cash consideration being
offered in the Mergers will be financed at the SCANA holding company level
through commercial and investment banks and institutional lenders. It is
expected that this financing and the issuance of new shares will not have a
material effect on the capital structure of SCANA. In this regard, SCANA's
capital structure will closely resemble that of most registered holding company
systems.
Set forth below is a summary of the historical capital structures of SCANA
and PSNC as of December 31, 1998, and the pro forma consolidated capital
structure of SCANA, as of December 31, 1998 (assuming that the consideration
paid by SCANA for the shares of PSNC
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common stock consisted of $348 million in cash consideration and $348 million in
stock consideration and, therefore, $352 million in cash was paid to SCANA
shareholders in the First Merger).
SCANA and PSNC Historical Capital Structures
(Dollar amounts in millions)
% of Total % of Total
SCANA Capitalization PSNC Capitalization
----- -------------- ---- --------------
Common stock equity $1,746 49.4% $224 57.6%
Preferred stock equity 117 3.3% n/a n/a
SCE&G Obligated Mandatorily 50 1.4% n/a n/a
Redeemable Preferred Securities of
SCE&G's Subsidiary Trust I, holding
solely $50 million principal amount
of 7.55% Junior Subordinated
Debentures of SCE&G, due 2027
Long-term debt 1,623 45.9% 165 42.4%
------ ------ ---- ------
Total $3,536 100.0% $389 100.0%
SCANA PRO FORMA Consolidated Capital Structure
(Dollar amounts in millions) (unaudited)
% of Total
Amount Capitalization
------ --------------
Common stock equity $1,742 39.6%
Preferred stock equity 117 2.7%
SCE&G Obligated Mandatorily 50 1.1%
Redeemable Preferred Securities of
SCE&G's Subsidiary Trust I, holding
solely $50 million principal amount
of 7.55% Junior Subordinated
Debentures of SCE&G, due 2027
Long-term debt 2,488 56.6%
------ -----
Total (excluding short-term debt) $4,397 100.0%
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Significantly, SCANA's pro forma consolidated common equity to total
capitalization ratio of 39.6% as of December 31, 1998, is well above the
"traditionally acceptable 30% level." See Northeast Utilities, 47 SEC Docket
1270 at 1279, n. 47 (Dec. 21, 1990). It should be noted that in most mergers
involving cash consideration, the acquiring company will incur some debt or
other obligation as part of the acquisition. SCANA intends to finance its
acquisition through loans from sophisticated commercial lenders and potential
registered public offerings of securities subject to the provisions of, and
protection afforded to investors by, the Securities Act of 1933, as amended.
Furthermore, acquisition indebtedness incurred at the registered holding company
level has been approved by the Commission in connection with other transactions
such as cross border transactions (See General Public Utilities Corporation,
Holding Co. Act Release No. 26559 (Aug. 23, 1996) (authorizing issuance of
debentures with terms of up to 40 years with proceeds to be used to, among other
things, "fund the acquisition of interests, and to make investments in . . .
foreign utility companies," and "for other [General Public Utilities'] corporate
purposes")) and, as demonstrated above, the level of indebtedness of SCANA
following the Preferred Second Merger is well within the level that the
Commission has been comfortable with in the past.
ii. Protected Interests
Section 10(b)(3) also requires that a proposed acquisition not be
detrimental to the public interest, the interest of the investors or consumers
or the proper functioning of the resulting holding company system. As set forth
more fully in the discussion of the standards of Section 10(c)(2), below, and
elsewhere in this Application-Declaration, SCANA's proposed acquisition of
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PSNC will combine SCANA's existing natural gas operations with those of PSNC,
and allow SCANA to extend its service area into some of the fastest growing
markets in North Carolina. As an economically integrated and efficient energy
company, the combined company will be able to offer improved capabilities in the
delivery of a more complete range of services and products for all customers.
As noted by the Commission in Entergy Corporation, et al., 55 SEC Docket
2035 at 2045 (December 17, 1993), "concerns with respect to investors' interests
have been largely addressed by developments in the federal securities laws and
the securities markets themselves." In this regard, SCANA will continue to be a
reporting company subject to the disclosure requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") following completion of the Preferred
Second Merger, which will provide investors with readily available information
concerning SCANA and its subsidiary companies. Furthermore, the Preferred Second
Merger is subject to various other federal and state regulatory approvals (See
Item 4 - Regulatory Approvals, below). Finally, SCANA notes that the incurrence
of acquisition indebtedness is not detrimental to investor's interests. As the
Commission has previously recognized, under Section 7(c)(2)(A) of the Act, a
registered holding company can issue other than "plain vanilla" securities
"solely . . . for the purpose of effecting a merger, consolidation, or other
reorganization." Conectiv, Inc., Holding Company Act Release No. 26832 (Feb. 25,
1998). Indeed, the issue for purposes of Section 10(b)(3) is not the existence
of parent-level debt per se. Rather, the question is whether it is permissible
for a registered system to have debt at more than one level. The Commission has
answered this question in the affirmative. In the 1992 amendments to Rule 52,
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the Commission eliminated the requirement that a public-utility subsidiary
company could issue debt to nonassociates only if its parent holding company had
issued no securities other than common stock and short-term debt. The rule
release explains:
Condition (6) provides that a public-utility subsidiary company may
issue and sell securities to nonassociates only if its parent holding
company has issued no securities other than common stock and
short-term debt. All eight commenters that considered this condition
recommended that it be eliminated. They noted that it may be
appropriate for a holding company to issue and sell long-term debt and
that such a transaction is subject to prior Commission approval. They
further observed that other controls, that did not exist when the
statute was enacted, provide assurance that such financings will not
lead to abuse. These include the likely adverse reaction of rating
agencies to excessive amounts of debt at the parent holding company
level and the disclosure required of companies seeking public capital.
The Commission agrees with these observations and also noted the power
of many state utility commissions to limit the ability of utility
subsidiaries to service holding company debt by restricting the
payment of dividends to the parent company. The Commission concludes
that this provision should be eliminated.
Exemption of Issuance and Sale of Certain Securities by Public-Utility
Subsidiary Companies of Registered Public-Utility Holding Companies, Holding Co.
Act Release No. 25573 (July 7, 1992). Moreover, the Commission has previously
permitted combination gas and electric holding companies to issue debt at the
holding company as well as the subsidiary level. See Cinergy Corp., Holding Co.
Act Release No. 26909 (Aug. 21, 1998) (authorizing the issuance of up to $400
million of unsecured debt securities); Conectiv, Inc., Holding Co. Act Release
No. 26921 (Sept. 28, 1998) (authorizing issuance of up to $250 million of
debentures). Therefore, the post- merger SCANA capital structure having two
levels of debt will be similar to the capital structure of similarly situated
registered holding companies.
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For these reasons, SCANA submits that investors' interests in SCANA will
continue to be protected and that the Commission has no basis for making a
negative finding under Section 10(b)(3). SCANA's acquisition of PSNC will be in
the public interest and in the interest of investors and consumers, and will not
be detrimental to the proper functioning of the resulting holding company
system.
2. Section 10(c)
a. Section 10(c)(1)
Section 10(c)(1) prohibits the Commission from approving an acquisition for
which Commission approval is required under Section 9(a) if such acquisition is
unlawful under the provisions of Section 8 or is detrimental to the carrying out
of the provisions of Section 11.
i. Section 8 Analysis
Section 8 prohibits a registered holding company from acquiring interests
in an electric utility company and a gas utility company serving substantially
the same territory in contravention of state law. Following the Preferred Second
Merger, SCANA's electric utility company, SCE&G, will continue to serve
customers exclusively in South Carolina, while the gas utility operations of
PSNC which SCANA acquires will be located in North Carolina. When a registered
holding company's holdings include an electric utility company and a gas utility
company, each of which serve customers in a different state from the other, the
utilities do not "[serve] substantially the same territory" for purposes of
Section 8. Moreover, no state law prohibits SCANA from acquiring PSNC. Thus,
SCANA's acquisition of PSNC under the Preferred Second Merger does not violate
Section 8 of the Act and is therefore not prohibited, in this regard, by Section
10(c)(1).
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ii. Section 11 Analysis - Integration
Section 10(c)(1) also requires that an acquisition not be detrimental to
carrying out the provisions of Section 11 of the Act. Section 11(b)(1), in
pertinent part, directs the Commission:
to require . . . that each registered holding company, and each
subsidiary company, thereof, take such action as the Commission shall
find necessary to limit the operations of the holding-company system
of which such company is a part 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. . . . The Commission may permit as
reasonably incidental, or economically necessary or appropriate to the
operations of one or more integrated public utility systems the
retention of an interest in any business (other than the business of a
public utility company as such) which the Commission shall find
necessary or appropriate in the public interest or for the protection
of investors or consumers and not detrimental to the proper
functioning of such system or systems.
I. Integrated Electric Utility System
The existing SCANA electric utility system is, and following the Preferred
Second Merger, will continue to be, an integrated electric utility system.
Section 2(a)(29)(A) of the Act defines an integrated public utility system with
respect to electric utility companies as:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distribution facilities, whose utility
assets, whether owned by one or more electric utility companies, are
physically interconnected or capable of interconnection and which
under normal circumstances 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 area or region affected)
the advantages of localized management, efficient operation, and the
effectiveness of regulation.
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SCE&G and GENCO operate in a single contiguous service territory in the State of
South Carolina, and the Preferred Second Merger will not have any impact on the
operation of SCANA's electric utility system.
II. Integrated Gas Utility System
Section 2(a)(29)(B) defines an integrated public utility system with
respect to gas utility companies as:
a system comprised 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 area or
region affected) the advantages of localized management, efficient
operation, and the effectiveness of regulation; provided that gas
utility companies deriving natural gas from a common source of supply
may be deemed to be included in a single area or region.
SCE&G's gas utility operations are located in a single contiguous area in South
Carolina and are currently integrated.
PSNC's gas utility operations are also currently integrated. PSNC's gas
utility operations are located in three areas within the State of North
Carolina: the Raleigh, Durham and Research Triangle area in the north central
portion of the state; Gastonia, Concord and Statesville in the central portion
of the state; and Asheville, Hendersonville and Brevard in the Western area.
PSNC currently transports, distributes and sells natural gas to residential,
commercial and industrial customers in these three non-contiguous areas. PSNC
serves all three areas using, in the aggregate, all of its gas supplies under
its gas purchase contracts with various marketers and
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suppliers. These supplies come from commonly used basins along the Gulf Coast,
including basins in Texas, Louisiana, Mississippi, Alabama and the adjacent
offshore areas.
While these gas supplies are transported from the basins by various
interstate pipelines, only one pipeline, Transco, has physical connections with
PSNC. The other interstate pipelines have direct or indirect connections with
Transco that enable PSNC's gas to flow to Transco and through Transco to PSNC.
Because PSNC obtains its gas supplies from common basins and uses Transco to
coordinate transportation of that gas to its three service areas, PSNC operates
an integrated gas utility company that satisfies the requirements of Section
2(a)(29)(B). See NIPSCO Industries, Holding Co. Act Release No. 26975 (Feb. 10,
1999); Sempra Energy, Holding Co. Act Release No. 26971 (Feb. 1, 1999); Pennzoil
Co., 43 S.E.C. 709 (1968); American Natural Gas Co., 43 S.E.C. 203 (1966).
On a combined basis SCANA's and PSNC's gas utility systems will also meet
the definition of Section (2)(a)(29)(B) of the Act. Although their service
territories do not overlap, there can be little question that the Carolinas,
specifically, and the southeastern United States, generally, constitute a single
area or region. Indeed, by definition, The Southern Company, a large electric
registered holding company operating in four southeastern states is an
integrated system and operates in the same single region.
The Commission has also looked to coordination of gas supply and common gas
supply sources such as common pipeline suppliers and supply coming from common
gas basins as an indication of an integrated gas utility system. See NIPSCO
Industries, Holding Co. Act Release No. 26975 (Feb. 10, 1999) (finding
integration between gas utility companies in Indiana and Massachusetts based on
coordinated gas supply departments, obtaining gas from common
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basins and using trading hubs). The gas utility companies at issue here are also
integrated using these criteria. SCANA and PSNC's combined gas system will
satisfy Section 2(a)(29)(B) of the Act because it will take gas from a common
source of supply. PSNC takes essentially all of its gas from Gulf Coast
production areas and SCANA takes 98% of its gas supply from the same Gulf Coast
areas. In addition, both SCANA and PSNC are connected to Transco's
transportation systems, and the combined company will be able to use Transco, to
the extent permitted by Transco's tariff and their respective service agreements
with Transco, to transfer this gas among service areas and provide flexibility
in its operations. SCANA also has connections with Southern Natural, which is
connected to Transco's transportation system and will allow the combined company
to coordinate gas transportation services between Southern Natural and Transco
and access all gas supplies connected to either pipeline. Because SCANA and PSNC
purchase substantial quantities of gas from the same supply areas and have
sufficient transportation capacity to ensure delivery of said gas, the
companies' combined gas utility systems will be integrated for purposes of the
Act. See NIPSCO Industries, Inc. Holding Co. Act Release No. 265975 (Feb. 10,
1999) ("relevant inquiry today is whether the system utilities purchase
substantial quantities of gas produced in the same supply basins and whether
there is sufficient transportation capacity available in the marketplace to
assure delivery on an economical and reliable basis").
Following the Mergers, the gas supply function for the combined SCANA and
PSNC gas systems will be managed by a single service company, SCANA Services,
which will be able to coordinate the taking of its gas supply from this Gulf
Coast region. As existing gas supply contracts between each of SCANA and PSNC
and their respective gas suppliers terminate in the ordinary course of business,
SCANA Services will coordinate contracts for future gas supplies on
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behalf of SCANA and PSNC. The economies of scale created by this coordinated gas
procurement are expected to generate cost savings to the combined company.
In addition to being integrated, the combined gas operations of SCANA and
PSNC after the Preferred Second Merger will be "economically efficient." Because
SCANA and PSNC purchase gas from the same Gulf Coast production areas, the
companies can consolidate their supply contracts after the Preferred Second
Merger and purchase greater quantities of gas at a potentially lower cost.
Similarly, the interconnection of SCANA's and PSNC's gas transportation services
through Transco and Southern Natural provides a flexible system in which SCANA
and PSNC can capture economics of scale and coordinate gas transportation at the
lowest possible cost.
iii. Section 11 Analysis - Retention of Gas Utility System
As noted above, both the electric utility operations and gas utility
operations of SCANA will be separately integrated. Another potential issue is
whether the combination of SCANA's electric and gas utility businesses with
PSNC's gas utility business is retainable under the standards of Section 11 of
the Act.
Historically, the Commission had considered the question of whether a
registered electric system could retain a separate gas system under a strict
standard that required showing a loss of substantial economies before retention
would be permitted. New England Electric System, 41 S.E.C. 888 (1964). In its
affirmation of that decision, the United States Supreme Court declared that a
loss of substantial economies could be demonstrated by the inability of the
separate gas system to survive on a stand-alone basis. SEC v. New England
Electric System, 384 U.S. 176, 181 (1966). This rigid interpretation of the
requirements of Section 11(b)(1) has been
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explicitly rejected by the Commission in its most recent decisions under
Sections 9(a) and 10 of the Act both with respect to exempt holding companies,
(TUC Holding Company, Holding Co. Act Release No. 26749 (Aug. 1, 1997) and
Houston Industries Incorporated, Holding Co. Act Release No. 26744 (July 24,
1977)) and newly formed registered companies (New Century Energies, Inc.,
Holding Co. Act Release No. 26748 (Aug. 1, 1997)).
In these recent decisions, the Commission acknowledged that as a result of
the transformation of utilities' status as franchised monopolies with captive
ratepayers to competitors and also as a result of the convergence of the
electric and gas industries that was then underway (and which continues today
and of which SCANA is already a prime example), the historical standards of
review had become outdated and that separated electric and gas companies might
be weaker competitors than they would be together in the same market. New
Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997);
Houston Industries Incorporated, Holding Co. Act Release No. 26744 (July 24,
1997). Moreover, in its registered holding company decisions, the Commission has
explicitly allowed transactions where, as is the case with SCANA and PSNC, the
resulting system will be predominantly electric although the merger will combine
more than one gas system owned by the constituent parties. See WPL Holdings,
Inc., Holding Co. Act Release No. 26856 (April 14, 1998), aff'd sub nom.,
Madison Gas and Electric Company v. SEC, 168 F.3d 1337 (D.C. Cir. 1999); Ameren
Corporation, Holding Co. Act Release No. 26809 (Dec. 30, 1997). Thus, newer
transactions, such as SCANA's proposed acquisition of PSNC, should be evaluated
on the basis of new Commission precedent and policy in light of changing
industry standards and should not be evaluated against criteria that have been
repudiated by recent Commission decisions.
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SCANA believes that the Commission should approve the Preferred Second
Merger as a matter of policy and as a matter of fairness, and can approve the
Preferred Second Merger as a matter of law. First, the Commission has already
acknowledged that the electric and gas industries are converging and that
combination companies may be more effective competitors in a given market. The
Commission has recognized and accepted the changing nature of the energy
industry and, in particular, the fact that the combination of multiple electric
and gas operations in a single company offers that company a means to compete
more effectively in the emerging energy services business in which a few cents
can make the difference between economic success and economic failure. WPL
Holdings, Inc., et al., Holding Co. Act Release No. 26856 (April 14, 1998),
aff'd sub nom., Madison Gas and Electric Company v. SEC, supra. Indeed, the
Commission has noted that "the utility industry is evolving towards a broadly
based energy-related business"/9/ marked by "the interchangeability of different
forms of energy, particularly gas and electricity."/10/ In the instant
situation, the lost economies that would follow from denial of approval for the
Preferred Second Merger are substantial, both quantitatively and qualitatively.
Section 10(c)(1) does not require that the Commission rigidly enforce
Section 11(b)(1) without consideration of the lost economies that would result
from divestiture of additional systems in considering acquisitions under Section
9(a). As the Court of Appeals stated in Madison Gas and Electric Company v. SEC:
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/9/ Consolidated Natural Gas Company, Holding Co. Act Release No. 26512 (April
30, 1996).
/10/ Id.
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By its terms . . ., Section 10(c)(1) does not require that new
acquisitions comply to the letter with Section 11. In contrast to its
strict incorporation of Section 8 . . ., with respect to Section 11
Section 10(c)(1) prohibits approval of an acquisition only if it "is
detrimental to the carrying out of [Section 11's] provisions." The
Commission has consistently read this provision to import into Section
10's regime not only the integration requirement of 11(b)(1)'s main
clause but also the exceptions to the requirement in the (A)(B)(C)
clauses./11/
In the instant situation, substantial economies would be lost by requiring
SCANA to divest any of its retail gas operations, some of which have been held
since the utility's inception. SCE&G has undertaken a traditional "A-B-C clause"
analysis which quantifies lost economies that may occur if it was forced to
divest any of its retail gas operations. From this analysis, it is evident that
divestiture of any of SCE&G's gas retail operations would result in negative
impact on shareholders and gas customers. Based on the results of operations for
the year 1998, operating the gas operations of SCE&G as a stand-alone gas
utility would result in approximately $12.5 million in increased labor costs,
$1.1 million in increased property taxes and $2.3 million in increased
depreciation and amortization. Such increased expenses represent roughly 7.0
percent of SCE&G's total gas operating revenue, 7.9 percent of its existing gas
operating expenses, and 46.1 percent of SCE&G's gas operating income (after
income taxes). Although the Commission
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/11/ Section 11(b)(1) states that "the Commission shall permit a registered
holding company to continue to control one or more additional integrated
public utility systems, if, after notice and opportunity for hearing, it
finds that -- (A) Each of such additional systems cannot be operated as an
independent system without the loss of substantial economies which can be
secured by the retention of control by such holding company of such system;
(B) All of such additional systems are located in one state, or in
adjoining states, or in a contiguous foreign country; and (C) The continued
combination of such systems under the control of such holding company is
not so large (considering the state of the art and the area or region
affected) as to impair the advantages of localized management, efficient
operation, or the effectiveness of regulation."
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has declined to draw a bright-line numerical test under Section 11(b)(1), it has
indicated that cost increases resulting in a 6.78% loss of operating revenues, a
9.72% increase in operating revenue expenses and a 42.46% loss of net income
would afford an "impressive basis for finding a loss of substantial economies."
See Engineers Public Service Co, 12 S.E.C. 41, 59 (1942). In the present
situation, the loss of operating revenues and net income would be slightly
greater than the standards set forth by the Commission, while the resulting
increase in operating revenue expenses would be slightly lower.
In addition to these increased expenses, roughly $40.8 million in increased
capital expenditures would be required to operate SCE&G's gas operations as a
stand-alone gas utility. These capital expenditures would be incurred in
connection with replicating existing services for the stand-alone gas utility,
including billing, meter reading, customer service and computer and information
systems. Such additional capital expenditures represent 266.56 percent of the
total capital expenditures of SCE&G for fiscal 1998, more than a two and
one-half times increase of current levels.
The increased expenses and capital expenditures that would result from
operating SCE&G's gas operations as a stand-alone utility would most likely be
passed along to gas customers. Assuming that the stand-alone gas operations of
SCE&G would be permitted to recover all cost increases through higher rates
charged to customers, SCE&G would realize a 9.5% increase in gas operating
revenues and customers would, in turn, be paying this increase in revenue.
Customers would also incur twice the postage that they currently incur because
instead of mailing one payment, as is the present case, they would mail two
separate payments, one for each of electric and gas services. This additional
cost could approach up to $1.0 million annually.
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In addition, while difficult to quantify, customers would also have to contend
with the additional cost, effort and inconvenience associated with dealing with
two utilities.
Divestiture of SCANA's gas operations would also cause a significant,
although difficult to quantify, amount of damages to SCANA's ability to compete
in the marketplace as well as costs to SCANA's customers and regulators. As
noted above, the gas and electric industries are converging nationwide and in
the southeastern region in particular, and in these circumstances separation of
electric and gas businesses would likely cause the separated entities to be
weaker competitors than they would be together. As competition has developed in
the utility industry, those companies in the retail energy delivery business
have found that they must be able to offer customers a range of options to meet
their energy needs. Potential non-quantifiable costs to customers which would
result from divestiture of SCANA's gas operations involve the additional
expenses of doing business with two public utility companies instead of one and
the costs associated with making multiple companies supply information to
shareholders and publish reports required by the Exchange Act. Similarly,
regulatory costs would involve additional duties for the staff of the SCPSC as a
result of dealing with an additional public utility company. These additional
duties would largely be the result of duplicating existing functions such as
separate requests for approvals of financing.
With respect to the retention by SCANA of PSNC's gas utility businesses
following the Preferred Second Merger, the economies of scale that would be lost
upon divestiture are more difficult to quantify because such economies have not
yet been realized. Consequently, the lost economies that would result if SCANA
were eventually forced to divest any of PSNC's gas operations should be measured
as those economies and benefits (i.e., revenue
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enhancement opportunities) that are expected to result over time following the
Preferred Second Merger but would not be realized if the Preferred Second Merger
were not approved. The combination of the gas operations of PSNC into the SCANA
system is presently expected to result in significant revenue enhancement
opportunities. Although no assurances can be given, SCANA currently expects that
in each of the next five years, the combined company will realize increases in
operating revenue of approximately $15 million, $16 million, $18 million, $19
million and $21 million, respectively. When discounted at a rate of 9.5%, the
aggregate present value of this five-year stream of increases is $67 million.
This represents an average increase in revenue, on a present value basis, of
$13.5 million per year. If the Preferred Second Merger is not approved, this
average increase in revenue (e.g., $13.5 million per year) would equal roughly
4.5% of PSNC's 1998 operating revenue of $300.1 million. The same average
increase in revenue would represent 5.4% of PSNC's 1998 operating expenses of
$250.9 million, and, net of tax, approximately 38.9% of PSNC's 1998 net gas
income of $21.4 million. Thus, failure to approve the Preferred Second Merger
would also result in lost economies.
For all of the foregoing reasons, the Commission should hold that the
combination of electric and gas operations under SCANA's newly registered
holding company is lawful under the provisions of Section 8 and is not
detrimental to the carrying out of the provisions of Section 11.
iv. Section 11 Analysis - Retention of Non-Utility
Businesses
As a result of the Preferred Second Merger, the non-utility businesses and
interests of PSNC described above will become businesses and interests of SCANA.
SCANA seeks to
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retain both its current non-utility businesses and those which SCANA will
acquire from PSNC. All of these businesses satisfy the standards for retention
of non-utility businesses set forth under Section 11(b)(1) of the Act and the
cases interpreting the foregoing.
Section 11(b)(1) limits the non-utility interests of a registered holding
company to those that are "reasonably incidental, or economically necessary or
appropriate to the operations of such integrated public-utility system", on a
finding by the Commission that such interests are "necessary or appropriate in
the public interest or for the protection of investors or consumers and not
detrimental to the proper functioning" of the integrated system. The Commission
has interpreted these provisions to require (i) the existence of an operating or
functional relationship between the utility operations of the registered holding
company and the non-utility activities sought to be retained/12/ and (ii) that
the retention is in the public interest./13/ The non-utility business may also
be retained if the business evolved out of the system's utility business, the
investment is not significant in relation to the system's total financial
resources and the investment has the potential to produce benefits for investors
and/or consumers./14/ In addition, the Commission has stated that "retainable
non-utility interests should occupy a clearly subordinate position to the
integrated system constituting the primary business of the registered holding
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/12/ See generally Michigan Consolidated Gas Co., 44 S.E.C. 361 (1970), aff'd,
444 F.2d 913 (D.C. Cir. 1971).
/13/ See, e.g., id. (quoting General Public Utilities Corp. 32 S.E.C. 807, 839
(1951)); United Light and Railways Co., 35 S.E.C. 516, 519 (1954).
/14/ CSW Credit, Inc., Holding Co. Act Release No. 25995 (1994); Jersey Central
Power and Light Co., Holding Co. Act Release No. 24348 (March 18, 1987).
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company."/15/ With respect to new acquisitions, the Commission has interpreted
Section 10(c)(1) of the Act to mean that "any property whose disposition would
be required under Section 11(b)(1) may not be acquired."/16/
Rule 58 of the Act provides additional evidence of the types of permissible
non- utility activities retainable by registered systems as it exempts from
Section 9(a) of the Act acquisitions by registered holding companies of the
securities of an energy related company provided that after such an acquisition,
the holding company's aggregate investment in such energy related company does
not exceed $50 million or 15% of the consolidated capitalization of the
registered holding company./17/ Rule 58 defines 'energy related company' as a
company that, directly or indirectly, derives substantially all of its revenues
from certain enumerated activities. Clearly, if Rule 58 permits acquisition
without SEC approval, then the types of businesses being acquired are retainable
under the Act. Several of the non-utility businesses which SCANA seeks to retain
after the Mergers are specifically enumerated activities under Rule 58, and will
be discussed individually. Similarly, the Act also allows registered holding
companies to acquire and maintain interests in the following exempt entities:
exempt telecommunications companies (Section 34), foreign utility companies
(Section 33) and exempt wholesale generators (Section 32).
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/15/ United Light and Railways Co., 35 S.E.C. at 519.
/16/ Texas Utilities Co., 21 S.E.C. 827, 829 (1946) (denying approval to
acquisition of transportation company by registered holding company).
/17/ Rule 58(a)(1)(i)-(ii).
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As set forth below, all of SCANA's and PSNC's non-utility businesses meet
the retention standards set out by the Commission, fall within the exemption for
energy-related activities in Rule 58, are otherwise exempt entities or
constitute a de minimis activity in the utility's local service territory./18/
The material non-utility businesses currently relate to, evolved out of or
support the operation of SCANA's or PSNC's utility businesses by being
activities which have operating or functional relationships with the utility
businesses of each. The retention of these non-utility businesses will also
produce benefits for SCANA's present and future customers and shareholders, and
therefore the retention of all the non-utility businesses should be permitted.
1. Pipeline Corporation, Cardinal and Cardinal Pipeline Company: Pipeline
Corporation is engaged in the purchase, transmission and sale of natural gas on
a wholesale basis, through the ownership of transmission pipelines and LNG
plants. Pipeline Corporation also supplies the natural gas for SCE&G's gas
distribution system. This supply of natural gas for the utility operations of
SCANA is clearly functionally related to such utility operations. See SEI
Holdings, Inc., Holding Co. Act Release No. 26581 (Sept. 26, 1996) ("The
Commission has approved the acquisition or construction of physical assets that
are reasonably necessary in the day-to-day conduct of marketing operations.")
See also New Century Energies, Inc. Release No. 26748 (Aug. 1, 1997)
(authorizing retention of interest in Texas Ohio Pipeline, Inc.). Cardinal and
Cardinal Pipeline Company are also engaged in the construction and operation of
natural gas pipelines that provide essential transportation services to PSNC and
are therefore similarly retainable by SCANA following the Mergers. Moreover,
registered gas holding
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/18/ This discussion does not cover the two existing SCANA subsidiaries that are
currently in liquidation and not of issue under the Act.
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companies have been authorized to retain pipelines as functionally related. See,
e.g., CNG Transmission Corporation, Holding Co. Act Release No. 25239 (Jan. 9,
1991) (and since SCANA is both an electric and gas holding company system, these
operations are also functionally related for SCANA). Consequently, the
Commission's decisions support the retainability of these pipelines and
transmission interests.
2. South Carolina Fuel: South Carolina Fuel acquires, owns and provides
financing for SCE&G's fuel, fossil and sulfur dioxide emission allowances. Rule
58 provides that a company that engages in the "ownership, operation and
servicing of fuel procurement . . ." is an energy related company, and may be
retained by a registered holding company./19/ In addition, the Commission has
found that fuel management services are acceptable interests to be held by a
registered holding company. See WPL Holdings, Release No. 26856 (April 14,
1998).
3. Energy Marketing and Sonat Public Service: Energy Marketing markets
electricity, natural gas and other light hydrocarbons, and also provides
energy-related risk management services to producers and consumers. Sonat Public
Service is engaged in gas brokering activities and also provides non-regulated
energy products and services to industrial and commercial accounts. Rule 58
explicitly authorizes the retention of companies engaged in the "brokering and
marketing of energy commodities, including . . . electricity [and] natural
gas."/20/ In addition, the Commission has previously authorized the acquisition
or retention of entities
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/19/ Rule 58(b)(1)(ix).
/20/ Rule 58(2)(b)(v)
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engaged in marketing and brokering as well as related risk management
operations. See New Century Energies, Inc., Holding Co. Act Release No. 26748
(Aug. 1, 1997) (retention of e prime which engages in "purchasing and selling
gas and electricity at negotiated rates reflecting market conditions" and
"employ[s] risk management strategies such as swaps, futures and option
contracts"). See also SEI Holdings, Holding Co. Act Release No. 26581 (Sept. 26,
1996); Until Corp., Holding Co. Act Release No. 26527 (May 31, 1996); New
England Electric System, Holding Co. Act Release No. 26520 (May 23, 1996).
4. SCANA Propane Gas and SCANA Propane Storage: These subsidiary companies
are engaged in purchasing, delivering and selling propane within the
southeastern United States, and owning and operating an underground propane
storage facility and leasing storage space to industries, utilities and others.
SCANA Propane Gas is involved in a functionally related business to SCANA's
utility business, providing customers with a different source of fuel for
special needs and facilitating SCANA's development as a full service energy
supplier, which the Commission has recognized as a legitimate business goal for
a competitive utility company in today's environment. See Consolidated Natural
Gas Company, Holding Co. Act Release No. 26512 (April 30, 1996) (the "utility
business is evolving towards a broadly based energy-related business . . .
marked by the interchangeability of different forms of energy"). Moreover,
propane operations are functionally related to gas utility operations as is
evidenced by Columbia Energy Group's retention and recent expansion of its
subsidiary, Columbia Propane Company. In addition, SCANA announced on September
29, 1999 that it intends to sell its retail propane assets, including SCANA
Propane Gas and SCANA Propane Storage, to Suburban Propane.
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5. SCI: SCI owns and operates a fiber optics telecommunications network and
a radio service network within South Carolina, and also provides tower site
construction, management and rental services in South Carolina and Georgia. SCI
will apply to the FCC for a determination that it is an "exempt
telecommunications company" within the meaning of Section 33 of the Act.
6. ServiceCare: ServiceCare is engaged in providing energy-related products
and services beyond the energy meter, providing customers with service contracts
on their home appliances, and is also engaged in home security monitoring. A
number of registered holding companies have been authorized to service home
appliances and provide related warranties either directly or through subsidiary
companies. (See Ameren Corporation, Holding Co. Act Release No. 26809 (Dec. 30,
1997); New Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1,
1997); and Cinergy Corporation, Holding Co. Act Release No. 26662 (Feb. 7,
1997)) as well as to engage in energy consulting and the provision of a range of
energy related products to customers (See Central and South West Corp., Holding
Co. Act Release No. 26367 (Sept. 1995); Entergy Corp., Holding Co. Act Release
No. 26342 (July 27, 1995)). Finally, the retention of a home security service
has been allowed by the Commission pursuant to Section 11(b)(1) of the 1935 Act.
See Conectiv, Inc., Release No. 26832 (Feb. 25, 1998).
7. Primesouth: Primesouth is engaged in power plant management and
maintenance services. Companies engaged in such activities are specifically
enumerated as retainable under Rule 58(b)(vii), which exempts from Section
(9)(a)(2) of the Act those companies which engage in "[the] sale
of...management, and other similar kinds of expertise,
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developed in the course of utility operations in such areas as . . . maintenance
and operation . . . ."/21/ The Commission's decisions have consistently held
that a holding company may engage in such activities. See, e.g., New Century
Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997) (authorizing
retention of subsidiary engaged in plant engineering, design, operation and
maintenance); Central and South West Corporation, Holding Co. Act Release No.
26280 (Apr. 26, 1995) (authorizing the engineering and construction department
to provide services to third parties); Entergy Corporation, Holding Co. Act
Release No. 26322 (June 30, 1995) (approval for engaging in maintenance and
management services); General Public Utilities Corporation, Holding Co. Act
Release No. 25108 (June 26, 1990) (authorizing management services). Primesouth
is therefore retainable by SCANA.
8. SCANA Resources: SCANA Resources is a vehicle by which SCANA makes
initial investments in new, energy-related business opportunities. Past
Commission decisions have held that a holding company may be engaged in such
energy-related investment activities. See Ameren Corporation, Holding Co. Act
Release No. 26809
- ----------
/21/ Rule 58(b)(1)(vii).
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(December 30, 1997 ) (approval of retention of CIPSCO Energy Company, a vehicle
seeking energy-related investment opportunities).
9. Clean Energy: Clean Energy is engaged in the conversion of vehicles to
allow their operation on natural gas or other alternative fuels. Clean Energy
also advises customers on the installation and operation of natural gas fueling
stations, and also operates such stations. Rule 58 also specifically allows a
registered holding company to own an interest in such a company. Under Section
(b)(iii), a company engaged in the "ownership, operation, sale, installation and
servicing of refueling, recharging and conversion equipment and facilities
relating to electric and compressed natural gas vehicles"/22/ is exempted from
the provisions of Section 9(a)(2) of the Act. Consequently, Rule 58 explicitly
allows for the retention of Clean Energy by SCANA, and, in addition, such
activities have also been held to be retainable by the Commission. See New
Century Energies, Inc., Release No. 26748 (August 1, 1997) (retention of company
selling products and services related to electric and natural gas-powered
vehicles, and in developing fueling sites for such vehicles). See also
Consolidated Natural Gas Co., Holding Co. Act Release No. 25615 (Aug. 27, 1992);
Central Power and Light Co., Holding Co. Act Release No. 26160 (Nov. 18, 1994).
10. Pine Needle and Blue Ridge: Pine Needle is a joint venture with other
third parties formed to own and operate a liquefied natural gas storage
facility. Blue Ridge is a PSNC subsidiary used to make a construction loan to,
and hold PSNC's equity interest in, Pine Needle.
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/22/ Rule 58(b)(iii).
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The Commission has held that the storage of natural gas for use in a
distribution business is functionally related to the operations of a gas utility
under Section 11(b)(1) of the 1935 Act. See Conectiv, Inc. Release No. 26832
(February 25, 1998). Therefore, Blue Ridge, and consequently Pine Needle, are
interests which are retainable by SCANA.
11. SCE&G's Bus Transit Services: SCE&G operates a bus service which
provides transportation throughout Columbia, South Carolina. This operation has
a de minimis effect on the operations of SCANA (contributing approximately .1%
of SCANA's consolidated operating revenues). Furthermore, the bus service is
confined to SCE&G's local service territory and is completely local in nature.
Although the bus service does not fall within the bounds of the Rule 40
exemption from Section 9 because it is operated by a public utility subsidiary
company, SCANA believes that this service has a similar community development
purpose and requests authorization to retain SCE&G's existing bus service for
the reasons stated above.
12. Utility Ownership of Buildings and Property: Both SCE&G and PSNC own
buildings and property used in connection with their utility operations. The
Commission has allowed retention of such buildings and property for use in
utility operations. See New Century Energies, Inc., Holding Co. Act Release No.
26748 (August 1, 1997); UNTIL Corp., Holding Co. Act Release No. 25524 (April
24, 1992); American Electric Power Co., Holding Co. Act Release No. 21898
(January 27, 1981).
As has been shown, all of the current material non-utility businesses of
SCANA and PSNC will bear a strong functional relationship to the utility
business of SCANA following the Mergers. The Commission has consistently stated
in previous releases that interests similar to
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those enumerated above are retainable by registered holding companies, and
furthermore, Rule 58 now specifically allows retention of some of the above
interests. Due to these factors, the Commission should permit the retention of
all of SCANA's and PSNC's current non-utility businesses. Moreover, it should be
noted that in its recent orders approving mergers that create registered holding
companies, the Commission has held that investments made by a merging holding
company while that company was exempt from the Act do not count toward the safe-
harbor limit under Rule 58 that no more than 15% of consolidated capitalization
be invested in energy-related companies. See New Century Energies, Inc., Release
No. 26748 (August 1, 1997).
b. Section 10(c)(2)
Section 10(c)(2) requires the Commission to examine whether a proposed
acquisition will serve the public interest by tending towards the economical and
efficient development of an integrated public utility system. For all of the
foregoing reasons, the acquisition of PSNC by SCANA in the Preferred Second
Merger meets the criteria of Section 10(c)(2). SCANA's acquisition of PSNC will
produce long-term benefits, both quantitative and qualitative economies and
efficiencies, and will result in the creation of an economically integrated and
efficient energy company consistent with modern notions of "integration".
SCANA's acquisition of PSNC will produce long-term benefits. 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 American Electric Power Co., 46
S.E.C. 1299, 1320-1321 (1978). Further, the Commission has recognized that while
some potential benefits cannot be precisely estimated, nevertheless they too
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are entitled to be considered: "[S]pecific dollar forecasts of future savings
are not necessarily required; a demonstrated potential for economies will
suffice even when these are not precisely quantifiable." Centerior Energy Corp.,
Holding Co. Act Release No. 24073 (April 29, 1986) (citation omitted). See
Energy East Corporation, Holding Co. Act Release No. 26976 (Feb. 12, 1999)
(authorizing acquisition based on strategic benefits and potential but presently
unquantifiable savings.)
SCANA's acquisition of PSNC will also produce a number of quantitative and
qualitative benefits. The acquisition of PSNC will provide SCANA with the
opportunity to extend its service area into some of the fastest growing markets
in North Carolina while increasing SCANA's domestic retail customer base to
approximately 1.3 million customers in the southeastern region. SCANA and its
shareholders and employees will be able to participate in these growing markets
through PSNC, a company with which customers in North Carolina are familiar. In
turn, as previously described herein, SCANA expects to increase its annual
revenues substantially, which should result in increased cash flow for
reinvestment and growth in the energy and services delivery businesses. The
integration of PSNC into the SCANA system is also expected to provide
opportunities for margin improvement and cost savings though consolidation of
duplicate functions and greater efficiencies in operations, business processes
and purchasing. SCANA's acquisition of PSNC will also allow SCANA to offer
customers access to more comprehensive products and services than either company
alone could offer. The retail natural gas experience and expertise of PSNC will
complement the electricity, natural gas and telecommunications experience and
expertise of SCANA, thus offering improved capabilities in the delivery of a
more complete range of products and services for all customers.
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For these reasons, the acquisition of PSNC by SCANA will serve the public
interest by tending towards the economical and efficient development of an
integrated public utility system.
3. Section 10(f)
Section 10(f) prohibits the Commission from approving an acquisition unless
the Commission is satisfied that the acquisition will be undertaken in
compliance with applicable state laws. As described in Item 4 of this
Application-Declaration, SCANA's acquisition of PSNC pursuant to the Preferred
Second Merger will be consummated in compliance with all applicable state laws.
Item 4. Regulatory Approvals
The Preferred Second Merger is subject to the jurisdiction of the NCUC.
Such regulation is governed by North Carolina General Statute, Section
62-111(a), which states that "any merger or combination affecting any public
utility" shall require application to and written approval by the NCUC". The
standard for evaluating a public utility merger under this North Carolina
statute is whether the transaction is "justified by the public convenience and
necessity." On May 3, 1999, SCANA and PSNC filed an application for approval
with the NCUC, and SCANA and PSNC believe that the Preferred Second Merger
satisfies this standard. The Preferred Second Merger is also subject to the
notification and reporting requirements of the HSR Act, and on September 26,
1999, the applicable waiting period under the HSR Act expired. In addition, the
transfer of certain licenses held by PSNC must be approved by the FCC. No other
state or federal commission has jurisdiction over the Preferred Second Merger.
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Item 5. Procedure
The Commission has issued and published the requisite notice under Rule 23
with respect to the filing of this Application on August 31, 1999, and specified
September 27, 1999 as the date by which comments must be entered and the date on
which an order of the Commission granting and permitting this Application to
become effective may be entered. On September 24, 1999, an intervention was
filed with the Commission by Paul S. Davis. The Applicant's response thereto is
filed herewith as Exhibit J-2.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the proposed
acquisition. 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-1.1 Restated Articles of Incorporation of SCANA as adopted on April
26, 1989 (Filed as Exhibit 3-A to Registration Statement No.
33-49145 and incorporated by reference herein).
A-1.2 Articles of Amendment of SCANA, dated April 27, 1995 (Filed as
Exhibit 4-B to Registration Statement No. 33-62421 and
incorporated by reference herein).
A-2 Copy of By-Laws of SCANA as revised and amended on December 17,
1997 (Filed as Exhibit 3-C to Form 10-K for the year ended
December 31, 1997 and incorporated by reference herein).
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A-3 Amended and Restated Charter of PSNC, dated February 1, 1991.
(Filed as Exhibit 3-A-4 to PSNC's 1992 Form 10-K and incorporated
by reference herein).
A-4 By-laws of PSNC, as amended to date. (Filed as Exhibit 3-I to
PSNC's Form 10-Q for the quarter ended March 31, 1994 and
incorporated by reference herein).
B-1 Amended and Restated Agreement and Plan of Merger, dated as of
February 16, 1999 and amended and restated as of May 10, 1999, by
and among PSNC, SCANA, New Sub I, Inc. and New Sub II, Inc.
(included in Exhibit C-1 hereto).
C-1 Registration Statement on Form S-4 of SCANA for the shareholders
meeting to be held in connection with the Mergers (filed with the
Commission on May 11, 1999 (File No. 333-78227) and incorporated
by reference herein).
C-2 Joint Proxy Statement/Prospectus of SCANA and PSNC for the
special meeting of shareholders to be held in connection with the
Mergers (included in Exhibit C-1).
D-1.1 Application of PSNC before the NCUC. (previously filed)
D-1.2 Order of the NCUC (to be filed by amendment).
E-1 Map of service territory of SCANA (filed in paper format on Form
SE).
E-2 Map of service territory of PSNC (filed in paper format on Form
SE).
E-3 SCANA Corporate Chart (included in Exhibit C-1).
E-4 PSNC Corporate Chart (included in Exhibit C-1).
F-1 Opinion of Counsel.
F-2 Past tense opinion of counsel (to be filed by amendment).
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G-1 Opinion of Morgan Stanley and Co. Incorporated (included in
Exhibit C-1).
G-2 Opinion of PaineWebber Incorporated (included in Exhibit C-1).
H-1 Annual Report of SCANA on Form 10-K for the year ended December
31, 1998 (filed with the Commission on March 18, 1999 and amended
on April 27, 1999, and incorporated by reference herein).
H-2 Annual Report of PSNC on Form 10-K for the year ended September
30, 1998 (filed with the Commission on December 21, 1998 and
incorporated by reference herein).
H-3 Quarterly Report on Form 10-Q of SCANA for the quarter ended June
30, 1999 (filed with the Commission on August 13, 1999 and
incorporated by reference herein).
H-4 Quarterly Report on Form 10-Q of PSNC for the quarter ended June
30, 1999 (filed with the Commission on August 13, 1999 and
incorporated by reference herein).
H-5 Quarterly Report on Form 10-Q of SCANA for the quarter ended
March 31, 1999 (filed with the Commission on May 17, 1999 and
incorporated by reference herein).
H-6 Quarterly Report on Form 10-Q of PSNC for the quarter ended March
31, 1999 (filed with the Commission on May 14, 1999 and
incorporated by reference herein).
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H-7 Quarterly Report on Form 10-Q of PSNC for the quarter ended
December 31, 1998 (filed with the Commission on February 12, 1999
and incorporated by reference herein).
H-8 Form U-3A-2 of SCANA for the year ended December 31, 1998 (filed
with the Commission on February 26, 1999 and incorporated by
reference herein).
I-1 Proposed Form of Notice (previously filed).
J-1 Gas Retention Study.
J-2 Memorandum of Law in Response to Request For a Hearing and
Comments of Paul S. Davis.
B. Financial Statements
FS-1 SCANA Unaudited Pro Forma Condensed Consolidated Balance Sheet
(included in Exhibit C-1).
FS-2 SCANA Unaudited Pro Forma Condensed Consolidated Statement of
Income (included in Exhibit C-1).
FS-3 Notes to SCANA Unaudited Pro Forma Condensed Consolidated
Financial Statements (included in Exhibit C-1).
FS-4 SCANA Consolidated Balance Sheet as of June 30, 1999 (as included
in Exhibit H-3).
FS-5 SCANA Consolidated Statement of Income for the three months ended
June 30, 1999 (as included in Exhibit H-3).
FS-6 PSNC Consolidated Balance Sheet as of June 30, 1999 (included in
Exhibit H-4).
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FS-7 PSNC Consolidated Statement of Income for the three months ended
June 30, 1999 (included in Exhibit H-4).
Item 7. Information as to Environmental Effects
The proposed transaction involves neither a "major federal action" nor
"significantly affects the quality of the human environment" as those terms are
used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C.
Sec. 4321 et seq. No federal agency is preparing an environmental impact
statement with respect to this matter.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the Applicant has duly caused this Amendment No. 1 to the
Application/Declaration to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: November 5, 1999 SCANA CORPORATION
/s/ H. Thomas Arthur
-----------------------------
Name: H. Thomas Arthur
Title: Senior Vice President
and General Counsel
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[SCANA LETTERHEAD]
Telephone (803) 217-8547
Fax (803) 217-9336
November 5, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
This opinion is furnished to the Securities and Exchange Commission (the
"Commission") in connection with the filing with the Commission of the
Application/Declaration on Form U-1 (File 70-09521) (the "Application") of SCANA
Corporation (the "Company") under the Public Utility Holding Company Act of
1935, as amended (the "Act"). The Application requests that the Commission issue
an order authorizing the acquisition (the "Acquisition") by the Company of all
of the issued and outstanding shares of common stock of Public Service Company
of North Carolina ("PSNC"), which, among other things, operates a gas utility
company (as defined in section 2(a)(4) of the Act) in the state of North
Carolina. I am senior vice-president and general counsel to the Company and have
acted as counsel to the Company in connection with the filing of the
Application.
In connection with this opinion, I have examined originals or copies
certified or otherwise identified to my satisfaction of such corporate records
of the Company and PSNC, certificates of public officials, certificates of
officers and representatives of the Company and PSNC, and other documents as I
have deemed necessary in order to render the opinions hereinafter set forth.
In such examination, I have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity to
the original documents of all documents submitted to us as copies. As to any
facts material to our opinion, I have, when relevant facts were not
independently established, relied upon the aforesaid agreements, instruments,
certificates and documents.
The opinions expressed below with respect to the Acquisition described in
the Application are subject to the following further assumptions and conditions:
<PAGE>
Securities and Exchange Commission
November 5, 1999
Page 2
a. The Acquisition shall have been duly authorized and approved, to
the extent required by the governing corporate documents and applicable
state laws, by the Board of Directors of the Company and PSNC and the
shareholders of PSNC.
b. All required approvals, authorizations, consents, certificates,
rulings and orders of, and all filings and registrations with, all
applicable federal and state commissions and regulatory authorities with
respect to the Acquisition shall have been obtained or made, as the case
may be, and shall have become final and unconditional in all respects and
shall remain in effect (including the approval and authorization of the
Commission under the Act) and the Acquisition shall have been accomplished
in accordance with all such approvals, authorizations, consents,
certificates, orders, filings and registrations.
c. The Commission shall have duly entered an appropriate order with
respect to the Acquisition as described in the Application granting and
permitting the Application to become effective under the Act and the rules
and regulations thereunder.
d. The registration statement (no. 333-78227) filed with respect to
the shares of Company common stock to be issued in connection with the
Acquisition and declared effective by the Commission on May 12, 1999, shall
remain effective pursuant to the Securities Act of 1933, as amended; no
stop order shall have been entered with respect thereto; and the issuance
of shares of Company common stock in connection with the Acquisition shall
have been consummated in compliance with the Securities Act of 1933, as
amended, and the rules and regulations thereunder.
e. The solicitation of proxies from the shareholders of PSNC with
respect to the Acquisition was conducted in accordance with the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder.
f. The applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations
thereunder has expired.
<PAGE>
Securities and Exchange Commission
November 5, 1999
Page 3
g. The appropriate articles of merger shall have been duly and validly
filed with the Secretary of State of the State of South Carolina, and such
other corporate formalities as are required by the laws of the State of
South Carolina for the consummation of the Acquisition shall have been
taken; and such mergers shall have become effective in accordance with the
laws of the State of South Carolina.
h. The parties shall have obtained all consents, waivers and releases,
if any, required for the Acquisition under all applicable governing
corporate documents, contracts, agreements, debt instruments, indentures,
franchises, licenses and permits.
Based on the foregoing, and subject to the assumptions and conditions set
forth herein, I am of the opinion that when the Commission has taken the action
requested in the Application:
1. All state laws applicable to the proposed Acquisition will have been
complied with; however, we express no opinion as to the need to comply
with state blue sky laws.
2. The Company is a corporation validly organized, duly existing and in
good standing in the State of South Carolina and PSNC is a corporation
validly organized, duly existing and in good standing in the State of
North Carolina.
3. The shares of Company common stock to be issued in connection with the
Acquisition will be validly issued, fully paid and nonassessable, and
the holders thereof will be entitled to the rights and privileges
appertaining thereto set forth in the restated Articles of
Incorporation of the Company. The shares of common stock of PSNC to be
acquired by the Company in the Acquisition will be validly issued,
fully paid and nonassessable, and the Company, as holder thereof, will
be entitled to the rights and privileges appertaining thereto set
forth in the Articles of Incorporation of PSNC.
4. The Company may legally acquire the shares of common stock of PSNC.
5. The consummation of the Acquisition will not violate the legal rights
of the holders of any securities issued by the Company.
I am a member of the State Bar of South Carolina and do not purport to be
an expert on, nor do I opine as to, the laws of any jurisdiction other than the
State of South Carolina and the federal laws of the United States of America.
I hereby consent to the use of this opinion as an exhibit to the
Application.
Very truly yours,
By: /s/ H. Thomas Arthur
-------------------------
H. Thomas Arthur
Senior Vice President and
General Counsel
SOUTH CAROLINA ELECTRIC & GAS COMPANY
STUDY OF THE ECONOMIC IMPACT
OF A DIVESTITURE OF THE GAS OPERATIONS
OF SOUTH CAROLINA ELECTRIC & GAS COMPANY
This Study was undertaken by the management and staff of South Carolina
Electric & Gas Company (SCE&G). The objective of the study is to quantify
the economic impact on shareholders and customers of SCE&G divesting its
natural gas assets and business. SCE&G is a wholly-owned subsidiary of
SCANA Corporation, a public utility holding company.
September, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
I. Executive Summary........................................................2
II. Assumptions..............................................................3
III. Cost Analysis............................................................5
IV. Impact on Shareholders...................................................7
V. Impact on Customers......................................................7
VI. Conclusions..............................................................8
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Executive Summary
SCE&G's management and staff undertook this Study in order to assess the impact
of separating SCE&G's natural gas assets and business from its currently
combined utility operations. SCE&G is a public utility subsidiary of SCANA
Corporation, which is currently an exempt holding company under the Public
Utility Holding Company Act of 1935, and provides electric and natural gas
service in a major portion of South Carolina.
The Study focuses on the increased costs associated with operating a stand-alone
gas company versus the costs of operating a gas business as part of a
combination utility company. The economic impacts are evaluated from two
perspectives -- shareholders and customers. The effect on shareholders is the
direct result of the increased costs necessary to support operations after
divestiture which, absent adequate rate relief, result in income reductions. The
effect on customers assumes recovery of the increased costs through rate
increases.
The projected impact on shareholders is a reduction in income of 46.08%. The
impact on customers is a rate increase of 9.50%. Given the significant adverse
economic effects on shareholders and customers, SCE&G finds that it is
preferable to continue owning its gas assets and operating its gas business as
part of a combined utility.
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Assumptions
The Study assumes that the electric and gas utility businesses of SCE&G can, in
fact, be separated. The businesses are currently part of a combined company as
described below.
o SCE&G is primarily a combination electric and gas utility, engaged in
the generation, transmission, distribution and sale of electricity and
in the purchase and sale, primarily at retail, of natural gas in South
Carolina.
o SCE&G's gas business serves more than 250,000 residential, commercial
and industrial customers in 31 of the 46 counties in South Carolina.
Revenues for 1998 were $230 million on sales of 43.3 million
dekatherms.
o SCE&G's electric business provides service to more than 517,000
customers in 24 counties. Revenues for 1998 were $1.2 billion on sales
of 21.2 million megawatt hours.
The Study assumes that it would be possible to separate the gas business from
the combined utility for the following reasons.
o The electric and gas systems are physically separate;
o A large number of personnel who are directly involved in the
day-to-day operations of the electric and gas systems work exclusively
for one business or the other;
o The electric and gas businesses are separately regulated for purposes
of setting rates; and
o It is not uncommon elsewhere in the country for stand-alone electric
and gas companies to share portions of the same service territories.
SCANA is currently seeking regulatory approvals to merge with Public Service
Company of North Carolina (PSNC). PSNC is in the business of transporting,
distributing and selling natural gas to approximately 334,000 residential,
commercial and industrial customers in North Carolina. For 1998, revenues were
$300 million on sales of 63.8 million dekatherms. PSNC is not involved in any
other utility operations and, as such, currently operates as a stand-alone gas
company. Because PSNC is a stand-alone gas company that is comparable in size to
the gas operations of SCE&G, the cost structures of a number of business
functions, including executive management, board of directors and other
administrative activities, were analyzed. This analysis formed the basis of
estimating the costs of performing similar functions for SCE&G's gas operations
after divestiture.
An exhaustive analysis of every cost component that could be associated with the
creation of a stand-alone gas business was not made. The cost components
expected to change significantly were identified and further analyzed.
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The following general assumptions were made in conducting the cost analysis.
o The gas operations of SCE&G will operate independently from the
electric operations. Accordingly, the gas business will have all the
necessary management, other personnel, facilities, computer systems,
equipment, materials and supplies required to operate as a stand-alone
company.
o Staffing will be sufficient to insure that functions necessary to
support a stand-alone company will be performed. Also, the current
level and quality of service to gas customers will not be affected.
o Labor costs include pension and benefits costs, as well as applicable
payroll taxes. Pensions, benefits and taxes were calculated using a
percent of labor based on actual costs for 1998.
o In general, non-labor costs remain unchanged from amounts prior to the
reorganization.
o Increases in depreciation expense and property taxes result from the
additional capital expenditures required.
o For the purpose of showing the impact on the gas customers of SCE&G,
it is assumed that the net increase in costs will be allowed in rates
to be set in a formal proceeding following the reorganization. The
effect on rates was determined using a rate of return analysis for the
twelve months ended June 30, 1999. It was assumed that SCE&G's gas
operations were earning the currently allowed return on common equity
of 12.25 percent.
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Cost Analysis
Distribution Operations
It is not expected that the direct costs of operating and maintaining SCE&G's
gas distribution system, including mains, services, measuring and regulating
station equipment, meters and house regulators, will change significantly as a
result of separating from the combined utility. To a great extent, these
functions are supervised and performed by personnel who currently work only for
the gas business.
Customer Service
The costs associated with customer service functions, including operation of
call centers and business offices, are expected to increase substantially when
the electric and gas businesses are separated. Both businesses realize
efficiencies and cost savings by sharing personnel, facilities and equipment.
Personnel costs will increase approximately 200 percent as a result of
additional staffing of call centers and business offices to insure that service
levels are maintained. A minimum of two new buildings will have to be acquired
or constructed to replace the shared call centers and customer service centers
located in Columbia and Charleston, SC, the primary metropolitan areas in the
Company's service territory. In addition, 19 smaller business offices in various
communities to which the Company provides both electric and gas service will
have to be duplicated. The new call centers and business offices will have to be
outfitted with the computer equipment, telecommunications equipment, office
furniture and other fixtures necessary to support the customer service function.
Customer Billing
The gas business also benefits from economies of scale associated with customer
billing activities, including meter reading, operation of the billing system,
remittance processing and credit and collections. Currently, the meter reading
staff is responsible for reading both electric and gas meters. A 115 percent
increase in personnel will be needed to support a meter reading function
exclusively for gas operations. Since separate bills will need to be rendered
for gas service, in contrast to the combination electric and gas bills currently
prepared, gas operations will need its own billing system, including the
necessary computer software and hardware. The Company has recently implemented a
new customer information system for its electric and gas operations and,
therefore, has a basis for estimating the required investment and ongoing
operating costs associated with a billing system for use by its gas operations
on a stand-alone basis. Staffing levels will need to be increased by 225 percent
to support remittance processing and credit and collections functions associated
with an independent billing function.
Executive Officers and Board of Directors
The gas operations of SCE&G currently have the benefit of sharing the costs of
executive management and a board of directors with the electric operations of
SCE&G and other companies owned by SCANA. As an independent business, SCE&G's
gas operations would need its own executive management and board of directors as
described below.
-5-
<PAGE>
Board of Directors - The Board of Directors would consist of nine
non-employee members. The directors would be compensated by the payment of
annual retainer fees and fees for each board meeting and committee meeting
attended. The directors would also be reimbursed for expenses associated
with attending each meeting.
Chief Executive Officer (CEO) - The CEO reports to the Board of Directors
and is responsible for overseeing the entire Company. Three other executive
officers (Chief Operating Officer, Chief Financial Officer and General
Counsel) report directly to the CEO.
Chief Operating Officer (COO) - The COO has overall responsibility for the
operating activities of the Company, including customer service, gas
distribution operations, engineering, technical support, planning and
marketing.
Chief Financial Officer (CFO) - The CFO is responsible for the finance,
accounting, information systems, treasury, risk management, shareholder
administration and investor relations functions.
General Counsel - The General Counsel oversees legal services, governmental
affairs, corporate secretarial and human resources.
Non-executive officers and upper-level managers, as appropriate for the range of
responsibilities and number of employees in the organization, will manage the
operating activities and administrative functions mentioned above.
Other Administrative & General
In addition to the costs of separate executive management and a board of
directors, the costs of other administrative functions will increase as a result
of losing existing economies of scale once these services are no longer shared
with electric operations or other SCANA subsidiaries. These functions include
information systems, human resources, finance, accounting, risk management,
legal, corporate secretarial, shareholder administration, investor relations and
governmental affairs. The labor costs associated with these activities are
expected to increase 128 percent.
Summary
The following is a summary of the costs that will increase as a result of the
transformation of the gas operations of SCE&G into an independent business.
Expenses:
Labor $ 12,590,719
Depreciation & Amortization 2,309,328
Property Taxes 1,106,084
------------
Total $ 16,006,131
Capital Expenditures $ 40,829,979
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<PAGE>
Impact on Shareholders
Based on results of operations for the year 1998, the increases in expenses
represent the following percentages of gas operating revenue, expenses, and
income.
Total Gas Operating Revenue 6.95%
Total Gas Operating Expenses (excluding income taxes) 7.93%
Gas Operating Income (after income taxes) 46.08%
The additional capital expenditures are the following percentages of net utility
plant as of the end of 1998 and total capital expenditures for the year.
Net Utility Plant. 17.81%
Total Capital Expenditures 266.56%
Impact on Gas Customers
Assuming the stand-alone gas operations of SCE&G are permitted to recover all
cost increases through higher rates charged to customers, the effect on annual
revenues is as follows.
Increase in Gas Operating Revenue $22.5 million
Percentage Increase in Gas Operating Revenue 9.50%
In addition to bearing the costs of the rate increase, customers would incur
twice the postage of mailing one payment to the combined utility, or up to a
total of $1.0 million annually.
Although it would be difficult to quantify, customers would also have to contend
with the additional cost, effort and inconvenience associated with dealing with
two utilities rather than one.
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<PAGE>
Conclusions
Absent adequate rate relief, the separation of SCE&G's current gas business from
the combined utility is expected to result in a substantial increase in costs
and, therefore, a substantial decrease in income. A decline in earnings
estimated at 46 percent would certainly make investment in the stand-alone
company unattractive. Ultimately, the cost of capital would increase and
earnings would be further depressed.
If rate relief is provided, SCE&G's gas customers would face an increase in
their bills for gas service of nearly ten percent without an increase in the
level or quality of service. An increase in rates would make gas a less
attractive energy alternative and diminish the ability to continue expanding the
customer base. Such a scenario reduces the possibility of new economies of scale
developing over time that might lead to future rate reductions.
Furthermore, while the impact has not been quantified, SCE&G's electric
operations would expect to suffer similar adverse consequences of having to
operate as a stand-alone business instead of benefiting from the efficiencies of
functioning as part of a combination utility.
Based on the foregoing conclusions, the management of SCE&G believes that the
creation of a stand-alone gas business from the gas operations of a combination
utility would not be in the best interests of shareholders or customers.
Accordingly, SCE&G recommends that it be allowed to retain its existing gas
assets and continue to operate the gas business in conjunction with its electric
business.
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Application - Declaration on Form U-1 under the Public Utility Holding Company
Act of 1935 (File No. 70-9521)
Application - Declaration on Form U-1 under the Public Utility Holding Company
Act of 1935 (File No. 70-9553)
MEMORANDUM OF LAW
IN RESPONSE TO
REQUEST FOR HEARING AND COMMENTS OF PAUL S. DAVIS
This memorandum is intended to respond to the request for hearing and
comments of Paul S. Davis in connection with the pending applications of SCANA
Corporation ("SCANA") in connection with its proposed acquisition of Public
Service Company of North Carolina ("PSNC"). On June 16, 1999, SCANA filed its
Application-Declaration on Form U-1 (the "Application") under the Public Utility
Holding Company Act of 1935 (the "Act") for approvals relating to the proposed
acquisition of PSNC by SCANA. On August 31, 1999, the Securities and Exchange
Commission (the "Commission") issued and published the requisite notice under
Rule 23 under the Act with respect to the filing of the Application, and
specified September 27, 1999 as the date by which objections or comments were to
be entered. By letter dated September 24, 1999, Paul S. Davis (the "Respondent")
filed an objection with the Commission, challenging the proposed transactions on
various grounds.
Although clothed with references to the Act, Respondent's concerns appear
to go not to the question of regulatory compliance but, rather, to the
underlying business transaction. In this regard, the Respondent misapprehends
the nature of the Commission's jurisdiction. The Commission, in the first
instance, does not dictate the particulars of a transaction. Instead, once the
parties have negotiated their deal, the matter is reviewed under the standards
of the Act to ensure that the proposed transaction will not be detrimental to
the public interest or the interest of investors or consumers, the "protected
interests" under the Act. For the reasons set forth below, the Respondent's
concerns are meritless./1/
The paragraphs set forth below in bold are the objections taken directly
from the Respondent's letter, and our response is set forth below each
objection. Capitalized terms used herein and not otherwise defined shall have
the meanings given in the Application.
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/1/ In particular, the Commission has previously found that investors are
adequately protected by the disclosure required under the other federal
securities laws. See "The Regulation of Public-Utility Holding Companies"
Report of the Division of Investment Management of the United States
Securities and Exchange Commission (June 1995) ("the disclosure
requirements of the Securities Act [of 1933] and the [Securities] Exchange
Act [of 1934] and the regulation inherent in the public securities markets
have imposed substantial controls on financing transactions that were not
present when the Act was adopted.").
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<PAGE>
1. The Respondent argues that "The terms of the proposed merger of SCANA
and Public Service Company of North Carolina (PSNC) are unfair to the
shareholders of SCANA and pay an excessive premium to shareholders of PSNC.
Accordingly the security issues of stock and the acquisitions by the companies
are not in the interests of investors and do not meet the standards of Sections
6,7,9 and 10 of the Public Utility Holding Company Act of 1935 (the "Act")." To
the contrary, the record amply demonstrates that the terms of the First Merger,
the merger in which SCANA shareholders will receive consideration, are fair to
the shareholders of SCANA, and the Preferred Second Merger does not provide an
excessive premium to shareholders of PSNC.
Section 33-11-103 of the South Carolina Business Corporation Act requires
that a plan of merger ". . . be approved by . . . two-thirds of the votes
entitled to be cast on the plan . . . ." S.C. CODE ANN. section 33-11-103
(1995). By requiring a shareholder vote, the statute allows shareholders to make
an informed decision as to the "fairness" of the transaction. On July 1, 1999 at
a special meeting of SCANA shareholders, the First Merger was approved by the
holders of approximately 76% of the outstanding shares of SCANA common stock.
Thus the Respondent's claim that the First Merger is "unfair to the shareholders
of SCANA" is inconsistent with the view of the holders of 76% of the outstanding
shares of SCANA common stock who voted in favor of the First Merger. State
merger statutes are designed to "prevent a small minority from arbitrarily
blocking the wishes of a substantial majority." See 2 ABA-ALI Model Bus. Corp.
Act Ann.2d section 73 (1971) (as discussed by the American Bar Association's
Committee on Corporate Laws, in revising the Model Business Corporation Act)./2/
A substantial majority of SCANA shareholders approved the terms of the First
Merger after receiving the information required by the Commission to make an
informed decision; thus, the terms of the First Merger should not be deemed
unfair because of the view of a small minority.
In addition to the approval of SCANA shareholders, the terms of the Mergers
were approved by the boards of directors of SCANA and PSNC after months of due
diligence, analysis and intense evaluation of the assets, liabilities and
business prospects of the companies. See SCANA Registration Statement on Form
S-4 (Exhibit C-1 to the Application). PaineWebber Incorporated has also provided
an opinion to SCANA that the financial terms of the Mergers, taken as a whole,
were fair to the holders of SCANA common stock. See Opinion of PaineWebber
Incorporated (Exhibit G-2 to the Application). The PaineWebber Opinion provides
further evidence that the terms of the First Merger are fair to the shareholders
of SCANA.
The Respondent also claims that the terms of Preferred Second Merger, by
which SCANA will acquire PSNC, provide "an excessive premium" to shareholders of
PSNC. On February 12, 1999, the last business day before the date on which SCANA
and PSNC entered into
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/2/ The American Bar Association's Committee on Corporate Laws, in discussing
whether states should adopt a two-thirds shareholder approval requirement
for mergers or a simple majority, stated that ". . . the Model Act
originally adopted two-thirds as a point for attaining reasonable balance.
However, in 1969 an amendment reduced the required vote from two-thirds to
a majority in recognition of the generally prevailing view that . . . a
minority should not be permitted to block the wishes of the majority."
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2
<PAGE>
the Merger Agreement, the closing price per share of PSNC common stock as
reported on the NYSE-Composite transactions was $22.58. The Merger Agreement
provides that each holder of PSNC common stock will receive consideration of
approximately $33.00 (depending on the operation of exchange ratio) for each
share, a premium of roughly 46%.
This premium of 46% is consistent with premiums paid to shareholders in
recent acquisitions of gas utilities. Not including the SCANA-PSNC transaction,
there have been a total of 12 major acquisitions of gas utility companies
announced since 1997. The premiums paid to shareholders of the gas utilities
involved in these transactions range from 60% (DTE Energy Company's acquisition
of MCN Energy, announced on October 5, 1999) to 19% (Wisconsin Energy's proposed
acquisition of WICOR, announced June 28, 1999). The 46% premium to be paid to
PSNC shareholders is well within this range, and is consistent with several
other transactions in the gas utility industry. (See Eastern Enterprises
proposed acquisition of Energy North, announced July 15, 1999 (58% premium) and
Carolina Power & Light's proposed acquisition of North Carolina Natural Gas,
announced November 11, 1998 (48% premium)).
2. The Respondent alleges that "The proposed issuance by SCANA and PSNC of
$700,000,000 of debt securities, for the purpose of providing elections to
receive cash (in some cases), or of forcing shareholders of accept cash (in
other situations), is unfair to shareholders and would deteriorate the financial
structure of the merged company. Accordingly it is contrary to the interests of
investors and consumers and does not meet the standards of Sections 6 and 7 of
the Act." Again, the Respondent is mistaken. SCANA's proposed issuance of
$700,000,000 of debt securities to provide cash consideration for the Mergers is
consistent with Commission precedent. In most mergers involving cash
consideration, the acquiring company will incur some debt or other obligation as
part of the acquisition. Section 7(c)(2)(A) of the 1935 Act expressly
contemplates acquisition indebtedness incurred at the holding company level in
connection with many transactions and acquisitions.
More importantly, the issuance of $700,000,000 of debt securities would not
deteriorate the financial structure of the merged company because it would not
alter SCANA's common equity to total capitalization ratio in a manner
inconsistent with standards set by the Commission. The Application sets forth
the pro forma consolidated capital structure of SCANA, as of December 31, 1998
(assuming that the consideration paid by SCANA for the shares of PSNC common
stock consisted of $348 million in cash consideration and $348 million in stock
consideration and, therefore, $352 million in cash was paid to SCANA
shareholders in the First Merger). These pro forma financials take into
consideration the issuance by SCANA of $700 million in long-term debt in
financing the Mergers, as well as SCANA's assumption of $165 million of PSNC's
existing long-term debt following the Preferred Second Merger. Based on these
figures, the pro forma consolidated common equity to total capitalization ratio
of 39.6% as of December 31, 1998 is well above the "traditionally acceptable 30%
level" that the Commission has set. See Northeast Utilities, 47 SEC Docket 1270
at 1279, n. 47 (Dec. 21 1990).
For these reasons, the proposed issuance of debt securities would not
deteriorate the financial structure of the merged company and is not contrary to
the interests of investors and consumers and Respondent's claim is therefore
meritless.
3
<PAGE>
3. The Respondent contends that "The provision in the Merger Agreement
(pages A-10 and A-11) under which SCANA may require its shareholders holding
less than 100 shares to receive all cash for their shares, forfeiting the right
which other shareholders have to elect to receive stock, is clearly unfair and
discriminatory, and is probably illegal under general principles of law even
apart from the Holding Company Act. No such provision is proposed for PSNC
shareholders. This provision is obviously contrary to the interests of investors
and should be disapproved." Again, the Respondent's concerns are misguided.
Although the Merger Agreement does provide SCANA with the option to require that
shareholders holding less than 100 shares of SCANA common stock receive cash for
their shares, SCANA management has elected not to exercise this option. Thus,
contrary to the Respondent's assertion, shareholders will have the option to
exchange their shares for shares in the combined company. Regardless of this
decision by SCANA management, the provision by which SCANA shareholders who own
less than 100 shares would receive all cash for their shares is not illegal
because it is identical to provisions in other transactions that have been
approved by the Commission. See Sierra Pacific Resources, Holding Co. Act
Release No. 27054 (July 26, 1999) (approving transaction in which Sierra Pacific
Resources shareholders owning less than 100 shares received cash for said shares
in the same type of first tier merger as the First Merger).
4. The Respondent states that "Fees and commissions proposed to be paid are
very substantial ($3,500,000 for Paine Webber and $4,550,000 for Morgan Stanley;
see Merger Proxy statement, pages 39 and 44). Underwriting fees will be required
for the $700,000,000 debt issue. The reasonableness of the fees should be
determined at a hearing." As explained more fully in the Application, SCANA
believes that the overall fees, commissions and expenses to be incurred in
connection with the Mergers are reasonable and fair in light of the size and
complexity of the Mergers and the anticipated benefits of the Mergers to the
public, investors and consumers. See Northeast Utilities, Holding Co. Act
Release No. 25548 (June 3, 1992), modified on other grounds, Holding Co. Act
Release No. 25550 (June 4, 1992) (noting that fees and expenses must bear a fair
relation to the value of the company to be acquired and the benefits to be
achieved in connection with the acquisition). SCANA expects to incur a combined
total of approximately $11,952,800 in fees, commissions and expenses in
connection with the Mergers. Based on the closing price of SCANA stock on May
12, 1999, the Preferred Second Merger would be valued on an equity basis at
approximately $679 million and the Mergers would be valued on an equity basis at
approximately $3.3 billion. The estimated fees and expenses of $11,952,800
represent approximately 1.76% of the value of the consideration to be paid to
shareholders of PSNC in the Preferred Second Merger, and .3% of the aggregate
consideration to be paid to shareholders of SCANA and PSNC in the Mergers. These
percentages are consistent with percentages previously approved by the
Commission. See, e.g., Entergy Corp, Holding Co. Act Release No. 25952 (Dec. 17,
1993) (fees and expenses represented approximately 1.7% of the value of the
consideration paid to the shareholders of Gulf States Utilities); Northeast
Utilities, Holding Co. Act Release No. 25548 (June 3, 1992) (approximately 2% of
the value of the assets to be acquired).
5. The Respondent contends that "Since under the proposed merger SCANA will
become a registered holding its physical properties must meet the standards
Section 11 of the Act. The gas properties of PSNC are not contiguous with those
of
4
<PAGE>
SCANA (see map on page 3 of the SCANA 1998 Annual Report). Accordingly they
constitute one or more additional gas stems, and may be acquired or retained
only upon a showing of "loss substantial economics" under separate operation.
The burden is on the company to make such a showing. See cases digested under 15
U.S.C.A., Sec. 79k (Sec. 11 of the Act), Notes 44 to 47, pages 170-171. A
hearing is essential for this determination." Again, the Respondent misstates
the law.
As discussed in the Application, the gas utility operations of SCANA and
PSNC will form a single, integrated gas utility system consistent with
Commission precedent. Section 2(a)(29)(B) of the Act defines an integrated
public utility system with respect to gas utility companies as:
a system comprised 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 area or
region affected) the advantages of localized management, efficient
operation, and the effectiveness of regulation. . . .
Although their service territories do not overlap, there can be little question
that the Carolinas, specifically, and the southeastern United States, generally,
constitute a single area or region. The Southern Company, a large electric
registered holding company operating in four southeastern states, is an
integrated system and operates in the same single region.
In addition, the Commission has looked to coordination of gas supply and
common gas supply sources, such as common pipeline suppliers and supply coming
from common gas basins, as an indication of the economies produced by an
integrated gas utility system. See NIPSCO Industries, Inc. Holding Co. Act
Release No. 26975 (Feb. 10, 1999) ("relevant inquiry today is whether the system
utilities purchase substantial quantities of gas produced in the same supply
basins and whether there is sufficient transportation capacity available in the
marketplace to assure delivery on an economical and reliable basis"). As
discussed in more detail in the Application, following the Preferred Second
Merger, the combined company will take essentially all of its gas supply from
Gulf Coast production areas./3/ SCANA and PSNC are both connected to Transco's
transportation systems, which will allow the combined company to transport gas
from the Gulf Coast areas to and among service areas. SCANA also has connections
with Southern Natural, which is connected to Transco's transportation system and
will allow the combined company to coordinate gas transportation services
between Southern Natural and Transco and access all gas supplies connected to
either pipeline. Because SCANA and PSNC purchase substantial quantities of gas
from the same supply areas and have sufficient transportation capacity
- ----------
/3/ Section 2(a)(29)(B) also states that "gas utility companies deriving
natural gas from a common source of supply may be deemed to be included in
a single area or region."
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5
<PAGE>
to ensure delivery of said gas, the companies' combined gas utility systems will
be integrated for purposes of the Act.
For all of the foregoing reasons, the combined gas utility systems of SCANA
and PSNC will be integrated, and the combined company will consist of a single
electric utility system and a single gas utility system as defined in the Act.
The Application contains full analysis of the Mergers under Section 11 based on
Commission precedent, public policy and traditional "A-B-C" clause analysis.
6. The Respondent objects that "SCANA has requested authority to engage in
hedging transitions, including "interest rate swaps, caps, floors, collars and
forward agreements." (Release 35-27071, File 70-9533, Item 2, Fourth). Such
arrangements are highly speculative. They are not among the securities set forth
in Section 7(c) of the Act which are authorized for companies subject to the
Act, and should be disapproved." The Respondent appears to be unaware that the
Commission has granted authority to registered holding companies to engage in
similar hedging transactions. See Conectiv, Inc., Release No. 26832 (Feb. 25,
1998). SCANA has only requested authority to make and continue use of financial
hedging instruments in connection with utility operations. These hedging
transactions will be closely monitored and overseen by SCANA management. It will
not, contrary to the Respondent's claim, engage in speculative transactions. 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, and SCANA
will only enter into interest rate swap agreements with counterparties whose
senior debt ratings are greater than or equal to "BBB+". SCANA management
believes it is taking appropriate steps to mitigate any risk associated with
these transactions.
* * * * *
In addition to the objections discussed above, the Respondent has also
offered several comments in his letter dated September 24, 1999. The issues
discussed in these comments have been thoroughly addressed by our responses to
the objections listed above as well as in the Application. There is, however,
one comment which we would like to address in particular, concerning the
announced change in SCANA's dividend policy. The Respondent states that "The
drastic reduction in SCANA dividends, to become effective in October, was
announced in February concurrently with the merger announcement. If the
$700,000,000 debt issue is disapproved, the company might be able to restore the
dividend."
Under principles of state corporate law, SCANA has the right to increase or
decrease its common stock dividend as required by law or contract or as its
board of directors may decide. At its meeting on February 16, 1999 after careful
deliberation, the SCANA board of directors determined that a reduction in the
dividend, commencing with the third quarter 1999 dividend, was in the best
interests of SCANA, its shareholders and consumers to better ensure continued
growth of SCANA in light of future challenges facing it including environmental
expenditures and the need for increased generation capacity. As noted in the
merger proxy statement that was distributed to shareholders of both SCANA and
PSNC, SCANA intends to implement the new dividend policy "whether or not the
Mergers are completed." See SCANA
6
<PAGE>
Registration Statement on Form S-4. Thus, contrary to the Respondent's claim,
the new SCANA dividend policy is independent of the Mergers and the $700,000,000
debt issuance in connection therewith. Moreover, in accordance with basic
principles of corporate law, SCANA believes that decisions as to the proper
dividend policy for the company are properly left to the discretion of its
board, who is best positioned to determine the policy that is in the best
interests of the company, its shareholders and consumers.
* * * * *
The respondent has requested an evidentiary hearing based on several
objections. All of these objections are without merit and the request should be
denied by the Commission. The principal issues of law raised by the Respondent
can be addressed by the Commission on the basis of the record before it. The
record before the Commission is comprehensive, and the Application is amply
supported by Commission precedent. A hearing at the Commission would be
duplicative of other regulatory proceedings with state commissions and, as such,
would be wasteful and not in the public interest.
To justify a hearing, a party must show both (i) a genuine issue regarding
a material fact and (ii) a useful purpose to be served by holding a hearing. The
burden is on the party requesting a hearing to make such a showing. Bare
assertions will not suffice, and a request for a hearing will not be granted if
no disputed material facts are set forth. See, e.g., Sempra Energy, 67 S.E.C.
Docket 994, 1012 (1998) (based upon the facts or issues of law in the record, no
hearing necessary in order for the Commission to conclude that the applicable
standards of the Act were satisfied); WPL Holdings, Inc., 2256 S.E.C. Docket
2261, 2261-62 (1998) (request for hearing denied because the issues raised by
the intervenors did not warrant exploration at a hearing); Northeast Utils., 62
S.E.C. Docket 1555, 1561 (1991) (request for hearing denied because it did not
raise a question of fact or law that would be meaningfully developed by a
hearing); Centerior Energy Corp., 35 S.E.C. Docket 769, 777-78 (1986) (request
for hearing denied for failure to set forth facts making up a violation of the
Act)./4/
Speculative and conclusory allegations do not rise to the level of genuine
material issues and cannot provide a basis for a hearing. Entergy Corp., 55
S.E.C. Docket 2035, 2050 (1993) ("the intervenor cannot rely on bald or
conclusory allegations that [material facts are in dispute]"); Woolen Mills
Assocs. v. F.E.R.C., 917 F.2d 589, 592 (D.C. Cir. 1990) ("mere
- ----------
/4/ See also Entergy Corp., 55 S.E.C. 2035, 2050 (1993) (denying intervenors
request for a hearing to "develop the record" in light of the existence of,
and intervenors' participation in, "extensive hearings" held by two state
commissions and FERC); City of New Orleans v. S.E.C., 969 F.2d 1163, 1167
fn. 6 (D.C. Cir. 1992) (noting that the court has "recognized that
evidentiary hearings are required only when a genuine issue of material
fact exists"), citing Wisconsin's Env't. Decade, Inc. v. S.E.C., 882 F2d
523, 526 (D.C. Cir. 1989); Northeast Utils., 48 S.E.C. Docket 694, 698
(1991), aff'd sub nom. City of Holyoke Gas & Elec. Dep't., 972 F.2d 358
(D.C. Cir. 1992); accord Cajun Elec. Power Coop. v. F.E.R.C., No. 92-1461,
1994 WL 326863 (D.C. Cir. July 12, 1994) (per curiam) (ordering hearing but
reiterating standard that hearing is required only where there are genuine
issues of material fact).
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7
<PAGE>
allegations of disputed fact are insufficient to mandate a hearing; a petitioner
must make an adequate proffer of evidence to support them").
An agency need not conduct a hearing unless doing so would serve a useful
purpose. Connecticut Bankers Ass'n. v. Board of Governors of Fed. Reserve Sys.,
627 F2d 245, 250-51 (D.C. Cir 1980) (in light of the fact that "[e]videntiary
hearings consume time, energy, and resources," such requests cannot be
"indiscriminately grant[ed]"); City of Lafayette v. S.E.C., 454 F.2d 941, 953
(D.C. Cir. 1971) (hearing not required in matter where ultimate decision would
not be "enhanced or assisted by the receipt of evidence"), aff'd sub nom. Gulf
States Utils Co. v. F.P.C., 411 U.S. 747 (1973); Woolen Mill Assocs., 917 F.2d
at 592 (finding allegations of disputed facts insufficient in light of "no
substantial evidence contradicting any material finding by the Commission" when
intervenor "had ample opportunity to submit whatever evidence it desired
throughout the. . . proceeding"). Even where issues of fact exist, a hearing
will not be granted unless the reviewing agency in its discretion believes that
it cannot adequately address the issues upon written submissions. See, e.g.,
Cities of Carlisle & Neola v. F.E.R.C., 741 F.2d 429, 431 (D.C. Cir 1984)
(finding no need for more than a paper hearing due to Commission's ability to
consider fully the issues without recourse to more formal procedures); Boston
Carrier, Inc. v I.C.C., 728 F.2d 1508, 1511 & fn. 5 (D.C. Cir. 1984) (finding
the Commission did not "abuse . . . its discretion by refusing to hold an oral
hearing . . . since it reasonably could have found the factual disputes to be
resolvable using its modified procedure"). The Respondent's request for a
hearing on the Application should be denied because none of his objections sets
forth a genuine issue regarding a material fact or a useful purpose to be served
by a hearing.
Accordingly, for all the reasons set forth above, SCANA asks the Commission
to deny the request for hearing and to issue orders approving the proposed
transactions, on or before December 31, 1999.
8
