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As filed with the Securities and Exchange Commission on April 5, 1996
File No. 70-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM U-1 APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Northern States Power Company
414 Nicollet Mall
Minneapolis, Minnesota 55401
Wisconsin Energy Corporation
231 West Michigan Street
Milwaukee, Wisconsin 53203
(Name of companies filing this statement
and address of principal executive offices)
None
(Name of top registered holding company parent to be Primergy Corporation)
James J. Howard Richard A. Abdoo
Chairman of the Board, President and Chairman of the Board, President and
Chief Executive Officer Chief Executive Officer
Northern States Power Company Wisconsin Energy Corporation
414 Nicollet Mall 231 West Michigan Street
Minneapolis, Minnesota 55401 Milwaukee, Wisconsin 53203
(Name and addresses of agents for service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application-Declaration to:
Gary R. Johnson Walter T. Woelfle
Vice President, General Counsel Director, Legal Services Department
and Secretary Wisconsin Electric Power Company
Northern States Power Company 231 West Michigan Street
414 Nicollet Mall Milwaukee, Wisconsin 53203
Minneapolis, Minnesota 55401
Peter D. Clarke Gary W. Wolf
Gardner, Carton & Douglas Cahill Gordon & Reindel
321 North Clark Street 80 Pine Street
Suite 3400 New York, New York 10005
Chicago, Illinois 60610G
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TABLE OF CONTENTS
Item 1. Description of Proposed Transaction . . . . . . . . . . . . . . . .1
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1. General Request . . . . . . . . . . . . . . . . . . . . . . . .2
2. Overview of the Transaction . . . . . . . . . . . . . . . . . .3
B. Description of the Parties to the Transaction. . . . . . . . . . . .4
1. General Description . . . . . . . . . . . . . . . . . . . . . .4
(a) NSP. . . . . . . . . . . . . . . . . . . . . . . . . . . .4
(b) WEC. . . . . . . . . . . . . . . . . . . . . . . . . . . .7
(c) New NSP. . . . . . . . . . . . . . . . . . . . . . . . . 10
(d) WEC Sub. . . . . . . . . . . . . . . . . . . . . . . . . 10
(e) Primergy Services/Additional Services Companies. . . . . 10
(f) Primergy Hold. . . . . . . . . . . . . . . . . . . . . . 11
2. Description of Energy Sales and Facilities. . . . . . . . . . 12
(a) NSP and NSP-W. . . . . . . . . . . . . . . . . . . . . . 12
(i) Energy Sales. . . . . . . . . . . . . . . . . . . 12
(ii) Electric Generating Facilities. . . . . . . . . . 12
(iii) Electric Transmission and Other Facilities. . . . 14
(iv) Fuel Sources. . . . . . . . . . . . . . . . . . . 15
(v) Gas Facilities. . . . . . . . . . . . . . . . . . 15
(b) WEPCO . . . . . . . . . . . . . . . . . . . . . . . . . 16
(i) Energy Sales. . . . . . . . . . . . . . . . . . . 16
(ii) Electric Generating Facilities. . . . . . . . . . 16
(iii) Electric Transmission and Other Facilities. . . . 17
(iv) Fuel Sources. . . . . . . . . . . . . . . . . . . 18
(v) Gas Facilities. . . . . . . . . . . . . . . . . . 18
3. Electric Coordination . . . . . . . . . . . . . . . . . . . . 18
4. Gas Coordination. . . . . . . . . . . . . . . . . . . . . . . 20
5. Non-Utility Interests of NSP, NSP-W and WEC . . . . . . . . . 22
(a) NSP and NSP-W. . . . . . . . . . . . . . . . . . . . . . 22
(b) WEC. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
C. Description of Transaction and Statement as to Consideration . . . 28
1. Background. . . . . . . . . . . . . . . . . . . . . . . . . . 28
2. Merger Agreement. . . . . . . . . . . . . . . . . . . . . . . 31
3. Management of Primergy following the Merger . . . . . . . . . 32
4. Related Agreements. . . . . . . . . . . . . . . . . . . . . . 33
D. Dividend Reinvestment Plan . . . . . . . . . . . . . . . . . . . . 33
1. Dividend Reinvestment Plan. . . . . . . . . . . . . . . . . . 33
(a) Eligibility of Participants and Purposes of the DRIP . . 33
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(b) Sources of Common Stock and Use of Proceeds. . . . . . . 34
2. Stock Incentive Plan. . . . . . . . . . . . . . . . . . . . . 34
E. Other NSP and WEC Stock Based Plans/Other
Post-Transaction Financings. . . . . . . . . . . . . . . . . . . . 37
Item 2. Fees, Commissions and Expenses . . . . . . . . . . . . . . . . . . 38
Item 3. Applicable Statutory Provisions. . . . . . . . . . . . . . . . . . 39
A. Transaction . . . . . . . . . . . . . . . . . . . . . . . . . 41
1. Section 10(b) . . . . . . . . . . . . . . . . . . . . . . . . 42
(a) Section 10(b)(1) . . . . . . . . . . . . . . . . . . . . 43
(i) Interlocking Relationships. . . . . . . . . . . . 43
(ii) Concentration of Control. . . . . . . . . . . . . 43
(b) Section 10(b)(2) . . . . . . . . . . . . . . . . . . . . 47
(i) Reasonableness of Consideration . . . . . . . . . 47
(ii) Reasonableness of Fees. . . . . . . . . . . . . . 49
(c) Section 10(b)(3) . . . . . . . . . . . . . . . . . . . . 52
2. Section 10(c) . . . . . . . . . . . . . . . . . . . . . . . . 54
(a) Section 10(c)(1) . . . . . . . . . . . . . . . . . . . . 54
(b) Retention of Gas Operations. . . . . . . . . . . . . . . 55
(i) Retention is Appropriate Under
Sections 8 and 11 . . . . . . . . . . . . . . . . 57
(ii) Retention is also Appropriate Under
Section 11(b)(1). . . . . . . . . . . . . . . . . 62
(c) Retention of Other Businesses. . . . . . . . . . . . . . 70
(d) Section 10 (c)(2). . . . . . . . . . . . . . . . . . . . 87
(i) Efficiencies and Economies. . . . . . . . . . . . 87
(ii) Integrated Public Utility System. . . . . . . . . 90
(a) Electric System . . . . . . . . . . . . . . 90
(b) Gas Utility System. . . . . . . . . . . . . 94
3. Section 10(f) . . . . . . . . . . . . . . . . . . . . . . . . 96
4. Temporary exception to permit the holding of NSP-W
as a subsidiary of NSP for a short period of time
following the NSP Merger. . . . . . . . . . . . . . . . . . . 97
5. Section 9(a)(1) . . . . . . . . . . . . . . . . . . . . . . . 97
6. Other Applicable Provisions-Sections 6, 7 and 12. . . . . . . 99
B. Intra-system Financing . . . . . . . . . . . . . . . . . . . . . . 99
C. Primergy Services/Additional Services Companies. . . . . . . . . .101
D. Other Services . . . . . . . . . . . . . . . . . . . . . . . . . .108
Item 4. Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . .109
A. Antitrust . . . . . . . . . . . . . . . . . . . . . . . . . . . .109
B. Federal Power Act . . . . . . . . . . . . . . . . . . . . . . . .109
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C. Natural Gas Act . . . . . . . . . . . . . . . . . . . . . . . . .110
D. Atomic Energy Act. . . . . . . . . . . . . . . . . . . . . . . . .110
E. State Public Utility Regulation. . . . . . . . . . . . . . . . . .111
Item 5. Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . .111
Item 6. Exhibits and Financial Statements. . . . . . . . . . . . . . . . .111
A. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .111
B. Financial Statements . . . . . . . . . . . . . . . . . . . . . . .113
Item 7. Information as to Environmental Effects. . . . . . . . . . . . . .115
ANNEX A - Domestic Operations of NRG
ANNEX B - International Operations of NRG
ANNEX C - Names of Inactive NRG Subsidiaries
ANNEX D - WMIC Investments
ANNEX E - WISPARK Investments
ANNEX F - WISVEST Investments
ANNEX G - WITECH Investments
ANNEX H - Affiliate Contracts
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Item 1. Description of Proposed Transaction
A. Introduction
This Application-Declaration seeks approvals relating to the proposed
combination of Northern States Power Company, a Minnesota corporation ("NSP"),
and Wisconsin Energy Corporation, a Wisconsin corporation ("WEC"), by which WEC
will acquire 100% of the issued and outstanding common stock of NSP and by which
WEC's public utility subsidiary, Wisconsin Electric Power Company, a Wisconsin
corporation ("WEPCO"), will acquire substantially all of the assets of Northern
States Power Company, a Wisconsin corporation ("NSP-W") and a public utility
subsidiary of NSP (the "Transaction"). Following the consummation of the
Transaction, WEC (which will be renamed Primergy Corporation ("Primergy") prior
to such time) will register with the Securities and Exchange Commission (the
"Commission") as a holding company under the Public Utility Holding Company Act
of 1935, as amended (the "Act"). NSP is currently a public-utility company and
an exempt holding company under the Act, WEC is an exempt holding company under
the Act, and NSP-W and WEPCO are public-utility companies under the Act.
The Transaction is expected to produce substantial benefits to the public,
investors and consumers and will meet all applicable standards of the Act.
Among other things, NSP and WEC believe that the Transaction offers significant
strategic and financial benefits to each company and to their respective
shareholders, as well as to their employees, customers and the communities in
which they do business. These benefits include, among others:
(i) Maintenance of competitive rates that will improve
Primergy's ability to meet the challenges of the increasingly competitive
environment in the utility industry;
(ii) Integration of corporate and administrative functions,
including the elimination of duplicate positions, limiting capital expenditures
for administrative facilities and information systems, and savings in areas such
as legal, auditing and consulting fees;
(iii) Expanded management resources and ability to select
leadership from a larger and more diverse management pool;
(iv) Centralized management, supervision, and operation of
nuclear generating facilities;
(v) Greater purchasing power for items such as fuel and
transportation services, and streamlining of inventories;
(vi) More efficient pursuit of diversification into non-utility
areas;
(vii) Increased geographic diversity of service territories,
reducing exposure to local changes in economic, competitive, or climatic
conditions; and
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(viii) Continued ability to play a strong role in the economic
development efforts of the communities NSP, NSP-W and WEPCO now serve.
In this regard, NSP and WEC believe that synergies created by the Transaction
will generate substantial cost savings which would not be available absent the
Transaction. NSP and WEC have estimated the dollar value of certain synergies
from the Transaction to be approximately $2.0 billion over the 10-year period
from 1997 to 2006. The expected Transaction benefits are discussed in further
detail in Item 3.A.2.d.(i). below.
The Transaction has been approved by the shareholders of NSP and WEC.
Various aspects of the Transaction are also subject to the approval of: (i) the
Federal Energy Regulatory Commission (the "FERC"), (ii) the Nuclear Energy
Regulatory Commission (the "NRC"), (iii) the Minnesota Public Utilities
Commission ("MPUC"), (iv) the North Dakota Public Service Commission ("NDPSC"),
(v) the Public Service Commission of Wisconsin ("PSCW"), (vi) the Michigan
Public Service Commission ("MPSC"), (vii) the expiration of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act") and (viii) the receipt of a private letter ruling from the Internal
Revenue Service (the "IRS") providing certain assurances regarding the federal
income tax consequences of the Transaction. The requested private letter ruling
from the IRS has been obtained. An application for disclaimer of jurisdiction
over the transaction has been filed with the South Dakota Public Utilities
Commission ("SDPUC") and the SDPUC has issued an order acknowledging that it
does not have jurisdiction over the Transaction. FERC approval will also be
required to transfer hydroplants from NSP-W to WEPCO and to transfer
certificates for liquefied natural gas ("LNG") facilities from NSP-W to WEPCO.
In addition, NSP and NSP-W possess various franchises, permits and licenses
granted by local and state authorities that may need to be renewed or replaced
as a result of the Transaction. Apart from the approval of the Commission under
the Act, the foregoing approvals are the only governmental approvals required
for the Transaction. In order to permit timely consummation of the Transaction
and the realization of the substantial benefits it is expected to produce, the
applicants request that the Commission's review of this Application-Declaration
commence and proceed as expeditiously as practicable.
1. General Request
Pursuant to Sections 9(a) and 10 of the Act, the applicants hereby request
authorization and approval of the Commission for Primergy to acquire, by means
of the mergers described below, all of the issued and outstanding common stock
of NSP and for WEPCO to acquire substantially all of the assets of NSP-W. The
applicants also hereby request that the Commission approve (i) the establishment
of Primergy Services, Inc. ("Primergy Services") and one or more other service
companies as subsidiary service companies (the "Additional Services Companies")
in accordance with Rule 88 of the Act and the acquisition by Primergy of all of
the outstanding voting securities of Primergy Services and of all Additional
Services Companies, (ii) the Service Agreement filed as Exhibit B-4 hereto and
the form of Non-Utility Service Agreement filed as Exhibit B-5 hereto as a basis
for Primergy Services and the Additional Services Companies to comply with
Section 13 of the Act and the Commission's rules thereunder, (iii) the
establishment of, and acquisition by Primergy of all the outstanding voting
securities of, a new Primergy subsidiary to serve as a holding company for
certain of the Primergy system's non-utility
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interests ("Primergy Hold") or, if Primergy Hold is not formed, the
acquisition by Primergy of the direct non-utility subsidiaries of NSP, (iv)
the issuance of shares of Primergy common stock ("Primergy Common Stock") in
connection with the Transaction, (v) authority through a period ending five
years from the date of the Order issued by the Commission approving the
matters requested hereby for Primergy to issue (and/or acquire in open-market
transactions) up to 18.2 million shares of Primergy Common Stock under a
Primergy shareholder dividend reinvestment and stock purchase plan and under
the Primergy Stock Incentive Plan, (vi) the retention by Primergy of the gas
properties of NSP and WEPCO and the continuation of NSP and WEPCO as
combination gas and electric utilities, (vii) the retention by Primergy of
the non-utility businesses of NSP and WEC and of the non-utility affiliates
of NSP and WEC, (viii) all outstanding intra-system debt and guarantees and
(ix) exemption from the at-cost standards of certain transactions. The
applicants also request an order under the Act temporarily exempting New NSP
from the registration requirements of the Act during the limited period
following the NSP Merger (as defined below) that New NSP (as defined below)
owns NSP-W.
2. Overview of the Transaction
NSP, WEC, New NSP and WEC Sub (as defined below) have entered into an
Agreement and Plan of Merger, dated as of April 28, 1995, as amended and
restated as of July 26, 1995 (the "Merger Agreement"), which provides for a
strategic business combination involving NSP and WEC in a "merger-of-equals"
transaction. The Transaction will be accomplished through a three stage
process. In the first stage, NSP will reincorporate in Wisconsin by merging
into Northern Power Wisconsin Corp., a Wisconsin corporation and a wholly-owned
subsidiary of NSP ("New NSP"). Immediately prior to this merger and for state
regulatory reasons, NSP-W will transfer the gas utility assets necessary to
furnish gas utility services to the communities of LaCrosse and Hudson,
Wisconsin to New NSP (the "Designated Gas Utility Assets"). In the second
stage, WEC Sub Corp., a wholly-owned subsidiary of WEC ("WEC Sub"), will merge
with and into New NSP, with New NSP left as the surviving corporation. In the
third stage, NSP-W will merge into WEPCO and ownership of all other NSP
subsidiaries will be transferred from NSP to WEC, which, as noted above, will be
renamed Primergy. Also in connection with the Transaction, WEPCO will be
renamed Wisconsin Energy Company (for purposes of clarity, in this Application
such entity will hereinafter be referred to as WEPCO).
Upon completion of the Transaction, Primergy will own two combination
electric and gas public utility companies: NSP and WEPCO. NSP will continue to
own and operate the same utility facilities at the same locations outside
Wisconsin as prior to the Transaction, along with the Designated Gas Utility
Assets formerly owned by NSP-W. WEPCO will own and operate the same utility
facilities at the same locations as prior to the Transaction, along with the
balance of the gas utility and all electric assets of NSP-W. See Exhibit E-12
for the resulting corporate structure.
New NSP and WEC Sub are shell corporations formed by NSP and WEC to effect
the Transaction. Specifically, the Merger Agreement provides for: (i) the
merger of NSP with and into New NSP (the "Reincorporation Merger") pursuant to
which (a) each issued and outstanding share of common stock, par value $2.50 per
share, of NSP ("NSP Common Stock") (except shares held by NSP shareholders who
perfect dissenters' rights with respect thereto ("NSP
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Dissenting Shares")) will be canceled and converted into one share of common
stock, par value $2.50 per share, of New NSP ("New NSP Common Stock"), and (b)
each issued and outstanding share of cumulative preferred stock, par value
$100.00 per share, of NSP ("NSP Preferred Stock") (except NSP Dissenting Shares)
will be canceled and converted into one share of cumulative preferred stock, par
value $100.00 per share, of New NSP ("New NSP Preferred Stock") with terms
(including dividend rates and general voting rights) and designations under New
NSP's Articles of Incorporation (the "New NSP Articles") identical to those of
the canceled shares of NSP Preferred Stock under NSP's existing Restated
Articles of Incorporation (the "NSP Articles"), and (ii) the merger of WEC Sub
with and into New NSP (the "NSP Merger," together with the Reincorporation
Merger, the "Mergers") pursuant to which (a) each issued and outstanding share
of New NSP Common Stock will be canceled and converted into 1.626 (the "Ratio")
shares of common stock, par value $.01 per share, of Primergy ("Primergy Common
Stock") and (b) each issued and outstanding share of New NSP Preferred Stock
will remain outstanding and shall be unchanged thereby (except for any shares of
New NSP Common Stock and New NSP Preferred Stock owned directly or indirectly by
New NSP or WEC, which will be canceled and will not be converted or remain
outstanding). Each issued and outstanding share of common stock, par value $.01
per share, of WEC ("WEC Common Stock") will remain outstanding and unchanged, as
one share of Primergy Common Stock. Based upon the capitalization of WEC and
NSP on April 28, 1995 (the date the Merger Agreement was initially signed) and
the Ratio, holders of WEC Common Stock and NSP Common Stock would each have held
50% of the aggregate number of shares of Primergy Common Stock that would have
been outstanding if the Mergers had been consummated as of such date.
Following the Mergers and upon consummation of the Transaction, WEC (which,
as noted above, will be renamed Primergy Corporation) intends and requests all
requisite authorization of the Commission to realign certain non-utility
subsidiaries and to establish and acquire all of the capital stock of Primergy
Hold which will serve as a holding company and which will acquire the
outstanding capital stock of certain of the non-utility subsidiaries of NSP and
WEC. See Exhibit E-13 for the resulting corporate structure. Although NSP and
WEC currently contemplate the establishment of Primergy Hold, no decision has
yet been reached. Therefore, the non-utility subsidiaries of NSP and WEC will
be held by Primergy either directly and/or indirectly through Primergy Hold.
A copy of the Merger Agreement is incorporated by reference as
Exhibit B-1.
B. Description of the Parties to the Transaction
1. General Description
(a) NSP
NSP was incorporated under the laws of the State of Minnesota in 1909. It
is a public-utility company and a holding company exempt from regulation by the
Commission under the Act (except for Section 9(a)(2) thereof) pursuant to
Section 3(a)(2) of the Act and by order of the Commission in Northern States
Power Company, Release No. 35-22334 (December 23, 1981).
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NSP owns all of the outstanding common stock of NSP-W, a Wisconsin
corporation, which is a public-utility company under the Act. Maps of the
electric and gas service areas of NSP and NSP-W are filed as Exhibits E-4 and
E-5.
NSP is engaged primarily in the generation, transmission and distribution
of electricity throughout a 30,000 square mile service area. NSP also
purchases, distributes and sells natural gas to retail customers, and transports
customer-owned gas, in approximately 100 communities within this area. NSP
provides electric utility service in South Dakota and electric and gas utility
service in Minnesota and North Dakota. Of the more than 2.5 million people
served by NSP, the majority are concentrated in the Minneapolis-St. Paul
metropolitan area. In 1995, more than 60% of the electric retail revenue of NSP
was derived from sales in the Minneapolis-St. Paul metropolitan area and more
than 55% of its retail gas revenue was derived from sales in the St. Paul
metropolitan area. As of December 31, 1995, NSP provided electric utility
service to approximately 1,100,000 customers and gas utility service to
approximately 330,000 customers.
NSP-W is engaged in the generation, transmission, and distribution of
electricity to approximately 208,000 retail customers in an area of
approximately 18,900 square miles in northwestern Wisconsin, to approximately
9,100 electric retail customers in an area of approximately 300 square miles in
the western portion of the Upper Peninsula of Michigan, and to 10 wholesale
customers in the same general area. NSP-W purchases, distributes and sells to
retail customers or transports customer-owned natural gas, in the same service
territory to approximately 68,200 customers in Wisconsin and 4,700 customers in
Michigan. In 1995, NSP-W provided approximately 15.1% of NSP's consolidated
revenues. The Designated Gas Utility Assets consist of all gas utility assets
necessary to provide gas utility service to the communities of LaCrosse,
Wisconsin and Hudson, Wisconsin, representing 4.7% of NSP's consolidated gas
utility assets and 6.6% of NSP's consolidated gas utility revenues.
Retail sales rates, services and other aspects of NSP's retail operations
are subject to the jurisdiction of the MPUC, the NDPSC, and the SDPUC within
their respective states. The MPUC also possesses regulatory authority over
aspects of NSP's financial activities including security issuances, property
transfers when the asset value is in excess of $100,000, mergers with other
utilities, and transactions between NSP and affiliates. In addition, the MPUC
reviews and approves NSP's electric resource and gas supply capacity plans for
meeting customers' future energy needs. NSP-W is subject to regulation of
similar scope by the PSCW and the MPSC, except that the MPSC does not regulate
NSP-W's issuances of securities. In addition, before facilities may be sited
and built, a state commission generally must certify the need for new generating
plants and transmission lines of designated capacities to be located within such
state.
Wholesale rates for electric energy sold in interstate commerce, wheeling
rates for energy transmission in interstate commerce, and certain other
activities of NSP and NSP-W (including its hydro-electric facilities) are
subject to the jurisdiction of the FERC. The operation and construction of
NSP's Prairie Island and Monticello nuclear facilities are subject to regulation
by the NRC.
Non-utility businesses conducted directly by NSP consist of: (i) an
appliance warranty program for its residential customers, (ii) construction of
natural gas distribution systems for
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third parties (primarily end-users and municipal gas systems), (iii) sale and
installation of power quality instruments primarily to protect equipment of
customers from electric surges and (iv) sale of steam to Liberty Paper Inc.,
which is an industrial customer in NSP's service territory.
While NSP-W is the only public-utility subsidiary of NSP under the Act, NSP
has seven other directly-owned subsidiaries that are engaged in various non-
utility businesses. The activities of these subsidiaries are more fully
described under Item 1.B.5.a. below. For the year-ended December 31, 1995,
approximately 10.2% of NSP's consolidated operating revenues and 12.6% of its
consolidated net income were derived from the non-utility businesses. As of
December 31, 1995, approximately 10.1% of NSP's consolidated assets were
invested in nonutility businesses.
NSP Common Stock is listed on the New York Stock Exchange, Inc. ("NYSE")
and the Chicago and Pacific Stock Exchanges. As of December 31, 1995, there
were 68,175,934 shares of NSP Common Stock and 2,400,000 shares of NSP
cumulative preferred stock outstanding. NSP's principal executive office is
located at 414 Nicollet Mall, Minneapolis, Minnesota 55401. NSP-W does not have
any preferred stock outstanding and all of its common stock is owned by NSP.
Copies of the Articles of Incorporation of NSP and NSP-W are incorporated by
reference as Exhibit A-1 and Exhibit A-2.
On a consolidated basis, NSP's operating revenues for the twelve months ended
December 31, 1995, were $3.146 billion, consisting of the following (before
intercompany eliminations)(1):
<TABLE>
<CAPTION>
($ in millions)
Electric Utility Gas Utility Other
---------------- ----------- -----
<S> <C> <C> <C>
NSP $2,020 $336 $19
NSP-W 381 78(2) -
Non-Utility Subsidiaries - - 312
</TABLE>
Consolidated assets of NSP and its subsidiaries as of December 31, 1995 were
approximately $6.229 billion, consisting of $3.681 billion in net electric
utility property, plant and equipment ($3.135 billion for NSP and $546 million
for NSP-W); $376 million in net gas utility property,
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(1) In the following table, Electric Utility revenues are the revenues
derived by NSP and NSP-W from their operations as an "electric utility company"
as defined in Section 2(a)(3) under the Act; Gas Utility revenues are the
revenues derived by NSP and NSP-W from their operations as a "gas utility
company" under Section 2(a)(4) of the Act; and Non-Utility Subsidiaries revenues
include all other revenues of consolidated subsidiaries of NSP. These amounts
do not conform to NSP's consolidated financial reports, as NSP reports in its
consolidated financial statements: (i) the revenues of its wholly-owned
regulated natural gas interstate pipeline (Viking Gas Transmission Company) as
part of Gas Utility revenues, (ii) the revenues of its other consolidated
subsidiaries as part of "Other Income (Deductions)" and (iii) the results of the
operations of its non-consolidated subsidiaries under "Equity in Earnings of
Unconsolidated Affiliates."
(2) For the year ended December 31, 1995 revenues from the Designated Gas
Utility Assets were approximately $29 million.
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plant and equipment ($320 million for NSP and $56 million for NSP-W); and $2.172
billion in other corporate assets.
More detailed information concerning NSP and its subsidiaries is contained
in NSP's Annual Report on Form 10-K and Annual Report to Shareholders for the
year ended December 31, 1995, which are incorporated by reference as Exhibits H-
1 and H-4, respectively, and in NSP-W's Annual Report on Form 10-K for the year
ended December 31, 1995, which is incorporated by reference as Exhibit H-6.
(b) WEC
WEC, incorporated under the laws of the State of Wisconsin in 1981, is a
holding company exempt from regulation by the Commission under the Act (except
for Section 9(a)(2) of the Act) pursuant to Section 3(a)(1) of the Act and by
order of the Commission in Wisconsin Energy Corporation, Release No. 35-24267
(December 18, 1986). As explained above, WEC will change its name to Primergy
Corporation prior to the consummation of the Transaction.
WEC has one utility subsidiary, WEPCO, which is a public-utility company
under the Act. On January 1, 1996, Wisconsin Natural Gas Company ("WNG"), a gas
utility company under the Act and a subsidiary of WEC, was merged into WEPCO in
accordance with an order from the PSCW dated May 9, 1995 in Docket Nos. 6630-
GM100 and 6670-GM100. Accordingly, WEPCO is now a combination electric and gas
utility company. Unless the context requires otherwise, references herein to
WEPCO are to WEPCO as a combination electric and gas company. A map of the gas
and electric service areas of WEPCO is filed as Exhibit E-3.
WEPCO is engaged in the business of generating, transmitting, distributing
and selling electric energy to approximately 955,616 customers as of December
31, 1995 in a service area of approximately 12,000 square miles with a
population estimated at over 2,200,000 in southeastern (including the Milwaukee
area), central and northern Wisconsin and in the Upper Peninsula of Michigan.
WEPCO also distributes and sells steam supplied by its Valley Power Plant to
approximately 473 space heating and processing customers in downtown and near
southside Milwaukee as of December 31, 1995.
WEPCO also purchases, distributes and sells natural gas to retail customers
and transports customer-owned natural gas to approximately 357,030 customers as
of December 31, 1995 in three distinct service areas in Wisconsin: west and
south of the City of Milwaukee, the Appleton area and the Prairie du Chien area.
The gas service territory, which has an estimated population of over 1,100,000,
is largely within the electric service area of WEPCO.
WEPCO is subject to the regulation of the PSCW as to retail electric, gas
and steam rates in Wisconsin, issuance of securities, construction of new
facilities, transactions with affiliates, levels of short-term debt obligations,
and various other matters. WEPCO is also subject to the regulation of the MPSC
as to the various matters associated with retail electric service in Michigan to
the same extent that it is regulated by the PSCW as noted above, except as to
construction of certain new facilities, issuance of securities, levels of short-
term debt obligations and advance approval of transactions with affiliates.
Wholesale rates for electric energy sold in
-7-
<PAGE>
interstate commerce, wheeling rates for energy transmission in interstate
commerce, hydro-electric facilities, and certain other activities of WEPCO are
subject to the jurisdiction of the FERC. The operation of WEPCO's Point Beach
nuclear facilities are subject to regulation by the NRC.
WEC also owns all of the issued and outstanding common stock of seven
corporations and 50% of one limited liability company engaged, directly or
indirectly through subsidiaries or affiliates, in non-utility businesses, which
are described in more detail in Item 1.B.5.b. below. For the year ended
December 31, 1995, approximately one-half of 1% of WEC's consolidated operating
revenues were derived from its non-utility businesses. As of December 31, 1995,
approximately 5% of WEC's consolidated assets were invested in nonutility
businesses.
WEC, as a public utility holding company (a "holding company") under the
Wisconsin Holding Company Act (the "Wisconsin Act"), is subject to the
jurisdiction of, and regulation by, the PSCW. The following is a brief summary
of certain provisions of the Wisconsin Act that currently apply to WEC and will
apply to Primergy.
The PSCW, if it finds the capital of any public utility affiliate will be
impaired by payment of a dividend, may order the utility affiliate to limit or
cease payment of dividends to the holding company. Various transactions by a
public utility affiliate with others in the holding company system are
prohibited, including: lending money, guaranteeing obligations, combining
advertising, providing utility service on terms different from those for other
consumers in the same class, and, without PSCW approval after establishing that
the utility affiliate will be paid at fair market value, selling or leasing
certain real property and using the services of utility employees. The
Wisconsin Act prohibits (i) any public utility affiliate from providing any non-
utility product or service in a manner or at a price that unfairly discriminates
against any competing provider, (ii) any non-utility activity from being
subsidized materially by the customers of any public utility in the system,
(iii) the operation of the system in any way which materially impairs any public
utility affiliate in the system's credit, ability to acquire capital on
reasonable terms, or ability to provide safe, reasonable, reliable and adequate
utility service, (iv) any transfer by a public utility affiliate to any other
system company of any confidential public utility information, including
customer lists, for any non-utility purpose, unless the PSCW has approved the
transfer, and (v) any termination of the system's interest in a public utility
affiliate without PSCW approval.
The Wisconsin Act also limits non-utility diversification, such that,
stated generally, the net book value of the assets (other than investment in
system affiliates) of all non-utility affiliates may not exceed the sum of
25% of the net book value of all electric utility affiliates and a
percentage, to be determined by the PSCW (but not less than 25%), of the net
book value of all other public utility affiliates (the PSCW has fixed that
percentage at 25% for book value of WEPCO's gas utility business). In order
to ensure that Primergy is within the foregoing prescribed limits at the time
NSP becomes a subsidiary of Primergy, NSP must first become a Wisconsin
corporation owning public utility assets in Wisconsin. It is because of this
requirement that NSP will be merged into New NSP pursuant to the
Reincorporation Merger and New NSP will acquire the Designated Gas Utility
Assets from NSP-W. Further, the Wisconsin Act requires the PSCW to
periodically investigate the impact of the operation of every
-8-
<PAGE>
holding company system on every public utility affiliate in the system and to
determine whether each non-utility affiliate does, or can reasonably be expected
to do, at least one of the following: (a) substantially retain, attract or
promote business activity or employment or provide capital to businesses within
the service territory of any public utility affiliate or certain other
businesses, (b) increase or promote energy conservation or develop, produce or
sell renewable energy products or equipment, (c) conduct a business that is
functionally related to providing utility service or to developing or acquiring
energy resources and (d) develop or operate commercial or industrial parks in
the service territory of any public utility affiliate. The PSCW is also
authorized to order a holding company to terminate its interest in a public
utility affiliate if the PSCW finds that, based upon clear and convincing
evidence, termination of the interest is necessary to protect the interests of
utility investors in a financially healthy utility and the interests of
consumers in reasonably adequate utility service at a just and reasonable price.
WEC Common Stock is listed on the NYSE. As of December 31, 1995, there
were 110,819,337 shares of WEC Common Stock outstanding. WEC has no shares of
preferred stock outstanding. As of December 31, 1995, there were 304,508 shares
of WEPCO preferred stock outstanding. WEPCO's outstanding preferred stock will
not be impacted by the Mergers. WEC's principal executive office is located at
231 West Michigan Street, Milwaukee, Wisconsin 53203. Copies of the amended
Articles of Incorporation of WEC and WEPCO are incorporated by reference as
Exhibit A-4 and Exhibit A-5.
For the year ended December 31, 1995, WEC's operating revenues on a
consolidated basis were approximately $1.779 billion, consisting of the
following:
<TABLE>
<CAPTION>
($ in millions)
Company Electric Utility Gas Utility Steam Other(3)
- ------- ---------------- ----------- ----- -----
<S> <C> <C> <C> <C>
WEPCO(4) $1,437 $318 $15 -
Non-Utility - - - $9
</TABLE>
Consolidated assets of WEC and its subsidiaries as of December 31, 1995,
were approximately $4.561 billion, consisting of $3.907 billion in net electric
utility property, plant and equipment, $387 million in net gas utility property,
plant and equipment, $25 million in net steam utility property, plant and
equipment and $242 million in non-utility assets.
- ---------------
(3) In this table, electric revenues are the revenues derived by WEPCO
from its operations as an "electric utility company" as defined in Section
2(a)(3) under the Act; gas revenues are the revenues derived by WEPCO from its
operations as a "gas utility company" as defined in Section 2(a)(4) under the
Act; steam revenues are revenues derived by WEPCO from its steam operations; and
non-utility revenues include all other revenues of WEC and its consolidated
subsidiaries. These amounts do not conform to WEC's consolidated financial
reports, as WEC reports revenues of its non-utility businesses in its
consolidated financial statements as part of "Other Income and Deductions."
(4) Reflects the January 1, 1996 merger of WNG, the former wholly-owned
gas utility subsidiary of WEC, into WEPCO.
-9-
<PAGE>
More detailed information concerning WEC and WEPCO is contained in the
Annual Reports of WEC and WEPCO on Form 10-K for the year ended December 31,
1995, which are incorporated by reference as Exhibits H-2 and H-3, respectively,
and in WEC's 1995 Annual Report to Shareholders, which is incorporated by
reference as Exhibit H-5.
(c) New NSP
New NSP was incorporated under the laws of the State of Wisconsin in April
1995 solely for the purpose of facilitating the Transaction. New NSP has, and
prior to the consummation of the Transaction will have, no operations other than
those contemplated by the Merger Agreement to accomplish the Transaction. The
authorized capital stock of New NSP consists of 160 million shares of common
stock, par value $2.50 per share, and 7,000,000 shares of Preferred Stock, par
value $100 per share. At present, the outstanding common stock of New NSP,
which consists of 100 issued and outstanding shares, is owned by NSP. A copy of
the Amended Articles of Incorporation of New NSP is attached as Exhibit A-3.
Pursuant to the Merger Agreement, prior to the consummation of the Mergers, New
NSP or NSP will acquire the Designated Gas Utility Assets from NSP-W to enable
compliance with the Wisconsin Act. The New NSP Articles will be amended,
effective upon the consummation of the Mergers, to change the name of New NSP to
"Northern States Power Company." The principal executive office of New NSP is
located at 414 Nicollet Mall, Minneapolis, Minnesota 55401
(d) WEC Sub
WEC Sub was incorporated under the laws of the State of Wisconsin on April
26, 1995 solely for the purpose of facilitating the Transaction. The authorized
capital stock of WEC Sub consists of 9,000 shares, 8,000 of such shares being
designated as Common Stock, $.01 par value per share, (the "WEC Sub Common
Stock") and 1,000 of such shares being designated as Preferred Stock, $.01 par
value per share. Of its authorized capitalization, 1,000 shares of WEC Sub
Common Stock are issued and outstanding, all of which are owned by WEC. WEC Sub
has, and prior to the closing of the Transaction will have, no operations other
than the activities contemplated by the Merger Agreement necessary to accomplish
the merger of WEC Sub into New NSP as described herein. The principal executive
office of WEC Sub is located at 231 West Michigan Street, Milwaukee, Wisconsin
53203.
(e) Primergy Services/Additional Services Companies
Prior to the consummation of the Transaction, Primergy Services will be
incorporated in Wisconsin to serve as the service company for the Primergy
system after the consummation of the Transaction. Primergy Services will
provide NSP and WEPCO, and the other companies of the Primergy system, with a
variety of administrative, management and support services.
NSP and WEC are currently considering the establishment of two other
service companies, which companies, if formed, may provide various operating
services for non-nuclear, steam and/or chilled water system or nuclear
generating facilities (the "Additional Services Companies").
-10-
<PAGE>
Such subsidiaries would be known as Primergy Generation Corporation
("Primergy GC") and Primergy Nuclear Corporation ("Primergy NC"). Promptly upon
the obtaining of the requisite regulatory authorizations, Primergy GC may
undertake responsibility for one or more of the following: the operation,
maintenance, repair and rehabilitation of all non-nuclear generation and steam
and/or chilled water system facilities owned and/or operated by NSP and WEPCO
(collectively, the "Primergy Companies") and Primergy NC may undertake
responsibility through an operating agreement for the operation, maintenance,
repair and rehabilitation of all nuclear generation facilities owned and/or
operated by the Primergy Companies. Primergy GC and Primergy NC may also
undertake responsibility through their respective operating agreements for the
design, construction, start-up and testing of any new generation facilities
which the Primergy Companies may need in the future.
Neither Primergy GC nor Primergy NC would take title to any material
amounts of equipment or property or become obligated under any material
contracts with its affiliates (except for an operating agreement). Rather,
Primergy GC and Primergy NC would employ the facilities and properties of their
respective affiliates in carrying out their responsibilities, and agreements
with unaffiliated entities will be entered into either directly by the owners of
the generation facilities involved or by Primergy GC or Primergy NC, as the case
may be, as agent for such owners.
In addition, Primergy GC and Primergy NC may provide services to
unaffiliated entities.
The authorized capital stock of Primergy Services and any Additional
Services Companies formed would consist of 1,000 shares of common stock, par
value $.01 per share. Upon consummation of the Transaction, all issued and
outstanding shares of Primergy Services and the Additional Services Companies
will be held by Primergy.
Primergy Services will enter into a service agreement with NSP and WEPCO
(the "Service Agreement"). (A copy of the form of Service Agreement as well as
an appendix entitled "Description of Services and Determination of Charges for
Services" is filed as Exhibit B-4.)
For the direct, and certain of the indirect, non-utility affiliates of
Primergy, Primergy Services may enter into one or more separate service
agreements (the "Non-Utility Service Agreement"). (A copy of the form of Non-
Utility Service Agreement as well as an appendix entitled "Description of
Services and Determination of Charges for Services" is filed as Exhibit B-5.)
(f) Primergy Hold
As noted in Item 1.A.2. above, NSP and WEC are currently considering
whether Primergy Hold will be formed. If formed, Primergy Hold will be
incorporated in Wisconsin to serve as a holding company for, and to acquire the
outstanding capital stock of, certain non-utility subsidiary companies of NSP
and WEC. The non-utility subsidiary companies are described below in Item
1.B.5. The resulting corporate structure if Primergy Hold is formed is set
forth in Exhibit E-13. The authorized capital stock of Primergy Hold will
consist of 1,000
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<PAGE>
shares of common stock, par value $.01 per share. Upon consummation of the
Transaction, all issued and outstanding shares of Primergy Hold will be held by
Primergy.
If Primergy Hold is not formed, it is contemplated that the direct non-
utility subsidiaries of NSP and WEC will become direct subsidiaries of Primergy.
The resulting corporate structure if Primergy Hold is not formed is set forth in
Exhibit E-12.
2. Description of Energy Sales and Facilities
(a) NSP and NSP-W
(i) Energy Sales
For the year ended December 31, 1995, NSP and NSP-W sold the following
amounts of electric energy (at retail or wholesale) and distributed the
following amounts of natural or manufactured gas at retail:
<TABLE>
<CAPTION>
Year-ended
December 31, 1995
-----------------
<S> <C>
NSP
Kwh of electric energy sold 35,498,513,000
(including amounts delivered in interchange)
Mcf of gas distributed at retail (including 85,406,859
natural and manufactured gas)
NSP-W
Kwh of electric energy sold 5,501,716,000
(including amounts delivered in interchange)
Mcf of gas distributed at retail (including 18,951,421(5)
natural and manufactured gas)
</TABLE>
(ii) Electric Generating Facilities
As of December 31, 1995, NSP and NSP-W had a total net generating
capability of 7,937 Mw and NSP had a total summer net generating capacity of
6,261 Mw available primarily from the following Units:
Sherburne County ("Sherco"): NSP owns two coal-fired generating units and
shares a third unit at its Sherco station in Minnesota with a combined net
capability of 1,424 Mw. NSP owns a 59% undivided interest in the third unit at
the station ("Sherco 3"), of which NSP's share of the net capability of this
unit is 514 Mw.
- ---------------
(5) Approximately 5,970,049 Mcf was attributable to the Designated Gas
Utility Assets.
-12-
<PAGE>
Prairie Island: NSP owns two nuclear generating units at its Prairie
Island station in Minnesota with a combined net capability of 1,027 Mw.
Monticello: NSP owns one nuclear generating unit at its Monticello station
in Minnesota with a net capability of 544 Mw.
King: NSP owns one coal-fired generating unit at its King station in
Minnesota with a net capability of 567 Mw.
Black Dog: NSP owns four coal-fired generating units at its Black Dog
station in Minnesota with a combined net capability of 461 Mw.
High Bridge: NSP owns two coal-fired generating units at its High Bridge
station in Minnesota with a combined net capability of 262 Mw.
Riverside: NSP owns two coal-fired generating units at its Riverside
station in Minnesota with a combined net capability of 366 Mw.
Anson: NSP owns two oil/gas-fired combustion turbine electric generating
units at its Angus Anson station in Sioux Falls, South Dakota, with an aggregate
net generating capability of 232 Mw.
Inver Hills: NSP owns five oil/gas-fired combustion turbine electric
generating units at its Inver Hills station located in Inver Grove Heights,
Minnesota, with an aggregate net generating capability of 343 Mw.
NSP also owns numerous smaller generating units fueled with natural gas,
oil or waste, wind and one hydro-electric generating facility, with an aggregate
net capability of 521 Mw.
As of December 31, 1995, NSP-W had a total net summer generating capability
of 838 Mw from the following Units. All of the electric generating assets of
NSP-W will be transferred to WEPCO as part of the Transaction.
Bay Front: NSP-W owns three steam electric generating units at its Bay
Front station in Ashland, Wisconsin that are fueled with coal, wood and gas,
with a combined net capability of 75 Mw.
French Island: NSP-W owns two steam electric generating units, fueled with
wood and refuse derived fuel, and two oil-fired combustion turbine generating
units at its French Island generating station in LaCrosse, Wisconsin with a
combined net capability of 171 Mw.
Flambeau: NSP-W owns a gas/oil-fired combustion turbine electric
generating unit at its Flambeau station in Park Falls, Wisconsin with a summer
net generating capability of 12 Mw.
Wheaton: NSP-W owns six oil-fired combustion turbine electric generating
units at its Wheaton station in Eau Claire, Wisconsin with a combined net
capability of 332 Mw.
-13-
<PAGE>
Hydro Plants: NSP-W also owns and operates 19 hydro-electric generating
stations throughout northwestern Wisconsin with an aggregate net capability of
248 Mw.
NSP-W presently relies primarily on NSP for base load generation and
purchases of power to meet the needs of NSP-W's customers. The electric
operations of NSP and NSP-W are fully integrated and all generating units are
centrally dispatched by NSP. The electric production and transmission costs of
NSP and NSP-W are shared by the companies under an agreement which is called the
"Agreement to Coordinate Planning and Operation and Interchange Power and Energy
Between Northern States Power Company (Minnesota) and Northern States Power
Company (Wisconsin)" ("Interchange Agreement"). The Interchange Agreement was
approved by the FERC in Docket No. ER84-690-000, dated August 21, 1985. On July
10, 1995, NSP and WEC filed an amendment to the Interchange Agreement with FERC
to substitute WEPCO for NSP-W. For the year ended December 31, 1995, the
combined energy (Kwh) production and power purchases of NSP and NSP-W were
produced 50% by coal-fired generation, 30% by nuclear generation, 18% by
hydroelectric generation and 2% from other generation. The 1995 electric system
peak load for NSP and NSP-W was 7,519 Mw and occurred on July 13, 1995,
exclusive of off-system transactions. For the year ended December 31, 1995,
approximately 45% of the combined Kwh sales of NSP and NSP-W was obtained from
coal-fired generation, approximately 30% from nuclear generation, 21% from
purchases and approximately 4.0% from renewable resources.
(iii) Electric Transmission and Other Facilities
As of December 31, 1995, NSP's electric transmission system included 265
circuit miles of 500 Kv line, 751 circuit miles of 345 Kv line, 287 circuit
miles of 230 Kv line, 59 circuit miles of 161 Kv line, 1,206 circuit miles of
115 Kv line and 1,875 circuit miles of transmission line under 115 Kv. The bulk
of NSP's high voltage transmission system is located in the State of Minnesota.
As of December 31, 1995, NSP's transmission substations had a combined capacity
of approximately 25,100 thousand KVA and the distribution substations totaled
approximately 12,300 thousand KVA. Manitoba Hydro-Electric Board, Minnesota
Power Company and NSP completed the construction of a 500 Kv transmission
interconnection between Winnipeg, Manitoba, Canada, and the Minneapolis-St.
Paul, Minnesota, area in May 1980. NSP has a contract with Manitoba Hydro-
Electric Board for 500 Mw of firm power utilizing this transmission line. In
addition, the Company is interconnected with Manitoba Hydro through a 230 Kv
transmission line completed in 1970. A map of NSP's major electric transmission
lines is filed as Exhibit E-8.
As of December 31, 1995, NSP-W's electric transmission system included 166
circuit miles of 345 Kv line, 280 circuit miles of 161 Kv line, 521 circuit
miles of 115 Kv line and 1,541 circuit miles of transmission line under 115 Kv.
As of December 31, 1995, NSP-W's transmission substations had a combined
capacity of approximately 4,100 thousand KVA and the distribution substations
totaled approximately 1,930 thousand KVA. A map of NSP-W's major electric
transmission lines is filed as Exhibit E-6.
Other assets owned by NSP and NSP-W include electric distribution systems
located throughout its service area, and property, plant and equipment owned or
leased supporting their
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<PAGE>
electric and gas utility functions. NSP and NSP-W also own or lease other
physical properties, including real property, and other facilities necessary to
conduct their operations. See Item 1.B.3. for information on present electric
coordination.
All of the above referenced facilities of NSP-W will be transferred to
WEPCO as part of the Transaction.
(iv) Fuel Sources
NSP's and NSP-W's electric power generation by fuel type during each of the
three calendar years ended December 31, 1995, as well as the average cost of
such fuels to NSP and NSP-W per million BTUs, are set forth in the NSP and NSP-W
Annual Reports on Form 10-K for the year ended December 31, 1995, which are
incorporated by reference as Exhibits H-1 and H-6.
(v) Gas Facilities
NSP provides natural gas service at retail in the St. Paul metropolitan
area and portions of southeast, northwest and central Minnesota, as well as
eastern North Dakota. NSP-W provides natural gas service in western and central
Wisconsin as well as Ironwood in Michigan's Upper Peninsula. Both NSP and NSP-W
are directly connected to various interstate pipelines and have separate
contractual supply portfolios for transportation through pipelines and with
suppliers of natural gas. The gas delivery operations of NSP and NSP-W are
managed out of St. Paul, Minnesota, pursuant to a Supervisory Control and Data
Acquisition Agreement among NSP, NSP-W and Viking Gas Transportation Company (a
wholly-owned interstate pipeline subsidiary of NSP). Under this agreement, NSP
manages the pressures of the various pipelines owned by these companies and the
inflow and outflow of natural gas from these pipelines. This agreement was
approved by the MPUC in Docket No. G002/AI-94-831 and by the PSCW in Docket No.
4220-AU-117.
The gas properties of NSP include 6,357 miles of natural gas distribution
and transmission mains, the Westcott LNG plant with a storage capacity of 2 Bcf
equivalent and three propane-air plants with a storage capacity of .7 Bcf
equivalent to help meet the peak requirements of its firm residential,
commercial and industrial customers. NSP-W's gas properties include
approximately 1,399 miles of natural gas distribution mains, the Eau Claire LNG
plant with a storage capacity of .3 Bcf equivalent and no operating propane-air
plants. All of NSP-W's gas utility assets in Wisconsin, except the Designated
Gas Utility Assets, will be transferred to WEPCO as part of the Transaction. As
noted above, the Designated Gas Utility Assets will consist of all gas utility
assets necessary to serve Hudson, Wisconsin and LaCrosse, Wisconsin, which
service territories border the existing gas operations of NSP in Minnesota.
NSP and NSP-W provide each other with certain wholesale LNG liquefaction,
storage and vaporization service under certificate authority granted by FERC.
NSP and NSP-W will seek FERC authorization to abandon the certificated services
by assignment of the contractual obligations to New NSP and WEC. NSP and NSP-W
are also authorized to make certain sales of natural gas for resale under
blanket authority granted by the FERC under 18 CFR 284.402.
-15-
<PAGE>
(b) WEPCO
(i) Energy Sales
For the year ended December 31, 1995, WEPCO sold the following amounts of
electric energy (at retail or wholesale) and distributed the following amounts
of natural or manufactured gas at retail:
<TABLE>
<CAPTION>
Year-ended
December 31, 1995
-----------------
<S> <C>
Kwh of electric energy sold 27,283,869,000
(including amounts delivered
in interchange)
Mcf of gas distributed at retail 88,673,000
(including natural and
manufactured gas)
</TABLE>
(ii) Electric Generating Facilities
As of December 31, 1995, WEPCO had a total net generating capability of
5,712 Mw from the following units.
Point Beach Power Plant: WEPCO wholly owns two nuclear electric generating
units at its Point Beach nuclear power plant with a combined net capability of
947 Mw.
Oak Creek Power Plant: WEPCO owns four coal-fired electric generating
units at its Oak Creek power plant with a combined net capability of 1,141 Mw.
Presque Isle: WEPCO owns nine coal-fired electric generating units at its
Presque Isle power plant with a combined net capability of 612 Mw.
Pleasant Prairie: WEPCO owns two coal-fired electric generating units at
its Pleasant Prairie power plant with a combined net capability of 1,210 Mw.
Port Washington: WEPCO owns four coal-fired electric generating units at
its Port Washington power plant with a combined net capability of 324 Mw.
Valley: WEPCO owns two coal-fired electric generating units at its Valley
power plant with a combined net capability of 227 Mw.
-16-
<PAGE>
Edgewater: WEPCO owns a 25% undivided interest in one coal-fired unit at
the Edgewater power plant, operated by a nonaffiliated utility. WEPCO's 25%
interest equates to a net capability of 98 Mw.
Concord: WEPCO owns the four gas/oil fired combustion turbine generating
units at its Concord power plant with a combined net capability of 332 Mw.
Paris: WEPCO owns the four gas/oil fired combustion turbine generating
units at its Paris power plant with a combined net capability of 332 Mw.
Germantown: WEPCO owns the four oil-fired combustion turbine generating
units at its Germantown power plant with a combined net capability of 252 Mw.
Hydro-Plants: WEPCO owns 16 hydro-plants with an aggregate net capability
of 75 Mw.
Combustion Turbine and Other: WEPCO owns 4 smaller combustion turbines and
diesel units with a combined net capability of 162 Mw.
The 1995 electric system peak load for WEPCO was 5,368 Mw and occurred on
July 31, 1995. For the year ended December 31, 1995, approximately 70.3% of Kwh
production of WEPCO was obtained from coal-fired generation, approximately 26.9%
from nuclear generation, approximately 1.6% from hydroelectric generation and
approximately 1.2% from other generation.
WEPCO also operates a district steam system for space heating and
processing in downtown and near southside Milwaukee. The system consists of
approximately 30 miles of high and low pressure mains and related regulating
equipment. Steam for the system is supplied by WEPCO's Valley Power Plant. As
of December 31, 1995, there were 473 customers on the system.
(iii) Electric Transmission and Other Facilities
As of December 31, 1995, WEPCO's electric transmission system included 639
circuit miles of 345 Kv lines, 123 circuit miles of 230 Kv lines, 1,605 circuit
miles of 138 Kv lines and 394 circuit miles of lines at less than 138 kilovolts.
As of December 31, 1995, WEPCO's transmission substations had a combined
capacity of 13,107,789 KVA and the distribution substations had a combined
capacity of 13,727,473 KVA. These facilities are located within the states of
Wisconsin and Michigan. A map of WEPCO's major electric transmission lines is
attached as Exhibit E-7.
Other assets owned by WEPCO include an electric distribution system. WEPCO
also owns or leases other physical properties, including real property, and
other facilities necessary or appropriate to conduct its operations. See Item
1.B.3. for information on electric coordination.
-17-
<PAGE>
(iv) Fuel Sources
WEPCO's electric power generation by fuel type during each of the three
calendar years ended December 31, 1995, as well as the average cost to WEPCO per
million BTUs, is set forth in its Annual Report on Form 10-K for the year ended
December 31, 1995, which is incorporated by reference as Exhibit H-3.
(v) Gas Facilities
WEPCO provides natural gas service in three distinct service areas in
Wisconsin: west and south of the City of Milwaukee, the Appleton area and the
Prairie du Chien area. WEPCO is directly connected to various interstate
pipelines and has contracts with these pipelines and others for firm gas
transportation. The gas properties of WEPCO include 7,040 miles of natural gas
distribution mains, a LNG plant with a storage capacity of 0.25 Bcf equivalent
and three propane-air plants with a storage capacity of .05 Bcf equivalent to
help meet the peak requirements of its firm, residential, commercial and
industrial customers.
WEPCO is also authorized to make certain sales of natural gas for resale
under blanket certificate authority granted by FERC under 18 CFR 294.402.
3. Electric Coordination
The following table sets forth certain information with respect to the
electric operations of Primergy pro forma as of December 31, 1995, adjusted to
give effect to the Transaction (before intercompany eliminations).
<TABLE>
<CAPTION>
Electric Operating Kwh of Electric Energy Sales
Revenues (including amounts delivered
($ in millions) in interchange)
--------------- ---------------
<S> <C> <C>
NSP $2,020 35,498,513,000
WEPCO $1,818 32,785,585,000
------ --------------
TOTAL $3,838 68,284,098,000
</TABLE>
NSP, NSP-W and WEPCO are already physically interconnected. As explained
previously, as part of the Transaction, WEPCO will acquire all of the electric
operations of NSP-W through a merger of NSP-W into WEPCO. NSP and NSP-W are
directly connected through numerous transmission lines that they own, including
one 345 Kv transmission line, two 115 Kv transmission lines and two 69 Kv
transmission lines. NSP-W and WEPCO are directly interconnected by a
transmission system consisting of a 345 Kv transmission system and lower voltage
facilities. NSP-W and WEPCO own the direct connection at 345 Kv, which is
located at the Rocky Run substation in central Wisconsin. This 345 Kv
interconnection and others form the border between the Mid-Continent Area Power
Pool ("MAPP") and the Mid-American Interconnected Network ("MAIN") called the
MAPP/MAIN border. WEPCO is located in the
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<PAGE>
Wisconsin, Upper Michigan (WUMS) portion of MAIN. NSP and NSP-W own 83% of the
transmission capacity located to the west of the MAPP/WUMS border while WEPCO,
under an allocation agreement, is entitled to the use of 52% of the MAPP/WUMS
interconnection capability on the east side of the interconnection. NSP and
WEPCO intend to operate Primergy as a single system, economically dispatched,
although they also intend to continue to operate separate control areas, one
within MAIN and one within MAPP. This method of operation may change in the
future should the borders of MAPP and/or MAIN change.
NSP, NSP-W and WEPCO are also each directly interconnected to numerous
other neighboring utilities. In addition to its direct interconnection with NSP
and NSP-W, WEPCO is also directly interconnected with six neighboring utilities-
- -Commonwealth Edison, Madison Gas & Electric Company ("MGE"), Marquette Board of
Light & Power ("Marquette"), Upper Peninsula Power Company ("UPP"), Wisconsin
Power and Light Company ("WP&L"), and Wisconsin Public Service Corporation
("WPS"). In addition to their direct interconnection with WEPCO, NSP and NSP-W
are directly interconnected with eighteen neighboring utilities-Basin Electric
Power Cooperative ("Basin"), Cooperative Power Association ("Coop Power"),
Central Power Electric Cooperative ("Central Coop"), Dairyland Power Cooperative
("Dairyland"), Heartland Consumers Power District ("Heartland"), Interstate
Power Company ("Interstate"), Manitoba Hydro-Electric Board ("Manitoba"),
Minnesota Power & Light Company ("MPL"), Minnkota Power Cooperative
("Minnkota"), Missouri Basin Municipal Power Agency ("Mo Basin"), North Central
Power ("North Central"), Northwestern Public Service Company ("Northwestern"),
Otter Tail Power Company ("Otter Tail"), Southern Minnesota Municipal Power
Agency ("So. Minn. MPA"), United Power Association ("UPA"), the federal Western
Area Power Administration ("WAPA"), WP&L and WPS.
NSP also participates in two 345 Kv lines that give it limited purpose
contractual interconnections with six additional utilities. The "East 345 Line"
runs between Minneapolis-St. Paul and St. Louis and includes as participants IES
Utilities Inc., Interstate, MidAmerican Energy Company ("MidAmerican") and Union
Electric ("UE"). The "West 345 Line" runs between Minneapolis-St. Paul and
Kansas City and includes as participants Kansas City Power and Light ("KCPL"),
Interstate, MidAmerican, Omaha Public Power District ("OPPD") and St. Joseph
Light and Power ("SJLP").
All of the above interconnections are depicted on maps attached as
Exhibit E-2.
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<PAGE>
4. Gas Coordination.
The following table sets forth certain information with respect to the gas
operations of Primergy pro forma as of December 31, 1995, adjusted to give
effect to the Transaction (before intercompany eliminations).
<TABLE>
<CAPTION>
Gas Operating Mcf of Gas Distributed
Revenues (including natural and
($ in millions) manufactured gas)
--------------- -----------------
<S> <C> <C>
NSP $365 91,376,908
WEPCO $367 101,654,372
---- -----------
TOTAL $732 193,031,280
</TABLE>
NSP presently provides natural gas service at retail in Minnesota and North
Dakota. NSP-W provides gas service in western Wisconsin (near Eau Claire and
the Minnesota border), northwestern Wisconsin and Michigan's Upper Peninsula.
WEPCO presently provides gas service in southern Wisconsin. Upon completion of
the Transaction, the NSP and WEPCO gas operations will continue to serve this
contiguous four state area. The combined gas service territories of NSP and
WEPCO after the Transaction are shown in Exhibit E-9.
The gas systems of NSP and NSP-W, on the one hand, and WEPCO, on the other,
each presently operate as a single coordinated system. While the NSP and WEPCO
gas systems are not physically interconnected, they will functionally perform as
a coordinated system through purchase of natural gas from common sources of
supply, delivery through common interstate pipelines (all of which are open
access transportation-only pipelines under FERC Order 636) and storage of gas in
common underground storage facilities.
NSP, NSP-W and WEPCO are served through a "grid" of interstate pipelines
that serve the four state region. Underground storage providers are also
attached to such grid. A map of this grid is shown as Exhibit E-14. This grid
allows the coordination of gas purchases and delivery in a manner analogous to
the coordination created by the electric generation and transmission grid.
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<PAGE>
NSP, NSP-W and WEPCO purchase interstate gas transmission and storage
service from the following:
PROVIDER NSP NSP-W WEPCO
- -------- --- ----- -----
ANR Pipeline Company X X X
Northern Natural Gas Company X X X
Viking Gas Transmission Company X X X
Great Lakes Gas Transmission Company X X
Northern Border Pipeline Company X X
TransCanada Pipeline Ltd. X X
ANR Storage Company X
Llano, Inc. X
Williston Basin Interstate Pipeline X
KN Westex Gas Services Company X
Moss Bluff Gas Storage System X
Natural Gas Pipeline Company of America X
Texaco Natural Gas Company, Inc. X
As a result of FERC Order 636 regarding restructuring, NSP, NSP-W and WEPCO are
now able to directly purchase wholesale natural gas at the wellhead (or
processing plant outlet, hub, or gathering system outlet) from numerous
independent "third party" suppliers. However, NSP, NSP-W and WEPCO purchase
significant quantities of natural gas from common supply fields.
NSP, NSP-W and WEPCO purchase gas in the following major supply fields or
basins:
FIELD/BASIN NSP NSP-W WEPCO
----------- --- ----- -----
Hugoton X X X
Permian X X X
Andarko X X X
Rocky Mountain X X
Williston X
Arkoma X
Gulf Coast X
Alberta, Canada X X X
The three companies procure some gas supplies from common producers. However,
there are hundreds of natural gas producers available in the marketplace. Since
restructuring of gas supply under FERC Order 636 was designed to allow local
distribution companies ("LDCs") to directly contract with any producers they
wish, and allow the three companies to use competitive bidding procedures to
select their respective suppliers, the fact that NSP, NSP-W and WEPCO purchase
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<PAGE>
supplies from different suppliers within the common pools simply indicates that
FERC's policy objective of robust supply competition is being achieved.
5. Non-Utility Interests of NSP, NSP-W and WEC
(a) NSP and NSP-W
NSP has seven direct operating non-utility subsidiaries, all of which are
wholly-owned: Viking Gas Transmission Company ("Viking"), Cenerprise, Inc.
("Cenerprise"), Eloigne Company ("Eloigne"), First Midwest Auto Park, Inc.
("FMAP"), Cormorant Corporation ("Cormorant"), United Power & Land Company
("UP&L"), and NRG Energy, Inc. ("NRG"). NSP-W has two wholly-owned
subsidiaries, Clearwater Investments, Inc. ("Clearwater") and NSP Lands, Inc.
("NSP Lands") and a 78% owned subsidiary, Chippewa & Flambeau Improvement
Company ("C&F"). A corporate chart of NSP and its subsidiaries, showing their
non-utility interests, is filed as Exhibit E-10.
The 1995 consolidated revenues and net income and consolidated assets as of
December 31, 1995 of NSP's and NSP-W's direct non-utility subsidiaries before
intercompany eliminations were as follows:
<TABLE>
<CAPTION>
($ Thousands)
Company Revenue Net Income Assets
------- ------- ---------- ------
<S> <C> <C> <C>
Cormorant $-- $16 $683
UP&L 3,578 588 15,192
FMAP 1,627 234 7,064
Viking 16,328 1,658 49,421
Cenerprise 223,615 (1,590) 53,011
Eloigne 1,339 1,610 46,267
NRG 64,180 31,201 452,334
NSP Lands 1,284 575 587
Clearwater (63) 546 3,453
C&F 593 40 813
</TABLE>
Together, NSP's and NSP-W's non-utility subsidiaries and investments constituted
approximately 10.1% of NSP's consolidated assets as of December 31, 1995. NSP's
and NSP-W's non-utility subsidiaries and investments also provided approximately
10.2% of NSP's total revenues and approximately 12.6% of NSP's consolidated net
income for the year ended December 31, 1995.
NSP's aggregate investment in EWGs as of December 31, 1995 is within the
limits of Rule 53. NSP's aggregate investment in other non-utility subsidiaries
and affiliates as of December 31, 1995 is within the limits on such investments
contained in proposed Rule 58.
VIKING. Viking owns and operates a 500 mile interstate natural gas
pipeline serving portions of Minnesota, Wisconsin and North Dakota with a
capacity of 400,000 Mcf per day.
-22-
<PAGE>
Viking is a regulated natural gas company under the Natural Gas Act of 1938, as
amended (the "Natural Gas Act"). The Viking pipeline currently serves 10% of
NSP's gas distribution system needs. Approximately 75% of NSP's gas customers
are located within 40 miles of the Viking pipeline. Viking currently operates
exclusively as a transporter of natural gas for third-party shippers under FERC
rate and tariff jurisdiction. Viking has agreements with NSP, NSP-W and WEC for
natural gas transportation services in interstate commerce under the rate and
tariff jurisdiction of the FERC and all such agreements have been approved by
the FERC.
CENERPRISE, INC. Cenerprise, formerly Cenergy, Inc., commenced operations
in October 1993 through the acquisition from bankruptcy of selected assets of
Centran Corporation, a natural gas marketing company. As part of its natural
gas marketing services, Cenerprise has agreements with Viking for natural gas
transportation services in interstate commerce under the rate and tariff
jurisdiction of the FERC and such agreements have been approved by the FERC. As
such, Cenerprise is a "marketing affiliate" of Viking under FERC rules (18 CFR
Part 161). On December 1, 1994, the FERC approved Cenerprise's application to
market and broker electric power, other than power generated by NSP and NSP-W.
Cenerprise, in addition to marketing electricity and natural gas, provides
customized value-added energy conservation and management services to retail
customers, both inside NSP's service territory and on a national basis through
its offices in Houston, Texas; Louisville, Kentucky; Chesapeake, Virginia;
Corpus Christi, Texas; Chicago, Illinois; Milwaukee, Wisconsin and Pittsburgh,
Pennsylvania. Cenerprise offers customers energy products and services
including: performance contracting, end-use electric and gas marketing, risk
management, construction and energy consulting and administrative services. The
MPUC has approved an affiliate transaction contract whereby Cenerprise may sell
natural gas at market based rates (determined by competitive bids) to NSP for
resale to retail gas customers. (MPUC Docket No. G002/AI-94-433). As of
December 31, 1995, NSP's investment in Cenerprise (including undistributed
earnings or loss) was $18.6 million.
On September 1, 1995, a non-regulated subsidiary of NSP merged with Kansas
City-based Energy Masters Corporation ("EMC") which resulted in the purchase of
an 80% ownership interest in EMC by NSP. NSP subsequently assigned its interest
in EMC to Cenerprise. Cenerprise has an option to acquire the remaining 20% of
EMC in three years. EMC has offices in seven states nationwide and specializes
in energy efficiency improvement services for commercial, industrial and
institutional customers.
In 1995 Cenerprise and Atlantic Energy Enterprises established Atlantic
CNRG Services LLC ("ACNRG"). Each company owns 50% of the new venture that
markets new and expanded natural gas products and services in the Northeast
region of the United States. ACNRG competes with other independent marketing
companies for the sale of natural gas and related energy services to end-use
customers or LDCs. In February 1996, ACNRG purchased the gas marketing assets
of Interstate Gas Marketing, Inc., a natural gas end-user sales company with
offices in Scranton and Pittsburgh, Pennsylvania. These assets, primarily
natural gas end user contracts, were merged into ACNRG after the acquisition.
Cenerprise also holds a majority working interest in two separate producing
fields located in South Texas. The fields produce primarily natural gas, with
some associated oil. The
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<PAGE>
leaseholds comprise a combined total of approximately 3,985 acres. Minor
override and working interest properties are held in Oklahoma and Kentucky.
These reserves are utilized to fill Cenerprise's natural gas sales commitments.
ELOIGNE COMPANY. In 1993, NSP established Eloigne to identify and develop
affordable housing investment opportunities. Eloigne's principal business is
the acquisition of a broadly diversified portfolio of rental housing projects
which qualify for low income housing tax credits under federal tax law.
Although operating income from Eloigne projects is immaterial, tax credits
recognized from the projects were $3.2 million in 1995. As of December 31,
1995, NSP's investment in Eloigne (including undistributed earnings or loss) was
$25.2 million.
CLEARWATER INVESTMENTS, INC. Clearwater was established to identify and
develop affordable housing investment opportunities for NSP-W. Clearwater's
principal business is the acquisition of a broadly diversified portfolio of
rental housing projects which qualify for low income housing tax credits under
federal tax law. Tax credits recognized from the projects are estimated to be
$750,000 in 1995. Clearwater has invested in the following housing projects:
Woodsedge Eau Claire Limited Liability Partnership in Eau Claire, Wisconsin;
Plover Limited Liability Company in Plover, Wisconsin; and Shoe Factory Holding
LLC in Chippewa Falls, Wisconsin. As of December 31, 1995, NSP-W's investment
in Clearwater (including undistributed earnings or loss) was $857,000.
FIRST MIDWEST AUTO PARK, INC. FMAP owns and operates a parking garage.
NSP has a lease agreement with FMAP for 92 parking spaces on the basement level
of FMAP's garage and two agreements to lease storage and office space in FMAP's
garage, which agreements were approved by the MPUC in Docket Nos. E002/AI-94-
1042 and E002/AI-94-1043. The parking garage is located next to NSP's
headquarters in Minneapolis and is primarily used by NSP's employees. It
provides secure, close parking for NSP employees. As of December 31, 1995,
NSP's investment in FMAP (including undistributed earnings or loss) was $1.9
million.
CORMORANT CORPORATION. Cormorant was established for the principal purpose
of acquiring fuel resources and has historically engaged in oil, gas, coal
lignite and uranium exploration. As of December 31, 1995, NSP's investment in
Cormorant (including undistributed earnings or loss) was $0.7 million.
UNITED POWER AND LAND COMPANY. UP&L owns and holds real property typically
surrounding or adjacent to property owned and used by NSP in its regulated
operations. UP&L's land holdings consist of 12 parcels located in Minnesota and
Wisconsin, including the Renaissance Square office facility adjacent to NSP's
corporate headquarters. The majority of UP&L's land consists of property
adjacent to land owned and used for NSP's Sherco and Monticello plant sites.
UP&L receives rental revenue for some of the land which is leased to third
parties for agricultural purposes. UP&L provides a direct benefit to NSP. Real
property needed by NSP for its utility operations can often only be obtained as
part of purchases of larger tracts. In these cases, UP&L may acquire the
property, transfer the useful portion to NSP, hold any potential useful portion
for future use by NSP, and resell the remainder. Since UP&L is not subject to
NSP's first mortgage indenture, it is easier to transfer real property through
UP&L than to obtain a separate release from the mortgagee for each transaction.
Besides acquiring, holding
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<PAGE>
and disposing of real estate, UP&L also leases virtually all of its Renaissance
Square office building to NSP pursuant to two separate agreements. These
agreements were approved by the MPUC in Docket Nos. E002-AI-90-845 and E002-AI-
94-1056. NSP conducts various utility operations at the Renaissance Square
facility, including customer service operations. NSP achieved substantial cost
savings by having UP&L purchase the building rather than NSP, as NSP was able to
avoid the requirement of Minnesota law that a purchaser of a building who has
eminent domain power pay the relocation expenses of outgoing tenants. Pursuant
to a property management agreement, NSP manages this building on behalf of UP&L.
This agreement was approved as an affiliate transaction by the MPUC in Docket
No. E002/AI-94-1188. As of December 31, 1995, NSP's investment in UP&L
(including undistributed earnings or loss) was $6.1 million.
NSP LANDS, INC. NSP Lands was created to develop and sell land owned by
NSP-W adjacent to Lake Arbutus, a hydro-electric generating facility previously
owned by NSP-W. NSP Lands has no other activities in process at this time. As
of December 31, 1995, NSP-W's investment in NSP Lands (including undistributed
earnings or loss) was $490,000.
CHIPPEWA & FLAMBEAU IMPROVEMENT COMPANY. C&F was created in 1911 for the
purpose of building, maintaining, and operating dams and reservoirs on the
Chippewa and Flambeau Rivers in Wisconsin and is 75.86% owned by NSP-W; the
balance is owned by unaffiliated entities. C&F owns and operates the Flambeau
Reservoir. In addition, C&F leases and operates the Chippewa Reservoir pursuant
to a lease agreement with NSP-W. This lease was approved by the PSCW as an
affiliate transaction in an order dated December 17, 1987 in Docket No. 4220-AE-
100. C&F controls water leases from the Flambeau and Chippewa Reservoirs to
provide a uniform flow of water on the Chippewa and Flambeau Rivers. The flow
benefits the downstream hydro plants.
NRG ENERGY, INC. NRG is a wholly owned subsidiary of NSP that develops,
builds, acquires, owns and operates several non-regulated energy-related
businesses as described in Annex A and Annex B hereto. NRG directly owns and
operates certain resource recovery businesses and steam and chilled water
businesses. Through subsidiaries and affiliates, NRG is involved in numerous
independent power projects, energy-related services and fuel enhancement and
related projects. The domestic operations of NRG are described in Annex A
hereto and its international operations are described in Annex B hereto. As of
December 31, 1995, NSP's investment in NRG (including undistributed earnings or
loss) was approximately $317,000,000.
NRG also has numerous other subsidiaries that are inactive and are in the
process of being dissolved. These subsidiaries (which are listed in Annex C)
were formed in connection with actual or potential projects that did not
materialize.
(b) WEC
WEC has seven wholly owned non-utility subsidiaries devoted primarily
to stimulating economic growth in WEPCO's service area and to capitalizing on
diversified investment opportunities for stockholders: (i) Badger Service
Company, (ii) Minergy Corp., (iii) WEC Generation International Inc, (iv)
Wisconsin Michigan Investment Corporation,
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<PAGE>
(v) WISPARK Corporation, (vi) WISVEST Corporation and (vii) WITECH Corporation.
In addition, WEC holds a 50% interest in Custometrics LLC.
A corporate chart of WEC, showing its non-utility interests, is filed
as Exhibit E11.
(i) Badger Service Company ("Badger") holds coal rights in
Indiana. WEC's estimates indicate that 40 million tons of coal could be
recovered from this property with conventional mining techniques; however, there
are no current plans to develop the property. Badger Service Company may sell
or develop these rights in the future as conditions warrant.
(ii) Minergy Corp. ("Minergy") is engaged in the business of
developing and marketing proprietary technologies designed to convert high
volume industrial and municipal wastes into value-added products and provides
various consulting, operation, maintenance and other services related to the
installation, operation and maintenance of thermal sand reclamation facilities.
Minergy is proposing to build a $45 million facility in Neenah, Wisconsin that
would recycle paper sludge from area paper mills into two usable and salable
products: glass aggregate and steam. The plant will also provide substantial
environmental and economic benefits to the area by providing a beneficial
alternative to landfilling paper sludge.
(iii) WEC Generation International Inc ("WEC Generation") was
formed in February, 1996 to provide a vehicle through which WEC may investigate
investment opportunities. WEC Generation has acquired 100% of the equity
interest of two offshore Dutch companies, Valace Investments B.V. and Scotloc
Holding B.V. Each of these entities is currently inactive.
(iv) Wisconsin Michigan Investment Corporation ("WMIC") engages
in investment and financing activities. Activities include advances to
affiliated companies and investments in financial instruments and in
partnerships developing low and moderate-income housing projects. Other
investments may be made from time to time. WMIC's subsidiary, WMF Corp.,
engages in financing activities; any funds obtained by WMF Corp. through
financing arrangements are advanced to WMIC. WMIC's and WISPARK's investments
are detailed in Annexes D and E, respectively. Although operating income from
WMIC and WISPARK from low and moderate-income housing projects was immaterial,
tax credits from their projects in 1995 were approximately $2.6 million.
(v) WISPARK Corporation ("WISPARK") is a real estate
development subsidiary of WEC engaging in all aspects of real estate development
including the acquisition, construction, financing, management, leasing and
disposition of real estate. WISPARK's ownership positions in its subsidiaries
and affiliates are listed in Annex E.
(vi) WISVEST Corporation ("WISVEST") invests in energy-related
activities. Currently, it is an investor in a company which provides strategic
energy management services with a focus on natural gas management. WISVEST is
also an investor in a company which markets an advanced energy information
system to utilities which gives them the ability to communicate directly with
their customers. WISVEST's investments are set forth in Annex F.
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<PAGE>
(vii) WITECH Corporation ("WITECH") is a venture capital
subsidiary of WEC. WITECH provides long-term capital to companies located in
Wisconsin and Michigan's Upper Peninsula in exchange for equity and other
positions in such companies. WITECH currently has investments in the companies
listed in Annex G.
(viii) Custometrics LLC ("Custometrics") is a joint venture
formed by WEC and Marshall & Ilsley Corp. Custometrics will provide system
solutions related to billing and other aspects of the customer service segment
of the energy services industry.
The 1995 operating revenues and net income and assets as of December 31,
1995 of WEC's direct non-utility subsidiaries (before inter-company
eliminations) were as follows:
<TABLE>
<CAPTION>
($ Thousands)
Company Revenue Net Income (Loss) Assets
- ------- ------- ----------------- ------
<S> <C> <C> <C>
Badger $64 $24 $3,072
Minergy -- (734) 1,953
WEC Corporate 627 614 42,742
WEC Sub. -- -- 1
WEC Generation -- -- --
WMIC (5) 6,164 2,740 135,367
WISPARK (6) 9,974 429 159,500
WISVEST (7) (940) (719) 1,768
WITECH (8) 1,198 (6,987) 51,447
Custometrics 18 (454) 545
------ ----- -------
Subtotal 17,105 (5,087) 396,395
Less: Adjustments
and Eliminations (8,217) (343) (154,442)
------ ----- -------
Total Non Utility 8,888 (5,430) 241,953
</TABLE>
WEC non-utility subsidiaries and investments constituted approximately 5% of
WEC's assets on a consolidated basis as of December 31, 1995. Operating
revenues from WEC's non-utility subsidiaries and investments were approximately
one-half of 1% of WEC's consolidated total operating revenues for the year ended
December 31, 1995.
- ---------------
(5) WMIC's carrying value of its investments in affiliates range in size
from $13,000 to $3,209,000.
(6) WISPARK's carrying value of its investment in affiliates range in size
from $144,000 to $7,814,000.
(7) WISVEST's carrying value of its investments in affiliates range in
size from $1 to $175,000.
(8) WITECH's carrying value of its investments in affiliates range in size
from $1 to $12,930,000.
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<PAGE>
C. Description of Transaction and Statement as to Consideration
1. Background
WEC and NSP both believe that fundamental changes in the regulatory
structure of the electric utility industry are inevitable and that such
changes will likely occur in the near future. Recently enacted federal laws
and recent actions by federal and state regulatory commissions are
facilitating the changes to bring more competition to various segments of the
industry.
The Energy Policy Act of 1992 (the "1992 Act") granted the FERC
authority to order electric utilities to provide transmission service to
certain other utilities and to other buyers and sellers of electricity in the
wholesale market. The 1992 Act also created a new class of power producers,
exempt wholesale generators ("EWGs"), which are exempt from regulation under
the Act. The exemption from regulation under the Act of EWGs has increased
the number of entrants into the wholesale electric generation market, thus
increasing competition in the wholesale segment of the electric utility
industry.
Commencing in December 1993, pursuant to its authority under the
1992 Act, FERC issued a number of orders in specific cases directing
utilities to provide transmission services. Under FERC's evolving
transmission policies, utilities are being required to offer transmission
services to third parties on a basis comparable to services that the
utilities provide themselves. In April 1995, FERC issued a notice of
proposed rulemaking under which it proposed to implement, on a comprehensive
basis, the comparable transmission service policies it has set forth in
specific cases. FERC's actions to date and its transmission rulemaking
proceeding have increased the availability of transmission services, thus
creating greater competition in the wholesale power supply market.
In addition, state regulatory bodies in certain states, including,
among others, California, Minnesota and Wisconsin, have initiated proceedings
to review the basic structure of the electric industry. These bodies are
considering proposals to require some measure of competition in the retail
portion of the industry. Prior to NSP and WEC entering into the Merger
Agreement, the PSCW requested comments regarding how the industry might be
restructured in order to create a more competitive environment. Following
receipt of responses, the PSCW created a task force to analyze how the
industry might be restructured in Wisconsin to allow consumers to receive the
benefits of increased competition. It was the view of NSP's and WEC's
managements that such proceedings would result in some measure of increased
competition in the retail electric supply segment of the business. For an
update on the PSCW's proceedings, see footnote 30 under Item 3.A.2.b.(ii).
The changes to the electric industry that have occurred and that
are occurring are bringing increased competition to various sectors of the
business and are putting pressure on utilities to lower their costs. Both
NSP and WEC recognized that a combination with another financially strong
utility would enable the combined entity to generate and deliver energy more
cheaply and efficiently and thereby enable such combined entity to remain a
premier supplier of energy in an increasingly competitive industry.
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<PAGE>
Beginning in the spring of 1994, the management of NSP analyzed
various potential strategic options that might be available to NSP, including
possible business combinations with other utilities. Beginning in late
summer of 1994, management was assisted in this process by the Management
Consulting Division of Deloitte & Touche LLP ("Deloitte & Touche"). The NSP
Board was briefed at its August 1994 meeting with respect to the work that
had been done by NSP management in assessing the industry environment and
analyzing various potential merger partners and possible legal structures.
The management of NSP looked at substantially all of the utilities of
significant size with service areas proximate to the main service areas of
NSP. None of the other utilities offered synergistic opportunities of the
magnitude that could be realized through a merger with WEC. The physical
proximity of the service areas of WEC, the compatibility of and similarity
between NSP's and WEC's operations and the excellent reputation of WEC's
management made WEC the natural first choice for a combination partner for
NSP. No alternative merger scenarios were seriously considered at or after
this time.
In September 1994, at the suggestion of Mr. James J. Howard,
Chairman and Chief Executive Officer of NSP, Mr. Edwin Theisen,
then-President and Chief Operating Officer of NSP, raised the concept of a
combination of NSP and WEC with Mr. Richard A. Abdoo, Chairman, President and
Chief Executive Officer of WEC. That led to a series of discussions between
Messrs. Abdoo and Theisen which ultimately resulted in a meeting at the end
of October 1994 between Messrs. Howard, Abdoo and Theisen, at which the two
companies' views of the future of the utility industry were discussed. The
three men discussed in a very preliminary fashion the concept of a business
combination, structured as a merger of equals, between NSP and WEC. They
also identified the issues of management succession, board composition and
location of the headquarters as significant points to be agreed upon.
Shortly after the October 1994 meeting, NSP engaged the law firms
of Gardner, Carton & Douglas and Wachtell, Lipton, Rosen & Katz to advise it
with respect to the potential transaction.
Shortly after the October 1994 meeting, WEC management reviewed
possible strategic alternatives for WEC, including: a business combination
with NSP, the possibility of remaining an independent company and the
possibility of a combination with another Midwestern utility. No alternative
merger scenarios were seriously considered by WEC management. There was also
a review of the consequences of WEC remaining an independent company. WEC
sought advice from the investment banking firm of Barr Devlin Associates,
Inc. ("Barr Devlin") and the law firms of Quarles & Brady and Skadden, Arps,
Slate, Meagher & Flom with respect to strategic alternatives. The WEC Board
was briefed at its November 1994 meeting with respect to the fact that WEC
management was reviewing various strategic alternatives, including a possible
business combination with NSP, and that management would report back to the
WEC Board.
In late November 1994, representatives of WEC advised
representatives of NSP that WEC management was interested in exploring the
possibility of a combination of the two companies, but WEC felt that it
needed to perform additional internal analysis of the potential benefits of
the transaction before it further engaged NSP in any substantive discussions.
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In December 1994, NSP management briefed the NSP Board with respect
to its analysis of various strategic alternatives, the potential synergies
that could be achieved by a combination with WEC or other utilities (such as
cost savings from economies of scale and decreased fuel costs, reduction in
operational and maintenance expenses, integration of nuclear facilities and
elimination of duplicative administrative expenditures), and the legal and
regulatory implications of alternative combination structures.
Representatives of WEC contacted representatives of NSP in early
January 1995 and indicated that WEC was interested in proceeding with
discussions concerning a possible merger of equals. Messrs. Howard and Abdoo
met on January 6, 1995, at which meeting Mr. Abdoo indicated that WEC was
interested in proceeding with the discussions. The parties agreed that it
was desirable to arrange an introductory meeting of the parties' respective
management teams and advisors to discuss, among other things, the due
diligence and negotiation process.
On January 10, 1995, NSP engaged Goldman, Sachs & Co. ("Goldman
Sachs") as its financial advisor in connection with the possible transaction.
An introductory meeting was held on January 12, 1995, attended by
representatives of WEC and NSP and their respective counsel, financial
advisors and consultants. Working groups composed of representatives of both
companies were formed to examine various issues including structure,
financial modeling, regulatory considerations, integration of employee
benefit plans, communications and an analysis of synergies. Shortly after
the meeting, the companies entered into a confidentiality agreement, pursuant
to which the parties agreed to exchange non-public information with a view
toward exploring a possible business combination.
Deloitte & Touche was engaged to assist the senior managements of
NSP and WEC and certain employees designated by them (collectively, the
"Synergies Working Group") in identifying and quantifying the potential cost
savings from synergies resulting from the proposed merger.
During the following months, the various task forces continued
their work with respect to the synergistic analysis, business plans, legal
structures, regulatory plans, due diligence and employee benefits. In
addition, discussions continued between NSP management and Goldman Sachs on
the one hand, and WEC management and Barr Devlin on the other hand, with
respect to negotiation of the exchange ratio, and between counsel for WEC and
counsel for NSP, with respect to the terms of drafts of the merger and stock
option agreements. Numerous briefings were also made by management and the
outside advisors to the respective Boards of Directors of NSP and WEC.
Prior to April 28, 1995, the advisors for both parties agreed on
the proposed structure for the Transaction and negotiated the terms of the
Merger Agreement, including the conditions to closing, the termination
provisions, the break-up fees, the covenants which would govern the
operations of NSP and WEC prior to the completion of the transaction and
various other matters, such as employee benefits and workforce matters, which
would govern the operations of Primergy after the NSP Merger. Goldman Sachs
and Barr Devlin held further
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discussions with respect to the exchange ratio and agreed to recommend to
their clients a ratio which would result in each company's common
shareholders as a group owning 50% of the surviving company's common equity.
On April 28, 1995, the Boards of Directors of NSP and WEC each
unanimously approved the Merger Agreement, and certain related agreements and
the transactions contemplated thereby.
Additional information regarding the background of the Transaction
is set forth in the Joint Registration Statement on Form S-4 of WEC and New
NSP, which is filed as Exhibit C-1 hereto (the "Joint Registration
Statement").
2. Merger Agreement
The Merger Agreement provides for NSP to be merged with and into
New NSP pursuant to the Reincorporation Merger. In order for NSP to become a
Wisconsin corporation, NSP will not be the survivor of the merger with New
NSP. Also, prior to the merger, NSP-W will transfer the Designated Gas
Utility Assets to New NSP, so that New NSP will be a "public utility" under
Wisconsin law. Absent these transactions, it might be possible that the
utility assets of NSP would not be considered in determining the amount of
permitted non-utility investments of Primergy under Wisconsin law. See Item
1.B.1.b. above. Immediately after the Reincorporation Merger, WEC Sub will
be merged into New NSP pursuant to the NSP Merger, with New NSP being the
survivor. Soon thereafter, New NSP is expected to dividend the shares of
NSP-W to Primergy and, immediately thereafter, NSP-W will merge into WEPCO.
The Merger Agreement is incorporated by reference as Exhibit B-1.
Under the terms of the Merger Agreement, upon consummation of the
Transaction: (i) each issued and outstanding share of NSP Common Stock
(other than shares owned directly or indirectly by NSP or WEC and NSP
Dissenting Shares) will be canceled and ultimately converted into the right
to receive 1.626 shares of Primergy Common Stock, (ii) each issued and
outstanding share of NSP Preferred Stock (other than shares owned directly or
indirectly by NSP or WEC and NSP Dissenting Shares) will be canceled and
converted into the right to receive one share of New NSP Preferred Stock with
terms (including dividend rates and general voting rights) and designations
under the New NSP Articles identical to those of the canceled shares of NSP
Preferred Stock under the NSP Articles and (iii) each issued and outstanding
share of WEC Common Stock will be unchanged as a result of the NSP Merger and
will remain outstanding thereafter as a share of Primergy Common Stock, so
that the common shareholders of WEC and NSP immediately prior to the Mergers
(except for the holders of NSP Dissenting Shares) will all be common
shareholders of Primergy immediately upon the consummation of the Mergers.
The Transaction is expected to be tax-free to NSP and WEC
shareholders (except as to dissenters' rights and fractional shares). Based
on the capitalization of WEC and NSP on April 28, 1995, and the Ratio, the
shareholders of WEC and NSP would each own securities representing
approximately 50% of the outstanding voting power of Primergy.
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Except as set forth below, if any holder of NSP Common Stock would
be entitled to receive a number of shares of Primergy Common Stock that
includes a fraction, then in lieu of a fractional share, such holder will be
entitled to receive a cash payment determined by multiplying the fractional
share interest by the average of the last reported sales price, regular way,
per share of WEC Common Stock on the NYSE Composite Tape for the ten business
days prior to and including the last business day on which WEC Common Stock
was traded on the NYSE, without any interest thereon. Because each share of
WEC Common Stock will become a share of Primergy Common Stock at a 1:1 ratio,
fractional shares will not result from the conversion of whole shares of WEC
Common Stock. Fractional shares of NSP Common Stock held in accounts under
the dividend reinvestment plans and employee benefit plans of NSP will be
converted into the applicable number of shares (or fractional shares) of
Primergy Common Stock under corresponding plans of Primergy, in accordance
with the Ratio.
The Transaction is subject to customary closing conditions,
including the receipt of the requisite shareholder approvals of WEC and NSP
(which have been obtained) and all necessary governmental approvals,
including the approval of the Commission.
The Transaction is designed to qualify as a tax-free reorganization
under Section 368(a) of the Internal Revenue Code of 1986, as amended. NSP
and WEC believe the Transaction will be treated as a "pooling of interests"
for accounting purposes.
The Merger Agreement contains certain covenants relating to the
conduct of business by the parties pending the consummation of the
Transaction. Generally, the parties must carry on their businesses in the
ordinary course consistent with past practice, may not increase common stock
dividends beyond specified levels, and may not issue capital stock except as
specified. The Merger Agreement also contains restrictions on, among other
things, charter and bylaw amendments, capital expenditures, acquisitions,
dispositions, incurrence of indebtedness, certain increases in employee
compensation and benefits and affiliate transactions.
3. Management of Primergy following the Merger
The Merger Agreement provides that, after the effectiveness of the
Mergers, Primergy's principal corporate office will be located in
Minneapolis, Minnesota. Primergy's board of directors, which will be
classified into three classes, will consist of a total of twelve directors,
six of whom will be designated by NSP and six of whom will be designated by
WEC. As of the date hereof, NSP and WEC have not determined which
individuals, in addition to Messrs. Howard and Abdoo, will serve as officers
of Primergy following consummation of the Transaction. Mr. James Howard, the
current Chairman, Chief Executive Officer and President of NSP, will be
entitled to serve as Chairman and Chief Executive Officer of Primergy until
the later of the date of the Annual Meeting of Primergy that occurs in 1998
or the last day of the sixteenth month following the effectiveness of the
Mergers (the "Initial Period"), and as Chairman of the Board of Primergy
until the later of July 1, 2000, or the second anniversary of the last day of
the Initial Period. Mr. Richard Abdoo as Chairman and Chief Executive
Officer of WEC, will be entitled to serve as Vice Chairman of the Board,
President and Chief Operating Officer of Primergy until Mr. Howard ceases to
be Chief Executive Officer, and thereafter will
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serve as Vice Chairman, President and Chief Executive Officer of Primergy.
Mr. Abdoo will assume the position of Chairman when Mr. Howard ceases to be
Chairman.
4. Related Agreements
In connection with the Merger Agreement, NSP and WEC also entered
into reciprocal stock option agreements (the "Option Agreements")
(Exhibits B-2 and B-3 hereto) giving each company the right to acquire
shares of the other's common stock under specified circumstances. The
Option Agreements provide that no option may be exercised until all
necessary regulatory approvals (including any required approval of the
Commission) have been obtained for the acquisition of shares pursuant
to such option.
D. Dividend Reinvestment Plan and Stock Incentive Plan
Primergy proposes, from time to time through a period five years
from the date of an Order issued by the Commission to issue and/or acquire in
open market transactions up to 18.2 million shares of Primergy Common Stock
(the "Additional Common Stock") under Primergy's dividend reinvestment plan
and stock incentive plan.
1. Dividend Reinvestment Plan
NSP currently has in place the NSP Dividend Reinvestment and Stock
Purchase Plan (the "NSP Plan") and WEC has in place the WEC Stock Plus
Investment Plan (the "WEC Plan"). Upon completion of the Mergers, the NSP
Plan will cease and participants in the NSP Plan will become participants in
the WEC Plan, which is referred to below as the "DRIP" and which will become
the Primergy plan.
Set forth below is a description of the principal terms of the DRIP.
(a) Eligibility of Participants and Purposes of the DRIP
All holders of record of shares of (i) Primergy Common Stock and
(ii) any WEC Preferred Stock, WEPCO Preferred Stock or NSP Cumulative
Preferred Stock (collectively, the "Preferred Stock," and together with
Primergy Common Stock, the "Eligible Securities") may participate in the
DRIP. The DRIP will also permit other investors who are not shareholders of
any of these companies and may permit beneficial owners of the companies'
stock held by brokers and other custodial institutions of such brokers and
other custodial institutions that have established procedures which permit
their customers to participate, to make an original purchase of Primergy
Common Stock, whereupon they will become shareholders of Primergy and will be
entitled to participate in the DRIP like other shareholders. The purpose of
the DRIP will be, among other things, to provide holders of Eligible
Securities and other investors with a simple, convenient and economical
method of purchasing shares of Primergy Common Stock through reinvestment of
dividends and cash investments. The DRIP is designed to encourage and
facilitate broader ownership of Primergy Common Stock. Full investment of
funds will be possible under the DRIP, subject to minimum and maximum
purchase limits, because the DRIP will permit fractional as well as whole
shares to be credited to a participant's account. The DRIP
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will also provide Primergy with a means to raise equity capital and to
increase ownership by small, long-term investors.
(b) Sources of Common Stock and Use of Proceeds
Any shares of Additional Common Stock purchased under the DRIP with
optional cash payments and reinvested dividends may be, at the discretion of
Primergy, authorized but unissued shares, treasury shares or shares purchased
on the open market by the DRIP's independent plan administrator (the
"Administrator"). As of the date of this Application, the WEC Administrator
is purchasing shares in the open market for the WEC Plan. The decision as to
whether shares are to be purchased directly from Primergy, or in the open
market or in privately negotiated transactions, will be based on Primergy's
need for common equity and any other factors considered by Primergy to be
relevant. Any determination by Primergy to alter the manner in which shares
will be purchased for the DRIP, and implementation of any such change, will
comply with applicable law and Commission interpretations then in effect.
Net proceeds from new issue or treasury shares received by Primergy will
be added to Primergy's general funds to be available for general corporate
purposes. Primergy will not receive any proceeds from shares acquired by the
Administrator in the open market or in privately negotiated transactions.
Primergy will not use any proceeds from new issue or treasury shares to
acquire the securities of or any interest in any EWG or foreign utility
companies (as those terms are defined in Sections 32(e) and 33(a) of the Act,
as amended by the Energy Policy Act of 1992), until such time as such use
shall be approved by regulation or order of the Commission, to the extent
such approval is required under the Act.
A full statement of the provisions of the DRIP is included in WEC's
Registration Statement on Form S-3 (Exhibit C-3 hereto).
2. Stock Incentive Plan
Pursuant to the Merger Agreement, it was agreed that Primergy would
adopt a stock compensation plan to replace the NSP Long-Term Incentive Award
Stock Plan (the "NSP LTIASP") and the WEC 1993 Omnibus Stock Incentive Plan
(the "WEC OSIP") (except with respect to obligations incurred thereunder
prior to the NSP Merger) subject to approval by shareholders. The Primergy
Stock Incentive Plan was approved by shareholders, will become effective at
the effective time of the Mergers and will terminate ten years thereafter.
The purpose of the Primergy Stock Incentive Plan is to enable
Primergy and its subsidiaries and other affiliates (as defined in the
Primergy Stock Incentive Plan) to attract, retain and motivate officers and
employees and to provide Primergy and its affiliates with the ability to
provide incentives directly linked to the profitability of Primergy's
businesses, increases in shareholder value and the enhancement of customer
service.
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The Primergy Stock Incentive Plan has been designed to comply with
recent tax law changes which impose limits on the ability of a public company
to claim tax deductions for compensation paid to certain highly compensated
executives. Section 162(m) of the Code generally denies a corporate tax
deduction for annual compensation exceeding $1,000,000 paid to the Chief
Executive Officer and the four other most highly compensated officers of a
public company. Certain types of compensation, including performance-based
compensation, are generally excluded from this deduction limit. While NSP
and WEC believe compensation payable pursuant to the Primergy Stock Incentive
Plan will be deductible for federal income tax purposes under most
circumstances, compensation not qualified under Section 162(m) of the Code
may be payable under certain circumstances such as death, disability and
change in control (all as defined in the Primergy Stock Incentive Plan).
Set forth below is a summary of certain important features of the
Primergy Stock Incentive Plan, which summary is qualified in its entirety by
reference to the actual plan (Exhibit C-4 hereto):
The Primergy Stock Incentive Plan will be administered by the
Primergy Compensation Committee, or such other committee of the Primergy
Board as the Primergy Board may from time to time designate, and will be
composed solely of not less than two "disinterested persons," as defined in
Rule 16b-3, who also qualify as "outside directors" for purposes of Section
162(m) of the Code.
Officers and salaried employees of Primergy and its affiliates
designated by the Primergy Compensation Committee who are responsible for or
who contribute to the management, growth and profitability of Primergy are
eligible to be granted awards under the Primergy Stock Incentive Plan. No
grant will be made under the Primergy Stock Incentive Plan to a director who
is not an officer or a salaried employee.
The Primergy Stock Incentive Plan authorizes the issuance of up to
12,000,000 shares of Primergy Common Stock pursuant to the grant or exercise
of stock options, including incentive stock options ("ISOs"), nonqualified
stock options, stock appreciation rights, restricted stock and performance
units. However, no more than 3,000,000 shares may be issued as restricted
stock. No single participant may be granted awards pursuant to the Primergy
Stock Incentive Plan covering in excess of 100,000 shares of Primergy Common
Stock in any one calendar year, and no participant may be granted performance
units in any one calendar year, payable in cash in an amount that would
exceed $1,000,000. Subject to the foregoing limits, the shares available
under the Primergy Stock Incentive Plan can be divided among the various
types of awards and among the participants as the Primergy Compensation
Committee sees fit. The shares subject to grant under the Primergy Stock
Incentive Plan are to be made available from authorized but unissued shares
or from treasury shares as determined from time to time by the Primergy
Board. Awards may be granted for such terms as the Primergy Compensation
Committee may determine, except that the term of an ISO may not exceed ten
years from its date of grant. The Primergy Compensation Committee will have
broad authority to fix the terms and conditions of individual agreements with
participants.
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The exercise price of any stock option will not be less than 100%
of the fair market value of such stock on the date of grant. A stock
appreciation right ("SAR," and stock appreciation rights "SARs") may be
granted in conjunction with a contemporaneously granted ISO or a previously
or contemporaneously granted nonqualified option. Since the exercise of a
SAR is an alternative to the exercise of an option, the option will be
cancelled to the extent that the SAR is exercised, and the SAR will be
cancelled to the extent the option is exercised.
With respect to restricted stock, the Primergy Compensation
Committee may, prior to granting shares of restricted stock, designate
certain participants as "Covered Employees" upon determining that such
participants are, or are expected to be, "Covered Employees" within the
meaning of Section 162(m)(3) of the Code. The Primergy Compensation
Committee will also provide that restricted stock awards to these Covered
Employees cannot vest unless applicable performance goals established by the
Primergy Compensation Committee within the time period prescribed by Section
162(m) of the Code are satisfied. These performance goals must be based on
the attainment of specified levels of earnings per share, market share, stock
price, sales, costs, net operating income, cash flow, retained earnings,
return on equity, results of customer satisfaction surveys, aggregate product
price and other product price measures, safety record, service reliability,
demand-side management (including conservation and load management),
operating and maintenance cost management, energy production availability and
individual performance measures. Such performance goals may also be based on
the attainment of specified levels of Primergy's performance under one or
more of the measures described above relative to the performance of other
corporations. Performance goals based on the foregoing factors are
hereinafter referred to as "Performance Goals." With respect to Covered
Employees, all Performance Goals must be objective performance goals
satisfying the requirements for "performance-based compensation" within the
meaning of Section 162(m)(4) of the Code. The Primergy Compensation
Committee may also condition the vesting of restricted stock awards to
participants who are not Covered Employees upon the satisfaction of these or
other applicable performance goals. The provisions of restricted stock
awards (including any applicable Performance Goals) need not be the same with
respect to each participant. During the restriction period, the Primergy
Compensation Committee may require that the stock certificates evidencing
restricted shares be held by Primergy. Restricted stock may not be sold,
assigned, transferred, pledged or otherwise encumbered.
As to performance units, they may be denominated in shares of
Primergy Common Stock or cash, or may represent the right to receive dividend
equivalents with respect to shares of Primergy Common Stock, as determined by
the Primergy Compensation Committee. Performance units will be payable in
cash or shares of Primergy Common Stock if applicable Performance Goals
(based on one or more of the measures described above regarding restricted
stock awards) determined by such committee are achieved during an award
cycle. An award cycle will consist of a period of consecutive fiscal years
or portions thereof designated by the Primergy Compensation Committee over
which performance units are to be earned. At the conclusion of a particular
award cycle, the Primergy Compensation Committee will determine the number of
performance units to be granted to a participant which have been earned in
view of applicable Performance Goals and shall deliver to such participant
(i) the number of shares of Primergy Common Stock equal to the value of
performance units determined by the Primergy Compensation Committee to have
been earned and/or (ii) cash equal to the value of such earned
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performance units. The Primergy Compensation Committee may, in its
discretion, permit participants to defer the receipt of performance units on
terms and conditions established by the Primergy Compensation Committee.
The Primergy Compensation Committee will have the authority to
determine the officers and employees to whom and the time or times at which
performance units shall be awarded, the number of performance units to be
awarded to any participant, the duration of the award cycle and any other
terms and conditions of an award.
The Primergy Stock Incentive Plan provides that, in the event of
any change in corporate capitalization, such as a stock split, or a corporate
transaction such as any merger, consolidation, share exchange, separation,
spin-off or other distribution of stock or property of Primergy, or any
reorganization or partial or complete liquidation of Primergy, the Primergy
Compensation Committee or the Primergy Board may make such substitutions or
adjustments in the aggregate number and kind of shares reserved for issuance
under the Primergy Stock Incentive Plan, in the number, kind and option price
of shares subject to outstanding stock options and SARs, and in the number
and kind of shares subject to other outstanding awards granted under the
Primergy Stock Incentive Plan as may be determined to be appropriate by
either the Primergy Compensation Committee or the Primergy Board, in its
sole discretion. The Primergy Stock Incentive Plan also provides that in the
event of a change in control (as defined in the Plan) of Primergy (i) any
SARs and stock options outstanding as of the date of the change of control
which are not then exercisable and vested will become fully exercisable and
vested, (ii) the restrictions applicable to restricted stock will lapse and
such restricted stock shall become free of all restrictions and fully vested
and (iii) all performance units will be considered to be earned and payable
in full, any restrictions will lapse and such performance units will be
settled in cash as promptly as practicable. The holders of options (other
than options of holders subject to Section 16(b) of the Exchange Act that
were granted not more than six months before the change in control) will have
the right, for a period of 60 days after such date, to surrender such options
in exchange for a cash payment based on the change in control price (as
defined in the Primergy Stock Incentive Plan). However, if settlement in
cash would disqualify a transaction from pooling-of-interests accounting
treatment, the Primergy Compensation Committee may substitute stock.
E. Other NSP and WEC Stock Based Plans/Other Post-Transaction Financings
NSP and WEC currently have one and two plans, respectively, in addition
to the NSP LTIASP and the WEC OSIP which involve the issuance of shares of
the companies' common stock to participating employees. Pursuant to the
Merger Agreement, Primergy intends to adopt such stock-based plans (the
"Primergy Other Stock-Based Benefit Plans") prior to consummation of the
Transaction.
Primergy will seek authorization from the Commission, as required, in
connection with the Primergy shares to be issued under the Primergy Other
Stock-Based Benefit Plans and in connection with other security issuances
(including intra-system financings). It is intended that the authorization
to be sought will follow an approach similar to that set forth in
Consolidated
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Natural Gas Company, Release No. 35-26467 (February 1, 1996) (proposed five
year financing authorization).
Item 2. Fees, Commissions and Expenses
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, in connection with the Transaction, including the solicitation of
proxies, registration of securities of Primergy under the Securities Act of
1933, and other related matters, are estimated as follows:
Commission filing fee relating to
Application-Declaration on Form U-1. . . . . . . . . . $2,000.00
Commission filing fee for the Joint
Registration Statement on Form S-4 . . . . . . . . $1,065,569.75
Accountant's fees. . . . . . . . . . . . . . . . . . . . . . . (9)
Legal fees and expenses relating to the Act. . . . . . . . . . (9)
Other legal fees and expenses. . . . . . . . . . . . . . . . . (9)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9)
Shareholder communication and proxy solicitation . . . . . . . (9)
NYSE listing fee . . . . . . . . . . . . . . . . . . . . . . . (9)
Exchanging, printing, and engraving
of stock certificates. . . . . . . . . . . . . . . . . . . . . (9)
Investment bankers' fees and expenses
Barr Devlin. . . . . . . . . . . . . . . . . . . . . . . . . (9)
Goldman Sachs. . . . . . . . . . . . . . . . . . . . . . . . (9)
Consulting fees related to human resource
issues, public relations, regulatory support,
and other matters relating to the Transaction. . . . . . . . . (9)
Expenses related to integrating the operations of the
merged company and miscellaneous . . . . . . . . . . . . . . . (9)
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9)
- ------------------------
(9) To be filed by Amendment.
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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:
<TABLE>
<CAPTION>
Transactions to which section
Section of the Act or rule is or may be applicable
- ------------------- -------------------------------
<S> <C>
2(b), 3(a)(2) Temporary exemption of NSP from registration
requirements pending merger of NSP-W into WEPCO.
4, 5 Registration of Primergy as a holding
company following consummation of the Transaction.
6(a), 7 Issuance of Primergy Common Stock in the Transaction in
exchange for shares of NSP Common Stock; issuance of
Primergy Common Stock under Primergy Stock Incentive Plan
and Primergy Dividend Reinvestment Plan; issuance of Stock
by Primergy Hold to Primergy; issuance of stock of Primergy
Services and the Additional Services Companies to Primergy;
approval of all outstanding intra-system debt, including
guarantees.
9(a)(1), 10 Acquisitions of Primergy Common Stock in open-market
transactions under Primergy Stock Incentive Plan and
Primergy Dividend Reinvestment Plan; acquisition by
Primergy of stock of Primergy Hold, Primergy Services
and the Additional Services Companies; acquisition by
Primergy Hold of stock of certain non-utility subsidiaries
of NSP and WEC and/or acquisition by Primergy of non-utility
subsidiaries of NSP; acquisition by WEPCO of NSP-W.
9(a)(2), 10(a), Acquisition by Primergy of common stock of NSP and
(b), (c) and (f) NSP-W.
8, 9(c)(3), 11(b), 21 Retention by Primergy of NSP's and WEC's gas operations
and other businesses of NSP and WEC and their direct
and indirect subsidiaries.
12(b) Approval of all outstanding intra-system debt, including
guarantees.
13 Approval of the Service Agreement and services provided
to utility affiliates thereunder by Primergy Services
and the Additional Services Companies; incidental services
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between NSP and WEPCO; approval of the Non-Utility Agreement
and services provided to non-utility affiliates thereunder
by Primergy Services and the Additional Services Companies;
approval of the performance of certain services between
Primergy system companies.
13(b)(1) Exemption from at-cost standards with respect to certain
services.
32 Retention of EWGs.
33 Retention of FUCOS.
Rules
- -----
42 Open-market purchases of Primergy Common Stock pursuant
to the Primergy Dividend Reinvestment Plan and Stock
Incentive Plan.
80-92 Primergy Services and the Additional Services Companies
charges to Primergy system companies; NSP charges to WEPCO
and WEPCO charges to NSP; charges for services among
Primergy system companies.
83(a) Exemption from at-cost standards with respect to certain
services.
87(a)(3) Incidental Services between NSP and WEPCO and among the
Primergy System Companies.
88 Approval of Primergy Services and the Additional Services
Companies as subsidiary service companies.
</TABLE>
To the extent that other sections of the Act or the Commission's rules
thereunder are deemed to be applicable to the Transaction, such sections and
rules should be considered to be set forth in this Item 3.
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A. Transaction
Section 9(a)(2) 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), an "affiliate" of a specified company means
"any person that directly or indirectly owns, controls, or holds with power
to vote, 5 per centum or more of the outstanding voting securities of such
specified company," and "any company 5 per centum or more of whose
outstanding voting securities are owned, controlled, or held with power to
vote, directly or indirectly, by such specified company...."
NSP, WEPCO and NSP-W are public-utility companies as defined in Section
2(a)(5) of the Act. Since WEC currently owns more than five percent of the
voting securities of WEPCO and will acquire more than five percent of the
voting securities of NSP (and, indirectly, NSP-W) as a result of the
Transaction, and because NSP will become an "affiliate" of WEC as a result of
the Transaction, WEC must obtain the approval of the Commission for the
Transaction under Sections 9(a)(2) and 10 of the Act. Moreover, following
the acquisition of NSP, WEC will need Commission approval under Section 9(a)
to consummate the merger of NSP-W into WEPCO. The statutory standards to be
considered by the Commission in evaluating the Transaction are set forth in
Sections 10(b), 10(c) and 10(f) of the Act.
As set forth more fully below, the Transaction complies with all of the
applicable provisions of Section 10 of the Act and should be approved by the
Commission. Thus:
- The consideration to be paid in the Transaction is fair and
reasonable;
- The Transaction will not create detrimental interlocking relations or
concentration of control;
- The Transaction will not result in an unduly complicated capital
structure for the Primergy system;
- The Transaction is in the public interest and the interests of
investors and consumers;
- The Transaction is consistent with Sections 8 and 11 of the Act;
- The Transaction tends toward the economical and efficient development
of an integrated electric utility system; and
- The Transaction will comply with all applicable state laws.
Furthermore, this Transaction also provides an opportunity for the
Commission to follow certain of the interpretive recommendations made by the
Division of Investment Management (the "Division") in the report issued by
the Division in June 1995 entitled "The Regulation of Public Utility Holding
Companies" (the "1995 Report"). While the Transaction and the requests
contained in this Application/Declaration are well within the precedent of
transactions approved by the Commission as consistent with the Act prior to
the 1995 Report and thus could be approved without any reference to the 1995
Report, a number of the recommendations contained therein serve to strengthen
the applicants' analysis and would facilitate the creation of a new holding
company better able to compete in the rapidly evolving utility industry. The
Division's
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overall recommendation that the Commission "act administratively to modernize
and simplify holding company regulation...and minimize regulatory overlap,
while protecting the interests of consumers and investors,"(10) should be
used in reviewing this Application/Declaration since, as demonstrated below,
the Transaction will benefit both consumers and shareholders of Primergy and
since the other federal and state regulatory authorities with jurisdiction
over this Transaction will have approved it as in the public interest. In
addition, although discussed in more detail in each applicable item below,
the specific recommendations of the Division with regard to financing
transactions,(11) utility ownership(12) and diversification(13) are
applicable to this Transaction.
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)
unless:
(1) such acquisition will tend towards interlocking relations or
the concentration of control of public-utility companies, of a kind
or to an extent detrimental to the public interest or the interest
of investors or consumers;
(2) in case of the acquisition of securities or utility assets,
the consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or
indirectly, in connection with such acquisition is not reasonable
or does not bear a fair relation to the sums invested in or the
earning capacity of the utility assets to be acquired or the
utility assets underlying the securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure
of the holding-company system of the applicant or will be
detrimental to the public interest or the interest of investors or
consumers or the proper functioning of such holding-company system.
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(10) Letter of the Division of Investment Management to the Securities
and Exchange Commission, 1995 Report.
(11) E.G., the reduced regulatory burdens associated with routine
financings. 1995 Report at 50.
(12) E.G., the Commission should apply a more flexible interpretation of
the integration requirements under the Act; the Commission's analysis should
focus on whether the resulting system will be subject to effective
regulation; the Commission should liberalize its interpretation of the
"A-B-C" clauses and permit combination systems where the affected states
agree, and the Commission should "watchfully defer" to the work of other
regulators. 1995 Report at 71-77.
(13) E.G., the Commission should promulgate rules to reduce the
regulatory burdens associated with energy-related diversification and the
Commission should adopt a more flexible approach in considering all other
requests to enter into diversified activities. 1995 Report at 88-90.
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(a) Section 10(b)(1)
(i) Interlocking Relationships
By its nature, any merger results in new links between previously
unrelated companies. However, these links are not the types of interlocking
relationships targeted by Section 10(b)(1), which was primarily aimed at
preventing business combinations unrelated to operating synergies. The
Merger Agreement provides for the Board of Directors of Primergy to consist
of twelve members, six designated by NSP and six designated by WEC.(14) In
addition, each of the subsidiaries of Primergy is expected to enter into a
service agreement with Primergy Services and/or the Additional Services
Companies. These actions are necessary to integrate NSP and WEC fully into
the Primergy system and will therefore be in the public interest and the
interest of investors and consumers. Forging such relationships is
beneficial to the protected interests under the Act and thus is not
prohibited by Section 10(b)(1). Moreover, the benefits that will accrue to
the public, investors and consumers from the combination of NSP and WEC make
clear that whatever interlocking relationships may arise from the combination
are not detrimental.
(ii) Concentration of Control
Section 10(b)(1) is intended to prevent utility acquisitions that would
result in "huge, complex, and irrational holding company systems at which the
Act was primarily aimed." American Electric Power Company, Inc., 46 SEC
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 at which the Act was specifically directed."
Vermont Yankee Nuclear Power Corp. et al., 43 SEC 693, 700 (1968). The
NSP-WEC strategic alliance will not create a "huge, complex and irrational
system," but rather will afford the opportunity to achieve economies of scale
and efficiencies which are expected to benefit investors and consumers.
Size: While the combination of NSP and WEC will result in a large
utility system, it certainly will not be one that exceeds the economies of
scale of current electric generation and transmission technology. If
approved, the Primergy system will serve approximately 2.3 million electric
customers and 750,000 gas customers in a 61,600-square mile area in five
states. As of December 31, 1995, the combined assets of NSP and WEC totaled
approximately $10.649 billion and, for the year ended December 31, 1995,
combined operating revenues totaled approximately $4.339 billion. As of
December 31, 1995 the combined owned summer generating capacity of NSP, NSP-W
and WEPCO totaled 13,093 Mw.
The Commission has approved a number of acquisitions involving larger
and similarly-sized operating utilities. See, e.g., CINergy Corp., Release
No. 26146 (October 21, 1994) (combination of Cincinnati Gas Electric Co. and
PSI Resources; combined assets at time of
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(14) The applicants acknowledge the requirements of Section 17(c) of
the Act and Rule 70 thereunder with respect to limitations upon directors and
officers of registered holding companies and subsidiary companies thereof
having affiliations with commercial banking institutions and investment
bankers, and undertake that, upon completion of the Mergers, they will be in
compliance with the applicable provisions thereof.
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acquisition of approximately $7.9 billion); Entergy Corporation, Release No.
35-25952 (December 17, 1993) (acquisition of Gulf States Utilities; combined
assets at time of acquisition in excess of $22 billion); Northeast Utilities,
Release No. 35-25221 (December 21, 1990) (acquisition of Public Service
Company of New Hampshire; combined assets at time of acquisition of
approximately $9 billion); Centerior Energy Corp., Release No. 35-24073
(April 29, 1986) (combination of Cleveland Electric Illuminating and Toledo
Edison; combined assets at time of acquisition of approximately $9.1
billion); American Electric Power Company, Inc., 46 SEC 1299 (1978)
(acquisition of Columbus and Southern Ohio Electric; combined assets at time
of acquisition of close to $9 billion).(15)
As the following table demonstrates, five of the twelve registered
electric utility holding company systems--Southern, Entergy, Central and
South West, Northeast and AEP--will be larger--and in some cases
significantly larger--than Primergy in terms of assets, operating revenues,
customers and/or sales of electricity:(16)
<TABLE>
<CAPTION>
TOTAL OPERATING ELECTRIC SALES IN
ASSETS REVENUES CUSTOMERS KWH
SYSTEM TOTAL ($ MILLIONS) ($ MILLIONS) (THOUSANDS) (MILLIONS)
- ------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Southern 27,042 8,297 3,507 139,991
Entergy 22,613 5,798 2,360 97,452
AEP 15,713 5,505 2,773 114,080
CSW 10,909 3,623 1,661 57,334
Northeast 10,585 3,643 1,680 40,159
Primergy 10,649 4,339 2,352 68,284
</TABLE>
Primergy will be a mid-size registered holding company, and its operations
will not exceed the economies of scale of current electric generation and
transmission technology or provide undue power or control to Primergy in the
region in which it will provide service.
Efficiencies and economies: As noted above, the Commission has rejected
a mechanical size analysis under Section 10(b)(1) in favor of assessing the
size of the resulting system with reference to the efficiencies and economics
that can be achieved through the integration and coordination of utility
operations. As the Commission stated in American Electric Power Company,
although the framers of the Act were concerned about "the evils of bigness,
they were
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(15) These numbers are unadjusted for inflation. The AEP-Columbus number
in particular would be considerably higher in current dollars.
(16) Except for Primergy amounts which are as of December 31, 1995 or for
the year ended December 31, 1995, amounts are as of December 31, 1994 or for
the year ended December 31, 1994.
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also aware that the combination of isolated local utilities into an
integrated system afforded opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations...[and][t]hey
wished to preserve these opportunities...." 46 SEC at 1309.
More recent pronouncements of the Commission confirm that size is not
determinative. Thus, in Centerior Energy Corp., Release No. 35-24073 (April
29, 1986), the Commission stated flatly that a "determination of whether to
prohibit enlargement of a system by acquisition is to be made on the basis of
all the circumstances, not on the basis of size alone." See also Entergy
Corporation, et al., Release No. 35-25952 (December 17, 1993). In addition,
in the 1995 Report, the Division recommended that the Commission approach its
analysis on merger and acquisition transactions in a flexible manner with
emphasis on whether the transaction creates an entity subject to effective
regulation and is beneficial for shareholders and customers as opposed to
focusing on rigid, mechanical tests.(17)
By virtue of the Transaction, Primergy will be in a position to realize
the "opportunities for economies of scale, the elimination of duplicate
facilities and activities, the sharing of production capacity and reserves
and generally more efficient operations" described by the Commission in
American Electric Power Company, 46 SEC 1299, 1309. Among other things, the
Transaction is expected to yield labor cost savings, corporate and
administrative and purchasing savings, fuel and purchased gas savings, and
savings associated with nuclear operations. These expected economies and
efficiencies from the combined utility operations are described in greater
detail in Item 3.A.2.d.(i). below and are projected to result in savings of
approximately $2.0 billion over the first ten years alone. A portion of
these savings will result in direct energy cost savings to electric and gas
customers through lower rates.
Competitive Effects: Section 10(b)(1) also requires the Commission to
consider possible anticompetitive effects of a proposed combination. See
Entergy Corporation, supra at 2041, citing MUNICIPAL ELECTRIC ASS'N OF
MASSACHUSETTS, ET AL. V. SEC, 413 F. 2d 1052, 1056-1058 (D.C. Cir. 1969). As
the Commission noted in Northeast Utilities, Release No. 35-25221 (December
21, 1990), the "antitrust ramifications of an acquisition must be considered
in light of the fact that the public utilities are regulated monopolies and
that federal and state administrative agencies regulate the rates charged to
customers." NSP and WEC will file Notification and Report Forms with the
Department of Justice and the Federal Trade Commission pursuant to the HSR
Act describing the effects of the Transaction on competition in the relevant
market and it is a condition to the consummation of the Transaction that the
applicable waiting period under the HSR Act shall have expired.
In addition, the competitive impact of the Transaction will be fully
considered by the FERC, and is the one issue the FERC has set for hearing. A
detailed explanation of the reasons why the Transaction will not threaten
competition in even the most narrowly drawn geographic and product markets is
set forth in the prepared testimony of Dr. Joe D. Pace, filed with the FERC
on behalf of NSP and WEC, a copy of which is filed as Exhibit D-1.2. The
application filed by NSP and WEC with the FERC is filed as Exhibit D-1.1.
The Commission may
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(17) 1995 Report at 73-74.
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<PAGE>
appropriately rely upon the FERC with respect to such matters. Entergy
Corporation, supra at 2042 citing CITY OF HOLYOKE GAS & ELECTRIC DEPARTMENT,
ET AL. V. SEC, 972 F.2d 358, 363-64 quoting WISCONSIN'S ENVIRONMENTAL DECADE,
INC. V. SEC, 882 F.2d 523,527 (D.C. Cir. 1989).
As summarized in the testimony and exhibits of Dr. Pace, there are three
potential markets that could be impacted: (1) the long-term power supply
market, (2) the short-term capacity market and (3) the non-firm energy
market. With respect to the long-term power supply market, neither entity
would control barriers to entry such as generating sites or fuel sources.
Hence, neither NSP, WEPCO nor the combined Primergy would have any market
dominance over building new generating facilities.
With respect to the short-term capacity markets, the exhibits to Dr.
Pace's testimony indicate that the combined Primergy system would be short of
capacity commencing in 1997. Hence, from a supply standpoint, the combined
Primergy system will be a net purchaser in the short-term capacity market in
the immediate future. Thus, it would have no market power in that market.
Finally, with respect to the non-firm energy market, Dr. Pace's
testimony and exhibits discuss a robust competitive market. The impact of
the merger will have a pro-competitive impact insofar as it makes available
to a number of potential purchasers in the non-firm energy market, at a
single transmission rate, a number of additional potential suppliers. To
illustrate, utilities that are presently interconnected only with WEPCO will
gain access, via the merger and the single system Primergy tariff rate, to an
additional sixteen entities for the same transmission price, for purposes of
accessing non-firm energy supplies. Dr. Pace's exhibits also show that
neither NSP, WEPCO nor Primergy in combination could have a dominant market
position in the non-firm energy markets.
To the extent that transmission constraints prevent the import of
additional energy at times from MAPP to MAIN (or to the WUMS area of MAIN),
the commitments which the applicants have made before FERC alleviate any
potential anticompetitive effects of such constraints. Those commitments
include the two commitments described below under Item 3.A.2.(d).(ii).,
namely, the commitment to sell only at incremental cost and the waiver of
priority rights for the import of non-firm energy. In addition, NSP and
WEPCO have agreed to operate under an Independent Tariff Administrator to
alleviate any concerns over their potential ability to exercise transmission
market power. See Item 4.B. below.
For these reasons, the Transaction will not "tend toward interlocking
relations or the concentration of control" of public utility companies, of a
kind or to the extent detrimental to the public interest or the interests of
investors or customers within the meaning of Section 10(b)(1).
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(b) Section 10(b)(2)
As noted above, the Commission may not approve the proposed combination
of NSP and WEC under Section 10(b)(2) if it finds that the consideration to
be paid in connection with the combination, including all fees, commissions
and other remuneration, is "not reasonable or does not bear a fair relation
to the sums invested in or the earning capacity of...the utility assets
underlying the securities to be acquired...."
(i) Reasonableness of Consideration
NSP and WEC believe that standards of Section 10(b)(2) regarding
consideration are satisfied in the present case for the following reasons.
First, the Transaction is a pure stock-for-stock exchange and qualifies
for treatment as a pooling of interests(18). As set forth more fully above,
each share of NSP Common Stock will be converted into the right to receive
1.626 shares of Primergy Common Stock, each share of NSP Preferred Stock will
be converted into a share of New NSP Stock having terms under the New NSP
Articles identical to the terms in the NSP Articles, and each share of WEC
Common Stock will continue as a share of Primergy Common Stock. The
Transaction will therefore involve no "acquisition adjustment" or other
write-up of the assets of WEC or NSP. The only difference for a NSP
preferred shareholder is that they will own shares in a Wisconsin corporation
(i.e., New NSP), rather than a Minnesota corporation, (i.e., NSP), which
differences are explained in the Joint Registration Statement (Exhibit C-1
hereto).
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(18) Twelve specific conditions must be met to qualify as a pooling. The
Transaction should meet those criteria as follows: (1) Both NSP and WEC were
autonomous and were not a subsidiary or division of another corporation
within two years before the plan of combination was initiated; (2) At the
date of the merger initiation and at the date of consummation NSP and WEC are
independent of each other; (3) NSP and WEC will undertake a course of action
which will attempt to complete the transaction within one year in accordance
with a specific plan, or completed in a single transaction. Litigation or
proceedings of a governmental authority that delay the completion of a plan
are excepted from the one-year rule, provided they are beyond the control of
the combining companies; (4) At the consummation date of the plan, Primergy
will offer and issue its majority class of stock (voting rights) for no less
than 90% of the voting common stock interests of NSP and WEC. The 90% or
more of the voting common stock interests being acquired is determined at the
date the plan is consummated; (5) No changes in the equity interests of the
voting common stock of NSP or WEC were to be made in contemplation of a
pooling of interests. This restriction is for a period beginning two years
prior to the initiation date of the plan of combination and for the period
between the initiation date and the consummation date; (6) NSP and WEC will
not reacquire any of its voting common stock in substance or form to effect a
business combination. Any reacquisition must be a normal amount as evidenced
by both companies' patterns of reacquisition prior to the merger; (7) Each
NSP and WEC common stockholder will receive a voting common stock interest
exactly in proportion to his or her voting common stock interest prior to the
combination; (8) The NSP and WEC common shareholders will receive the rights
they are entitled to and will not be deprived or restricted in any way from
exercising those rights; (9) The entire merger agreement will be effected on
the date of consummation; (10) Subsequent to consummation the combined
corporation, Primergy will not agree to reacquire or retire any of the stock
which was issued to effect the transaction; (11) Primergy will not enter into
any agreements to the benefit of the former shareholders of NSP or WEC, such
as loan guarantees; (12) Primergy will not plan to dispose of substantial
amounts of the assets of NSP or WEC within two years of the date of the
combination other than routine transactions in the ordinary course of
business or to eliminate excess capacity.
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Second, the Transaction was submitted to, and approved by, the affected
public shareholders, i.e., the common shareholders of WEC and NSP and the
preferred shareholders of NSP. Holders of approximately 97.3% of WEC's
common stock represented at the meeting approved the Transaction and holders
of approximately 96.2% of NSP's common and preferred stock represented at the
meeting approved the Transaction.
Third, the Ratio is the product of extensive and vigorous arms-length
negotiations between WEC and NSP. These negotiations were preceded by
extensive due diligence, analysis and evaluation of the assets, liabilities
and business prospects of each of the respective companies. See "Background
of the Mergers" at pages 33-38 of the Joint Registration Statement (Exhibit
C-1 hereto). As recognized by the Commission in Ohio Power Co., 44 SEC 340,
346 (1970), prices arrived at through arms-length negotiations are
particularly persuasive evidence that Section 10(b)(2) is satisfied.
Finally, nationally-recognized investment bankers for WEC and NSP have
reviewed extensive information concerning the companies, analyzed the Ratio
employing a variety of valuation methodologies and have opined that the Ratio
is fair to the respective holders of WEC Common Stock and NSP Common Stock.
The investment bankers' analyses and opinions are described in detail on
pages 41 to 51 of the Joint Registration Statement (Exhibit C-1 hereto). The
assistance of independent consultants in setting considerations has been
recognized by the Commission as evidence that the requirements of Section
10(b)(2) have been met. The Southern Company; SV Ventures, Inc., Release No.
35-24579 (February 12, 1988).
In rendering their fairness opinions, NSP's investment banker (Goldman
Sachs) and WEC's investment banker (Barr Devlin) performed a number of
analyses relevant to the reasonableness of the Ratio and the analyses'
relation to the investment in, and earning capacity of, the utility assets of
NSP and WEC. These analyses considered, among other things, the pro forma
effect of the Transaction on Primergy's earnings, dividends and cash flow,
and the respective contributions of NSP and WEC to Primergy in terms of
assets, earnings, dividends, cash flow and businesses. Both Barr Devlin and
Goldman Sachs considered both public and non-public historical and projected
financial information and forecasts related to the earnings, assets,
business, dividends, cash flow, and prospects of NSP and WEC; historical
market prices and trading activities of NSP Common Stock and WEC Common Stock
and certain publicly traded companies deemed similar; and other information,
as more fully described on pages 41 to 51 of the Joint Registration Statement.
It is noteworthy that the pro forma analyses conducted by both Goldman
Sachs and Barr Devlin indicated that the Transaction would be accretive.
Specifically, Goldman Sachs' pro forma earnings analysis suggested that the
Transaction would be accretive to NSP shareholders (based on earnings
projections by NSP and WEC management for the years 1995 through 1999), and
Barr Devlin's analysis indicated that, on a pro forma basis, WEC shareholders
would experience accretion in earnings, dividends and book value per share
(based on projections by WEC management for 1995 through 1999).
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In light of these opinions and an analysis of all relevant factors,
including the benefits that may be realized as a result of the Transaction,
the Ratio falls within the range of reasonableness, and the consideration for
the Transaction bears a fair relation to the sums invested in, and the
earning capacity of, the utility assets of NSP and WEC.
(ii) Reasonableness of Fees
WEC and NSP believe that the overall fees, commissions and expenses
incurred and to be incurred in connection with the Transaction are reasonable
and fair in light of the size and complexity of the Transaction relative to
other transactions and the anticipated benefits of the Transaction to the
public, investors and consumers, are consistent with recent precedent, and
meet the standards of Section 10(b)(2).
As set forth in Item 2 of this Application-Declaration, NSP and WEC
together expect to incur a combined total of approximately $30 million in
fees, commissions and expenses in connection with the Transaction. By
contrast, The Cincinnati Gas and Electric Company and PSI Resources, Inc.
together incurred $47.1 million in fees, commissions and expenses in
connection with their combination into CINergy Corp., Northeast Utilities
alone incurred $46.5 million in fees and expenses in connection with its
acquisition of Public Service Company of New Hampshire and Entergy alone
incurred $38 million in fees in connection with its recent acquisition of
Gulf States Utilities--all of which amounts were approved as reasonable by
the Commission. See CINergy Corp., Release No. 35-26146 (October 21, 1994);
Northeast Utilities, et al., Release No. 35-25548 (June 3, 1992); Entergy
Corporation, et al., Release No. 35-25952 (December 17, 1993).
With respect to financial advisory fees, NSP and WEC believe that the
fees payable to their investment bankers are fair and reasonable for similar
reasons.
In January 1995, NSP engaged Goldman Sachs as a financial advisor to
assist the senior management of NSP in exploring the possibility of a
business combination with WEC. The Board of Directors of NSP selected
Goldman Sachs as a financial advisor in connection with the proposed business
combination because Goldman Sachs, as part of its investment banking
business, is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate
and other purposes. Goldman Sachs is familiar with NSP, having acted as its
financial advisor in connection with, and having participated in certain of
the negotiations leading to, the Merger Agreement. Goldman Sachs has also
provided certain investment banking services to NSP from time to time,
including acting as managing underwriter of certain public offerings of debt
securities of NSP. Pursuant to the terms of an engagement letter, dated
January 10, 1995, between NSP and Goldman Sachs (the "Goldman Sachs
Engagement Letter"), NSP has paid Goldman Sachs, through December 31, 1995,
approximately $5.5 million for rendering its fairness opinion and for advice
and assistance with respect to strategic matters relating to the Transaction,
valuation analyses and structuring and planning the business combination of
WEC and NSP and has reimbursed certain of its expenses in connection with the
Merger Agreement.
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Pursuant to the terms of the Goldman Sachs Engagement Letter, Goldman Sachs
will be paid a fee of $8.1 million if a business combination between NSP and WEC
is concluded, against which any advisory fees, and any amount paid by NSP under
the Goldman Sachs Engagement Letter, will be credited. NSP has also agreed to
reimburse Goldman Sachs for its reasonable out-of-pocket expenses, including all
reasonable fees and disbursements of legal counsel, and to indemnify Goldman
Sachs and certain related persons against certain liabilities in connection with
Goldman Sachs' engagement, including certain liabilities under the federal
securities laws.
On January 12, 1995, WEC entered into an engagement letter with Barr Devlin
pursuant to which Barr Devlin was retained to act as WEC's financial advisor in
connection with a potential business combination with NSP. Barr Devlin was
selected as WEC's financial advisor because Barr Devlin and principals of Barr
Devlin have a long history of association in the investment banking and electric
and gas utility industries. Barr Devlin is a privately-held investment banking
firm specializing in strategic and merger advisory services to the electric and
gas utility industries, the energy industry and selected other industries. In
this capacity, Barr Devlin and principals of Barr Devlin have been involved as
advisors in numerous transactions and advisory assignments in the electric, gas
and energy industries and are constantly engaged in the valuation of businesses
and securities within such industries.
Pursuant to the terms of Barr Devlin's engagement, WEC has agreed to pay
Barr Devlin for its services in connection with the Mergers (i) a financial
advisory retainer fee of $50,000 per quarter (which is the same retainer fee
required by a 1993 letter agreement between WEC and Barr Devlin for ongoing
financial advisory services, quarterly payment under such earlier agreement
constitutes payment of the quarterly retainer fee due for services rendered in
connection with the Mergers); (ii) an initial financial advisory progress fee of
$1,500,000 payable upon execution of the Merger Agreement; (iii) an additional
financial advisory progress fee of $1,500,000 payable upon WEC shareholders'
approval of the Merger Agreement and related matters; (iv) if the Mergers are
consummated, a transaction fee based on the aggregate consideration (i.e., the
fair market value at the closing date of the Mergers of the Primergy Common
Stock issued pursuant to the Merger Agreement) to be paid in connection with the
Mergers, ranging from 0.45% of the aggregate consideration (for a transaction
with an aggregate consideration of $1,000,000,000) to 0.35% of the aggregate
consideration (for a transaction with an aggregate consideration of
$4,000,000,000) and (v) if WEC were to receive a termination fee pursuant to the
Merger Agreement and/or the NSP Stock Option Agreement, a breakup fee in an
amount which is equal to 20% of the excess of the aggregate amount of all such
termination fees over the direct out-of-pocket expenses incurred by WEC in
connection with the Mergers. If the Merger had been consummated as of December
31, 1995, the transaction fee payable to Barr Devlin would have been
approximately $12.5 million.
All retainer fees payable during the term of the engagement, all financial
advisory progress fees and an additional $750,000 would be credited against any
transaction fee payable to Barr Devlin, reducing the actual fee to approximately
$11.8 million. If a transaction fee is paid by WEC, Barr Devlin has agreed to
waive its rights to the four subsequent quarterly retainer fee payments
otherwise payable pursuant to the 1993 letter agreement following the date such
transaction fee becomes payable. WEC has agreed to reimburse Barr Devlin for
its out-of-pocket expenses, including fees and expenses of legal counsel and
other advisors engaged with the
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consent of WEC, and to indemnify Barr Devlin against certain liabilities,
including liabilities under the federal securities laws, relating to or
arising out of its engagement. Pursuant to terms of the January 12, 1995
engagement letter, WEC has paid Barr Devlin through December 31, 1995
approximately $3.3 million for rendering its fairness opinion and for advice
and assistance with respect to strategic matters relating to the transaction,
valuation analysis and structuring and planning the business combination of
WEC and NSP and reimbursed expenses in connection with the Merger Agreement.
In connection with Barr Devlin's engagement, WEC has also agreed to consider
Barr Devlin as one of the potential candidates to act as WEC's financial
advisor in future transactions of a specified nature, if any, for a period of
three years following the date any transaction fee becomes payable. If Barr
Devlin were to be so engaged, the consideration to be paid to Barr Devlin for
any such successful future transaction would be at a discount from its normal
fee scale. If WEC were to engage a financial advisor other than Barr Devlin
for such a future transaction, the discounted fee schedule would not apply to
any subsequent engagement of Barr Devlin.
In the instant case, the aggregate fees to be paid to both companies'
investment bankers in connection with the Transaction--approximately $19.9
million described above--constitute approximately 0.29% of the companies'
combined market value. These fees are generally in accord with the fees
approved by the Commission in recent cases. In one recent case, the
Commission approved investment banking fees equal to 0.96% of the aggregate
value of the acquisition, The Southern Company; SV Ventures, Inc., Release
No. 35-24579 (December 12, 1988), or more than three times the investment
banking fee here on a percentage basis. In Centerior Energy Corp., Release
No. 35-24073 (April 29, 1986), relating to the affiliation of two utility
companies under a new common holding company, the Commission approved
combined investment banking fees amounting to 0.275% of the combined market
value of the two companies' common stock. In its order approving the
acquisition by Northeast Utilities of Public Service Company of New
Hampshire, the Commission approved approximately $10.6 million in financial
advisory fees for Northeast alone, representing in excess of 0.35% of the
value placed by the bankruptcy court on the assets to be acquired. Northeast
Utilities, et al., Release No. 35-25548 (June 3, 1992). In the Entergy-Gulf
States decision, the Commission approved financial advisory fees of $8.3
million by Entergy to its investment bankers, representing 0.36% of the
market value of the transaction. Entergy Corporation, et al., Release No.
35-25952 (December 17, 1993). Finally, in CINergy, the Commission approved
investment banking and financial advisory fees of approximately $13.1
million, amounting to 0.31% of the aggregate combined market value of the two
companies' common stock. CINergy Corp., Release No. 35-26146 (October 21,
1994). The estimated financial advisory fees to be paid by NSP and WEC in
connection with the Transaction are smaller on a percentage basis than those
approved in Southern, Northeast Utilities, Entergy and CINergy, and are
comparable on a percentage basis to those approved in Centerior Energy.
Finally, the investment banking fees of NSP and WEC reflect the
competition in the marketplace, in which investment banking firms actively
compete with each other to act as financial advisors to merger partners.
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(19) Based on the number of shares of NSP Common Stock and WEC Common
Stock outstanding as of December 31, 1995 and their closing prices on
December 31, 1995 of $49.125 and $30.625 per share, respectively.
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(c) Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the
Transaction will "unduly complicate the capital structure" of the Primergy
system or will be "detrimental to the public interest or the interest of
investors or consumers or the proper functioning" of the Primergy system.
Capital structure: The corporate capital structure of Primergy after
the Transaction will not be unduly complicated and will be substantially
similar to capital structures approved by the Commission in other orders.
See, e.g., Centerior Corp., Release No. 35-24073 (April 29, 1986); Midwest
Resources, Inc., et al., Release No. 35-25159 (September 26, 1990); CINergy
Corp., Release No. 35-26146 (October 21, 1994). Primergy's capital structure
will also be similar to the capital structures of existing registered holding
company systems.
In the Transaction, the shareholders of WEC and NSP will receive
Primergy Common Stock. Primergy will own 100% of the common stock of NSP and
WEPCO and there will be no minority common stock interest remaining in either
company. Each outstanding share of NSP and WEPCO preferred stock will remain
outstanding without change, except that, as explained above, NSP preferred
stock will be converted into New NSP preferred stock having terms under New
NSP's Articles identical to the terms of NSP's Articles. The outstanding New
NSP preferred stock will consist of 2.4 million shares, consisting of 10
series. Each share of New NSP preferred stock (like the existing preferred
stock of NSP) is entitled to one vote per share on all matters presented to
stockholders, other than the $3.60 series consisting of 275,000 shares, which
is entitled to three votes per shares. If the Transaction were consummated
December 31, 1995, the outstanding New NSP preferred stock would have
represented 4.1% of the total voting power of the New NSP preferred and
common stock, 5.7% of the total capital of New NSP (including long-term and
short-term debt) and 10.6% of the book equity which comprises common and
preferred stock and retained earnings. For the year ended December 31, 1995,
NSP's combined fixed charges and preferred dividend requirements were covered
3.41 times before provision for taxes. In addition, due to the obligations
imposed by the states in which New NSP will operate and the substantial
financial commitment of Primergy in New NSP, there is virtually no likelihood
that New NSP's assets or businesses will be permitted to deteriorate to an
extent that would jeopardize the interests of the New NSP preferred stock.
The Commission has found previously that the existence of preferred stock
under facts similar to those of New NSP does not violate the standards of
Sections 10(b)(3), 10(c)(1) or 11(b)(2) of the Act. Illinois Power Company,
44 SEC 140 (1970). See also Niagara Mohawk Power Corporation, SEC No-Action
Letter (January 24, 1991) and Texas Utilities Co., 31 SEC 367 (1950).
The existing debt securities of WEPCO, NSP and NSP-W will likewise
remain outstanding without change, except that, with the merger of NSP-W into
WEPCO, the debt of NSP-W will become the debt of WEPCO. The only voting
securities of Primergy which will be publicly held after the Transaction will
be Primergy Common Stock.
Primergy will have the ability to issue, subject to the approval of the
Commission, preferred stock, the terms of which, including any voting rights,
may be set by Primergy's Board of Directors as has been authorized by the
Commission with regard to other registered holding
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companies. See, e.g., The Columbia Gas System, Inc., Release No. 35-26361
(August 25, 1995) (approving restated charter, including preferred stock
whose terms, including voting rights, can be established by the board of
directors). The only class of voting securities of Primergy's or Primergy
Hold's direct non-utility subsidiaries will be common stock and, in each
case, all issued and outstanding shares of such common stock will be held by
Primergy or by Primergy Hold (other than as noted above for C&F, which is
75.86% owned, and Custometrics, which is 50% owned).
Set forth below are summaries of the historical capital structures of
NSP and WEC as of December 31, 1995, and the pro forma consolidated capital
structure of Primergy (assuming the transactions proposed herein occurred on
December 31, 1995):
NSP and WEC Historical Capital Structures
(dollars in millions)
NSP WEC
--------------- ---------------
Common stock equity $2,028 48.3% $1,871 53.8%
Preferred stock 240 5.7 30 0.9
Long-term debt 1,542 36.8 1,368 39.3
Short-term debt (20) 383 9.2 209 6.0
------ ------ ------ ------
Total $4,193 100.0% $3,478 100.0%
Primergy Pro Forma Consolidated Capital Structure
(dollars in millions) (unaudited)
Common stock equity $3,899 50.8%
Preferred stock 270 3.5
Long-term debt 2,910 37.9
Short-term debt (21) 592 7.8
------ -----
Total $7,671 100.0%
Primergy's pro forma consolidated common equity to total capitalization
ratio of 50.8% is significantly higher than Northeast Utilities' 27.6% common
equity position and comfortably exceeds the "traditionally acceptable 30%
level." Northeast Utilities, Release No. 35-25221 (December 21, 1990).
Protected interests: Section 10(b)(3) also requires the Commission to
determine whether the proposed combination will be detrimental to the public
interest, the interests of investors or consumers or the proper functioning
of the Primergy system. The combination of NSP and WEC is entirely
consistent with the proper functioning of a registered holding company
system. NSP's and WEPCO's utility operations will be fully integrated.
Further, the combination will result in
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(20) Including long-term debt due currently.
(21) Including long-term debt due currently.
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substantial, otherwise unavailable, savings and benefits to the public and to
consumers and investors of both companies and the integration of NSP and
WEPCO will improve the efficiency of their respective systems. The
integration of NSP and WEPCO is described below in Item 3.A.2.d.(ii) and the
benefits and savings are described in Item 3.A.2.d.(i). Moreover, as noted
by the Commission in Entergy Corporation, Release No. 35-25952 (December 17,
1993), "concerns with respect to investors' interests have been largely
addressed by developments in the federal securities laws and the securities
market themselves." Primergy, WEPCO and NSP will be reporting companies
subject to the continuous disclosure requirements of the Securities Exchange
Act of 1934 (the "1934 Act") following the completion of the Transaction.
The various reports previously filed by NSP and WEC under the 1934 Act
contain readily available information concerning the Transaction. For these
reasons, the applicants believe that the Transaction will be in the public
interest and the interest of investors and consumers, and will not be
detrimental to the proper functioning of the resulting holding company system.
2. Section 10(c)
Section 10(c) of the Act provides that, notwithstanding the provisions
of Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any
other interest, which is unlawful under the provisions of
Section 8 or is detrimental to the carrying out of the
provisions of Section 11 (22); or
(2) the acquisition of securities or utility assets of a
public-utility or holding company unless the Commission finds
that such acquisition will serve the public interest by
tending towards the economical and the efficient development
of an integrated public utility system....
(a) Section 10(c)(1)
Section 10(c)(1) requires that the proposed acquisition be lawful
under Section 8. Section 8 prohibits registered holding companies from
acquiring, owning interests in or operating both a gas and an electric
utility serving substantially the same area if state law prohibits it.
Following the Transaction, NSP will provide electric and gas utility services
in Minnesota and North Dakota and WEPCO will provide electric and gas utility
services in Wisconsin and Michigan. In addition, NSP will continue to
provide electric, but not gas, utility services in South Dakota and, through
the acquisition of the Designated Gas Utility Assets, will provide gas
service in Wisconsin. Since Wisconsin, Minnesota, Michigan and North Dakota
law all permit combination gas and electric utilities serving the same area,
the Transaction does not raise any issue under Section 8 or, accordingly, the
first clause of Section 10(c)(1). Indeed, Section 8
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(22) By their terms, Sections 8 and 11 only apply to registered holding
companies and are therefore inapplicable at present to WEC or NSP, since
neither is now a registered holding company. The following discussion of
Sections 8 and 11 is included only because, under the present transaction
structure, Primergy will register as a holding company after consummation of
the Transaction.
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indicates that a registered holding company may own both gas and electric
utilities where, as here, the relevant state utility commissions support such
an arrangement.
Section 10(c)(1) also requires that transactions not be detrimental
to carrying out the provisions of Section 11. Section 11(a) of the Act
requires the Commission to examine the corporate structure of registered
holding companies to ensure that unnecessary complexities are eliminated and
voting powers are fairly and equitably distributed. As described above in
Item 3.A.1.c., the Transaction will not result in unnecessary complexities or
unfair voting powers.
Although Section 11(b)(1) generally requires a registered holding
company system to limit its operations "to a single integrated public-utility
system, and to such other businesses as are reasonably incidental, or
economically necessary or appropriate to the operations of such integrated
public-utility system," a combination integrated gas and electric system
within a registered holding company is permissible under Section 8.
Additionally, Section 11(b)(1) provides that "one or more additional
integrated public utility systems" may be retained if, as here, certain
criteria are met. Section 11(b)(2) directs the Commission "to ensure that
the corporate structure or continued existence of any company in the holding
company system does not unduly or unnecessarily complicate the structure, or
unfairly or inequitably distribute voting power among security holders, of
such holding-company system."
As detailed below, the Transaction will not be detrimental to the
carrying out of the provisions of Section 11.
(b) Retention of Gas Operations
NSP and NSP-W have provided retail gas distribution service for
more than 70 years. Initially, this service was provided from coal through
local manufactured gas or "town gas" plants. From the late 1940's to the
early 1960's, interstate natural gas pipelines (primarily Northern Natural
Gas Company and Midwestern Gas Transmission Company (renamed Viking in 1989))
were constructed to provide natural gas delivery to NSP and NSP-W gas
distribution systems in each significant city served by NSP or NSP-W. NSP and
NSP-W also operated certain propane-air LPG peak shaving plants to meet firm
customer demand during extreme peak winter weather conditions. During the
gas supply shortages of the 1970's, NSP and NSP-W constructed the Westcott
and Eau Claire LNG plants to provide needed peak supply reliability for firm
customers.
NSP and NSP-W also responded to FERC's efforts from 1983 to 1993 to
restructure the interstate pipeline industry. In 1984, NSP and NSP-W were
among the first LDCs in the United States to convert from firm pipeline "full
requirements" sales service to firm transportation-only service, when FERC
approved this conversion on Midwestern. FERC Docket No. CP83-73. In 1987,
NSP and NSP-W began offering "open access" retail transportation service to
eligible large customers.
NSP and NSP-W currently purchase transportation only service from six
United States pipeline carriers and one Canadian pipeline carrier and storage
from four underground storage
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service providers. NSP and NSP-W procure natural gas supplies from numerous
suppliers located in every significant supply basin in North America. The
LNG and LPG peak shaving plants provide significant delivery capability
without incurring additional year-round pipeline fixed charges. As a result
of this "grid" approach to gas supply acquisition, NSP and NSP-W have retail
gas rates which are among the lowest in the region and well below the
national average, and the diversity of supply and delivery routes provide for
increased reliability for firm customers. Approximately 10.1% of the gas
delivered by NSP and NSP-W is third party gas purchased directly by large
industrial retail customers. Under rate designs approved by the various
regulatory agencies, NSP and NSP-W are financially indifferent to whether a
customer purchases sales or transportation only service.
WEPCO and its predecessor gas distribution companies have provided gas
service to customers in Wisconsin for more than 140 years. From 1855 to 1950
"town gas" was manufactured from coal and delivered to customers. Beginning
in 1950, Michigan Wisconsin Pipeline Co. (now ANR Pipeline) extended
facilities to the WEPCO service territory and customers were converted to
natural gas. WEPCO also operated several propane-air peak shaving facilities
to meet customer requirements in extremely cold weather. In 1965, WEPCO
constructed a LNG peak shaving plant to further meet customer demand during
very cold weather. This was the first successful utility-owned above ground
LNG plant in the country. Over the years, the LNG plant has saved customers
millions of dollars by replacing contracted services from the pipeline.
WEPCO also responded to FERC's efforts in the mid 1980's to restructure
the interstate pipeline industry. In 1985, WEPCO offered open access
transportation to eligible customers on its distribution system when ANR
Pipeline allowed transportation on the interstate pipeline system. At the
same time, WEPCO began purchasing a portion of its natural gas from suppliers
other than ANR and used the pipeline for transportation only. In 1988, WEPCO
successfully completed connections to two additional pipelines, Natural Gas
Pipeline of America and Northern Natural Gas Company. WEPCO currently
purchases transportation services on four interstate pipelines and storage
services from three pipelines. Natural gas is procured from a number of
different suppliers located in the mid-continent, Gulf Coast and Canadian
production areas. The LNG and propane-air peak shaving plants continue to
provide gas service to customers on the coldest days of the year while
reducing pipeline demand charges.
WEPCO continues to offer competitively priced natural gas sales service
to customers who prefer delivered gas service. WEPCO also provides
transportation and balancing services to a number of commercial and
industrial customers who prefer to purchase their own gas and transport their
gas on pipelines and through the WEPCO distribution system. Under this
transportation service, approximately one third of all gas delivered by WEPCO
is third party gas owned by customers. Under rate designs approved by the
various regulatory agencies, WEPCO is financially indifferent to whether a
customer purchases sales or transportation only service. For more general
information regarding the gas operations of NSP, NSP-W, and WEPCO, see Items
1.B.2.a.(v)., and 1.B.2.b.(v).
As part of the Transaction, the Designated Gas Utility Assets of NSP-W
will be transferred to New NSP. The Designated Gas Utility Assets are
located in western Wisconsin and
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border the existing gas operations of NSP in Minnesota. As a result,
following the Transaction, NSP will be an electric and gas utility whose gas
utility business will consist of its current gas utility business plus the
small portion transferred to it by NSP-W, and WEPCO will be an electric and
gas utility whose gas utility business will consist of its current gas
utility business and the remaining gas utility business of NSP-W. For the
reasons set forth below, Primergy's retention of such gas operations would
not be unlawful under Section 8 of the Act or detrimental to the carrying out
of Section 11 of the Act.
Today NSP and WEC are exempt holding companies, primarily engaged in the
energy services business. Following consummation of the Transaction, NSP and
WEPCO will continue to be energy services companies. In today's changing
energy markets, consumers and regulators must be--and are--more careful with
limited energy resources than was ever contemplated in 1935. Increasingly,
customers select among different forms of energy to perform the same or
similar tasks depending upon environmental and economic factors. As energy
service companies, NSP and WEPCO offer, and the Primergy system will offer,
diverse forms of energy to customers, thereby allowing choices among
different forms of energy, which, in turn, fosters efficiency and
conservation. By providing such choices, energy companies assist in the
allocation of scarce national resources, under the supervision of local
regulators who are most familiar with the needs of the local constituencies.
This modern energy business, with a high level of state scrutiny, is a far
cry from the marketplace and regulatory situation perceived by the drafters
of the Act and the then-perceived abuses that arose from combination
companies. The fears expressed at that time, the "favoring of one of these
competing forms of energy over the other," SEC V. NEW ENGLAND ELECTRIC
SYSTEM, 384 U.S. 176, 183 (1966), are no longer realistic in today's market.
For the reasons set forth below, and in the accompanying memorandum
attached to the Application as Exhibit J-4, retention of all of the gas
properties currently owned by NSP and WEPCO under the Transaction should be
approved by the Commission. The retention of these properties is totally
consistent with the Congressional intent behind Section 8 of the Act.
Moreover, the loss of economies that would result from divestiture meets all
the criteria set forth in prior pronouncements by the Commission for
retention of such properties under Section 11(b)(1)(A) and Sections
11(b)(1)(B) and (C).
(i) Retention is Appropriate Under Sections 8 and 11
Section 8 of the Act provides that "[w]henever a State law prohibits, or
requires approval or authorization of, the ownership or operation by a single
company of the utility assets of an electric utility company and a gas
utility company serving substantially the same territory, it shall be
unlawful for a registered holding company, or any subsidiary company
thereof...(1) to take any step, WITHOUT THE EXPRESS APPROVAL OF THE STATE
COMMISSION OF SUCH STATE, which results in its having a direct or indirect
interest in an electric utility company and a gas utility company serving
substantially the same territory; or (2) if it already has any such interest,
to acquire, WITHOUT THE EXPRESS APPROVAL OF THE STATE COMMISSION, any direct
or indirect interest in an electric utility company or gas utility company
serving substantially the same territory as that served by such companies in
which it already has an interest." (emphasis added)
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On its face, Section 8 indicates that, with the approval of the relevant
state utility commissions, registered holding company systems can include
both electric and gas utility systems. A careful reading of the section
indicates that the thrust of the section is to preclude the use of the
registered holding company form to circumvent any state law restrictions on
the ownership of gas and electric assets by the same company. Thus,
registered holding companies, or a registered holding company system that
includes combination companies, are implicitly acceptable under the statute
absent an objection by the affected state.
NSP and WEC believe that a reemphasis by the Commission on Section 8,
which would allow registered combination companies if, as is the case here,
they are permitted by the affected states, is consistent both with the Act
and its policy objectives. Indeed, over time the Commission has emphasized
different aspects of Section 8 and its interplay with Section 11--initially
allowing registered holding companies to own both gas and electric systems
under Section 8, then focusing solely on Section 11 as controlling
determinations regarding combination companies and requiring the second
system to meet a strict interpretation of the requirements set forth in
clauses A, B and C of Section 11(b)(1). See discussion of Section 11(b)(1)
below.
In its early decisions, the Commission adhered to the concept that the
decision of whether or not to allow combination companies was one that states
should make (although the Commission might have to implement it in certain
cases) and, where such systems were permissible, the role of the Commission
was to ensure that both such systems were integrated as defined in the Act.
Therefore, if a combination company did not violate state policy, there was
no need for the Commission to exercise jurisdiction to implement state policy.
By the early 1940's, however, the Commission, faced with further
perceived abuses, switched its focus to Section 11 and adopted a narrow
interpretation of the standards contained therein as the controlling factor
with regard to combination registered holding companies.(23) In connection
with its analysis of combination companies under Section 11, the Commission
frequently noted a policy concern existing at that time which advocated
separating the management of gas and electric utilities based on the belief
that the gas utility business tended to be overlooked by combination company
management who focused on the electric business. Therefore, it was believed
that gas utilities would benefit from having separate management focused
entirely on the gas utility business.(24) Both the legislative history of
the Act and recent changes in the utility industry indicate that it is now,
not only appropriate, but absolutely necessary, for the Commission to
reemphasize the provisions of Section 8 of the Act and allow
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(23) See, e.g., IN THE MATTER OF COLUMBIA GAS & ELECTRIC CORPORATION, 8
SEC 443 at 463 (1941); IN THE MATTER OF UNITED GAS IMPROVEMENT COMPANY, 9 SEC
52 (1941); SECURITIES AND EXCHANGE COMMISSION V. NEW ENGLAND ELECTRIC SYSTEM,
384 U.S. 175 (1966). It should be noted that the Commission continued to
give primacy to state utility commission determinations in making decisions
regarding combination exempt holding companies. See, e.g., IN THE MATTER OF
NORTHERN STATES POWER COMPANY, 36 SEC 1 (1954); DELMARVA POWER & LIGHT CO.,
46 SEC 710 (1976); WPL HOLDINGS, Release No. 35-24590 (February 26, 1988).
(24) See, e.g., IN THE MATTER OF THE PHILADELPHIA COMPANY, 28 SEC 35, 48
(1948); IN THE MATTER OF THE NORTH AMERICAN COMPANY, 11 SEC 196, 197-90
(1942); IN THE MATTER OF ILLINOIS POWER COMPANY, Release No. 11 SEC 140
(1970).
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combination registered holding companies where, as in this case, they are
permitted under relevant state law.
A review of the legislative history of Section 8 clarifies its purpose.
The Senate Committee on Interstate Commerce in its report on the Act noted
that the provision in Section 8 concerning combination companies "is
concerned with competition in the field of distribution of gas and electric
energy--a field which is essentially a question of State policy, but which
becomes a proper subject of Federal action where the extra-State device of a
holding company is used to circumvent State policy." The Report of the
Committee on Interstate Commerce, S. Rep. No. 621 at 31 (1935). In addition,
attached to the committee report is the Report of the National Power Policy
Committee on Public-Utility Holding Companies, which sets forth a recommended
policy that: "Unless approval of a State commission can be obtained the
commission would not permit the use of the holding-company form to combine a
gas and electric utility serving the same territory where local law prohibits
their combination in a single entity." Nothing in this history suggests a
Congressional desire to prohibit outright all combination companies where
state approvals can be obtained.
Much more recently, as discussed in more detail below, in the 1995
Report the Division recommended that the Commission interpret Section
11(b)(1) of the Act to allow registered holding companies to hold both gas
and electric operations as long as each affected state utility regulatory
commission approves of the existence of such a company.(25)
Local regulators are in the best position to assess the needs of their
communities. The Act was never intended to supplant local regulation but,
rather, was intended to create conditions under which local regulation was
possible. Section 21 of the Act, which codifies this legislative intent,
states:
Nothing in [the Act] shall affect...the jurisdiction of any
other commission, board, agency, or officer of...any State, or
political subdivision of any State, over any person, security,
or contract, insofar as such jurisdiction does not conflict
with any provision of [the Act]....
The legislative history reveals that Section 21 of the Act was further
intended "to insure the autonomy of State commissions [and]nothing in the
[Act] shall exempt any public utility company from obedience to the
requirements of State regulatory law." S. Rep. No. 621, 74th Cong., 1st
Sess. (1935) p. 10. The Act should not be used as a tool to override state
policy, particularly when the holding company involved is subject to both
state and federal regulation and when the affected state regulatory
commissions have supported the combined electric and gas operations in one
holding company system.
Finally, reemphasis on Section 8 fits within the overall regulatory
scheme of the Act. Section 11 of the Act is flexible and was designed to
change as the policy concerns over the
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(25) 1995 Report at 70.
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regulation of utility holding companies changed.(26) As discussed below, the
electric and gas utility industries and the regulation of those industries
have changed dramatically in recent years. It is competitive forces (the
very thing that the Act was designed to promote) that are pushing energy
companies, including registered holding companies unless they are to be
prevented from competing, to offer alternative forms of energy. Moreover, a
registered holding company would still be required to demonstrate that any
acquisition or transaction by which it would become a combination company
would not be detrimental to the carrying out of the provisions of Section 11
of the Act. In other words, its electric system would have to constitute an
integrated electric system and its gas system would have to constitute an
integrated gas system and both systems would have to be capable of being
operated efficiently. Thus, the standards of Section 11 would still have to
be met, but the application of those standards should take into account the
fundamental policy of the Act and allow local regulators to make the
threshold determination with regard to combination companies.
Each of NSP and WEPCO as a combination company is permissible
pursuant to the terms of Section 8 of the Act because the affected states are
expected to approve the continued combined activities, and each is in the
public interest. In addition, as part of retail merger approvals, the MPUC
and the PSCW will both review and approve NSP's, WEC's and WEPCO's
acquisition of parts of the NSP-W gas system. Furthermore, as required by
Section 11, in addition to the fact that NSP's and WEPCO's electric systems
constitute an integrated electric system, the gas systems of each together
will constitute an integrated gas system as explained in detail below under
Item 3.A.2.d.(ii).
With respect to Section 8, the combination of electric and gas
operations is lawful under all applicable state laws for each of NSP and
WEPCO and has been considered and approved indirectly on numerous occasions
by Wisconsin, Minnesota, North Dakota and Michigan regulators who have, and
will continue to have, direct jurisdiction over the Primergy gas operations.
The use of Primergy as a holding company for two combination companies will
not circumvent any state regulations, since the gas utility operations of
each of NSP and WEPCO individually will continue to be regulated by the
relevant jurisdictions. In addition, in their applications for approval of
the Transaction by the Minnesota, Wisconsin, Michigan and North Dakota
regulatory commissions--who have, and will continue to have, direct
jurisdiction over the Primergy system's gas utility operations located in
their respective states--NSP and WEC expect these commissions to either order
or express approval for NSP and WEPCO to continue as combination electric and
gas utility companies through the retention of NSP's and WEPCO's gas
operations and of Primergy as a holding company of NSP and WEPCO. Such
actions will reflect the recognition by these commissions that the existence
of both gas and electric systems in the Primergy holding company system will
allow Primergy's customers greater choice to meet their energy needs,
especially given the fact that the electric and gas systems operate in
substantially the same territory, while sharing in the synergies that result
from the Transaction. Moreover, the prior fear that a holding company such
as Primergy would be able to greatly emphasize one form of energy over the
other based on its own agenda has dissipated both because of the competitive
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(26) Mississippi Valley Generating Co., 36 SEC 159 (1955) (noting that
Congress intended the concept of integration to be flexible); UNITIL
Corporation, Release No. 35-25524 (April 24, 1992) (noting that Section 11
contains a flexible standard designed to accommodate changes in the industry).
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nature of the energy market, which requires utilities to meet customer energy
supply requirements or risk losing the customer to a competing supplier, and
because state regulators will have sufficient control over, and would be
unlikely to approve, a combination company that attempts to undertake such
practices.
Furthermore, the Commission has had the opportunity to review the
gas utility operations of NSP and WEC in prior orders. See Northern States
Power Company, 36 SEC 118 (1954), Northern States Power Company, Release No.
35-22334 (December 23, 1981) and Wisconsin Energy Corporation, Release No.
35-24267 (December 18, 1986). The decision of the Commission in Northern
States Power Company, 36 SEC 1, 8 (1954) is noteworthy for the Commission's
grant of an exemption to NSP under Section 3(a)(2) despite the Staff's
strenuous objections to NSP retaining its gas utility properties in St. Paul,
Minnesota. In this regard, the Commission noted:
Before considering the Division's contentions, it should be
observed that the continuance of combined gas and electric service
by Northern States in St. Paul not only does not circumvent state
law or policy but is affirmatively desired by the local authorities
concerned. The State of Minnesota has home-rule legislation and
the City of St. Paul has authorized and actively favors the
continuance by Northern States of combined gas and electric
service, and urges that the exemption be granted. The report of
the Senate Committee on Interstate Commerce pointed out in
connection with its comments on Section 8 of the Act that
competition in the field of distribution of gas and electric energy
is "essentially a question of State policy."(27) The considered
conclusion of the local authorities, deriving their power from
specific State legislation, should be given great weight in
determining whether the public interest would in fact be adversely
affected by the retention of combined operations. In the absence
of a compelling showing in the record to the contrary, we would not
be warranted in rejecting the appraisal of such authorities that
the local public interest, which is the public interest that is
significantly affected by the gas and electric combination in St.
Paul, is served by retention of the combined operation.
In Northern States Power Company, Release No. 35-22334 (December 23, 1981),
the Commission continued NSP's Section 3(a)(2) exemption virtually without
discussion. In Wisconsin Energy Corporation, Release No. 35-24267 (December
18, 1986), the Commission reviewed at length its prior decisions on ownership
of electric and gas utility operations by exempt holding companies and noted
the extensive regulation by the PSCW of holding companies. The Commission
granted WEC an exemption under Section 3(a)(1) and reserved jurisdiction over
its retention of the gas utility operations of WNG.
For all of these reasons, the Commission should approve the
retention by NSP and WEPCO of their respective gas properties as contemplated
by the Transaction. No policy would be furthered by requiring divestiture,
and, indeed, state policy would be thwarted by such a requirement.
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(27) S. Rep. No. 671, 74th Cong., 1st Sess. (1935), p. 29.
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(ii) Retention is also Appropriate Under Section 11(b)(1)
Even if the Act were not interpreted as generally permitting
combination gas and electric systems upon state approval, Section 11 contains
other provisions that permit the retention by NSP and WEPCO of their
respective gas systems. Section 11(b)(1) of the Act permits a registered
holding company to control one or more additional integrated public utility
systems--i.e., gas as well as electric--if:
(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.
Each of these requirements is satisfied in this Transaction, and retention
is, therefore, appropriate on the basis of Section 11(b)(1).
CLAUSE A OF SECTION 11(B)(1) IS SATISFIED.
In the 1995 Report, the Division recommended that the Commission
"liberalize its interpretation of the `A-B-C' clauses.(28) Historically,
however, as a "guide" to determining whether lost economies are "substantial"
under Section 11(b)(1)(A), under its previous narrow interpretation of this
section, the Commission had given consideration to four ratios, which measure
the projected loss of economies as a percentage of: (1) total gas operating
revenues; (2) total gas expense or "operating revenue deductions;" (3) gross
gas income and (4) net gas income or net gas utility operating income.
Although the Commission has declined to draw a bright-line numerical test
under Section 11(b)(1)(A), it has indicated that cost increases resulting in
a 6.78% loss of operating revenues, a 9.72% increase in operating revenue
deductions, a 25.44% loss of gross gas income and a 42.46% loss of net income
would afford an "impressive basis for finding a loss of substantial
economies." Engineers Public Service Co., 12 SEC 41, 59 (1942).
DIRECT LOSS OF ECONOMIES. NSP and WEPCO have each prepared
separate studies of their respective gas utility operations that analyze the
lost economies that their gas utility operations would suffer upon
divestiture when compared to their retention pursuant to the Transaction.
These studies are attached to this Application as Exhibit J-1 and Exhibit J-2
(the "Gas Studies"). As set forth in the Gas Studies, if the gas operations
of NSP and WEC were operated on a stand-alone basis, lost economies from the
need to replicate services, the loss of economies of scale, the costs of
reorganization, and other factors would be immediate and
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(28) 1995 Report at 74.
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substantial. In the absence of rate relief, those lost economies would
substantially injure the shareholders of NSP and WEC upon the divestiture of
those gas operations. As the studies further show, if rate relief were
granted with respect to the lost economies, then consumers would bear those
substantial costs over what they would have to pay if the properties were
retained as contemplated by the Transaction.
As set forth in the Gas Studies, divestiture of the gas operations of
WEPCO, NSP and NSP-W into stand-alone companies would result in lost
economies of $36,426,393 for WEPCO, $30,102,000 for NSP and $9,289,000 for
NSP-W. The table below shows the gas operating revenues, gas operating
revenue deductions, gas gross income and gas net income of NSP, NSP-W and
WEPCO.
COMPANY GAS OPERATING GAS OPERATING GAS GAS
- ------- REVENUES REVENUE GROSS NET
-------- DEDUCTIONS INCOME INCOME
---------- ------ ------
NSP $336,082,000 $300,024,000 $36,058,000 $26,655,000
NSP-W $78,015,000 $69,771,000 $8,244,000 $5,543,000
WEPCO $318,261,433 $271,238,964 $47,022,469 $31,944,293
On a percentage basis, the lost economies amount to 112.62% of 1995
gas net income in the case of WEPCO, 110.20% of gas net income in the case of
NSP and 165.16% of gas net income in the case of NSP-W--far in excess of the
loss of net income in UNITIL, where the Commission allowed the retention of
gas utility operations, and the 30% loss in NEW ENGLAND ELECTRIC SYSTEM that
the Commission has described as the highest loss of net income in any past
divestiture order.(29) As a percentage of 1995 gas operating revenues, these
lost economies described in the Gas Studies amount to 11.30% in the case of
WEPCO, 8.74% in the case of NSP and 11.73% in the case of NSP-W--losses
substantially higher than the losses in any past divestiture order.(30) As a
percentage of 1995 expenses or operating revenue deductions, the lost
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(29) See UNITIL Corp., Release No. 35-25524 (April 24, 1992) ("The
Commission has required divestment where the anticipated loss of income of
the stand-alone company was approximately 30%..." or "29.9% of net income
before taxes") citing SEC v. NEW ENGLAND ELECTRIC SYSTEM, 390 U.S. 207, 214
n. 11 (1968).
(30) The highest loss of operating revenues in any case ordering
divestiture is commonly said to be 6.58%. See, e.g., UNITIL CORP., Release
No. 35-25524 (April 24, 1992). ("[o]f cases in which the Commission has
required divestment, the highest estimated loss of operating revenues of a
stand-alone company was 6.58%..."), citing IN RE ENGINEERS PUBLIC SERVICE
CO., 12 SEC 41 (1942). In fact, however, the 6.58% ratio is not cited in
Engineers and is a post hoc calculation derived from claimed cost increases
which the Commission had found were "overstated" and "doubtful" in a number
of respects. IN RE ENGINEERS PUBLIC SERVICE CO., 12 SEC 41, 80-81 (1942).
See ALSO IN RE PHILADELPHIA CO., 28 SEC 35, 51 n. 26 (1949) (Engineers'
"estimate...of increased expenses...was overstated in several respects.").
While the SEC made no finding as to actual cost increases or ratio for the
Gulf States gas properties, it found that Engineers' estimate of
divestiture-related ratios cost increases or ratio for certain sister gas
properties in Virginia were also overstated and cut them and the resulting
ratios in half. IN RE ENGINEERS PUBLIC SERVICE CO., 12 SEC 41, 60 (1942).
If the same 50% discount were applied to Engineers' Gulf States gas
properties, the loss of operating revenues would have been 3.29%, the
increase in expenses would have been 4.73%, the loss of gross income would
have been 10.43%, and the loss of net income would have been 12.63%.
Disregarding the 6.58% ratio incorrectly attributed to the Engineers/Gulf
States case, the highest loss of operating revenues in any past divestiture
order was 5.85%. See table of ratios in NEW ENGLAND ELECTRIC SYSTEM, 41 SEC
888, 905 app. (1964) (The North American Company). This figure would be even
lower if adjusted for the increases in purchased gas costs since the
1940's.
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economies described in the Gas Studies would amount to 13.26% in the case of
WEPCO, 9.79% in the case of NSP, and 13.12% in the case of NSP-W, higher than
the losses in any past divestiture order and, in ENTERGY, another case in
which the Commission authorized the retention of gas operations. As a
percentage of 1995 gross income, the lost economies described in the Gas
Studies amount to 76.51% in the case of WEPCO, 81.46% in the case of NSP and
111.05% in the case of NSP-W, far in excess of the highest loss of gross
income in any divestiture order.
In order to recover these lost economies, WEPCO's gas division
would need to increase rate revenue by $36,426,393 or 11.45%, NSP would have
to increase revenues by $30,102,000 or 8.96% and NSP-W would have to increase
rate revenue by $9,289,000 or 11.91%. These increases in rate revenues would
have a direct and immediate negative impact on the rates charged to customers
for gas services. In addition, the customers of WEPCO and NSP gas business
who are also customers of their respective electric utility businesses will
experience a doubling of their postage costs to pay separate bills. The
total estimated increase in such postage costs is $3.84 per customer per year
or $1,631,000 in the aggregate ($1,356,000 for NSP gas customers and $275,000
for NSP-W gas customers).
LOSS OF "ENERGY SERVICE COMPANY ECONOMIES." Divestiture would also
result in the loss to consumers of the economies offered by the "energy
services" approach of NSP and WEC to the utility business. While the losses
cannot now be fully quantified, they are substantial. At the center of the
energy services company concept is the idea that providing gas and electric
products is only the start of the utility's job. In addition, the utility
must provide enhanced service to the consumer by providing an entire package
of both energy products and services. In this area, NSP's and WEC's efforts
are part of a trend by utilities to organize themselves as energy service
companies, that is, as providers of a total package of energy services rather
than merely suppliers of gas and electric products. The goal of an energy
service company is to retain its current customers and obtain new customers
in an increasingly competitive environment by meeting customers' needs better
than the competition. An energy service company can provide the customer
with a low cost energy (i.e., gas, electricity or conservation) option
without inefficient subsidies.
Through the adoption of the energy services concept, combination
utilities benefit all utility stockholders. For customers, a service company
provides the convenience and efficiency of service by a single energy
provider and reduces transaction costs incurred in gathering and analyzing
information, contacting energy suppliers, negotiating terms of services and
paying bills. For the communities in which an energy service company
operates, combining gas and electric operations simplifies community planning
on energy-related matters. For society, an energy service company is best
able to ensure an environmentally efficient allocation of energy. For
utility shareholders and employees, an energy service company is better able
to
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respond to a competitive environment and to remain an attractive investment
opportunity for shareholders and an appealing employer for utility employees.
THE A-B-C ANALYSIS SHOULD BE LIBERALIZED. Since 1968, in
interpreting clause (A) of Section 11(b)(1), the Commission has historically
looked to the Supreme Court decisions in SEC V. NEW ENGLAND ELECTRIC SYSTEM,
ET AL., 384 U.S. 176 (1966) ("NEES I") and 390 U.S. 207 (1968) ("NEES II").
In NEES I, the Supreme Court accepted the Commission's interpretation of the
"loss of substantial economies" language of clause (A) to require an
applicant seeking to own an electric and gas utility system to show that the
additional system, if separated from the principal system, would be incapable
of independent economic operation. The Court in NEES I accepted the
Commission's then-current interpretation of clause (A), despite earlier SEC
interpretations permitting the Commission to use business judgment and
expertise to apply the statutory phrase "loss of substantial economies." In
NEES I, the Court specifically recognized that the language of clause (A) was
"admittedly not crystal clear" and deferred to the agency's "EXPERTISE on the
total competitive situation." 384 U.S. at 185 (emphasis in original). In
NEES II, the Court reiterated and strengthened its earlier statement of
deference to the Commission. 390 U.S. at 219.
The Division recognized in the 1995 Report that the Commission was
no longer bound by the narrow interpretation of Clause (A) under the NEES
decisions. In so doing, the Division stated:
As discussed above, the SEC has generally required electric
registered holding companies that seek to own gas utility
properties to satisfy the requirements of the A-B-C clauses
concerning additional integrated systems. In contrast, exempt
holding companies have generally been permitted to retain or
acquire combination systems so long as combined ownership of
gas and electric operations is permitted by state law and is
supported by the interested regulatory authorities.
In the past, the SEC has construed the A-B-C clauses narrowly
to permit retention only where the additional system, if
separated from the principal system, would be incapable of
independent economic operations. Although the Supreme Court
upheld the SEC's reading, two justices dissented, contending
that the "serious impairment" standard was at odds with the
wording of the Act, had little basis in the statutory history
or aims of the Act, and could not be sustained by agency or
judicial precedent. The dissenting justices believed that the
statutory language "called for a business judgment of what
would be a significant loss."
Applicants in recent matters have argued that, in a
competitive utility environment, any loss of economies
threatens a utility's competitive position, and even a "small"
loss of economies may render a utility vulnerable to
significant erosion of its competitive position. There is
general support for a more relaxed standard. A number of
commenters emphasize that these are essentially state issues.
It does not appear that the SEC's precedent concerning
additional systems precludes the SEC from relaxing its
interpretation of section 11(b)(1)(A). Indeed, the SEC has
recognized that section 11 does not impose "rigid concepts"
but
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rather creates a "flexible" standard designed "to
accommodate changes in the electric utility industry."
Congress, in 1935, recognized that competition in the field of
distribution of gas and electric energy is essentially a
question of state policy. The Act was intended to ensure
compliance with state law in this regard. Moreover, it
appears that the utility industry is evolving toward the
creation of one-source energy companies that will provide
their customers with whatever type of energy supply they want,
whether electricity or gas. Accordingly, the Division
believes it is appropriate to reconcile the treatment of
registered and exempt companies in this regard, and so
recommends that the SEC permit registered holding companies to
own gas and electric utility systems pursuant to the A-B-C
clauses of section 11(b)(1), where the affected states
agree.(31)
In NEES I (and NEES II), the Court accepted the Commission's
interpretation of Clause A as a "construction well within the permissible
range given to those who are charged with the task of giving an intricate
statutory scheme practical sense and application." 384 U.S. at 185.
However, there is strong support in Supreme Court case law for the
Commission's application in this case of its current interpretation of Clause
A, based upon current competitive facts and current policy, as stated in the
Division's 1995 Report. In CHEVRON USA, INC. V. NATIONAL RESOURCES DEFENSE
COUNCIL, INC., 467 U.S. 837 (1984), the Court outlined the parameters for
changing agency interpretations of statutory language based on policy
considerations and agency expertise:
When a court reviews an agency's construction of the
statute which it administers, it is confronted with two
questions. First, always, is the question whether Congress
has directly spoken to the precise question at issue. If the
intent of Congress is clear, that is the end of the matter;
for the court, as well as the agency, must give effect to the
unambiguously expressed intent of Congress. If, however, the
court determines Congress has not directly addressed the
precise question at issue, the court does not simply impose
its own construction on the statute, as would be necessary in
the absence of an administrative interpretation. RATHER, IF
THE STATUTE IS SILENT OR AMBIGUOUS WITH RESPECT TO THE
SPECIFIC ISSUE, THE QUESTION FOR THE COURT IS WHETHER THE
AGENCY'S ANSWER IS BASED ON A PERMISSIBLE CONSTRUCTION OF THE
STATUTE.
467 U.S. at 842 (citations omitted; emphasis added). Justice Scalia, the
present dean of Supreme Court interpretations of administrative law, pointed
out that the Court's CHEVRON opinion clearly "announced the principle that
the courts will accept an agency's reasonable interpretation of the ambiguous
terms of a statute that the agency administers." The Honorable Antonin
Scalia, "Judicial Deference to Administrative Interpretations of Law," 1989
Duke L.J. 511.
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(31) Division Report at 74, 75, 76. Footnotes omitted.
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In the NEES I opinion, the Supreme Court specifically pointed out that
"[t]he phrase 'without the loss of substantial economies' is admittedly not
crystal clear." 384 U.S. at 185. Thus, the first prong of the analysis
under CHEVRON is clearly met. As Justice Scalia pointed out, under CHEVRON:
"the agency is free to give the statute whichever of several
possible meanings it thinks most conducive to accomplishment
of the statutory purpose. Under the latter regime, there is
no apparent justification for holding the agency to its first
answer, or penalizing it for a change of mind."
1989 Duke L.J. at 516. Justice Scalia convincingly argues that a primary
point of CHEVRON is to allow agencies flexibility to change their statutory
interpretations based upon current economic (and even political)
considerations. Under CHEVRON, it is entirely appropriate for the Commission
to interpret Clause A based on its CURRENT "EXPERTISE on the total
competitive situation." (NEES I at 185.)
Applicants believe that the Division's recommendation would represent
sound policy by the Commission. From a policy perspective, the Commission's
historic concern underpinning its 1964 NEES decision and a host of earlier
decisions where the retainability of gas properties by registered electric
systems was at issue--namely, of fostering competition between electric and
gas--is simply no longer valid given the current "state of the art" in the
electric and gas utility industries. In the generation since the Commission
decided the NEES case, profound economic and regulatory factors have wrought
a fundamental transformation in the gas supply and electric generation
industry, rendering obsolete the Commission's earlier premises regarding the
primacy of competition between gas and electric service and the lack of
competition within electric and gas service.
In the gas area, regulatory changes have introduced competition into
what was formerly a monopoly and have expanded the availability of
non-utility "transportation-only service" as an alternative to sales services
from the local gas utility company. The NSP, NSP-W and WEPCO gas operations
all have "open access" transportation-only service tariffs on file with their
respective state commissions, and approximately 20.1% of the gas delivered by
them in 1995 was directly purchased by customers. Combination utilities
therefore have less ability than they did in 1935 to "favor" electric--the
principal policy concern in decisions ordering the separation of gas and
electric systems--by curtailing the availability or increasing the price of
gas.(32) Combination utilities also have less incentive to
favor electric over gas in light of the increasing importance of demand-side
management, the costs and risks involved in the construction of new
generating capacity and the incentives to avoid such construction, and, as
noted in the June 1994 issue of THE ELECTRICITY JOURNAL, the emergence of
integrated resource planning involving both gas and electric service.
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(32) See, E.G., SEC V. NEW ENGLAND ELECTRIC SYSTEM, ET AL., 384 U.S. 176,
183-184 (1966). It is important to note that this issue--basically an
anti-trust issue--was the principal concern in previous decisions ordering
the separation of gas and electric systems and clearly is no longer
applicable to the changed utility competitive environment.
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In the electric area, the Energy Policy Act of 1992 and the Public
Utility Regulatory Policies Act of 1978 have introduced competition into the
electric utility business. As the chairman of the Senate Banking Committee
stated recently:
"[The Act] was substantially changed by the Energy Policy Act
of 1992. That law restructured the utility industry to
promote greater competition for the benefit of ENERGY
customers. The Energy Policy Act of 1992 was the product of a
cooperative effort on the part of the Banking Committee and
the Energy Committee to create a more market-oriented
regulatory framework for the ENERGY industry." Hearing on S.
182, The Communications Act of 1994 before the Comm. on
Commerce, Science and Transportation, 103rd Cong. 2nd Sess.
344-345 (1994) (Prepared Statement of Senator Riegle)
(emphasis added).
In addition, many states have "retail wheeling" measures under discussion
which are likely to have the effect of extending electric supply competition
to the retail level. Minnesota, Wisconsin, Michigan and North Dakota are
each in the process of evaluating various options that could increase
electric supply competition at the retail level.(33)
Instead of relying on the blunt instrument of competition BETWEEN gas
and electric, national policy has now created direct competition WITHIN the
gas and electric utility industries. Thus, combination ownership does not
eliminate competition, since a combination utility now has competitors for
both gas and electric service. Moreover, competition is not an end in
itself, but is merely a means to the end of efficient, cost-effective
service. Since combination ownership creates efficiencies and no longer has
the effect of eliminating competition, there is no reason for the Commission
to prohibit combination ownership, at least under the circumstances presented
here.
Nothing in the Supreme Court's NEES decisions compels a different
result. First, as the Commission noted in its UNION ELECTRIC decision, the
Supreme Court's NEES decisions attached "great weight ...to [the Commission's]
expertise in the administration of the Act." 45 SEC 489, 509, N.77. (1974).
The NEES decisions and the Court's reasoning in CHEVRON therefore leave the
Commission free to apply its expertise to administer the Act in light of
changes in legal, regulatory and economic circumstances which were not foreseen
at the time of the NEES
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(33) On December 12, 1995, the PSCW announced a determination outlining
the general direction of electric utility regulation in Wisconsin. It
includes a restructuring of the industry providing choice of electricity
provider for all consumers by the year 2000 as well as establishment of a
competitive generation business. The transmission and distribution functions
would remain regulated. In a February 22, 1996 Report to the Wisconsin
Legislature, the PSCW identified a 32 step workplan that it would follow for
Electric Utility Restructuring in Wisconsin. In the plan, the PSCW indicated
that during 1996 it will begin activities on 12 of these steps, some of which
would seek changes in applicable administrative rules under its jurisdiction,
including affiliated interest standards and quality of service standards.
The PSCW expects to present an electric utility restructuring plan to the
Wisconsin Legislature in 1997.
The PSCW also continued a generic investigation of the natural gas
industry in Wisconsin and addressed the extent to which traditional
regulation should be replaced with a different approach. In conjunction with
this generic investigation, the PSCW staff is reviewing the use of the
current purchased gas adjustment ("PGA") mechanism which is designed to pass
on to gas customers increases or decreases in the cost of natural gas
purchased for resale. A separate docket has been established to review the
PGA.
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decisions, including federal legislation which has "substantially changed"
the Act. See CHEVRON, 476 U.S. at 842.
Second, as noted by the Commission in UNION ELECTRIC and later
decisions, the NEES decisions are based on premises and policies that are no
longer operative. SEE DELMARVA POWER & LIGHT CO., ET AL., 46 SEC 710, 716
(1976) ("the objective of promoting retail competition between gas and
electricity, which was stressed in the NEES opinions is less critical now.");
UNION ELECTRIC CO., 45 SEC 489, 510 (1974), CITY OF CAPE GIRARDEAU, MISSOURI
V. SEC, 521 F.2d 324 (D.C. Cir. 1974) (describing as "outmoded" the
Commissions' previous policy to "promot[e] the wider...use of gas and
electric energy" and to "foster...variegated competition between gas and
electricity and the attendant promotion of the use of each;" holding that
"the maximization of energy use seems a questionable public policy objective"
and that "[i]n today's world the public interest and the long-run consumer
interest seem to call for prudent conservation and rational allocation" of
resources).
CLAUSES (B) AND (C) OF SECTION 11(B)(1) ARE SATISFIED.
The remaining requirements of Section 11(b)(1) are met because the gas
operations of WEPCO, NSP and NSP-W are located in the adjoining states of
Wisconsin, Minnesota, Michigan (Upper Peninsula), and North Dakota and
because the continued combination of the gas operations under Primergy 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. The gas systems are confined to a
relatively small area and are not as large as other gas systems in the same
area and will preserve the advantages of localized management, efficient
operation and effectiveness of regulation. Moreover, as the Commission has
recognized elsewhere, the determinative consideration is not size alone or
size in an absolute sense, either big or small, but size in relation to its
effect, if any, on localized management, efficient operation and effective
regulation. From these perspectives, it is clear that the continued
combination of the gas operations under Primergy is not too large.
Even after the combination, the gas operations of NSP and WEPCO, with
some 750,000 customers combined in four states, will be smaller than NorAm
(the parent of Minnegasco which has 2,700,000 customers, 630,000 of which are
in Minnesota), Northern Illinois Gas Company (1,769,800 customers) and
People's Gas Light and Coke Company (842,510 customers). These three gas
utilities are NSP and WEPCO's primary competitors in the region. With
respect to localized management, this issue is discussed for the Transaction
as a whole under Item 3.A.2.d.(ii).(a). below. Applied solely to the gas
operations, the current NSP, NSP-W and WEPCO gas systems enhance localized
management within the larger corporate structure and will continue to do so
after the Transaction is completed.
As a result of the Transaction, the gas utility operations of NSP-W
(other than the Designated Gas Utility Assets) will become part of WEPCO and
the Designated Gas Utility Assets (i.e. the distribution systems servicing
towns of LaCrosse and Hudson, Wisconsin) will become part of NSP. The
centralized functions of NSP (including the Designated Gas Utility Assets)
will be managed from St. Paul, Minnesota, and the local functions will
continue to be handled from regional offices, including offices in or near
LaCrosse and Hudson. Similarly, the
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central gas utility functions for WEPCO (including the gas utility business
acquired from NSP-W) will continue to be run from Milwaukee and local matters
will be handled by regional offices. No reduction in customer service or
support crews is expected. Management will therefore remain geographically
close to the gas operations, thereby preserving the advantages of localized
management. From the standpoint of regulatory effectiveness, NSP already
operates a multi-jurisdictional (Minnesota and North Dakota) gas utility, as
does NSP-W (Wisconsin and Michigan). In addition, several other gas
utilities in the region serve customers in several states. Thus, the
regulatory agencies in the four states are currently regulating
multi-jurisdictional gas utilities and will be able to effectively regulate
the gas utility operations of Primergy. In addition, it is expected that:
(i) the Wisconsin and Michigan regulatory authorities will indicate their
support for or order the retention of the existing gas system by WEPCO and
will approve WEPCO's acquisition of NSP-W's gas utility business, (ii) that
the North Dakota and Minnesota regulatory authorities will support the
retention of the existing gas system of NSP and (iii) the Wisconsin
Commission will approve NSP's acquisition of the Designated Gas Utility
Assets, thereby indicating that they can regulate these systems effectively.
With respect to efficient operation, as described below, as part of the
Primergy System, the gas operations of NSP and WEPCO are expected to reduce
purchased gas costs by $102 million from 1997 to 2000 and 100% of these
savings will be passed on directly to customers. Far from impairing the
advantages of efficient operation, the combination of the gas operations
under Primergy will facilitate and enhance the efficiency of gas operations.
For a more detailed discussion of Section 11(b)(1)(c), see the legal
memorandum filed as Exhibit J-3 hereto.
(c) Retention of Other Businesses
As a result of the Transaction, the non-utility businesses and
interests of NSP and WEC described in Item 1.B.5. above will become
businesses and interests of Primergy. Certain of such businesses will be
held directly by Primergy Hold, if formed, and if Primergy Hold is not
formed, will be held directly by Primergy. In addition, the subsidiaries,
affiliates and associates of the foregoing companies will become indirect
subsidiaries, affiliates and associates, respectively, of Primergy.
Corporate charts showing the subsidiaries, including non-utility
subsidiaries of NSP and WEC, are filed as Exhibits E-10 and E-11. A
corporate chart showing the projected arrangement of these subsidiaries under
Primergy is filed as Exhibit E-12.
Standard for retention: Section 11(b)(1) permits a registered holding
company to retain "such other businesses as are reasonably incidental, or
economically necessary or appropriate, to the operations of [an] integrated
public utility system." Under the cases interpreting Section 11, an interest
is retainable if (1) there is an operating or functional relationship between
the operations of the utility system and the non-utility business sought to
be retained, and retention is in the public interest,(34) or if (2) 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
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(34) See, e.g., Michigan Consolidated Gas Co., 44 SEC 361, 365 (1970),
aff'd, 444 F.2d 913 (D.C. Cir. 1971) (quoting General Public Utilities Corp.,
32 SEC 807, 839 (1951)); United Light and Railways Co., 35 SEC 516, 519
(1954).
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investment has the potential to produce benefits for investors and/or
consumers.(35) 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
company."(36)
The vast majority of Primergy's non-utility business would be exempt
from the Act. In addition, of the remainder, almost all of NSP's and certain
of WEC's non-utility businesses that are not EWGs or FUCOs would be
energy-related companies under the Commission's proposed Rule 58. Under
proposed Rule 58, an energy-related company is a company that derives or will
derive substantially all of its revenues (exclusive of revenues from
temporary investments) from one of the twelve businesses described in the
Rule and from such other activities and investments as the Commission may
approve under Section 10.
In the 1995 Report, in addition to the proposed Rule 58 safe harbor for
energy-related diversification, the Division suggested the adoption of a DE
MINIMUS "budget approach" for limited investments in activities which do not
fit within previous orders of the Commission, yet appear to be within the
meaning of the "other businesses" clauses of Section 11. The Division
suggested that this approach would allow registered holding companies to make
minimal investments without regard to the identity of each investment up to a
certain authorized amount, provided certain structural considerations were
observed which limited the potential losses to the amount of the investment
and insulated the other system assets by isolating the activity in a separate
subsidiary.(37)
Furthermore, under the provisions of Section 9(c)(3), the Commission may
permit investments which it determines are "appropriate in the ordinary
course of business" and "not detrimental to the public interest or the
interest of investors or consumers."
Upon the consummation of the Transaction, each of the non-utility
investments retained by Primergy from WEC and those to be acquired by
Primergy from NSP will become subject to the jurisdiction of, and regulation
by, the PSCW pursuant to the Wisconsin Act as described above in Item
1.B.1.b. The policy of the Wisconsin Act is set forth in its preamble, which
explicitly recognizes that the financial health of a public utility depends
upon the economic well-being of its service area and encourages the conduct
of substantial business by the utility within the service area by, among
other things, providing investment capital for new ventures. To foster these
objectives, and to ensure safe and reliable service at competitive rates,
the Wisconsin Act contains provisions concerning oversight by the PSCW of the
diversification and community investment permitted and encouraged by the
statute.(38) As previously described, among other
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(35) CSW Credit, Inc., Release No. 25995 (March 2, 1994); Jersey Central
Power & Light Co., Release No. 24348 (March 18, 1987).
(36) United Light and Railway Co., 35 SEC at 519.
(37) 1995 Report at 89-90. The Division also recommended a flexible
approach with respect to investments which neither met the energy-related
test of proposed Rule 58 and exceeded the DE MINIMUS amount.
(38) In the 1995 Report, the Division noted a comment by Wisconsin
Electric Power Company regarding the scope of the Wisconsin Act. 1995 Report
at 91.
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things, the Wisconsin Act provides for 1) a cap on amounts invested in
diversified non-utility businesses; 2) annual reporting requirements with
respect to the total amount of assets held by non-utility affiliates, amounts
located within the state and number of employees; and 3) periodic
investigations by the state commission at least every three years.
Furthermore, the state commission is required to consider whether the
non-utility affiliates 1) substantially retain, attract or promote business
activities or employment or provide capital to businesses being formed or
operating in the service territory of any public utility affiliate; or 2)
develop or operate commercial or industrial parks in the service territory of
any public utility affiliate. Each non-utility investment retained by
Primergy from WEC has been subject to analysis by the PSCW in accordance with
these requirements, and each non-utility investment retained (including those
obtained from NSP) will be subject to ongoing regulation under the Wisconsin
Act. Because the extensive regulation to which these investments will be
subject ensures such investments are and will be in the best interests of
investors and consumers, the Commission should allow retention under Section
11's "other businesses" clause or as permitted investments authorized by
Section 9(c)(3).
As set forth more fully below, the non-utility business interests that
Primergy will hold directly or through Primergy Hold meet the Commission's
standards for retention.
- -- BROKERING OF ENERGY, GAS, AND RELATED PRODUCTS AND SERVICES (Cenerprise,
WISVEST and ACNRG):
Cenerprise and ACNRG engage in natural gas and electric marketing
and brokering activities. WISVEST holds a 50% interest in Blackhawk
Energy Services, LLC ("Blackhawk"), a company which provides strategic
energy management and brokering services with a focus on natural gas
management. The marketing and brokering activities engaged in by
Cenerprise, Blackhawk and ACNRG are substantially similar to those
engaged in by numerous utility companies engaged in non-utility
brokering and marketing transactions, and in particular, their
activities are similar to those approved by the Commission and engaged
in by the registered systems. See., e.g., Northeast Utilities Services
Co., et al., Release No. 35-26359 (August 18, 1995) (authorizing
subsidiary to engage in electric powering brokering and marketing
transactions and fuel-for-power transactions within and outside the
service areas of affiliated public-utility companies); Consolidated
Natural Gas Co., Release No. 35-24329 (February 27, 1987) (authorizing
establishment of subsidiary under name CNG Trading to compete with
independent gas marketing companies and maintain and increase system gas
sales to LDCs and their end-users which could not be retained or secured
under existing utility tariffs); Entergy Corporation, et al., Release
No. 35-25848 (July 8, 1993) (authorizing subsidiary to provide
consulting services to non-associated companies, including expertise
relating to brokering of power resources); UNITIL Corp., et al., Release
No. 35-25816 (May 24, 1993) (authorizing establishment of subsidiary
under the name UNITIL Resources to serve as a power brokering agent for
the sale of client-owned bulk power purchaser clients). The retention
of Cenerprise, WISVEST's interest in Blackhawk and ACNRG and the
continuance of their operations thus should be permitted to continue.
Such activities would also be permitted under proposed Rule 58.
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- -- ENERGY CONSERVATION, MANAGEMENT AND RELATED SERVICES (Cenerprise, ACNRG,
EMC, Primergy GC, Primergy NC and O'Brien Management Services
Subsidiaries):
The Commission has authorized numerous registered holding companies
to engage in a variety of energy conservation, demand side management
and related services. See, e.g., Allegheny Power System, Inc., Release
35-26401 (October 27, 1995) (authorizing non-utility subsidiaries to
provide energy management services, including identification of energy
cost reduction and efficiency opportunities, design of facility and
process modifications to realize such efficiencies; management of or the
direct construction of energy conservation equipment; maintenance of
energy systems; training of client personnel; operation of equipment;
design, management, construction and installation of energy management
systems and structures; reporting system results and other similar or
related energy management activities); Central and South West
Corporation, Release No. 35-26367 (September 1, 1995) (authorizing
EnerShop, a non-utility subsidiary, to provide a range of energy-related
products and services to commercial and industrial customers of both
associate and non-associate companies, including consulting and energy
analysis, project management, design and construction, and energy
efficient equipment installation and maintenance); Entergy Corporation,
et al., Release No. 35-26342 (July 27, 1995) (authorizing Entergy
Systems and Service, Inc. to provide energy consulting services
worldwide, with a focus on lighting efficiency, and removing former 50%
limitation on energy management services business); Northeast Utilities,
et al., Release No. 35-26335 (July 19, 1995) (authorizing subsidiaries
of Northeast Utilities to provide, without a 50% limitation, energy
management services and demand-side management services and to enter
into joint ventures with utilities to provide such services).
As previously mentioned, Cenerprise, ACNRG, EMC and O'Brien
Management Services Subsidiaries provide retail customers within and
outside NSP's service areas energy conservation and management services
including utility billing analysis, end-use gas marketing, risk
management, construction and energy consulting, and administrative
services. Cenerprise's construction and energy consulting services and
energy analysis are similar to EnerShop's design, construction,
consulting and administrative services, and Northeast Utilities' demand
side management services. Furthermore, Cenerprise's energy consulting
service is similar to the energy consulting service offered by Entergy.
ACNRG provides services similar to those provided by Enershop. EMC
performs services similar to those provided by Allegheny's non-utility
subsidiaries, and services provided by Entergy Systems and Services,
Inc. If Primergy GC and/or Primergy NC are formed, they may perform
services for unaffiliated utilities similar to those services to be
performed for NSP and WEPCO. Such services, described in more detail in
Item 1.B.1.e. above, may include the operation, maintenance, repair,
rehabilitation, design, construction and testing of generation
facilities. Thus, Primergy should be able to retain these businesses.
All of such activities would also be permitted under proposed Rule 58.
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- -- PROVIDING FUEL PROCUREMENT SERVICES (Cormorant, Badger, Cenerprise, and
O'Brien Coalbed Subsidiaries):
As previously mentioned, Cormorant was established for the principal
purpose of acquiring fuel resources. Cormorant engages in oil, gas, coal
lignite and uranium exploration and holds rights to such resources.
O'Brien Coalbed Subsidiaries have interests in various gas wells,
Cenerprise has interests in various gas wells that it utilizes to meet its
national gas requirements and Badger owns coal rights in Indiana. The
Commission has approved the acquisition of coal and mineral rights by
registered holding company systems. See e.g., Alabama Power Company, 31
SEC 821 (1950) and Youghiogeny and Ohio Coal Company, Release No. 35-19587
(June 21, 1976). In Consolidated Natural Gas Company, Release No. 35-22845
(February 7, 1983), the Commission approved the establishment of CNG
Development, a subsidiary of Consolidated Natural Gas Company, a registered
holding company, to engage in natural gas and oil exploration. See also
New England Energy Incorporated, Release No. 35-23988 (January 13, 1986)
and New England Energy Incorporated, Release No. 35-21862 (December 13,
1980). Furthermore, in Allegheny Power System, Inc., Release No. 35-26401
(October 27, 1995), the Commission authorized AYP Capital, Inc., a
subsidiary of the registered holding company Allegheny Power System, Inc.,
to "facilitate the exploitation of resources contained on or in real
estate." As the activities of Cormorant, Badger, Cenerprise and O'Brien
Coalbed Subsidiaries, whether they engage in exploration of natural
resources or hold rights to others' exploration of such resources, are
substantially similar to those permitted by the Commission in other orders,
Primergy should be allowed to retain its interest in these businesses. The
exploration of natural resources or the holding of rights to such resources
also appears to be authorized under clause (ix) of paragraph (b) of
proposed Rule 58.
- -- PRODUCTION AND DISTRIBUTION OF THERMAL ENERGY (Steam heating division of
WEPCO; chilled water facility of WISVEST or other WEC affiliate; Minergy;
NRG's ownership and operation of several steam operations that provide
thermal energy; NRG Energy Center; NATS; TVI Joint Venture; PTLP; SFTLP and
the sale and delivery of steam from NSP to Liberty Paper Inc.):
The steam heating business of WEPCO, which is located exclusively in
its service territory and primarily in downtown and near southside
Milwaukee, serves the needs of 473 space heating and processing customers
and has annual revenues, under rates approved by the PSCW, of approximately
$15 million for the year ended December 31, 1995. The steam is supplied by
WEPCO's Valley Power Plant. WEPCO has entered into an agreement, subject
to PSCW approval, to acquire the steam heating and chilled water cooling
system at Milwaukee County regional medical facility. Steam would be sold
under rates approved by the PSCW. Chilled water facilities would be owned
by WISVEST or other non-utility affiliate of WEC and sold at market rates
not subject to PSCW regulation. Minergy also intends to supply the steam
produced during the ordinary course of the operation of its proposed Neenah
paper sludge recycling facility to area paper mills. NRG (through its
Waldorf, Washco and Grand Forks operations), NRG Energy Center, NATS, TVI,
PTLP and SFTLP are engaged in providing thermal energy
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heating and cooling services. NSP is engaged in supplying steam to
Liberty Paper Inc. The retention of these businesses will further
Primergy's ability to be an energy service company providing consumers
with additional options to meet their energy needs, thereby allowing
Primergy to compete more effectively in the energy-services business.
The Commission has previously approved the retention of such businesses.
See, e.g., General Public Utility Corp., 32 SEC 807, 840-841 (1951)
(Commission authorized retention of steam heating systems. Steam from
such systems was used to generate electricity and sold to customers for
heating purposes.) See also In re The North American Company, 11 SEC 194
(April 14, 1942) (Commission authorized retention of steam heating
operations which provided steam heat to customers and was used in the
generation of electricity.) As the Commission has determined that steam
heating operations, whether used for internal generation purposes or for
direct sale to customers, are reasonably incidental to the operation of
an electric utility system, the thermal energy heating and cooling
services of WEPCO, WISVEST or another non-utility affiliate of WEC,
Minergy, NRG, NRG Energy Center, NATS, NSP, TVI Joint Venture, PTLP and
SFTLP may be retained. The production, conversion and distribution of
thermal energy products, including process steam and chilled water, is
also permitted by proposed Rule 58. Thus, the production and
distribution of thermal energy is reasonably incidental to Primergy's
utility operations and may be retained.
- -- SALES OF APPLIANCE WARRANTY PROGRAMS AND SURGE PROTECTORS AND GENERATOR AND
ASSOCIATED EQUIPMENT (NSP and O'Brien Equipment Subsidiaries):
As previously mentioned, NSP directly conducts several
non-utility businesses including providing an appliance warranty
and repair program for its residential customers (known as
"Advantage Service") and selling and installing power quality
instruments to protect customers' equipment from electric surges
(known as "Ultra Power"). The sale of warranties for residential
customers' appliances and the sale of surge protection equipment
were approved by the Commission in Mississippi Power and Light
Company, Release No. 35-25140 (August 30, 1990). In that order,
the Commission allowed Mississippi Power and Light ("MP&L"), a
subsidiary of a registered holding company, to create a "Space
Conditioning Program" to market and sell "manufacturer's
warranties or other maintenance agreements for space conditioning
equipment such as water heaters and heat pumps and related
weatherization, ductwork and wiring improvements." In addition,
the Commission also approved the creation of a "Premium Power"
program to market, sell, lease and finance "the acquisition and
installation of surge supressors." NSP's warranties for
customers' appliances are substantially similar to the types of
warranties offered by MP&L. Furthermore, NSP's power quality
instruments achieve the same result as MP&L's surge
supressors--protecting customers' equipment from sudden power
surges. Thus, NSP should be allowed to retain these businesses. The
sale of warranties and surge protectors for customers' appliances
are also allowed under proposed Rule 58.
The O'Brien Equipment Subsidiaries sell, rent and manufacture gas,
steam and engine generator sets and associated equipment. Such activities
were approved by the Commission in CINergy Corp., Release No. 35-26146
(October 21, 1994). In that order,
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the Commission allowed CINergy to acquire PSI Resources, Inc. ("PSI").
PSI, through PSI Investments, bought, brokered and sold equipment from
generating plants. As the equipment sold by the O'Brien Equipment
Subsidiaries is substantially similar to that sold by PSI, Primergy
should be able to retain these subsidiaries.
- -- CONSTRUCTION OF GAS PIPELINES (NSP):
As previously mentioned, NSP directly constructs natural gas
distribution systems for third parties, primarily end-users and municipal
gas systems. Construction of gas pipelines for third parties was approved
in National Fuel Gas Company, Release No. 35-24381 (May 1, 1987), in which
the Commission authorized Utility Constructors, Inc., a subsidiary of a
registered holding company, to provide "pipeline construction and
replacement...and related and auxiliary services" to subsidiaries and to
non-associate companies. As NSP's natural gas distribution systems include
gas pipelines, NSP should also be allowed to retain this business.
Construction of gas pipelines for third parties is also allowed under
proposed Rule 58.
- -- RESOURCE RECOVERY OPERATIONS (NRG's ownership and operation of the Newport
RDF facility, NRG's operation of the Elk River facility, Becker Ash
Landfill, Minnesota Waste Processing and O'Brien Biogas Subsidiaries):
NRG and Minnesota Waste Processing are involved in the collection and
processing of municipal solid waste into RDF. The O'Brien Biogas
Subsidiaries are engaged in the sale of biogas. Such activities are
similar to investments in resource recovery facilities and technologies,
including RDF facilities, approved in The Southern Company, et al., Release
No. 35-26221 (January 25, 1995) (Commission authorized Development, a
subsidiary of Southern Company, to "explore and conduct market, technical
and financial tests and studies of...waste to energy projects and biomass
technology applications; environmental systems and equipment; alternative
fuels; improved fuel utilization; and alternative energy technologies.")
Furthermore, the Commission in prior orders has authorized the sale of
fuel from subsidiary companies to utilities. The North American Company, 11
SEC 194 (April 14, 1942) (Commission authorized retention of coal mining
subsidiary that supplied the majority of its output to the registered
holding company's utility operations.) Minnesota Waste Processing sells
municipal solid waste to NRG for NRG's Newport facility. The Newport
facility in turn, converts the municipal solid waste to RDF and sells such
fuel to NSP. As RDF is used to generate electricity, the sale of municipal
solid waste by Minnesota Waste Processing to Newport, and the subsequent
sale by Newport of RDF to NSP is similar to the sale of fuel to a utility.
Similarly, biogas is also used to generate electricity. Such activities
are thus reasonably necessary for the operation of Primergy's electric
utility system, and should be allowed to be retained. The ownership and
operation of RDF facilities also appears to be authorized under clauses
(vi) and (ix) of paragraph (b) of proposed Rule 58.
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- -- INVESTIGATION OF NEW BUSINESS OPPORTUNITIES (WEC Generation):
WEC Generation was formed to provide a vehicle through which WEC may
investigate new business opportunities. WEC Generation has acquired 100%
of the equity interest of two offshore Dutch companies, Valace Investments
B.V. and Scotloc Holding B.V. These investments will be exempt investments
or will be otherwise allowable by the Commission. Primergy will request
authorization to the extent required prior to making any of these
investments. The Commission has previously allowed the formation of
subsidiaries to explore potential permitted investment opportunities. See
Middle South Utilities, Inc., Release No. 35-22818 (January 11, 1983)
(authorizing the creation of a non-utility subsidiary to investigate new
business opportunities). Thus, these entities are retainable.
- -- OWNERSHIP OF, OPERATION OF, AND PROVIDING SERVICES TO FOREIGN EWGS AND
FUCOS (NRG, SSP, SSP2, NRGenerating, Gunwale, NRG International, NRG
Gladstone, NRG Operating, NRG Gladstone Superannuation Pty. Ltd., Saale
Energie, KS, MIBRAG, MIBRAG BV, Lambique Beheer BV, MIB GmbH, MIV GmbH &
Co., KG, MIVB GmbH, Saale Energie Services, SLAP I-P, SLAP I-C, Kladno,
ECKG, Kladno 1, Kladno 2, NRG CZ, NRG No. 1, NRG Collinsville, Sachsen, NRG
Australia Ltd., KSB, NRG Energy Development GmbH and NRGenerating 2):
With the exception of NRG, each of the above entities is engaged
exclusively in the business of owning, operating or providing services
to foreign EWGs or to entities that, upon making the necessary filings
under Section 32 or Section 33, would be foreign EWGs or FUCOs.(39) As
noted above, NRG is engaged in other businesses. However, with respect
to the entities listed above, NRG's only interest is through its
investments in such entities and NRG does not provide services for a fee
to any such entity.(40) Ownership of EWGs and FUCOs is exempted from the
Act by the Energy Policy Act of 1992. The applicants are in compliance
with the Commission's rules concerning investments in EWGs. Also, with
respect to the obligations of the various entities listed above, there
is no recourse to NSP, and there will be no recourse to Primergy, with
respect to the investments in any of these projects.
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(39) Primergy will make all necessary filings to establish such entities
as FUCOs immediately after it becomes a registered holding company, except
with respect to the MIBRAG project. Technically, the entities listed above
that are involved in the MIBRAG project also own interests in businesses that
are not EWGs and that, absent a major restructuring of the project, would not
be a FUCO. NRG invested in the MIBRAG project in order to obtain an interest
in its generation assets and to obtain coal supply for the Schkopau facility.
However, in order to facilitate investment in the MIBRAG project, the
generation assets were put in a separate entity which obtained EWG status
upon filing with FERC, in lieu of leaving the generation assets in MIBRAG and
seeking the requisite state commission approvals for FUCO status. Primergy
proposes to leave the current structure for the MIBRAG project in place and
to treat all of its investments in the MIBRAG project as an investment in a
FUCO for all purposes of the Act instead of attempting to restructure the
project in order to obtain FUCO status for all of the MIBRAG project.
(40) NRG does receive a management fee regarding its indirect investment
in SLAP I-P and SLAP I-C. However, each of the other investors receives a
fee equal to the fee paid to NRG, causing such fee in substance to be a
return on their investments in SLAP I-P and SLAP I-C.
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With respect to the various entities listed above that hold
indirect interests in EWGs or projects that will become FUCOs or EWGs,
they are similar to the New Special Purpose Subsidiaries established by
CINergy, and approved by the Commission in CINergy Corporation et al.,
Release No. 35-26376 (September 21, 1995). In that order, the
Commission authorized the organization of New Special Purpose
Subsidiaries for the "purpose of engaging, directly or indirectly, and
exclusively, in the business of acquiring, owning and holding the
securities of exempt wholesale generators." Under Rule 5b, such
interests in FUCOs are specifically permitted.
With respect to services to EWGs or entities that will become
FUCOs, the Commission has authorized subsidiaries of registered holding
companies to provide consulting, operations and management services to
an EWG or FUCO if it derives no part of its income, directly or
indirectly, from the generation, transmission, or distribution of
electric energy for sale within the United States. See, e.g., Entergy
Corporation, et al., Release No. 35-26322 (June 30, 1995) (authorizing
Enterprises, a wholly owned non-utility subsidiary company, to provide
consulting, operating and management services to associate companies,
including EWGs, FUCOs and QFs); CINergy Corporation, et al., Release No.
35-26376 (September 21, 1995) (authorizing Special Purpose Subsidiaries
to provide EWGs and FUCOs all services necessary or requested for their
operation). None of the above projects derives any part of its income
from the generation, transmission or distribution of electric energy
within the United States. Accordingly, Primergy should be permitted to
retain the businesses.
- -- OWNERSHIP AND OPERATION OF QFS AND FACILITIES RELATED THERETO (San Joaquin
Valley Energy I, Inc., San Joaquin Valley Energy IV, Inc., NRG Energy
Jackson Valley I, Inc., NRG Energy Jackson Valley II, Inc., NRG, NRG
Sunnyside Inc., NEO, Minnesota Methane, Landfill Power, STS Hydropower,
Northbrook Energy L.L.C., SOA, SCA, NRG Sunnyside Operations GP Inc.,
NRG Sunnyside Operations LP Inc., SJVEP I, SJVEP IV, JVEP, Suncook
Energy Corporation, Four Hills, L.P., Four Hills, Inc., Northbrook
Acquisition Corp., Bioconversion, AE Fourteen, NRG Hartford,
CDECCA(41) and O'Brien Cogeneration Subsidiaries):
Registered holding companies are permitted under the Act to own
QFs. Through the entities described above, Primergy will own interests
in and operate several QFs. The Commission has authorized subsidiaries
of registered holding companies to provide administrative, operational
and management services to QFs. See, e.g., Entergy Corporation, et al.,
Release No. 35-26322 (September 21, 1995); CINergy Corporation, et al.,
Release No. 35-26376 (September 21, 1995). These orders typically
involved instances in which the QF was not selling power to an associate
company that was a public utility. In the present case, the QF facility
at Eden Prairie, Minnesota, the QF facility at Inver Grove, Minnesota,
(each of which is 25% owned by NRG through Landfill Power) and the QF
facility at Burnsville, Minnesota (which is 50% owned by
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(41) Information on the seventeen joint ventures of NEO, each of which
would be a QF, will be supplied by Amendment.
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NRG through Minnesota Methane) sell power to NSP. These contracts were
entered into by NSP pursuant to PURPA and have been approved by the MPUC.
Through NRG Energy Jackson Valley I, Inc. and NRG Energy Jackson
Valley II, Inc., Primergy will also own a montan wax plant--which is the
thermal host for the Jackson Valley power generation facility and
Bioconversion, a supplier of biomass to the San Joaquin QF. Through
SCA, Primergy will own a 8.7 million ton waste coal pile. The
acquisition of ancillary facilities such as a thermal host facility was
approved by the Commission in Central and South West Corp., Release No.
35-25399 (November 1, 1991). Bioconversion supplies the biomass for the
San Joaquin QF facilities and is clearly necessary to the operations of
the QFs. Similarly, the waste coal pile of SCA is necessary, as it is
the fuel supply for the facility. The Commission has approved the
acquisition of fuel handling, fuel supplier and transportation
facilities. Energy Initiatives, Inc., Release No. 35-25991 (February
22, 1994). Accordingly, Primergy should be permitted to retain the
foregoing businesses. Such businesses would also be permitted under
proposed Rule 58.
- -- DEVELOPMENT AND COMMERCIALIZATION OF FUEL TECHNOLOGIES (Scoria, Graystone,
LES, RSCP and Le Paz):
Scoria and RSCP are engaged in the production of a synthetic coal.
Graystone, Le Paz and LES are engaged in the development of a uranium
enrichment facility which will provide a less expensive source of fuel
for nuclear operations.Under the rationale of Jersey Central Power Co.,
Release No. 35-24348 (March 18, 1987), a business which evolves in
connection with a holding company system's utility business, requires an
investment that is insignificant in relation to the holding company
system's total financial resources, and has the potential to produce
benefits for investors and/or consumers, may be retained. The businesses
of Graystone, Le Paz and Scoria grew out of the utility business of NSP,
involve expertise related to the utility business and would be
considered to be energy related under proposed Rule 58. NSP's
investments in Graystone, Le Paz and Scoria are not significant in
relation to the total financial resources of the Primergy System.
Moreover, these investments have the potential to produce profits for
investors and a variety of benefits for consumers. Furthermore, in New
England Electric System, et al., Release No. 35-26277 (April 26, 1995),
the Commission authorized NEERI, a wholly owned non-utility subsidiary
of NEES, to enter into a joint venture to perform research to further
refine the process for separating unburned carbon from coal ash. The
SynCoal process used by the Scoria venture produces dryer, cleaner
burning coal and causes ash and pyrite particles to be easily separated
from the coal. Thus, the purposes of the NEERI joint venture and the
Scoria venture are substantially similar as they achieve the same end
result--the development of coal that, when burned, is less injurious to
the environment. As a result, Primergy should be permitted to retain
these businesses. These businesses also are substantially similar to
several businesses permitted under proposed Rule 58.
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- -- GAS-RELATED ACTIVITIES (Viking):
As discussed previously, Viking, a gas pipeline subsidiary, ensures
access to natural gas supplies for the gas utility operations of NSP,
NSP-W and WEC and, thus, is functionally related to utility operations.
The Commission's decisions recognize the functional relationship of gas
pipelines to the gas utility business and the retainability of gas
transmission interests in connection with gas utility operations. See,
e.g., CNG Transmission Corp., Release No. 25239, (January 9, 1991); Gas
Related Activities Act of 1990, Sec.2(a). Since Viking's pipeline
functions are used in much the same way as in CNG Transmission Corp.,
Viking should be retained. Such activities are also allowed under
proposed Rule 58.
In addition, continued Primergy ownership of Viking will enhance
competition for natural gas supply and transportation in the region.
The states of Minnesota, Wisconsin and North Dakota are predominantly
served by Northern Natural Gas Company and ANR Pipeline Company and
Williston Basin Interstate Pipeline Company, respectively. The other
major interstate natural gas pipelines serving the region--Great Lakes
Gas Transmission Limited Partnership and Northern Border Pipeline
Company--are affiliates of ANR and Northern Natural, respectively. All
major markets served by Viking--the Twin Cities metropolitan area,
central Wisconsin, and Fargo, North Dakota--are served by alternative
pipelines. In addition, the majority of Viking's transportation
capacity is held under contract by parties not affiliated with NSP
(Minnegasco, ANR, and various Wisconsin and Minnesota LDCs.)
Primergy's ownership of Viking actually increases market
competition for natural gas supply and transportation services by
keeping a third pipeline operating in the market in competition with
Northern, ANR and their affiliates. Viking will provide an alternative
"open access" provider of natural gas transportation service not only
for NSP and WEPCO, but also for other local distribution companies and
industrial customers in the region. The opportunity for direct
connection to Viking creates competition for the existing pipelines,
benefiting customers through lower total gas rates. Divestiture of
Viking could reduce competition in the interstate natural gas
transportation market, potentially harming consumers.
- -- LAND OWNERSHIP (FMAP, UP&L and NSP Lands):
As previously mentioned, FMAP owns and operates a parking garage.
NSP leases from FMAP parking spaces as well as storage and office space.
The garage is located next to NSP's headquarters, and is primarily used
by NSP employees. It is anticipated that in the event that additional
facilities at NSP headquarters are necessary, the parking garage will be
razed and the site will be used for such expansion. UP&L's land
holdings including the Renaissance Square office facility adjacent to
NSP's corporate headquarters, which NSP uses for utility business. NSP
has long-term agreements to lease virtually all of the Renaissance
Square facility.
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In previous orders, the Commission has approved the purchase of
real estate which is incidentally related to the operations of a
registered holding company. See American Electric Power Service Co.,
Release No. 35-19981 (April 12, 1977) (Commission allowed a subsidiary
of American Electric Power to purchase employees' homes in conjunction
with their transfer to a new position in a different geographical area.)
Furthermore, FMAP's ownership of a parking garage and NSP's lease of
the Renaissance Square facility can be distinguished from ownership of a
commercial building brought into question in In re The North American
Company, 11 SEC 194 (April 14, 1942). In North American, a registered
holding company owned a twenty-five floor office building in downtown
New York. However, only two whole floors and part of three other floors
were occupied by North American, and the building was not within close
proximity to the company's headquarters. Given the proximity of the
parking garage to NSP's headquarters, the benefits to employees it
currently provides, and its potential for future use, ownership of the
garage is reasonably necessary to the operation of the utility business.
FMAP should be allowed to retain its interest in the parking facility.
Similarly, since virtually all of the Renaissance Square facility is
used by NSP in its utility operations, UP&L should be allowed to retain
its interest in the facility.
UP&L and NSP Lands also own and hold real property typically
surrounding or adjacent to property owned and used by NSP and NSP-W in
their regulated operations. The majority of such land consists of
property adjacent to land owned and used for NSP's Sherco and Monticello
plant sites and land adjacent to Lake Arbutus. In UNITIL Corporation et
al, Release No. 35-25524 (April 24, 1992), the Commission noted that
UNITIL Realty Corporation, a subsidiary of the registered holding
company, UNITIL, which acquired real estate to support utility
operations, engaged in activities which were within the confines of the
Act. UP&L's ownership of land adjacent to the Sherco and Monticello
plant sites are necessary to support such plants' future operations. As
stated previously, the land held by NSP Lands surrounded a
hydro-electric generation facility previously owned by NSP-W and is in
the process of being sold. Consequently, as the real estate held by
UP&L and NSP Lands is substantially similar to that owned by UNITIL
Realty Corporation, UP&L and NSP Lands should be allowed to retain its
interest in such property.
- -- OPERATION OF RESERVOIRS (C&F):
As previously stated, C&F builds, maintains and operates dams and
reservoirs on the Chippewa and Flambeau Rivers and leases and operates
the reservoirs from such rivers. By providing a uniform flow of water
to the downstream hydroplants, C&F helps ensure the consistent operation
of the plants, including plants owned by NSP-W. Such leasing and
operating activities are necessary to the operation of the plants and
thus should be retained. The Commission, in In Re Wisconsin River Power
Company, et. al., 27 SEC 539 (1948), noted that the activities of the
River Company, a subsidiary of a registered holding company whose
business consisted of "acquiring real estate and flowage rights
necessary for the construction and operation of dams and hydroelectric
plants...and making other preparations for such developments," did not
violate any sections of the Act. As C&F's leasing and operation of
reservoirs are significantly similar
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to the River Company's activities, and building, maintaining, and
operating dams and reservoirs on the Chippewa and Flambeau Rivers are
part of the preparations for operating hydroelectric plants, C&F should
be retained.
- -- METERING, BILLING, AND COLLECTING SERVICES (WISVEST and Custometrics):
WISVEST holds a 45% interest in Quantum Controls, LLC (d/b/a Energy
Oasys) ("Quantum"), a company which researches, markets, develops,
creates, distributes and sells utility industry software, automated
billing systems and devices and related products and services. Quantum
markets an advanced energy information system to utilities which gives
them the ability to communicate directly with their customers. WEC also
has another affiliate, Custometrics LLC ("Custometrics") which is a
joint venture formed by WEC and Marshall & Ilsley Corp. Custometrics
will provide system solutions related to billing and other aspects of
the customer service segment of the energy services industry.
Custometrics will provide these services to affiliated and unaffiliated
utilities.
These services are similar to those in which other registered
holding company subsidiaries have been authorized to engage and thus
should be retained. Central and South West Corporation, Release No.
35-26251 (March 14, 1995) (authorizing provisions of metering, billing
and collecting services to unaffiliated water and gas utilities); The
Southern Co., Release No. 35-26221 (January 25, 1995) (authorizing
subsidiary to offer automated billing services to nonaffiliate
utilities). These services would also be permitted under proposed Rule
58 and may be retained.
- -- DEVELOPMENT AND COMMERCIALIZATION OF COAL WASTE, SLUDGE AND SAND PROCESSING
(WEPCO, Minergy):
Minergy is engaged in the business of developing and marketing
proprietary technologies designed to convert high volume industrial and
municipal wastes into value-added products. Minergy owns the rights to
develop and market a technology developed and currently used by WEPCO to
process fly-ash and sludge into salable, more environmentally friendly
products. It also provides various consulting, operation, installation,
maintenance and other services related to thermal sand reclamation
facilities and is also proposing to build a $45 million facility in
Neenah, Wisconsin that would recycle paper sludge from area paper mills
into two usable and salable products: glass aggregate and steam. The
plant will also provide substantial environmental and economic benefits
to the area by providing a beneficial alternative to landfilling paper
sludge. This activity is similar to that previously permitted by the
Commission. See, New England Electric System, Release No. 35-26277
(April 26, 1995). The development and commercialization of coal waste
by-products is also an energy related activity under proposed Rule 58.
Additionally, some of the technology utilized in these services was
developed in connection with utility operations and the Commission has
previously permitted registered holding company subsidiaries to market
to third parties technology developed in the course of the operation of
affiliated utilities. See The Southern Co., Release No.
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35-26211 (December 30, 1994) (allowing marketing to third parties of
communications network capacity initially developed for utility
subsidiaries); Jersey Central Power & Light Co., Release No. 35-24348
(March 18, 1987) (allowing licensing to third party utilities of
computer theft prevention technology initially developed for company's
own use). This type of business would also be permitted under proposed
Rule 58 and accordingly may be retained.
- -- COMMUNITY INVESTMENTS (Eloigne, Clearwater, WMIC, WISPARK and WITECH):
As part of their attempts to further the public interest and invest
in the communities in which they provide service (and with respect to
WEC, pursuant to and in furtherance of the objectives of the Wisconsin
Act), NSP and WEC have invested in various local businesses and in low
and moderate-income housing projects through their non-utility
subsidiaries, Eloigne, Clearwater, WISPARK, WITECH and WMIC. These
non-utility investments are clearly DE MINIMUS, representing less than
1% of Primergy's 1995 pro forma assets and less than 1% of Primergy's
1995 pro forma revenues. These investments are part of continuing
programs intended to promote local business, develop industrial parks
and provide affordable housing in various areas primarily within NSP's
and WEPCO's service territories. Descriptions of these investments are
set out in Item 1.B.5. and in Annexes D, E and G to this application.
As discussed in more detail below, there are several bases for
concluding that the retention of these businesses by Primergy is
justified under the Act and should be permitted.
First, Section 11(b)(1) provides that the Commission "may permit as
reasonably incidental or economically necessary or appropriate...the
retention of an interest in any business...which the Commission shall
find NECESSARY OR APPROPRIATE IN THE PUBLIC INTEREST ...and not
detrimental to the proper functioning of [the registered holding company]
system or systems." (emphasis added) In the 1995 Report, the Division
recommended that registered companies be permitted to invest DE MINIMUS
amounts in diversified activities without regard to the specific
identity of each investment in order to greatly increase the flexibility
of registered companies desirous of diversifying.
Second, under Section 9(c)(3) of the Act, the Commission has the
authority, and should in this case grant, an exception by order for the
retention of these investments by Primergy since they were made in the
ordinary course of NSP's and WEC's business, are in the public interest
and will not be detrimental to the public interest or the interests of
investors or consumers. In addition, each of these community-oriented
investments were made initially in accordance with, and in furtherance
of the objectives of, both state and federal policy. Furthermore,
WEC's investments were made in accordance with the rigorous statutory
limitations of the Wisconsin Act applicable to non-utility
diversification, and, since having been made, continue to be subject to
periodic audits by the PSCW under the Wisconsin Act. When held by
Primergy, all of the investments will remain subject to such review.
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Finally, state holding company regulation has developed (such as
the Wisconsin Act) which dictates what investments are "necessary or
appropriate in the public interest" and are "not detrimental to the
proper functioning" of a holding company.
Twenty-five years ago, in a very different regulatory and
competitive environment, the Commission denied the application of a
public utility subsidiary company of a registered holding company to
invest through a wholly owned non-utility subsidiary in low and
moderate-income housing projects in MICHIGAN CONSOLIDATED GAS CO., 44
SEC 361, AFF'D, 444 F.2d 913 (D.C. Cir. 1971) ("MICHIGAN CONSOLIDATED").
The Commission determined and the court agreed that such an investment
could not be authorized under the "other businesses" clause of Section
11(b)(1) because it was not "functionally related" to the operation of
an integrated public utility system. Since this decision, however, the
definition of "functionally related" has developed and been liberalized
as the competitive environment has changed.(42) Additional competitive
pressures on registered holding companies have arisen as exempt holding
companies have been allowed to diversify,(43) and have engaged in many of
the activities previously considered not deemed "functionally related."
In the 1995 Report, the Division suggested additional relaxation of
this standard. Noting that the Commission must continue to respond
flexibly to changes in the utility industry, it advocated the adoption
of a "budget approach" for registered holding companies to make DE
MINIMUS investments in diversified activities which do not fit within
previous orders of the Commission, yet appear to be within the meaning
of the "other businesses" clauses of Section 11, and to otherwise adopt
a "flexible approach" toward other diversification activities.(44) The
Division suggested that this approach would allow registered holding
companies to make minimal investments up to a certain authorized amount,
provided certain structural considerations are observed which limit the
potential losses to the amount of the investment and insulate other system
assets by isolating the activity in a separate subsidiary.(45)
In MICHIGAN CONSOLIDATED the Commission also declined to use
Section 9(c)(3) as a means to provide an exemption. In affirming this
decision, the Court of Appeals did
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(42) See, e.g., JERSEY CENTRAL POWER & LIGHT CO., Release No. 35-24348
(March 18, 1987) (authorizing sale of computer programs); CNG ENERGY CO.,
Release No. 35-23963 (December 26, 1985) (authorizing sale of radio-dispatch
system).
(43) See, e.g., PACIFIC LIGHTING CORPORATION, 45 SEC 152 (1973)
(diversification of a holding company exempt under 3(a)(1) is not necessarily
detrimental to the public interest).
(44) This recommendation is in addition to proposed Rule 58, which would
provide a safe harbor for certain "energy related" activities. The Division
recommended the "budget approach" for use "without regard to the specific
identity of each investment." 1995 Report at 90.
(45) 1995 Report at 89-90. It must be emphasized that for investments
which neither meet the energy-related test of proposed rule 58 and exceed the
DE MINIMUS amount, the Division nonetheless recommends a flexible approach
which would allow registered holding companies to engage in nonutility
businesses that "are economically appropriate and in the public interest,
regardless of whether such activities are ancillary to the utility business."
1995 Report at 91.
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not directly address the Commission's interpretation of Section 9(c)(3),
but merely concluded that because the investment exceeded certain
limits, relief under 9(c)(3) was not available. 444 F.2d at 918. It is
important to note, however, that the statute itself does not contain any
such limitations. Rather, under the provisions of Section 9(c)(3), the
Commission may permit investments which it determines are "appropriate
in the ordinary course of business" and "not detrimental to the public
interest or the interest of investors or consumers." The Commission may
use this authority to grant an exception in this case.
Although the Commission has set forth criteria in Rule 40(a)(5) for
which an exception from 9(c)(3) will routinely be granted, nothing in
the statute dictates that this rule be the sole permitted exception.
Over the years, the Commission has amended the rule to adjust the
criteria to reflect the changing environment, and even after MICHIGAN
CONSOLIDATED, has considered situations which did not fall within the
criteria set forth in the rule on a case by case basis, revealing its
willingness to be flexible even prior to the 1995 Report.(46) Because the
aggregate annual limitations provided for in the rule do not apply
in a situation where, as here, the investments have already been made,
the Commission should consider the applicants' application for retention
on its own merits and grant an exception based on its statutory
authority in light of the unusual circumstances of this case discussed
below.
Finally, as previously discussed, the Division has recently
recommended a "budget approach" and a generally more flexible approach.
Although the Division suggested this policy under Section 11, it would
serve equally well for the Commission to use such an approach under
Section 9, especially, where, as here, "unusual or exceptional
circumstances" apply and the concerns of the Commission are met.
LOW AND MODERATE-INCOME HOUSING: Primergy's non-utility low-income
housing investments to be acquired from NSP and WEC are retainable under
both 11(b)(1) and 9(c)(3) because they are both DE MINIMUS in amount and
will be segregated from its operating utilities. Primergy will acquire
from NSP and WEC the non-utility subsidiaries Eloigne, Clearwater, WMIC
and WISPARK. As described above in Item 1.B.5.a. and 1.B.5.b. and
Annexes D and E, Eloigne, Clearwater, and WMIC invest in low and
moderate-income housing projects, and WISPARK is a general partner in
several projects in which WMIC is a limited partner. The combined value
of Primergy's interests in the low and moderate-income housing
investments of Eloigne, Clearwater, WISPARK and WMIC is less than $70
million, which represents less than 0.7% of the total assets of Primergy
at December 31, 1995 on a pro forma basis. Each of Eloigne, Clearwater,
WISPARK and WMIC will either be direct subsidiaries of Primergy or
indirect subsidiaries through Primergy Hold. As such, these investments
will be separate and distinct from Primergy's utility assets and will
not have any financial effect on these assets whatsoever.
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(46) See E.G. CONSOLIDATED NATURAL GAS CO., Release No. 35-23799 (August
20, 1995) (authorizing investment in excess of the then $50,000 limitation
under Rule 40(a)(5); EAST OHIO GAS CO., Release No. 35-25046 (February 27,
1990) (approving an investment in real estate projects larger than the
maximum per investment limit then permitted by Rule 40(a)(5)).
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Applicants believe that the Commission should grant an exception
and allow the retention of Eloigne, Clearwater, WISPARK, and WMIC under
Section 11(b)(1) and/or under Section 9(c)(3) because: (i) of the
exceptional and unusual circumstances surrounding the initial
acquisition of these investments by NSP and WEC, (ii) under the
Wisconsin Act, they are appropriate and in the public interest and (iii)
the continuing oversight of these investments by the PSCW under the
Wisconsin Act assures that the investments will continue to meet those
standards.
First, each of WEC's non-utility investments retained by Primergy
from WEC initially was made in furtherance of the policy of the
Wisconsin Act as set forth in its preamble and described above.
Furthermore, all of the low-income housing investments of Eloigne,
Clearwater, WMIC, and WISPARK qualify for federal low income housing tax
credits, which are designed to promote such investments. As retained by
Primergy, all of these investments, including those by Eloigne and
Clearwater, will come under the provisions of the Wisconsin Act. The
reporting requirements of the Wisconsin Act and the public policy
determinations enforced by the PSCW will serve to ensure the protection
of the public interest. This extensive supervision is a circumstance
which favors retention.
These investments were made while NSP and WEC were exempt holding
companies. It would be anomalous to allow NSP and WEC to hold these
investments as exempt holding companies, indeed to encourage such
investments by state and federal policy, but to require divestiture as a
consequence of these companies taking steps to become more competitive.
If, as required by the Wisconsin Act, these investments were not, and
may not be detrimental to, the proper functioning of a holding company
system, they certainly should not be considered by the Commission to be
detrimental to a larger, more competitive company, especially given the
ongoing state oversight and regulation. Accordingly, these investments
should be permitted and the businesses may be retained.
ADDITIONAL NON-UTILITY INVESTMENTS. Primergy will also acquire
from WEC subsidiaries primarily engaged in providing venture capital to
local businesses and developing industrial parks and other real estate
primarily within WEPCO's service area. As described in Item 1.B.5.b.
and Annexes E and G, WISPARK and WITECH were created to further the
policies of the Wisconsin Act, and engage in development of local
industrial parks and other real estate, and invest in and provide
venture capital to businesses primarily located in WEPCO's service area.
As argued above, it would undermine the trend toward flexibility and
contravene a strong state policy to compel divestiture of these
subsidiaries. The Commission has recognized the value to the public
interest in similar circumstances,(47) and should grant an exception in
this case to maintain the beneficial effects on local communities of these
investments. Each of these
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(47) See, E.G., GEORGIA POWER CO., Release No. 35-25949 (December 15, 1993)
(limited partnership formed to provide venture capital to high-technology
companies within utility's service territory); HOPE GAS, INC., Release No.
35-25739 (January 26, 1993) (venture capital partnership designed to provide
venture capital to local business); THE POTOMAC EDISON CO., Release No.
35-25312, (May 14, 1991) (risky, for-profit, economic development corporation
created to stimulate and promote growth and retain jobs).
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investments is individually, and in aggregate, DE MINIMUS, is segregated
from the utility assets of Primergy, was made in furtherance of public
policy as being appropriate in the public interest, and will be subject
to the continuing regulation under the Wisconsin Act. Accordingly,
these investments should be permitted under Sections 11(b)(1) and
9(c)(3) of the Act and the businesses are retainable.
Rule 53 requires that aggregate investments in EWGs and FUCOs not
exceed 50% of the system's consolidated retained earnings. As of December
31, 1995, the aggregate investment of NSP and WEC in EWGs and FUCOs was less
than 15% of combined retained earnings, well within the amount permitted.
The applicants acknowledge and commit to comply with the standards of Rule 53
following Primergy becoming a registered holding company.
Proposed Rule 58 would require that the aggregate investment in
"energy related" companies not exceed 15% of the consolidated capitalization
of a registered holding company. As of December 31, 1995, the aggregate
investment in "energy related" companies of NSP and WEC would come within
that limitation and would constitute less than 5% of their combined
capitalization.
(d) Section 10 (c)(2)
Because the Transaction is expected to result in substantial cost
savings and synergies, it will tend toward the economical and efficient
development of an integrated public utility system, thereby serving the
public interest, as required by Section 10(c)(2) of the Act.
(i) Efficiencies and Economies
The Transaction will produce economies and efficiencies more than
sufficient to satisfy the standards of Section 10(c)(2) of the Act. Although
some of the anticipated economies and efficiencies will be fully realizable
only in the longer term, they are properly considered in determining whether
the standards of Section 10(c)(2) have been met. See American Electric Power
Co., 46 SEC 1299, 1320-1321 (1978). Some potential benefits cannot be
precisely estimated, nevertheless they too are entitled to be considered.
"[S]pecific dollar forecasts of future savings are not necessarily required;
a demonstrated potential for economies will suffice even when these are not
precisely quantifiable." Centerior Energy Corp., Release No. 35-24073 (April
29, 1986).
NSP and WEC have estimated the nominal dollar value of synergies
from the Transaction to be approximately $2.0 billion over the 10-year period
from 1997-2006. The Transaction is expected to yield several types of
presently quantifiable benefits and savings, which are identified by area
below: (1) corporate and operations labor costs; (2) facilities
consolidation; (3) corporate and administration programs; (4) purchasing
economies (nonfuel); (5) nuclear; (6) fuel procurement; (7) production
dispatch and (8) gas supply. The total amount of savings currently estimated
in each of these categories, on a nominal dollar basis is summarized in the
table below:
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Transaction Synergies in Nominal Dollars
- -------------------------------------------------------------------------------
Category Nominal
Amount
- -------------------------------------------------------------------------------
Corporate and Operations Labor $1,205 million
Facilities Consolidation $46 million
Corporate and Administrative $313 million
Programs
Purchasing Economies (Nonfuel) $263 million
Nuclear $113 million
Fuel Procurement $100 million
Production Dispatch $42 million
Gas Supply $102 million
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Total Savings $2,184 million
Less: Costs to Achieve ($122 million)
Pre-merger Initiatives ($96 million)
Transaction Costs ($30 million)
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Net Savings $1,936 million
These expected savings far exceed the anticipated savings in a number of
recent acquisitions approved by the Commission. See, e.g., Entergy
Corporation, et al., Release No. 35-25952 (December 17, 1993) (expected
savings of $1.67 billion over ten years); Northeast Utilities, Release No.
35-25221 (December 21, 1990) (estimated savings of $837 million over 11
years); Kansas Power and Light Co., Release No. 35-25465 (February 5, 1992)
(expected savings of $140 million over five years); IE Industries, Release
No. 35-25325 (June 3, 1991) (expected savings of $91 million over ten years);
Midwest Resources, Release No. 35-25159 (September 26, 1990) (estimated
savings of $25 million over five years); CINergy Corp. Release No. 35-26146
(October 21, 1994) (estimated savings of approximately $1.5 billion over ten
years). These savings categories are described in greater detail below.
Corporate and Operations Labor Costs Savings: WEC and NSP estimate that
a net reduction in labor costs of approximately $1.205 billion can be
achieved as a result of the Transaction through elimination of approximately
1,223 full time equivalent duplicative positions in certain corporate
functions, with 1,003 occurring in 1997 and 220 in 1998.
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Facilities Consolidation: NSP and WEC estimate that the combination and
elimination of existing facilities will result in savings of approximately
$46 million. These savings will be attributable generally to having only one
primary energy management system (rather than two) and transferring
operations of NSP-W to existing facilities and leasing the vacated buildings
of NSP-W at market rates.
Corporate and Administrative Programs: NSP and WEC estimate a reduction
in corporate and administrative programs through the consolidation of
overlapping or duplicative programs and expenses of $313 million. Specific
areas in which savings are expected to occur include information systems,
professional services, demand-side management administration, benefits
administration, insurance, regulatory expenses, advertising and shareholder
services.
Purchasing Economies (Nonfuel): NSP and WEC estimate savings of $263
million through the combined procurement of material and supplies, inventory
reduction from standardization and limited sharing of parts and components
and from economies of scale from the aggregation of related work activities
and increased purchasing power over service providers.
Nuclear: WEC and NSP estimate savings of $113 million in connection
with the operation of their nuclear generation facilities. These savings
will arise from a number of different areas, including maintenance,
purchasing and warehousing, licensing and engineering.
Fuel Procurement: NSP and WEC estimate fuel cost savings of
approximately $100 million. These savings are expected to be primarily
attributable to the combined procurement of coal, nuclear fuel and rail
services for the transportation of coal.
Production Dispatch Savings: NSP and WEC estimate that production
dispatch savings of approximately $42 million will result from the integrated
economic dispatch of both electric systems. NSP and WEC currently commit and
dispatch their respective systems on an "economic dispatch" basis, that is,
each company commits and dispatches its generating system to meet the load in
such manner as to minimize production costs. Currently, energy transactions
between the companies occur when it is economically beneficial to do so.
However, there are differences in incremental cost between the two systems.
Primergy will be able to take advantage of these factors by committing and
dispatching the lower cost generation from NSP and WEPCO to serve the total
load of Primergy at a cost that is lower than the combined cost of the two
systems on a stand-alone basis.
Gas Supply: WEC and NSP estimate savings in natural gas supply
procurement and transportation of approximately $102 million. Major areas of
savings are expected to result from optimizing transportation capacity on
various pipelines, improving utilization of no-notice services resulting from
additional load diversity, shortening storage withdrawal periods to provide
greater peak day delivery and shifting purchases among various producers.
Through the purchased gas adjustment clauses ("PGA") of NSP and WEPCO, 100%
of these savings will be reflected in gas rates to customers if all of the
system gas costs continue to receive PGA treatment as at present.
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Additional Expected Benefits: In addition to the benefits described
above, there are other benefits which, while presently difficult to quantify,
are nonetheless substantial. These other benefits include maintenance of
competitive rates, expanded management resources, more diverse service
territory and continued community involvement.
Maintenance of Competitive Rates: Primergy will be able to meet
the challenges of the increasingly competitive environment in the
utility industry more effectively than either WEC or NSP standing alone.
The Mergers will create the opportunity for strategic, financial and
operational benefits for customers in the form of lower rates over the
long term and for shareholders in the form of greater financial strength
and financial flexibility. WEPCO and NSP have proposed, in their
filings with the numerous state jurisdictions to which they are subject,
a reduction of approximately 1.5% in retail electric rates beginning on
or about January 1997 (assuming that the Mergers are then effective) and
a rate freeze through the year 2000, subject to certain exceptions
regarding matters beyond NSP's or WEPCO's control, such as an increase
in the federal corporate tax rate. Subject to the same type of
exceptions, NSP and WEPCO have agreed to a freeze in their wholesale
rates for the same period.
Expanded Management Resources: A combined WEC and NSP entity will
be able to draw on a larger and more diverse mid and senior-level
management pool to lead Primergy forward in an increasingly competitive
environment for the delivery of energy, and should be better able to
attract and retain the most qualified employees. The employees of
Primergy should also benefit from new opportunities in the expanded
organization.
More Diverse Service Territory: The combined service territories
of NSP and WEPCO will be larger and more diverse than either of the
service territories of NSP or WEPCO as independent entities. This
increased geographical diversity will mitigate the risk of changes in
economic, competitive or climatic conditions in any given sector of the
combined service territory.
Community Involvement: Primergy will continue to play a strong
role in the economic development efforts of the communities NSP and WEC
now serve. The philanthropic and volunteer programs currently
maintained by the two companies will be continued.
(ii) Integrated Public Utility System
(a) ELECTRIC SYSTEM
As applied to electric utility companies, the term "integrated
public utility system" is defined in Section 2(a)(29)(A) of the Act as:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility assets,
whether owned by one or more electric utility companies, are physically
interconnected or capable of
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physical interconnection and which under normal conditions may be
economically operated as a single interconnected and coordinated system
confined in its operations to a single area or region, in one or more
states, not so large as to impair (considering the state of the art and
the area or region affected) the advantages of localized management,
efficient operation, and the effectiveness of regulation.
On the basis of this statutory definition, the commission has established
four standards that must be met before the commission will find that an
integrated electric system will result from a proposed acquisition of
securities:
(1) the utility assets of the system are physically interconnected or
capable of physical interconnection;
(2) the utility assets, under normal conditions, may be economically
operated as a single interconnected and coordinated system;
(3) the system must be confined in its operations to a single area or
region; and
(4) the system must not be so large as to impair (considering the state
of the art and the area or region affected) the advantages of localized
management, efficient operation, and the effectiveness of regulation.
Environmental Action, Inc. v. SEC, 895 F.2d 1255, 1263 (9th Cir. 1990)
(citing In re Electric Energy, Inc., et al., 38 SEC 658, 668 (1958)). In the
1995 Report, the Division recommended that the Commission "respond
realistically to the changes in the utility industry and interpret more
flexibly each piece of the integration requirement."(48) The Transaction
satisfies all four of these requirements.
First, NSP, NSP-W and WEPCO are already physically interconnected.
NSP-W and WEPCO are connected by a transmission system consisting of 345 Kv
and lower voltage facilities. NSP-W and WEPCO currently own the direct
connection at 345 Kv. NSP is directly connected to NSP-W through numerous
transmission lines that they own, including one 345 Kv transmission line, two
115 Kv transmission lines and two 69 Kv transmission lines. See Exhibit E-2
hereto.
Second, NSP and WEPCO will be economically operated as a single
interconnected and coordinated system. The two companies are interconnected
by a transmission system which will allow the transfer of power between NSP
and WEPCO to achieve the production cost savings of $42 million expected over
the next 10 years described in this Application-Declaration in Item
3.A.2.d.(i). above. The 345 Kv interconnection and others form the border
between the Mid-Continent Area Power Pool and the Mid-American Interconnected
Network called the MAPP/MAIN border. WEPCO is located in the Wisconsin,
Upper Michigan (WUMS) portion
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(48) 1995 report at 71.
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of MAIN. NSP and NSP-W own 83% of the transmission capacity located to the
west of the MAPP/WUMS border while WEPCO, under an allocation agreement, is
entitled to the use of 52% of the MAPP/WUMS interconnection capability on the
east side of the interconnection. NSP and WEPCO intend to operate Primergy
as a single system, economically dispatched, although they also intend to
continue to operate separate control areas, one within MAIN and one within
MAPP.
Since NSP already supplies a significant amount of economy energy to
WEPCO, the parties do not believe that anticipated power flows after the
transaction will change significantly from flows prior to the transaction.
Thus, they believe that the anticipated power flows between the companies
after the transaction should not have any adverse effect on the systems of
neighboring utilities. Moreover, under FERC's rules governing open access
transmission service and under the specific transmission tariffs being filed
by Primergy, there is an obligation to expand constrained facilities if there
is a sufficient demand for transmission service to justify doing so.
In addition, the applicants, in various pleadings before the FERC, have
made commitments, extending over several years, which will result in the
expansion of the current level of interconnection capability. They have also
made various commitments which would remove any incentive the applicants
might arguably have to manipulate the interface to constrain power flows
between MAPP and MAIN. These commitments include: (1) a commitment that any
energy they sell on the west side of the interface during periods of
constraint will be sold only at primergy's incremental cost (thus removing
any profit incentive associated with deliberately constraining the interface)
and (2) a commitment to waive their priority (under FERC precedent)
associated with non-firm economy energy imports used to serve native load
during periods of constraint. See exhibit D-1.2, hereto. Both of such
commitments are for a period of approximately six years. NSP and WEPCO also
have agreed to operate under an Independent Tariff Administrator to alleviate
any concerns over their potential ability to exercise transmission market
power. See Item 4.B. below.
For integration purposes under the act, what is relevant is that: (i)
Primergy will have sufficient internal transmission capacity to accommodate
the anticipated transfers between the NSP and WEPCO systems under central
economic dispatch, and will obtain transmission service from neighboring
utilities to accommodate any transfers that might exceed the capabilities of
its system; and (ii) Primergy's production cost savings can be achieved
without the need for contracting for transmission service with others. The
scheduled transfers to achieve the production cost savings can be achieved
without exceeding the capability of the 345 Kv line, a transmission facility
owned by the Primergy System.
Third, this single integrated system will operate in a single area or
region, the area delineated on Exhibit E-1, covering portions of Minnesota,
Wisconsin, Michigan, North Dakota and South Dakota. in the 1995 report, the
division has stated that the evaluation of the "single area or region"
portion of the integration requirement "should be made...in light of the
effect of technological advances on the ability to transmit electric energy
economically over longer distances, and other developments in the industry,
such as brokers and marketers, that affect the
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concept of geographic integration."(49) The 1995 Report also recommends
primacy be given to "demonstrated economies and efficiencies to satisfy the
integration requirements."(50) As set forth in item 3.a.2.d.(i)., the
Transaction will result in economies and efficiencies for the utilities and,
in turn, their customers.
Fourth, the system is not so large as to impair the advantages of
localized management, efficient operations, and the effectiveness of
regulation. The Commission's past decisions on "localized management" show
that the Transaction fully preserves the advantages of localized management.
In these cases, the Commission has evaluated localized management in terms
of: (i) responsiveness to local needs, see American Electric Power Co., Fed.
Sec. L. Rep. PARA 81, 647 at 80,602 (1978) (advantages of localized
management evaluated in terms of whether an enlarged system could be
"responsive to local needs"), General Public Utilities Corp., 37 SEC 28, 36
(1956) (localized management evaluated in terms of "local problems and
matters involving relations with consumers"); (ii) whether management and
directors were drawn from local utilities, see Centerior Energy Corp.,
Release No. 35-24073 (April 29, 1986) (advantages of localized management
would not be compromised by the affiliation of two electric utilities under a
new holding company because the new holding company's "management [would be]
drawn from the present management" of the two utilities); Northeast
Utilities, Release No. 35-25221 (December 21, 1990) (advantages of localized
management would be preserved in part because the board of New Hampshire
Utility, which was to be acquired by an out-of-state holding company,
included "four New Hampshire residents"); (iii) the preservation of corporate
identities, see Northeast Utilities, Release No. 35-25221 (December 21, 1990)
(utilities "will be maintained as separate New Hampshire corporations...[t]
herefore the advantages of localized management will be preserved"); Columbia
Gas System, Inc., Release No. 35-24599 (March 15, 1988) (benefits of local
management maintained where the utility to be added would be a separate
subsidiary); and (iv) the ease of communications, see American Electric Power
Co., Fed. Sec. L. Rep PARA 81,647 at 80,602 (1978) (distance of corporate
headquarters from local management was a "less important factor in
determining what is in the public interest" given the "present-day ease of
communications and transportation").
The Transaction satisfies all of these factors. NSP and WEPCO will
continue to operate through numerous regional offices with local service
personnel and line crews available to respond to customers' needs. Moreover,
as part of the Merger Agreement, Primergy has committed to provide charitable
contributions and community support within the service areas of NSP, NSP-W
and WEPCO at levels substantially comparable to the levels of charitable
contributions and community support provided by the parties within the
two-year period prior to the NSP Merger. In addition, the new management and
Board of Directors of Primergy is expected to be drawn solely from the
existing management and boards of NSP, WEC and WEPCO. After the transaction,
NSP and WEPCO will maintain their current headquarters as subsidiary
headquarters and as local operating headquarters for the areas they presently
serve, while Primergy will maintain the system headquarters. Although the
location of the corporate headquarters of Primergy will add distance from
people who are served by WEPCO, this
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(49) 1995 report at 72-74.
(50) 1995 report at 73.
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distance is, as noted by the Commission in the American Electric Power case,
a relatively unimportant factor given the present ease of transportation and
communications and the retention of WEPCO headquarters at its present
location. Thus, the Transaction will preserve all the benefits of localized
management of NSP and WEPCO.
As described earlier, the system will facilitate efficient operation.
Finally, the Primergy system will not impair the effectiveness of state
regulation. NSP and WEPCO will continue their separate existence as before
and their utility operations will remain subject to the same regulatory
authorities by which they are presently regulated, namely the MPUC, PSCW,
MPSC, NDPUC, SDPUC and the FERC. In addition, NSP, through the acquisition of
the Designated Gas Utility Assets, will become subject to the jurisdiction of
PSCW. NSP and WEC are working closely with the MPUC, PSCW, MPSC, NDPUC, and
SDPUC as well as the FERC and the NRC to ensure they are well informed about
this transaction. This Transaction will not be consummated unless all
required regulatory approvals are obtained.
(b) GAS UTILITY SYSTEM
Section 2(a)(29)(B) defines an "integrated public utility system" as
applied to gas utility companies as:
a system consisting of one or more gas utility companies which are so
located and related that substantial economies may be effectuated by
being operated as a single coordinated system confined in its operation
to a single area or region, in one or more states, not so large as to
impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation,
and the effectiveness of regulation: provided, that gas utility
companies deriving natural gas from a common source of supply may be
deemed to be included in a single area or region.
The Primergy gas utility system will meet the standard set forth in Section
2(a)(29)(B) and, therefore, will satisfy the requirements of sections
10(c)(1) and (2) and should be approved by the Commission.
First, both the Commission's limited precedent and current technological
realities indicate that the Primergy gas utility system will operate as a
coordinated system confined in its operation to a single area or region
because it will derive natural gas from common sources of supply,
transportation and storage. The gas utility operations of NSP and WEPCO will
operate in a single area or region covering portions of Wisconsin, Minnesota,
Michigan and North Dakota. See Exhibit E-9 hereto. The Commission has not
traditionally required that the pipeline facilities of an integrated system
be physically interconnected,(51) and instead has looked to such issues as
from whom the distribution companies within the system receive much, although
not all, of their
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(51) See, IN THE MATTER OF PENZOIL COMPANY, 43 SEC 709 (1968) (finding an
integrated system where facilities both connected with an unaffiliated
transmission company but not each other). See, ALSO AMERICAN NATURAL GAS
COMPANY, 43 SEC 203 (1966) ("It is clear the integrated or coordinated
operations of a gas system under the Act may exist in the absence of such
interconnection").
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gas supply.(52) The Commission also has considered obtaining gas from a
common pipeline(53) as well as from different pipelines when the gas
originates from the same gas field in determining a common source of
supply.(54) Since the time of most of these decisions, the state of the art
in the industry has developed to allow efficient operation of systems whose
gas supplies derive from many sources.
Because natural gas is made up of naturally occurring elements
found in geologic formations, and is not a refined energy product produced
from other fuels, the natural gas and electricity industries developed in
different structures. The gas industry developed in three separate segments:
FUNCTION OWNERSHIP
Production Independent Producers
Transmission/Storage Interstate Pipelines/Storage Companies
Distribution/Retail Sales Local Distribution Companies (LDCs)
While the NSP and WEPCO gas systems are not physically interconnected, they
will functionally perform as a coordinated system through the purchase of
natural gas from common sources of supply, delivery through common interstate
pipelines (all of which are open access transportation only pipelines under
FERC order 636) and storage of gas in common underground storage facilities.
This coordination will also result in greater, not lesser, efficiency.
As explained previously under Item 1.B.4.: (i) NSP, NSP-W and
WEPCO all contract for interstate pipeline transportation services from
Northern Natural Gas Company, ANR Pipeline Company, and Viking Gas
Transmission Company; (ii) all contract for underground storage services from
ANR Pipeline Company and Northern Natural Gas Company; (iii) all procure
transportation services from certain non-common pipelines (Great Lakes Gas
Transmission Company, Northern Border Pipeline Company, Williston Basin
Interstate Pipeline and Natural Gas Pipeline Company of America) and
non-common storage providers (ANR Storage Company, KN Westex Gas Services
Company, Moss Bluff Gas Storage System, Natural Gas Pipeline Company of
America, Llano, Inc. Gas and Texaco Natural Gas Company, Inc.) and (iv) all
three operations procure natural gas supplies from producers in several
common supply areas: the Texas/Oklahoma/Kansas region and Canadian regions.
Less significant volumes are purchased from non-common supply areas like the
Rocky Mountain and Williston Basin regions.
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(52) See, E.G., IN THE MATTER OF PHILADELPHIA COMPANY AND STANDARD POWER
AND LIGHT COMPANY, 28 SEC 35 (1948) ("most of the gas used by these companies
in their operations is obtained from common sources of supply"); CONSOLIDATED
NATURAL GAS COMPANY, Release No. 35-25040 (February 14, 1990) (finding
integrated system where each company derived natural gas from two
transmission companies, although one such company also received gas from
other sources).
(53) IN THE MATTER OF NORTH AMERICAN COMPANY, 31 SEC 463 (1950) (finding
Panhandle Eastern pipeline to be a common source of supply).
(54) See, IN THE MATTER OF CENTRAL POWER COMPANY AND NORTHWESTERN PUBLIC
SERVICE COMPANY, 8 SEC 425 (1941), in which the Commission declared an
integrated system to exist where two entities purchase from different
pipeline companies since "both pipelines run out of the Otis field, side by
side, and are interconnected at various points in their transmission system;
and that they are within two miles of each other at Kearney."
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NSP, NSP-W and WEPCO all use a "supply grid" approach to gas supply
procurement described in more detail in Item 1.B.4. Integrated NSP and WEPCO
gas operations would present opportunities to use an expanded supply grid and
more consolidated gas supply procurement to increase competition among
suppliers, transporters and storage providers to capture approximately $102
million in delivered gas cost savings. One hundred percent of these savings
will flow directly through to customers under the PGA clauses in NSP and
WEPCO's tariffs if all of the system gas costs continue to receive PGA
treatment as at present. Integrated gas operations could also offer
opportunities for more efficient utilization of NSP and WEPCO peak shaving
operations and more efficient reserve margins. With the cooperation of the
common pipeline interconnections, the ability to engage in swap transactions
will also exist.
Finally, the system will not be so large as to impair the
advantages of localized management or the effectiveness of regulation. As
set forth in Item 3.A.2.b.(ii)., localized management will be preserved. The
centralized functions of NSP will be managed from St. Paul, Minnesota, and
the local functions will continue to be handled from several regional
offices. Similarly, the central gas functions for WEPCO will continue to be
run from Milwaukee, Wisconsin, and local matters will be handled by several
regional offices. Management will, accordingly, remain close to the gas
operations, thereby preserving the advantages of local management.
As also set forth in Item 3.A.2.(b).(ii)., from a regulatory
standpoint, there will be no impairment of regulatory effectiveness. The
same regulators currently overseeing these gas operations will continue to
have jurisdiction after the Transaction. Those same four states are already
regulating multi-jurisdictional gas utilities as several other gas utilities
currently operate in several states, and, indeed, NSP and NSP-W currently
operate gas utilities in multiple states.
For all of these reasons, the post-Transaction gas operations
satisfy the integration requirements of Section 2(A)(29)(B).
3. Section 10(f)
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply in respect
of such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be detrimental
to the carrying out of the provisions of section 11.
As described below under Item 4, Regulatory Approvals, and as evidenced by
the applications before the MPUC, PSCW, MPSC, NDPUC and SDPUC, Primergy
intends to comply with all applicable state laws related to the proposed
transaction.
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4. Temporary exception to permit the holding of NSP-W as a subsidiary of
NSP for a short period of time following the NSP Merger
For state tax reasons, the merger of NSP-W into WEPCO may not occur for
up to twelve months after the NSP Merger. During this twelve month period,
New NSP will own NSP-W. As previously stated, NSP is currently exempt from
regulation under the Act (except for Section 9(a)(2) thereof) pursuant to
Section 3(a)(2). As New NSP will be for all intents and purposes the same
entity as NSP, it should continue to be exempt from registration under the
Act as a registered holding company, pending its dividending the shares of
NSP-W to Primergy. A similar result was reached in Kansas Power and Light
Company, Release No. 35-25465 (February 5, 1992). In that order, Kansas
Power and Light Company ("KPL") agreed to acquire all of the capital stock of
Kansas Gas and Electric Company ("KGE"), a public utility and a public
utility holding company exempt from registration under the Act pursuant to
Section 3(a)(2). For various tax reasons, it was implausible to merge KGE
directly into KPL. Therefore, pursuant to the merger agreement, KGE was
merged first into an existing subsidiary of KPL, KCA Corporation ("KCA").
KCA would subsequently be merged into KPL. The Commission granted KCA an
exemption under Section 3(a)(2) until the earlier of the date on which KCA
ceased to be a subsidiary, or January 1, 1995, the date set by the Kansas
Commission for consummation of the merger of KCA into KPL.
The same facts are present here. NSP-W will remain a subsidiary of NSP
to avoid adverse state tax consequences. Yet, it will cease to be a
subsidiary of NSP no later than twelve months after the NSP Merger. For these
reasons, applicants request that New NSP be exempt pursuant to Section
3(a)(2) from registration as a registered holding company under the Act until
the earlier to occur of NSP-W ceasing to be a subsidiary of NSP or twelve
months after the effective date of the NSP Merger.
Furthermore, the Commission has in previous instances not required
compliance with the Act's registration and related requirements in situations
where a strict interpretation of the Act would require such registration if
in a short period of time the situation would change so that registration
would no longer be required. IN THE MATTER OF UNITED PUBLIC UTILITIES CORP.
21 SEC 67 (1945). The Commission has acted similarly where the purchase of
outstanding securities of a public utility company which would require
registration was to be superseded shortly by a merger of the acquired company
into the acquiring company. IN THE MATTER OF CRESCENT PUBLIC SERVICE CO. 22
SEC 426 (1946). Similarly, the holding for a short period of time of NSP-W
as a subsidiary of NSP to avoid adverse tax consequences, with the merger of
NSP-W into WEPCO to take place shortly thereafter, should not require
compliance with the registration or related provisions of the Act.
5. Section 9(a)(1)
Primergy is also requesting authorization from the Commission under
Section 9(a)(1) of the Act for the acquisition by it of the voting securities
of Primergy Services, the Additional Services Companies and, if formed,
Primergy Hold as part of the Transaction. Section 9(a)(1) of the Act requires
a registered holding company or any subsidiary thereof to obtain
authorization from the Commission before acquiring "any securities or utility
assets or any other interest in any
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business." In order to approve an acquisition under Section 9(a)(1), the
Commission must find that such acquisition meets the standards of Section 10
of the Act, which in turn requires compliance with Sections 8 and 11 of the
Act. Although Primergy will not become a registered holding company until
consummation of the Transaction and thus Section 9(a)(1) is not applicable to
it until that time, because Primergy will become subject to Section 9(a)(1)
and whether and/or when Primergy Services, the Additional Services Companies
or Primergy Hold will be formed have not been determined, Primergy is
requesting the Commission's authorization for these transactions.
The acquisition by Primergy of the common stock of Primergy Services or
the Additional Services Companies, making them wholly-owned subsidiaries of
Primergy, will allow Primergy to create specialized subsidiary service
companies and capture economies of scale from the centralization of
administrative and general services to be provided to system companies.
Since the cost of such services are considered in rate cases, the benefits
realized as a result of Primergy Services and the Additional Services
Companies will accrue to Primergy's ratepayers. Virtually every registered
holding company has one or more subsidiary service companies performing many
of the same functions as Primergy Services and the Additional Services
Companies will perform. The acquisition of Primergy Services and the
Additional Services Companies is in the public interest, will not unduly
complicate the capital structure of Primergy and will not cause the Primergy
system to violate any other provision of the Act. Primergy Services and the
Additional Services Companies will each have only one class of authorized
stock, which will be its common stock, all of which will be owned by
Primergy. The operation of Primergy Services and the Additional Services
Companies, and the allocation of cost for their respective operations, are
discussed in detail in Item 3.C. below.
Primergy is also requesting authorization to acquire all of the issued
and outstanding common stock of Primergy Hold, which, if formed, will serve
as an intermediate holding company for certain of the system's non-utility
subsidiaries. Primergy may form such an intermediate holding company to
provide a clearer separation between the system's utility and non-utility
operations and to allow for centralization of the operation of the
non-utility operations. If it is formed, Primergy Hold will have a board of
directors, appointed officers and, possibly, employees, and also will receive
services from Primergy Services and, to the extent applicable, from the
Additional Services Companies. Costs for any work performed for Primergy
Hold by Primergy Services and the Additional Services Companies will be
charged to Primergy Hold in accordance with the appropriate allocation method
set forth in the Non-Utility Service Agreement.
Finally, Primergy requests authorization under Section 9(a)(1) of the
Act for Primergy Hold, if formed, to acquire all of the issued and
outstanding common stock of several of the first-tier subsidiaries of NSP and
WEC (other than WEPCO and NSP-W) and for Primergy to acquire all of the
issued and outstanding common stock of the remaining first-tier subsidiaries
of NSP and WEC (other than WEPCO and NSP-W) or, if not formed, for Primergy
to acquire all such stock. As discussed in Item 3.A.2.c. above, each of
these businesses may be retained by the Primergy system under the Act.
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6. Other Applicable Provisions-Sections 6, 7 and 12.
As noted in Item 1.D., the Merger Agreement provides for Primergy to
adopt the Primergy Stock Incentive Plan. In addition, Primergy intends to
continue the WEC dividend reinvestment plan (which will replace the NSP
dividend reinvestment plan), and to amend the stock provisions of their other
employee plans to provide for the acquisition or issuance of shares of
Primergy Common Stock in place of NSP Common Stock. Additional information
concerning the anticipated terms of the DRIP and the Primergy Stock Incentive
Plan is set forth in Item 1.D. To provide for the operation of these plans
after the consummation of the Transaction and the registration of Primergy as
a holding company under the Act, it is estimated that up to 18.2 million
shares of Primergy Common Stock may need to be issued or acquired in
open-market transactions through December 31, 2001 to fund the DRIP and the
Stock Incentive Plan.
The issuance by Primergy of shares of its common stock pursuant to such
plans and to effect the Transaction will comply with the standards of Section
7 of the Act. With reference to Sections 7(c) and 7(d) of the Act, Primergy
Common Stock has a par value of $0.01 per share, will be Primergy's only
outstanding voting security and will not be preferred as to dividends or
distributions over any other security of Primergy. Primergy Common Stock is
reasonably adapted to Primergy's security structure (common stock being the
cornerstone of a registered holding company's capital structure).
B. Intra-system Financing.
In the ordinary course of business, there have been and will continue to
be intercompany loans among WEC and its direct and indirect non-utility
subsidiaries. As previously noted in Item 1.B.5.b., one of the business
purposes of WMIC is to engage in financing activities. Generally, if at any
time during the year any of WEC, WITECH, WISPARK, WISVEST, Badger, Minergy or
WMIC's subsidiary, WMF Corp., has excess cash, such excess is loaned to WMIC.
These borrowed funds, as well as any funds borrowed under a $35 million line
of credit available to WMIC or other bank lines, are used by WMIC to finance
its own activities or are loaned by WMIC to the affiliates referenced above.
WMIC is seeking a second line of credit of $30 million to replace a line that
expired in March 1996. Such affiliates will borrow funds from WMIC, to the
extent available, to finance their own activities or to finance the
activities of entities in which they have an equity investment. These
intercompany loans bear interest at a rate slightly above the applicable
lender's cost of borrowing, the increase intended to cover the various costs
borne in administering the loan. The loans are generally short-term in
nature or due on demand.
In addition, WMIC has a medium term note program for the issuance of up
to $100 million of notes outstanding at any one time pursuant to which it
borrows funds from unaffiliated third parties through the issuance of notes
with maturities generally ranging from five to ten years. Such funds are
generally loaned by WMIC to WEC's other non-utility subsidiaries to finance
specific activities of such borrower, but may be used by WMIC for its own
business purposes or may be loaned by WMIC to one of its subsidiaries or
other affiliates. As with the intercompany loans discussed above, the
proceeds of the medium term notes that are
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loaned by WMIC to its affiliates bear interest at a rate slightly above the
rate paid by WMIC on the medium term notes, the increase intended to cover
the various costs borne in administering the loan. The maturity of the
intercompany loan corresponds with the maturity of the medium term notes
issued to obtain the funds.
To support the business activities of the entities in which they invest,
WITECH and WISPARK make loans and/or extend lines of credit to such entities
from time to time and WEC's other direct subsidiaries may make such loans or
extend credit to their respective investments in the future. At December 31,
1995, the intercompany loans among WEC and its direct subsidiaries were
approximately $150 million. WITECH and WISPARK have made loans to affiliates
of approximately $54 million at December 31, 1995. A portion of the $54
million loaned by WITECH and WISPARK was obtained by them from WMIC and is
included in the $150 million referenced above.
In addition to loans or extensions of credit made to various
subsidiaries and affiliates, WISPARK and WMIC guarantee debt incurred by
entities in which they have an equity investment. As of December 31, 1995,
such guarantees were approximately $11 million.
WEC loaned WMIC excess capacity funds, but has not guaranteed the debt
of any affiliated company. However, WEC has entered into support agreements
with WMIC and WMF Corp., which require WEC to ensure that the net worth of
the other party to such agreement is continuously maintained at not less than
$1.00. Certain debt holders of WMIC and WMF Corp. have the right to enforce
performance by WEC under these support agreements.
With respect to NSP, there have been and, while NSP-W continues after
the NSP Merger as a subsidiary of NSP, will continue to be intra-company
loans and advances in the ordinary course of business by NSP to NSP-W. The
interest rate on such advances is equal to the average daily rate paid by NSP
during the previous month on its short-term borrowings. Except as set forth
below, NSP and NSP-W have not loaned money to, borrowed money from, or
guaranteed the debt of any affiliated company. NSP has guaranteed
approximately $4 million of FMAP's outstanding debt. This debt was incurred
by FMAP in its acquisition of its primary asset, the parking garage next to
NSP's headquarters. NSP also has agreed, in connection with the $8.5 million
of outstanding 7.62% Notes of UP&L, to cause UP&L's cash flow to be at least
1.05 times its interest expense and mandatory debt retirement. The notes
were issued in connection with UP&L's acquisition of the Renaissance Square
building. As part of the purchase price for the acquisition of the Newport
RDF facilities, NRG issued a note to NSP, of which approximately $9.5 million
was outstanding on December 31, 1995 and which bears interest at a varying
rate. NSP had outstanding bank loans aggregating approximately $9.9 million
at December 31, 1995, relating to the NSP Employee Stock Ownership Plan (the
"ESOP"). NSP loans the proceeds of these loans to the ESOP with interest
rates and payment terms identical to NSP's obligations under the bank loans.
In connection with the various non-utility projects conducted by NRG
through subsidiaries, the debt incurred to finance such projects and
obligations related to such projects has been non-recourse to NRG except as
follows. As explained in Appendix B, NRG Gladstone (a wholly-owned
subsidiary of NRG) operates the Gladstone Power Station in Queensland,
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Australia pursuant to an Operation and Maintenance Agreement. NRG
Gladstone's obligations under the Operation and Maintenance Agreement are
guaranteed by NRG, subject to an aggregate liability cap of $25 million
(Australian) indexed in accordance with the Australian consumer price index
(approximately $20 million, based on exchange rates and the Australian
consumer price index in effect on December 31, 1995.) Also, in connection
with the acquisition of the Gladstone Power Station, NRG guaranteed that its
subsidiaries involved in the project would pay Australian taxes. NRG has
guaranteed the commitments of NRGenerating and NRG International to invest
$25 million in the Latin Power investment funds. With respect to the
acquisition of the Sunnyside cogeneration facility, NRG has guaranteed a note
of SCA (the entity that owns the facility) and the outstanding principal
amount of such note was approximately $1.75 million on December 31, 1995.
NRG loaned $2 million to Minnesota Waste Processing in connection with
Minnesota Waste Processing's acquisition of its warehouse to store RDF. As
explained in Annex A under the caption "O'Brien," NRG is in the final stages
of acquiring 42% of the equity interests of O'Brien Environmental Energy,
Inc. The United States Bankruptcy Court for New Jersey approved the
acquisition in February 1996. NRG has made various financial commitments in
connection with its acquisition of 42% of O'Brien, consisting of the
following: (i) a $35 million loan to O'Brien, (ii) the provision of a $100
million letter of credit, which O'Brien can make draws under, (iii) an
agreement to provide financing to Reorganized O'Brien in connection with the
Co-Investment Agreement described in Annex A under the caption "O'Brien."
NSP and WEC hereby request that the Commission approve the continuance
of all outstanding and committed intercompany loans and guarantees of
indebtedness.
C. Primergy Services/Additional Services Companies
As described more fully in Item 1.B.1.e., Primergy Services and the
Additional Services Companies may provide NSP and WEPCO, pursuant to the
Service Agreement and the non-utility subsidiaries of the Primergy system
pursuant to the Non-Utility Service Agreement, with one or more of the
following: administrative, management and support services, including
services relating to information systems, meters and transportation, electric
and gas system maintenance, marketing and customer relations, transmission
and distribution, engineering and construction, power engineering and
construction, human resources, materials management, facilities, accounting,
power planning, public affairs, legal, rates, finance, rights of way,
internal auditing, environmental affairs, fuels, investor relations,
strategic and operations planning, and general administrative and executive
management services. In accordance with the Service Agreement, services
provided by Primergy Services and the Additional Services Companies will be
directly assigned, distributed or allocated by activity, project, program,
work order or other appropriate basis. To accomplish this, employees of
Primergy Services and the Additional Services Companies will record
transactions utilizing the existing data capture and accounting systems of
each client company. Costs of Primergy Services and the Additional Services
Companies will be accumulated in accounts of each such service company and
directly assigned, distributed and allocated to the appropriate client
company in accordance with the guidelines set forth in the Service Agreement.
NSP and WEC are currently developing the system and procedures necessary to
implement the Service Agreement. It is anticipated that Primergy Services
and the Additional Services Companies will be staffed primarily by transferring
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personnel from the current employee rosters of NSP, WEPCO and their
subsidiaries. Each service company's accounting and cost allocation methods
and procedures are structured so as to comply with the Commission's standards
for service companies in registered holding company systems and are described
in Exhibit B-5.1 hereto. Each service company's billing system will use the
"Uniform System of Accounts for Mutual Service Companies and Subsidiary
Service Companies" established by the Commission for service companies of
registered holding company systems.
As compensation for services, the Service Agreement will provide for the
client companies to: "pay to [Primergy Services or any Additional Services
Company] all costs which reasonably can be identified and related to
particular services performed by Primergy Services or any Additional Services
Companies for or on its behalf." Where more than one company is involved in
or has received benefits from a service performed, the Service Agreement will
provide that "costs will be directly assigned, distributed or allocated,
between or among such companies on a basis reasonably related to the service
performed to the extent reasonably practicable," in accordance with the
methods set forth in Appendix A to the Service Agreement. Thus, charges for
all services provided by Primergy Services and any Additional Services
Companies to affiliated utility companies will be on an "at cost" basis as
determined under Rules 90 and 91 of the Act. The Non-Utility Service
Agreement will contain provisions similar to those of the Service Agreement,
except as set forth in detail below in this Item 3.C. The Non-Utility
Service Agreement also will permit charges for certain services to be at fair
market value to the extent authorized by the Commission. Thus, except for
the requested exceptions discussed below, services provided by Primergy
Services and any Additional Services Companies to non-utility affiliates
pursuant to the Non-Utility Service Agreement will also be charged on an "at
cost" basis as determined under Rules 90 and 91 of the Act.
Section 13(b) of the Act allows the Commission to exempt transactions,
by rule, regulation or order, from the provisions of Section 13(b) and the
rules promulgated thereunder if such transactions:
(1) are with any associate company which does not derive, directly
or indirectly, any material part of its income from sources within the
United States and which is not a public utility company operating within
the United States; or
(2) involve special or unusual circumstances or are not in the
ordinary course of business.
The Commission has utilized this exemptive power in the past under certain
circumstances (55) and recently with some frequency to generally
allow non-utility subsidiaries of registered holding
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(55) See, e.g., New England Electric System, Release No. 35-22309
(December 9,1981) (utility permitted to enter into lease with affiliated joint
venture with lease payments based on market price); EUA Cogenex Corporation,
Release No. 263731 (September 14, 1995) (authorizing service companies of two
registered holding companies to provide services to affiliated joint venture
at market based rates in certain circumstances).
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companies to provide services to certain FUCOs, EWGs and QFs at market-based
rates. (56) In addition, in the 1995 Report, the Division recommended that
"the SEC should also issue exemptive orders under Section 13 allowing more
non-utility subsidiaries to charge market rates to non-utility affiliates." (57)
The Commission's principal concern under Section 13 of the Act is to protect
the utility companies in a holding company system from abusive
cross-subsidization transactions with affiliates. Exemptions from Rules 90
and 91 for purely non-utility transactions will not interfere with this
mandate as all services to utility subsidiaries will be at cost in accordance
with Rules 90 and 91, but will benefit the holding company system by allowing
it to offer competitively priced services based on market considerations. In
fact, pursuant to Section 13(b)(1), the Commission has adopted Rule 83(a),
which provides that a service company "which subsidiary is or is about to
become engaged in the performance of any service, sales, or construction
contract for any associate company which does not derive, directly or
indirectly, a material part of its income from sources within the United
States and which is not a public-utility company operating within the United
States may obtain an "exemption....from the standards established by Section
13(b) of the Act, and the [Commission's] rules and regulations promulgated
thereunder, relating to the performance of any service, sales or construction
contract for such associate companies." Thus, Primergy Services and the
Additional Services Companies hereby request that the Commission grant an
exemption from the provisions of Rules 90 and 91, and the at-cost requirement
contained therein, for the following transactions: Services provided to
FUCOs, EWGs and associate companies (the "Primergy Foreign Associate
Companies") (58) that derive no part of their income, directly or indirectly,
from the generation, transmission or distribution of electric energy for sale
or the distribution of natural gas at retail in the United States and services
provided to an associated EWG or QF or IPP, provided that the purchaser of the
electricity sold by such entity is not an associate company of Primergy. No
services will be provided at market-based rates to a QF or EWG or IPP selling
electricity to NSP or WEPCO unless authorized by the Act or the Commission.
No change in the organization of Primergy Services or any Additional
Services Company, the type and character of the companies to be serviced, the
methods of allocating costs to associate companies, or in the scope or
character of the services to be rendered subject to Section 13 of the Act, or
any rule, regulation or order thereunder, shall be made unless and until
Primergy Services or the applicable Additional Services Company, as the case
may be, shall first have given the Commission written notice of the proposed
change not less than 60 days prior to the proposed effectiveness of any such
change. If, upon the receipt of any such notice, the Commission shall notify
Primergy Services or the applicable Additional Services Company, as the case
may be, within the 60-day period that a question exists as to whether the
proposed change is consistent with the provisions of Section 13 of the Act,
or of any rule, regulation or order thereunder, then the proposed change
shall not become effective unless and until Primergy
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(56) See, e.g., Entergy Corporation, Release No. 35-26322 (June 30, 1995);
General Public Utilities Corporation, Release No. 35-26307 (June 14, 1995)
and The Southern Company, Release No. 35-26212 (December 30, 1994).
(57) 1995 Report at 102.
(58) The companies that currently are Primergy Foreign Associate Companies
are those entities (other than NRG) listed in Item 3.A.2.(c). under the
caption "OWNERSHIP OF, OPERATION OF, AND PROVIDING SERVICES TO FOREIGN EWGS
AND FUCOS."
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Services or the applicable Additional Services Company, as the case may be,
shall have filed with the Commission an appropriate declaration regarding
such proposed change and the Commission shall have permitted such declaration
to become effective.
Primergy will structure the Service Agreement and the Non-Utility
Service Agreement so as to comply with Section 13 of the Act and the
Commission's rules and regulations thereunder.
Rule 88: Rule 88(b) provides that "[a] finding by the Commission
that a subsidiary company of a registered holding company...is so organized and
conducted, or to be so conducted, as to meet the requirements of Section 13(b)
of the Act with respect to reasonable assurance of efficient and economical
performance of services or construction or sale of goods for the benefit of
associate companies, at cost fairly and equitably allocated among them (or as
permitted by [Rule] 90), will be made only pursuant to a declaration filed with
the Commission on Form U-13-1, as specified in the instructions for that form,
by such company or the persons proposing to organize it." Notwithstanding the
foregoing language, the Commission has on at least two recent occasions made
findings under Section 13(b) based on information set forth in an
Application-Declaration on Form U-1, without requiring the formal filing of a
Form U-13-1. See UNITIL Corp., et al., Release No. 35-25524 (April 24, 1992);
CINergy Corp., Release No. 35-26146 (October 21, 1994). In this
Application-Declaration, Primergy has submitted substantially the same
application information as would have been submitted in a Form U-13-1.
Accordingly, it is submitted that it is appropriate to find that
Primergy Services and the Additional Services Companies will be so organized
and shall be so conducted as to meet the requirements of Section 13(b), and
that the filing of a Form U-13-1 is unnecessary, or, alternatively, that this
Application-Declaration should be deemed to constitute a filing on Form U-13-1
for purposes of Rule 88.
As explained previously under Item 1.B.5.a., NSP has various
subsidiaries and affiliates, including the Primergy Foreign Associate
Companies (59) (collectively, the "Exempt Companies") that currently are
providing services (including operation and maintenance) and selling goods to
EWGs and QFs or to entities that will qualify as EWGs or FUCOs following the
Transaction. The applicants request that the Commission permit the Exempt
Companies to continue such transactions without compliance with the at cost
provisions of Section 13(b) and the rules and regulations thereunder.
The Commission has previously granted affiliates of registered holding
companies authority to provide goods and services to existing and future
EWGs, QFs and FUCOs without compliance with the at cost provisions that fall
within one of the following categories:
"1) the project is a FUCO or an EWG that derives no part of its income,
directly or indirectly, from the generation, transmission, or
distribution of electric energy for sale within the United States;
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(59) These companies and entities (the "Exempt Companies") are listed in
Item 3.A.2.(c). under the captions "OWNERSHIP OF, OPERATION OF, AND PROVIDING
SERVICES TO FOREIGN EWGS AND FUCOS" and "OWNERSHIP AND OPERATION OF QFS AND
FACILITIES RELATED THERETO."
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2) the project is an EWG that sells electricity at market-based rates
which have been approved by the FERC or the appropriate state public
utility commission, provided that the purchaser is not an Excepted
Company; (60)
3) the project is a QF that sells electricity exclusively at rates
negotiated at arm's length to one or more industrial or commercial
customers purchasing such electricity for their use and not for
resale, or to an electric utility company other than an Excepted
Company; or
4) the power project is an EWG or a QF that sells electricity at rates
based upon its cost of service, as approved by FERC or any state
public utility commission having jurisdiction, provided that the
purchaser is not an Excepted Company."
Entergy Corp. et al., Release No. 35-26322 (June 30, 1995).
In the above Entergy order, the Commission granted Entergy Enterprises,
a wholly owned subsidiary of Entergy, authority to provide consulting
services to associate companies, including EWGs, FUCOs and QFs and operations
and management services, either directly, or through newly-established
subsidiaries of Entergy or Entergy Enterprises, to associate companies,
including EWGs, FUCOs or QFs, without complying with the at cost provisions
of Section 13(b) and the rules and regulations thereunder.
Also, in CINergy Corp. et al, Release No. 35-26376 (September 21, 1995),
the Commission authorized CINergy and CINergy Investments, a wholly-owned
subsidiary of CINergy, to acquire securities of new special purpose
subsidiaries ("NSPS") and to make additional investments in existing special
purpose subsidiaries ("ESPS"). ESPS and NSPS acquire, own or hold securities
of, and provide services to, FUCOs or EWGs. The Commission also authorized
ESPS and NSPS and CINergy Services to provide administrative, management and
support services to other ESPS and NSPS and their subsidiaries without
complying with the at cost provisions of Section 13(b) and the rules and
regulations thereunder. See also General Public Utilities Corp. et al.,
Release No. 35-26457 (January 18, 1996), (Pending completion of the record,
the Commission reserved jurisdiction over whether subsidiaries formed to
directly or indirectly acquire the securities of EWGs and FUCOs ("Subsidiary
Companies") could sell goods and services to associate EWGs, FUCOs and
associate Subsidiary Companies without complying with the at cost provisions
of Section 13(b) and the rules and regulations thereunder).
The applicants request that the Commission permit the Exempt Companies
to provide services or sell goods to EWGs, to QFs and to entities that will
qualify as QFs, EWGs or FUCOs following the Transaction to the same extent
permitted by the Commission in the above-cited orders. In addition, the
applicants request an exception with respect to Landfill Power and Minnesota
Methane which, as explained in Item 1.B.5.a., are affiliates of NSP that own
portions of QF facilities that sell power to NSP pursuant to PURPA contracts
approved by the MPUC.
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(60) An Excepted Company was defined as any subsidiary whose activities
and operations were primarily related to the domestic sale of electric
energy at retail or at wholesale to affiliates or providing goods and
services to such affiliates.
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The exception being requested by applicants is that the Commission permit the
Exempt Companies to provide services or goods to Landfill Power and Minnesota
Methane without compliance with the at cost standards. The power purchase
contracts of Landfill Power and Minnesota Methane with NSP do not contain any
provisions that would affect the price NSP pays for power as a result of the
price charged by the Exempt Companies in providing services or goods to
Landfill Power or Minnesota Methane.
Applicants also request that the Commission exempt from the at cost
standards various existing contracts among affiliates of NSP that are not
EWGs, QFs or entities that will become EWGs or FUCOs following the
Transaction. Each of these contracts (including the parties to each
contract) is described in Annex H and each was approved by the MPUC and/or
the PSCW. Under Minnesota law,
"[N]o contract or arrangement, including any general or continuing
arrangement, providing for the furnishing of management, supervisory,
construction, engineering, accounting, legal, financial or similar
services and no contract or arrangement for the purchase, sale, lease
or exchange of any property, right or thing, or for the furnishing of
any service, property, right or thing, other than those above
enumerated, made or entered into after January 1, 1975, between a
public utility and any affiliated interest...is valid or effective
unless and until the contract or arrangement has received the written
approval of the [Minnesota Public Utilities] commission." (61)
An "affiliated interest" includes every subsidiary of a public utility.
Furthermore the statute provides that "the [Minnesota Public Utilities]
Commission shall approve the contract or arrangement...only if it shall
clearly appear and be established upon investigation that it is reasonable
and consistent with the public interest...," with the utility bearing the
burden of proving that it is in the public interest. (62)
Also, under a policy statement issued in Docket No. EG-999/CI-90-1008
(1994), the MPUC had adopted extensive guidelines on the allocation of costs
for transactions with non-regulated affiliates. The Policy Statement docket
initially arose from an investigation of non-regulated utility appliance
sales and service programs. However, the MPUC later expanded the scope of
the docket, and the Policy Statement applies to all utility arrangements with
non-regulated affiliates. (63) The Policy Statement provides
that costs should be assigned between the utility and non-regulated function
using the following four step hierarchy:
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(61) Section 216B.48, subdivision 3 (Supp. 1993).
(62) Id.
(63) In MPUC Docket No. G002/M-94-831, the MPUC again expanded the scope of
the Policy Statement, indicating it would be applied to assign costs between
NSP utility operations and regulated affiliates (such as Viking).
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1. Tariffed rates shall be used to value tariffed services provided to
the non-regulated activity.
2. Costs shall be directly assigned to either regulated or non-regulated
activities whenever possible.
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3. Costs which cannot be directly assigned are common costs which shall
be grouped into cost categories. Each cost category shall be
allocated based on direct analysis of the origin of costs wherever
possible. If direct analysis is not possible, common costs shall be
allocated based upon an indirect cost-causative linkage to another
cost category or group of cost categories for which direct assignment
or allocation is available.
4. When neither direct nor indirect measures of cost causation can be
found, the cost category shall be allocated based upon a general
allocator computed by the ratio of all expenses directly assigned or
attributed to regulated and non-regulated activities, excluding the
cost of fuel, gas, purchased power, and the cost of goods sold.
Under this hierarchy, costs are allocated to non-regulated or regulated
affiliates on a "fully allocated cost" basis, in order to prevent any subsidy
of non-utility operations by the regulated utility operations and its
customers.
The contracts listed in Annex H between associate companies are
considered contracts between a public utility and an affiliated interest
under Minnesota and Wisconsin law. However, for each contract, the MPUC (and
in some cases the PSCW) has determined that the contract is reasonable and is
in the public's interest. The Commission's principal concern under Section
13 of the Act is to protect utility companies in a holding company system
from abusive cross-subsidization transactions between associate companies.
Since the MPUC or the PSCW has found that all the aforementioned contracts
are reasonable and are in the public interest, these contracts are devoid of
such cross-subsidization and should be permitted to continue. Also, the
contracts listed in Annex H under Natural Gas and Gas Related Services are
exempt from the at cost standards of the Act under Rule 81.
Applicants also request that the Commission exempt from the at cost
standards the management and administrative services to be provided by NRG to
Reorganized O'Brien, which services are described in Annex A under the
caption "O'Brien." These services are to be provided at cost and such
contract was approved by the Bankruptcy Court as part of the reorganization.
None of the entities to be acquired by NRG in this transaction, or to which
NRG will be providing such services, will be a "public-utility company" under
the Act. Accordingly, the provision of these services is devoid of the
cross-subsidization at which the Act is directed and should be permitted.
D. Other Services
In addition to the services to be provided by Primergy Services, NSP and
WEPCO may provide one another with certain services incidental to their
utility businesses, such as meter reading, materials management, gas
purchasing, transportation, and services of linemen and gas trouble crews.
These services will be provided at cost in accordance with the standards of
the Act and the Commission's rules and regulations thereunder.
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Item 4. Regulatory Approvals
Set forth below is a summary of the regulatory approvals that Primergy
expects to obtain in connection with the Transaction. It is a condition to
the consummation of the Mergers that final orders approving the Mergers be
obtained from the SEC under the Act and from the various federal and state
commissions described below on terms and conditions which would not have, or
would not be reasonably likely to have, a material adverse effect on the
business, assets, financial condition or results of operations of Primergy
and its prospective subsidiaries taken as a whole, or on Primergy's
prospective utility subsidiary located in the State of Minnesota taken as a
whole, or on its prospective utility subsidiary located in the State of
Wisconsin or which would be materially inconsistent with the agreements of
the parties contained in the Merger Agreement.
A. Antitrust
The HSR Act and the rules and regulations thereunder provide that
certain transactions (including the Transaction) may not be consummated until
certain information has been submitted to the Department of Justice ("DOJ")
and Federal Trade Commission ("FTC") and the specified HSR Act waiting period
requirements have been satisfied. NSP and WEC will submit the Notification
and Report Forms and all required information to the DOJ and FTC.
The expiration of the HSR Act waiting period does not preclude the
Antitrust Division or the FTC from challenging the Transaction on antitrust
grounds; however, applicants believe that the Transaction will not violate
Federal antitrust laws. If the Transaction is not consummated within twelve
months after the expiration or earlier termination of the initial HSR Act
waiting period, NSP and WEC will be required to submit new information to the
Antitrust Division and the FTC, and a new HSR Act waiting period would have
to expire or be terminated before the Transaction could be consummated.
B. Federal Power Act
Section 203 of the Federal Power Act provides that no public utility
shall sell or otherwise dispose of its jurisdictional facilities or directly
or indirectly merge or consolidate such facilities with those of any other
person or acquire any security of any other public utility, without first
having obtained authorization from the FERC. On July 10, 1995, an
application was filed with the FERC for approval of the Transaction under
Section 203 and Part 33 of the FERC's regulations. WEPCO, NSP and NSP-W also
filed on July 10, 1995 a Network Integration Service Tariff and a
Point-to-Point Transmission Service Tariff under Section 205. Finally, on
that same date, the applicants filed under Section 205 an amendment to the
interchange agreement between NSP and NSP-W to substitute WEPCO for NSP-W.
In addition, NSP and NSP-W hold certain hydroelectric project licenses, as
well as certificates of public convenience and necessity under Section 7 of
the Natural Gas Act. The mergers of NSP into New NSP and NSP-W into WEPCO
will constitute transfers of the hydroelectric project licenses and the
certificates of public convenience and necessity, requiring approval of the
FERC. Furthermore, prior to the mergers of NSP into New NSP and NSP-W into
WEPCO, the approval of the FERC under Section 204 of the Federal Power Act is
required for New NSP and WEC to assume the debt of NSP and NSP, respectively.
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In the pleadings filed in the proceedings before the FERC, the
applicants committed to FERC that they would operate under an independent
tariff administrator ("ITA") after the Mergers, to alleviate any concerns
over their potential ability to exercise transmission market power. As
proposed by the applicants, the ITA would be an independent body governed by
an independent board of directors. The ITA would administer the tariff by
providing service on a comparable basis to all users, determining available
transmission capacity, proposing additions to transmission facilities,
scheduling transactions over the transmission system, and receiving and
accounting for transmission revenues. For reasons of safety and liability,
applicants propose to retain actual operational control over their
transmission system including operating breakers and transmission facilities
maintenance. The manner in which the ITA would operate is explained in
detail in the supplemental testimony of Jose M. Delgado before the FERC,
which is filed as Exhibit D-1.3 hereto.
FERC is currently examining whether variants of the applicants' ITA
proposal should be imposed on all utilities across the nation. Applicants,
of course, are committed to accepting whatever proposals regarding comparable
transmission access eventually emanate from the FERC. FERC has established
that all potential users of a transmission system should receive comparable
access. The applicants, of course, will comply with whatever rules and
regulations FERC issues to further this goal. Thus, the applicants will not
be able to exercise any market power because of their transmission
facilities.
In an order issued January 31, 1996, FERC set only the competitive
impact of the Mergers for hearing and ordered an initial decision to be
issued before August 30, 1996. FERC also said that it would not set for
hearing issues regarding the potential savings from the Mergers, provided NSP
and WEPCO agreed to a four-year rate freeze for wholesale customers. Subject
to exceptions regarding matters outside of NSP's and WEPCO's control (such as
an increase in taxes), NSP and WEPCO have accepted the rate freeze.
C. Natural Gas Act
NSP and NSP-W perform LNG services under certificates of public
convenience and necessity issued by FERC under Section 7(c) of the Natural
Gas Act. NSP provides certain LNG liquefaction and redelivery service for
NSP-W under a 1985 agreement approved by FERC in Docket No. CP81-522-005, 45
FERC PARA 62, 013 (1988). NSP-W provides certain LNG storage and
vaporization services for NSP under a 1985 agreement approved by FERC in
Docket No. CP76-84-002, 37 FERC PARA 61, 302 (1986). As part of the
Transaction, NSP and NSP-W will seek FERC authorization to abandon the
certificated services by assignment of the contractual obligations to New NSP
and WEPCO. NSP and NSP-W anticipate submitting the abandonment requests later
in 1996. The abandonments will transfer the authority to the successor
corporations of NSP and NSP-W, but will not affect the form or level of LNG
services provided or the costs or revenues to the respective successor
companies.
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D. Atomic Energy Act
NSP holds NRC operating licenses in connection with its ownership and
operation of the Prairie Island and Monticello nuclear generating facilities.
The operating licenses authorize NSP to own and operate the facilities. The
Atomic Energy Act provides that such a license or any rights thereunder may
not be transferred or in any manner disposed of, directly or indirectly, to
any person through transfer of control unless the NRC finds that such
transfer is in accordance with the Atomic Energy Act and consents to the
transfer. Pursuant to the Atomic Energy Act, NSP and WEC will seek approval
from the NRC to reflect the fact that after the Mergers, New NSP, although
continuing to own and operate the Prairie Island and Monticello facilities,
will become an operating company subsidiary of Primergy.
E. State Public Utility Regulation
The MPUC, PSCW, NDPSC and MPSC have jurisdiction over various aspects of
the Transaction and an application for disclaimer of jurisdiction has been
filed with the SDPUC. By order dated September 8, 1995, the SDPUC agreed
that it did not have jurisdiction. Reference is made to Exhibits D-2.1
through D-6.1 with respect to the applications before those commissions.
Except as set forth above, no other state or local regulatory body or
agency and no other Federal commission or agency has jurisdiction over the
transactions proposed herein.
Item 5. Procedure
The Commission is respectfully requested to issue and publish not later
than April 15, 1996, the requisite notice under Rule 23 with respect to the
filing of this Application-Declaration, such notice to specify a date not
later than May 9, 1996 by which comments may be entered and a date on or
after May 9, 1996, as the date when an order of the Commission granting and
permitting this Application-Declaration to become effective may be entered by
the Commission.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the
proposed Transaction. The Division of Investment Management may assist in
the preparation of the Commission's decision. There should be no waiting
period between this 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 Amended and Restated Articles of Incorporation of NSP (filed as
Exhibit 3.01 to Form 10-Q of NSP for the quarter ended March 31, 1992,
File No. 1-3034, and incorporated herein by reference)
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A-2 Amended Articles of Incorporation of NSP-W (filed as Exhibit 30.01 to
Form 10-K of NSP-W for the year ended December 31, 1987,
File No. 10-3140, and incorporated herein by reference)
A-3 Amended Articles of Incorporation of New NSP (filed as Annex J to
Registration Statement No. 33-61619 on Form S-4 and incorporated
herein by reference)
A-4 Amended and Restated Articles of Incorporation of WEC (filed as
Exhibit (3)-1 to Form 10-Q of WEC for the quarter ended June 30, 1995,
File No. 1-9057, and incorporated herein by reference)
A-5 Amended and Restated Articles of Incorporation of WEPCO (filed as
Exhibit (3)-1 to Form 10-K of WEPCO for the year ended December 31,
1994, File No. 1-1245 and incorporated herein by reference)
B-1 Agreement and Plan of Merger (Merger Agreement) (filed as Annex A to
Registration Statement No. 33-61619 on Form S-4 and incorporated
herein by reference)
B-2 WEC Stock Option Agreement (filed as Annex C to Registration Statement
No. 33-61619 on Form S-4 and incorporated herein by reference)
B-3 NSP Stock Option Agreement (filed as Annex B to Registration Statement
No. 33-61619 on Form S-4 and incorporated herein by reference)
B-4 Form of Service Agreement between Primergy Services, Inc. and utility
affiliates (to be filed by Amendment)
B-5 Form of Service Agreement between Primergy Services, Inc. and
non-utility affiliates (to be filed by Amendment)
B-5.1 Primergy Services, Inc. Accounting and Cost Assignment Procedures (to
be filed by Amendment)
C-1 Registration Statement of WEC on Form S-4 (as amended) (filed as
Registration Statement No. 33-61619 and incorporated herein by
reference)
C-2 Joint Proxy Statement and Prospectus (included in Exhibit C-1)
C-3 Registration Statement of WEC on Form S-3 relating to the WEC Dividend
Reinvestment Plan (filed as Registration Statement No. 33-57765 and
incorporated herein by reference)
C-4 Primergy Stock Incentive Plan (filed as Annex K to Registration
Statement No. 33-61619 on Form S-4 and incorporated herein by
reference)
D-1.1 Original and supplemental testimony of Dr. Joe D. Pace to the FERC
(to be filed by Amendment)
D-1.2 Supplemental testimony of Jose M. Delgado before the FERC (to be filed
by Amendment)
D-1.3 Application of NSP, WEC and WEPCO before the FERC (to be filed by
Amendment)
D-2.1 Application of NSP before the MPUC (to be filed by Amendment)
D-3.1 Application of NSP, WEC, NSP-W and WEPCO before PSCW (to be filed by
Amendment)
D-4.1 Application of NSP before NDPSC (to be filed by Amendment)
D-5.1 Application of NSP, WEC, NSP-W and WEPCO before MPSC (to be filed by
Amendment)
D-6.1 Application of NSP before SDPUC (to be filed by Amendment)
E-1 Map of service areas of NSP, NSP-W and WEPCO
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E-2 Map showing interconnections of NSP, NSP-W and WEPCO
E-3 Map of WEPCO electric and gas service areas
E-4 Map of NSP electric and gas service areas
E-5 Map of NSP-W electric and gas service areas
E-6 Map of NSP-W transmission system
E-7 Map of WEPCO transmission system
E-8 Map of NSP transmission system
E-9 Map of Primergy gas utility system
E-10 NSP corporate chart
E-11 WEC corporate chart
E-12 Primergy corporate chart without Primergy Hold
E-13 Map of "grid" of interstate pipelines serving Primergy's four state
area
F-1 Preliminary opinion of counsel (to be filed by Amendment)
F-2 Past-tense opinion of counsel (to be filed by Amendment)
G-1 Opinion of Goldman, Sachs & Co. (filed as Annex F to Registration
Statement No. 33-61619 on Form S-4 and incorporated herein by
reference)
G-2 Opinion of Barr Devlin Associates, Inc. (filed as Annex G to
Registration Statement No. 33-61619 on Form S-4 and incorporated
herein by reference)
H-1 Annual Report of NSP on Form 10-K for the year ended December 31, 1995
(File No. 1-3034 and incorporated herein by reference)
H-2 Annual Report of WEC on Form 10-K for the year ended December 31, 1995
(File No. 1-9057 and incorporated herein by reference)
H-3 Annual Report of WEPCO on Form 10-K for the year ended December 31,
1995 (File No. 1-1245 and incorporated herein by reference)
H-4 NSP 1995 Annual Report to Shareholders (to be filed by Amendment)
H-5 WEC 1995 Annual Report to Shareholders and Proxy Statement Relating to
the May 27, 1996 Annual Meeting of Stockholders (including Annual
Financial Statements) (to be filed by Amendment)
H-6 Annual Report on Form 10-K of NSP-W for the year ended December 31,
1995 (File No. 10-3140 and incorporated herein by reference)
I-1 Proposed Form of Notice
J-1 NSP and NSP-W Analysis of the Economic Impact of a Divestiture of the
Gas Operations of NSP and NSP-W
J-2 WEC analysis of the Economic Impact of a Divestiture of WEPCO's Gas
Operations
J-3 Table of Estimated Losses of Economies in Prior Decisions on
Divestiture and Retention of Gas Operations (to be filed by
Amendment)
J-4 Legal Memorandum of Cahill, Gordon & Reindel
B. Financial Statements
FS-1 Primergy Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of December 31, 1995 (included in Form 10-K for the year ended
December 31, 1995 of WEC (Exhibit H-2 hereto) at p. 98)
114
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FS-2 Primergy Unaudited Pro Forma Condensed Consolidated Statements of
Income for the year ended December 31, 1995 (included in Form 10-K for
the year ended December 31, 1995 of WEC (Exhibit H-2 hereto) at p. 99)
FS-3 WEC Consolidated Balance Sheet as of December 31, 1995 (see Annual
Report of WEC on Form 10-K for the year ended December 31, 1995
(Exhibit H-2 hereto), at p. 63 and 64)
FS-4 WEC Consolidated Statements of Income for its last three fiscal years
(see Annual Report of WEC on Form 10-K for the year ended December 31,
1995 (Exhibit H-2 hereto), at p. 61)
FS-5 WEPCO Consolidated Balance Sheet as of December 31, 1995 (see Annual
Report of WEPCO on Form 10-K for the year ended December 31, 1995
(Exhibit H-3 hereto), at p. 59 and 60)
FS-6 WEPCO Consolidated Statements of Income for its last three fiscal
years (see Annual Report of WEPCO on Form 10-K for the year ended
December 31, 1995 (Exhibit H-3 hereto), at p. 58)
FS-7 NSP Consolidated Balance Sheet as of December 31, 1995 (see Annual
Report of NSP on Form 10-K for the year ended December 31, 1995
(Exhibit H-1 hereto), at p. 65)
FS-8 NSP Consolidated Statements of Income for its last three fiscal years
(see Annual Report of NSP on Form 10-K for the year ended December 31,
1995 (Exhibit H-1 hereto), at p. 64)
115
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Item 7. Information as to Environmental Effects
The Transaction neither involves "major federal actions" nor
"significantly [affects] the quality of the human environment" as those terms
are used in Section (2)(C) of the National Environmental Policy Act, 42
U.S.C. Sec. 4332. The only federal actions related to the Transaction
pertain to the Commission's declaration of the effectiveness of the Joint
Registration Statement, the approvals and actions described under Item 4 and
Commission approval of this Application-Declaration. Consummation of the
Transaction will not result in changes in the operations of NSP, NSP-W, or
WEPCO that would have any impact on the environment. No federal agency is
preparing an environmental impact statement with respect to this matter.
116
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, each of the undersigned companies has duly caused this
Application-Declaration to be signed on its behalf by the undersigned
thereunto duly authorized.
NORTHERN STATES POWER COMPANY WISCONSIN ENERGY CORPORATION
BY: /S/ E. J. McIntyre BY: /s/ Calvin H. Baker
------------------------------ -------------------------------
E. J. McIntyre Calvin H. Baker
Vice President and Vice President - Finance
Chief Financial Officer
Date: April 5, 1996
117
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Index of Exhibits
EXHIBIT - DESCRIPTION - TRANSMISSION METHOD
Method Exhibit Description
of Filing Number -----------
- --------- ------
A-1 Amended and Restated Articles of Incorporation of NSP
(filed as Exhibit 3.01 to Form 10-Q of NSP for the
quarter ended March 31, 1992, File No. 1-3034, and
incorporated herein by reference)
A-2 Amended Articles of Incorporation of NSP-W (filed as
Exhibit 30.01 to Form 10-K of NSP-W for the year ended
December 31, 1987, File No. 10-3140, and incorporated
herein by reference)
A-3 Amended Articles of Incorporation of New NSP (filed as
Annex J to Registration Statement No. 33-61619 on Form
S-4 and incorporated herein by reference)
A-4 Amended and Restated Articles of Incorporation of WEC
(filed as Exhibit (3)-1 to Form 10-Q of WEC for the
quarter ended June 30, 1995, File No. 1-9057, and
incorporated herein by reference)
A-5 Amended and Restated Articles of Incorporation of WEPCO
(filed as Exhibit (3)-1 to Form 10-K of WEPCO for the
year ended December 31, 1994, File No. 1-1245 and
incorporated herein by reference)
B-1 Agreement and Plan of Merger (Merger Agreement) (filed
as Annex A to Registration Statement No. 33-61619 on
Form S-4 and incorporated herein by reference)
B-2 WEC Stock Option Agreement (filed as Annex C to
Registration Statement No. 33-61619 on Form S-4 and
incorporated herein by reference)
B-3 NSP Stock Option Agreement (filed as Annex B to
Registration Statement No. 33-61619 on Form S-4 and
incorporated herein by reference)
B-4 Form of Service Agreement between Primergy Services,
Inc. and utility affiliates (to be filed by Amendment)
B-5 Form of Service Agreement between Primergy Services,
Inc. and non-utility affiliates(to be filed by
Amendment)
B-5.1 Primergy Services, Inc. Accounting and Cost Assignment
Procedures (to be filed by Amendment)
C-1 Registration Statement of WEC on Form S-4 (as amended)
(filed as Registration Statement No. 33-61619 and
incorporated herein by reference)
118
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C-2 Joint Proxy Statement and Prospectus (included in
Exhibit C-1)
C-3 Registration Statement of WEC on Form S-3 relating to
the WEC Dividend Reinvestment Plan (filed as
Registration Statement No. 33-57765 and incorporated
herein by reference)
C-4 Primergy Stock Incentive Plan (filed as Annex K to
Registration Statement No. 33-61619 on Form S-4 and
incorporated herein by reference)
D-1.1 Original and supplemental testimony of Dr. Joe D. Pace
to the FERC (to be filed by Amendment)
D-1.2 Supplemental testimony of Jose M. Delgado before the
FERC (to be filed by Amendment)
D-1.3 Application of NSP, WEC and WEPCO before the FERC (to
be filed by Amendment)
D-2.1 Application of NSP before the MPUC (to be filed by
Amendment)
D-3.1 Application of NSP, WEC, NSP-W and WEPCO before PSCW
(to be filed by Amendment)
D-4.1 Application of NSP before NDPSC (to be filed by
Amendment)
D-5.1 Application of NSP, WEC, NSP-W and WEPCO before MPSC
(to be filed by Amendment)
D-6.1 Application of NSP before SDPUC (to be filed by
Amendment)
P E-1 Map of service areas of NSP, NSP-W and WEPCO
P E-2 Map showing interconnections of NSP, NSP-W and WEPCO
P E-3 Map of WEPCO electric and gas service areas
P E-4 Map of NSP electric and gas service areas (Portions
shown in Wisconsin and Michigan are NSP-W territory)
P E-5 Map of NSP-W electric and gas service areas
E-6 Map of NSP-W transmission system (Included in
Exhibit E-2)
P E-7 Map of WEPCO transmission system
E-8 Map of NSP transmission system (Included in Exhibit E-2)
P E-9 Map of Primergy gas utility system
P E-10 NSP corporate chart
P E-11 WEC corporate chart
P E-12 Primergy corporate chart without Primergy Hold
P E-13 Map of "grid" of interstate pipelines serving
Primergy's four state area
F-1 Preliminary opinion of counsel (to be filed by Amendment)
F-2 Past-tense opinion of counsel (to be filed by Amendment)
119
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G-1 Opinion of Goldman, Sachs & Co. (filed as Annex F to
Registration Statement No. 33-61619 on Form S-4 and
incorporated herein by reference)
G-2 Opinion of Barr Devlin Associates, Inc. (filed as
Annex G to Registration Statement No. 33-61619 on
Form S-4 and incorporated herein by reference)
H-1 Annual Report of NSP on Form 10-K for the year ended
December 31, 1995 (File No. 1-3034 and incorporated
herein by reference)
H-2 Annual Report of WEC on Form 10-K for the year ended
December 31, 1995 (File No. 1-9057 and incorporated
herein by reference)
H-3 Annual Report of WEPCO on Form 10-K for the year ended
December 31, 1995 (File No. 1-1245 and incorporated
herein by reference)
H-4 NSP 1995 Annual Report to Shareholders (to be filed by
Amendment)
H-5 WEC 1995 Annual Report to Shareholders and Proxy
Statement Relating to the May 27, 1996 Annual Meeting of
Stockholders (including Annual Financial Statements)
(to be filed by Amendment)
H-6 Annual Report on Form 10-K of NSP-W for the year ended
December 31, 1995 (File No. 10-3140 and incorporated
herein by reference)
DT I-1 Proposed Form of Notice
DT J-1 NSP and NSP-W Analysis of the Economic Impact of a
Divestiture of the Gas Operations of NSP and NSP-W
DT J-2 WEC analysis of the Economic Impact of a Divestiture of
WEPCO's Gas Operations
DT J-3 Table of Estimated Losses of Economies in Prior
Decisions on Divestiture and Retention of Gas Operations
(to be filed by Amendment)
DT J-4 Legal Memorandum of Cahill, Gordon & Reindel
FS-1 Primergy Unaudited Pro Forma Condensed Consolidated
Balance Sheet as of December 31, 1995 (included in
Form 10-K for the year ended December 31, 1995 of WEC
(Exhibit H-2 hereto) at p. 98)
FS-2 Primergy Unaudited Pro Forma Condensed Consolidated
Statements of Income for the year ended December 31,
1995 (included in Form 10-K for the year ended
December 31, 1995 of WEC (Exhibit H-2 hereto) at p. 99)
FS-3 WEC Consolidated Balance Sheet as of December 31, 1995
(see Annual Report of WEC on Form 10-K for the year
ended December 31, 1995 (Exhibit H-2 hereto), at
p. 63 and 64)
FS-4 WEC Consolidated Statements of Income for its last three
fiscal years (see Annual Report of WEC on Form 10-K for
the year ended December 31, 1995 (Exhibit H-2 hereto),
at p. 61)
120
<PAGE>
FS-5 WEPCO Consolidated Balance Sheet as of December 31, 1995
(see Annual Report of WEPCO on Form 10-K for the year
ended December 31, 1995 (Exhibit H-3 hereto), at p.59
and 60)
FS-6 WEPCO Consolidated Statements of Income for its last
three fiscal years (see Annual Report of WEPCO on
Form 10-K for the year ended December 31, 1995
(Exhibit H-3hereto), at p. 58)
FS-7 NSP Consolidated Balance Sheet as of December 31, 1995
(see Annual Report of NSP on Form 10-K for the year
ended December 31, 1995 (Exhibit H-1 hereto), at p. 65)
FS-8 NSP Consolidated Statements of Income for its last
three fiscal years (see Annual Report of NSP on
Form 10-K for the year ended December 31, 1995
(Exhibit H-1 hereto), at p. 64)
121
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ANNEX A
DOMESTIC OPERATIONS OF NRG
SAN JOAQUIN. San Joaquin Valley Energy Partners I, L.P. ("SJVEP I") owns
the Chowchilla II, El Nido and Madera power generation facilities in San Joaquin
Valley, California with capacity of 10 Mw, 10 Mw and 25 Mw, respectively. San
Joaquin Valley Energy Partners IV, L.P. ("SJVEP IV") owns the Chowchilla I power
generation facility in San Joaquin Valley, California with capacity of 10 Mw.
Both SJVEP I and SJVEP IV are QFs. SAN JOAQUIN VALLEY ENERGY I, INC., a wholly-
owned subsidiary of NRG, is a 2% general partner and NRG ENERGY JACKSON VALLEY
II, INC., another wholly-owned subsidiary of NRG is a 43% limited partner in
SJVEP I. SAN JOAQUIN VALLEY ENERGY IV, INC., a wholly-owned subsidiary of NRG,
is a 2% general partner and NRG ENERGY JACKSON VALLEY II, INC. is a 43% limited
partner in SJVEP IV. The other partnership interests are owned by partnerships
formed by two individuals and by an individual investor, none of whom are
affiliates or associates of NSP or WEC. SJVEP I and SJVEP IV are both managed
by a management committee composed of two members from NRG and two from the
other general partner. NRG does not receive a fee for such services.
The four San Joaquin facilities commenced commercial operations between
1988 and 1990 and each facility burns biomass fuel. The fuel for Chowchilla I
is supplied by Bioconversion Partners, L.P. ("BIOCONVERSION") pursuant to
contracts with SJVEP I and SJVEP IV. SAN JOAQUIN VALLEY ENERGY IV, INC. is a 2%
general partner and NRG ENERGY JACKSON VALLEY II, INC. is a 43% limited partner
of Bioconversion. The balance of the ownership interests in Bioconversion are
owned by entities that are not affiliates or associates of NSP or WEC. The
Bioconversion facility is a multi-hearth plant that gasifies biomass, producing
a low heat content gas that is used by the Chowchilla I plant as fuel for power
generation. A by-product of the Chowchilla I gasification process is a
charcoal-like substance that is used as one of the several biomass fuels at
Chowchilla II.
SJVEP I and SJVEP IV have agreed with Pacific Gas and Electric Co. ("PG&E")
to a buy-out by PG&E of the power purchase agreements for the Chowchilla I,
Chowchilla II, El Nido and Madera facilities. Under the terms of the buyout,
the SJVEP partnerships have agreed to terminate the power purchase agreements
with PG&E in exchange for a termination payment by PG&E. In addition, PG&E has
a one-time right of first refusal with respect to sales by SJVEP I or SJVEP IV
to any third party of capacity and energy from the facilities. As a result of
the buy-out of the PG&E power purchase agreements, the San Joaquin facilities
have been taken out of service until the SJVEP partnerships enter into
replacement power purchase agreements, with either PG&E or a third party, or
locate a purchaser for the facilities.
JACKSON VALLEY. The Jackson Valley cogeneration facility, located near
Ione, California approximately 45 miles east of Sacramento, is a 16 Mw fluidized
bed power generation facility fueled by waste lignite. The Jackson Valley
facility is owned and operated by Jackson Valley Energy Partners, L.P., a
California limited partnership ("JVEP"). NRG ENERGY JACKSON VALLEY I, INC. and
NRG ENERGY JACKSON VALLEY II, INC., each a wholly owned subsidiary of NRG, own,
respectively, a 2% general partnership interest and a 48% limited partnership
interest in
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JVEP. The remaining partnership interests are owned by partnerships formed by
two individuals who are not affiliates or associates of NSP or WEC. The
facility, which is a QF, began operation in 1987.
JVEP and PG&E are party to a long-term energy and capacity purchase
agreement for the sale of facility output that expires in 2017. JVEP and PG&E
are currently negotiating the buy-out of such agreement by PG&E, pursuant to
which the agreement would be terminated in exchange for a) a termination payment
by PG&E to JVEP, b) an agreement on a new long-term energy and capacity purchase
agreement, and c) restart of the plant under the new contract on May 1, 1997.
Pending agreement on the terms of the buy-out, JVEP and PG&E have executed a
bridging agreement, pursuant to which the Jackson Valley facility has suspended
operations. If agreement is not reached, the existing purchase agreement with
PG&E will remain in effect.
JVEP acquired the Jackson Valley facility in July 1991. In connection with
its acquisition of the facility, JVEP also acquired a montan wax manufacturing
plant, three mineral leases and rights to mine lignite on property near the
facility. The property includes mines that are estimated to contain an
aggregate of more than 38 million tons of lignite, a residue lignite pile and
approximately 300 acres of undeveloped real property. The montan wax plant is
the thermal host for the power generation facility and, because of its use of
steam from the power facility, provides the power facility its QF status. The
wax plant extracts wax from mined lignite material, which creates, as a by-
product, waste lignite used to fuel the Jackson Valley power generation
facility. The use of waste fuel provides an additional basis for the power
generating facility's QF status. Montan wax is a hard, high-melting point
fossilized vegetable wax sold to unaffiliated third-parties for certain
industrial and commercial applications. All of the lignite mined by JVEP is
used for internal consumption by the wax plant and the power generation
facility.
SUNNYSIDE. The Sunnyside facility, located in Carbon County, Utah, is a 58
Mw waste coal-fired facility that utilizes circulating fluidized bed technology
and is a QF. The Sunnyside facility is owned by Sunnyside Cogeneration
Associates ("SCA"), a Utah joint venture, 50% of which is owned by NRG SUNNYSIDE
INC. (a wholly-owned subsidiary of NRG), and 50% of which is owned by an
affiliate of Babcock & Wilcox. Sunnyside Operations Associates L.P. ("SOA"), a
Delaware limited partnership in which wholly-owned subsidiaries of NRG (NRG
SUNNYSIDE OPERATIONS GP INC. AND NRG SUNNYSIDE OPERATIONS LP INC.) and a Babcock
& Wilcox affiliate each hold 50% interests, performs operation and maintenance
services on behalf of SCA. SCA and SOA are both managed by a management
committee composed of two members from NRG and two members from Babcock &
Wilcox. NRG is not compensated for such services. PacificCorp purchases the
energy and capacity generated by the Sunnyside facility pursuant to a power
purchase agreement with an initial term expiring in 2023.
SCA also owns an 8.7 million ton waste-coal pile located on property
adjacent to the facility site. The waste-coal is delivered to the facility fuel
handling system by an unaffiliated material handling contractor under a 25-year
material handling contract at prices escalated according to a schedule of
indices. The 8.7 million ton waste-coal pile is expected to provide sufficient
fuel for facility operations until 2013.
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O'BRIEN. In February, 1996, the United States Bankruptcy Court for New
Jersey approved the acquisition by NRG of an approximately 42% interest in
O'Brien Environmental Services, Inc. upon the effective date of NRG's proposed
plan of reorganization for O'Brien (expected to be in April 1996). O'Brien owns
interests in several operating projects which are QFs and one development
project, which will be a QF ("O'Brien Cogeneration Subsidiaries"). Jersey
Central Power & Light, Co., the utility purchaser under the power purchase
agreements for two of the operating projects, has agreed to allow the relevant
facilities to become EWGs at the option of NRG. At this time, no applications
for EWG status have been filed with respect to such projects, but filings are
expected to be made shortly. O'Brien also holds, through O'Brien Fuels, Inc.,
coalbed methane subsidiaries which own interests in gas rights ("O'Brien Coalbed
Subsidiaries"). O'Brien also owns several subsidiaries which sell, rent and
manufacture gas, steam and engine generator sets and associated equipment
("O'Brien Equipment Subsidiaries"), several subsidiaries which engage in demand
side management services ("O'Brien Management Services Subsidiaries") and
several subsidiaries that supply biogas ("O'Brien Biogas Subsidiaries").
Pursuant to the plan of reorganization, approximately $107 million is
currently expected to be made available to O'Brien's creditors, at least $81
million of which will be provided by NRG as follows: (i) a $28 million payment
by NRG for its 42% of the equity of O'Brien; (ii) a $7.5 million payment by NRG
for all of O'Brien's interest in certain biogas projects; and (iii) a $45
million unsecured loan from NRG to O'Brien. NRG is currently negotiating with
an unaffiliated lender to refinance the Newark Boxboard project in the amount of
$56 million, of which approximately $26 million would be applied for
distribution to O'Brien's creditors in reduction of NRG's approximately $107
million obligation. If this financing is not obtained concurrently with the
closing of the O'Brien transaction, NRG would be obligated to make a loan to
Reorganized O'Brien in the amount of $26 million.
Upon closing of the transaction, NRG would provide Reorganized O'Brien
with management and administrative services in connection with day to day
operations at cost. NRG employees also would serve as NRG's designees on the
board of directors of Reorganized O'Brien and may serve as certain executive
officers of Reorganized O'Brien. NRG and Reorganized O'Brien would also
enter into a "Co-Investment Agreement," pursuant to which NRG would grant
Reorganized O'Brien a right of first offer to acquire from NRG each energy
development project first developed or acquired by NRG for which a
co-investor is required because of federal or state regulatory restrictions
on NRG's ownership. NRG has agreed that, within the three-year period
following the closing date of the acquisition of O'Brien, a minimum of one or
more such projects, having an aggregate equity value of at least $60 million
or a minimum power generation capacity of 150 Mw, will be so offered. To
facilitate Reorganized O'Brien's ability to acquire projects under the
Co-Investment Agreement, NRG is obligated to provide financing to Reorganized
O'Brien to the extent funds are unavailable to Reorganized O'Brien on
comparable terms from other sources.
In connection with its bid for O'Brien, on January 3, 1996, NRG obtained a
$100 million letter of credit from Canadian Imperial Bank of Commerce, which it
delivered to O'Brien on
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January 18, 1996. NRG's reimbursement obligation under the letter of credit
is secured by a pledge by NRG of $60.9 million of cash provided by NSP to NRG,
NRG's right to receive $27.3 million in connection with the San Joaquin project
termination settlements and the stock of NRG Energy Center, Inc., the NRG
subsidiary that owns Minneapolis Energy Center. O'Brien has the right to draw
upon the letter of credit upon satisfaction of the conditions to closing under
the acquisition agreement between NRG and O'Brien that is part of the plan of
reorganization. NRG would be obligated to repay any draw on the letter of
credit within five business days.
NEO. NRG owns NEO Corporation ("NEO"), a wholly-owned subsidiary formed to
develop small power generation facilities in the United States. NEO is
currently involved in landfill gas-fired power generation projects, which are
based on the abatement of emissions of methane gas from landfills, and small
hydroelectric projects, all of which are QFs.
Minnesota Methane LLC ("MINNESOTA METHANE"), which is 50% owned by NEO and
50% owned by Ziegler Inc., is the primary vehicle for participation in the
landfill gas-fueled power generation and on-site power generation projects
undertaken by NEO. Minnesota Methane currently owns and operates a 3.3 Mw
facility located in Burnsville, Minnesota, which has been in operation since May
1993 and which is being expanded to 4 Mw. Power from this facility is sold to
NSP pursuant to a twenty-year agreement approved by the MPUC in Docket No.
E002/AI-94-378. In March 1996, Minnesota Methane commenced commercial operation
of a 3 Mw facility in Nashua, New Hampshire. The generation assets for the
Nashua project are owned by SUNCOOK ENERGY CORPORATION, a wholly-owned
subsidiary of Minnesota Methane. The landfill gas collection system for the
Nashua project is owned by FOUR HILLS, L.P., of which FOUR HILLS, INC. (a 50%-
owned subsidiary of NEO) is the 1% general partner and Ziegler Inc. and NEO are
each 49.5% limited partners. In addition, joint ventures of NEO and Ziegler
Inc. are pursuing seventeen additional projects in the United States. NEO's
interest in the seventeen new projects will be held through the following
project companies: LFG Partners, L.L.C.; MM Yolo Power LLC; NEO Albany, L.L.C.;
NEO Billerica, Limited Partnership; NEO Chautauqua, L.L.C.; NEO Fitchburg,
Limited Partnership; NEO Hartford, LLC; NEO Lopez Canyon LLC; NEO Lowell,
Limited Partnership; NEO Manconn, L.L.C.; NEO Phoenix LLC; NEO Prima Deschecha
LLC; NEO San Antonio LLC; NEO South Chollas LLC; NEO Spokane LLC; NEO Tacoma,
L.L.C.; NEO Tajiguas LLC; NEO Taunton, Limited Partnership; NEO Tomoka Farms
LLC; NEO Tulare LLC; NEO West Covina LLC; NEO Yolo LLC; Neomass Billerica, Inc.;
Neomass Fitchburg, Inc.; Neomass Lowell, Inc. and Neomass Taunton, Inc.
Landfill Power LLC ("LANDFILL POWER"), which is 50% owned by Minnesota
Methane and 50% owned by a subsidiary of Browning-Ferris Industries, owns and
operates a 4.6 Mw landfill gas-fired power generation facility located in Eden
Prairie, Minnesota that commenced commercial operation in December 1994. Power
from this facility is sold to NSP pursuant to a 30-year contract that was
approved by the MPUC in Docket No. E002/AI-95-371. Landfill Power also owns a
15.7 Mw landfill gas-fired power generation facility in Inver Grove Heights,
Minnesota that commenced commercial operation in March 1996. Power from this
facility is sold to NSP pursuant to a 30-year contract approved by the MPUC in
Docket No. E002/AI-95-2570.
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NORTHBROOK ENERGY, L.L.C., which is 50% owned by NEO and 50% owned by Omega
Energy Partners L.L.C. ("Omega Energy"), is the primary vehicle for
participation in hydroelectric power projects undertaken by NEO. NEO entered
the hydroelectric power generation market through the acquisition of STS
Hydropower Ltd. ("STS HYDROPOWER") in December 1994, which is a wholly-owned
subsidiary of NORTHBROOK ACQUISITION CORP., which is in turn a wholly-owned
subsidiary of Northbrook Energy, L.L.C. Omega Energy is owned by the two
principal officers of STS Hydropower. STS Hydropower owns and operates ten
facilities throughout the United States with total generating power capacity of
21 Mw. None of the electricity from these facilities is sold to NSP, NSP-W, WEC
or any of their affiliates or associates. In addition, STS Hydropower operates
an additional facility on a cost plus fee basis. In February 1996, STS
Hydropower expects to commence commercial operation of a 3 Mw facility in Dixon,
Illinois.
SYNCOAL. Since 1991, through its wholly owned subsidiary, Scoria
Incorporated ("SCORIA"), NRG has been a 50% partner in the Rosebud SynCoal
Partnership ("RSCP"), a general partnership. RSCP's other 50% partner is
Western SynCoal, a subsidiary of Entech, a wholly-owned subsidiary of Montana
Power Company. RSCP manufactures SynCoal, with its Advanced Coal Conversion
Process ("ACCP"), a patented process owned by Western SynCoal and Scoria, at
RSCP's Colstrip Coal Beneficiation Plant located in Colstrip, Montana. The
plant began commercial operations in August 1993. Western Energy, a subsidiary
of Montana Power Company, operates the plant pursuant to an operation agreement
with the partnership. The ACCP process upgrades low quality, high moisture
lignite and sub-bituminous coals to clean, stable, high quality, low moisture
bituminous coals. The partnership's long-term goal is to develop an economical
process that produces a stable, pure SynCoal. As of December 31, 1995, an
investment of $2.7 million remains on NRG's books for RSCP.
LOUISIANA ENERGY. In 1991, NRG formed, with eight other U.S. and European
companies, Louisiana Energy Services, L.P. ("LES"), a Delaware limited
partnership that will develop a privately owned uranium enrichment facility in
the U.S. NRG owns a 6.73% interest in LES through two wholly-owned
subsidiaries, GRAYSTONE CORPORATION--a 0.54% general partner of LES and LE PAZ
INCORPORATED--a 6.19% limited partner of LES. LES plans to build an enrichment
plant, the Claiborne Enrichment Center ("CEC"), on a site it selected and
purchased in Claiborne Parish, Louisiana. LES is seeking to obtain a license to
construct and operate the facility from the Nuclear Regulatory Commission. NRG
has written off its $2.7 million investment in LES and currently has no net
investment in LES. NSP has a contract with LES to purchase up to 30% of its
uranium enrichment services from LES. This contract was approved by the MPUC in
Docket No. E-002/AI-92-1164.
If licensed, the CEC would be the first privately owned, federally
licensed, commercial uranium enrichment facility in the U.S. The plant would
employ advanced gas centrifuge technology, which is more energy-efficient than
gas diffusion technology and which has been used reliably for over 20 years in
other commercial scale enrichment plants. No nuclear reactions or chemical
conversions would take place at the CEC. Furthermore, if the license is issued,
prior to proceeding with construction, LES would be required to negotiate the
necessary construction agreements, complete the remaining pre-construction
engineering and discuss the
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sale of the plant's output with potential customers. Construction would take
approximately three years from the commencement of construction until the plant
is fully operational.
RESOURCE RECOVERY OPERATIONS. NRG owns 100% of and operates a resource
recovery facility in Newport, Minnesota and operates a resource recovery
facility owned jointly by NSP and United Power Association in Elk River,
Minnesota and a related ash landfill in Becker, Minnesota. Together these
facilities can process an aggregate of nearly 3,000 tons of municipal sold waste
("MSW") per day into refuse derived fuel ("RDF") and currently process over
800,000 tons of MSW per year. As of December 31, 1995, NRG's investment in the
Newport facility was approximately $10 million. RDF from the Newport facility
is sold to NSP pursuant to an agreement expiring on December 31, 2001, with
automatic renewals of five years until written notice to terminate is delivered
by either party, which was approved by the MPUC in Docket No. E002/AI-93-770.
Minnesota Waste Processing Company, L.L.C. ("MINNESOTA WASTE PROCESSING"),
a limited liability company 50% owned by NRG and 50% owned by LJP Enterprises,
Inc., collects MSW from several cities in southern Minnesota that is processed
at the Newport facility and at an unaffiliated RDF facility. Additionally, NRG
uses Minnesota Waste Processing's primary asset, a large warehouse, as a
temporary RDF storage facility to enable more efficient utilization of RDF as a
feedstock to NSP's generating plants. The $2 million storage and transfer
warehouse owned by Minnesota Waste Processing has been financed through a loan
from NRG to Minnesota Waste Processing. The RDF storage warehouse is located on
property adjacent to NSP's Wilmarth generating station in Mankato, Minnesota.
The property is leased by Minnesota Waste Processing from NSP pursuant to an
agreement approved by the MPUC in Docket No. E002/GR-92-1185.
Since 1989, NRG has operated the Elk River resource recovery facility
located in Elk River, Minnesota and a related ash landfill in Becker, Minnesota.
This facility can process over 1,500 tons of MSW per day, 90% of which is
recovered and re-used in NSP's power generation facilities in Elk River and
Mankato, Minnesota. NSP owns 85% of the Elk River facility, and United Power
Association owns the remaining 15%. NSP also owns an ash landfill in Becker,
Minnesota which receives ash from the burning of RDF, pursuant to agreements
with Anoka County, Hennepin County and Sherburne County.
Pursuant to agreements between NSP and the counties of Anoka, Hennepin and
Sherburne in Minnesota and the Tri-County Solid Waste Management Commission in
Minnesota, all of which expire in 2009, NSP is obligated to process a maximum of
450,000 tons of MSW per year and is entitled to receive service fees based on
the amount of waste processed, pass-through costs, revenues credited to the
counties and certain other factors. NSP also is entitled to an operation and
maintenance fee, which is designed to recover fixed costs and to provide NSP a
guaranteed amount for operating and maintaining the facility for the processing
of 214,900 tons of waste, whether or not the counties deliver such waste for
processing. NRG has agreed to operate the Elk River facility and the Becker ash
landfill on behalf of NSP and receives compensation for its services. Currently
there is no written agreement between NRG and NSP for the operation of the Elk
River facility. NRG and NSP are in the process of negotiating an
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agreement that will govern NRG's operation of the Elk River facility, including
NRG's compensation. Such agreement will be subject to review by, and will
require the approval of, the MPUC. The compensation and exchange of services
between NRG and NSP has been pursuant to the Administrative Services Agreement
between the parties that was approved by the MPUC in Docket No. E002/AI-92-148.
STEAM AND CHILLED WATER PRODUCTION, TRANSMISSION AND RELATED SERVICES.
NRG, through its wholly-owned subsidiary NRG Energy Center, Inc. ("NRG ENERGY
CENTER"), acquired the Minneapolis Energy Center in August 1993 for
approximately $110 million. NRG Energy Center provides steam and chilled water
to customers in downtown Minneapolis, Minnesota. NRG Energy Center currently
provides 86 customers with 1.3 billion pounds of steam per year and 29 customers
with 35.7 million tons of chilled water per year. NRG Energy Center's assets
include the main downtown steam and chilled water plant, the First Avenue
chilled water plant, the North Riverfront steam and chilled water plant, the Soo
Line steam plant, the Baker Building steam plant, the Minneapolis Convention
Center chilled water plant, the Foster House Hotel chilled water plant, the
Fairview steam plant, six miles of steam distribution lines and two miles of
chilled water distribution lines. The NRG Energy Center plants have a combined
steam capacity of 1.17 Mcf per hour (343 Mwt) and a cooling capacity of 32,900
tons per hour. NRG Energy Center's steam and chilled water rates are not
subject to the jurisdiction of the MPUC.
NATS. In August 1995, NRG formed a joint venture (the "TVI JOINT VENTURE")
with Thermal Ventures, Inc. ("TVI"), a company owned by two individuals, for the
purpose of acquiring an interest in district heating and cooling companies.
Both NRG and TVI will hold limited partnership interests in district heating and
cooling companies acquired through the TVI Joint Venture. In addition, NRG and
TVI have established North American Thermal Systems Limited Liability Company
("NATS") for the purpose of jointly owning their respective general partnership
interests in such district heating and cooling companies. NRG and TVI each
participate equally in the TVI Joint Venture and each owns 50% of the membership
interests in NATS.
In August 1995, Thermal Ventures LP ("TVLP"), a limited partnership owned
by the principals of TVI, transferred 48.9% of the limited partnership interests
in both the Pittsburgh Thermal, Limited Partnership ("PTLP") and the San
Francisco Thermal, Limited Partnership ("SFTLP") to NRG for $3.5 million. On
February 23, 1996, the California Public Utility Commission approved the sale
and transfer of SFTLP's 1% general partnership interest from TVI to NATS. The
related sale and transfer of PTLP's 1% general partnership interest from TVI to
NATS was approved by the Pennsylvania Public Utility Commission on March 13,
1996. NRG has agreed to pay $1.4 million to TVLP and make a capital
contribution to NATS of $250,000 as consideration for each general partner's
transfer.
Both PTLP and SFTLP are regulated utilities that operate under tariffs and
are rate-regulated. PTLP owns and operates a district heating and cooling
system that serves part of downtown Pittsburgh and has a peak capacity of
240,000 pounds of steam per hour and 11,000 tons of chilled water per year (106
Mwt). PTLP serves 24 customers with 300 million pounds of steam per year and 21
million tons of chilled water per year.
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SFTLP is the sole supplier of steam to downtown San Francisco. It serves
the area through its district heating system which has a capacity of 490,000
pounds of steam per hour (144 Mwt). SFTLP serves approximately 210 customers
with approximately 700 million pounds of steam per year that is primarily used
for space and domestic heating and absorption air-conditioning.
WALDORF. The Waldorf process steam operation, which is owned and operated
by NRG, consists of a five-mile closed-loop steam/condensation line that
delivers steam to the Waldorf Corporation, a paper manufacturer in St. Paul,
Minnesota. NRG purchases steam for its Waldorf line from NSP's High Bridge
power generation facility pursuant to an agreement for the sale of thermal
energy that expires in 2002 and that was approved by the MPUC in Docket No.
E002/CI-82-523. NRG and NSP are currently negotiating amendments to the
agreement, including an extension of the term, which will require MPUC approval
in 1996. The Waldorf steam/condensation line was placed in service in 1983 and
is the longest buried high pressure steam line in the United States designated
for a single user.
Under its agreement for the sale of thermal energy with NRG, NSP is
obligated to provide a minimum of 2.64 MMBtu and a maximum of 4 MMBtu of usable
steam during each fiscal year at a steam flow rate of between 250,000 pounds per
hour to 430,000 pounds per hour. NRG is obligated to pay all of NSP's
incremental costs associated with the sale of steam to NRG, including the
incremental cost of coal (as delivered to the High Bridge facility),
maintenance, auxiliary electrical power usage, ash disposal and replacement
energy.
WASHCO. NRG's Washco steam operation primarily consists of two steam lines
and a back-up boiler facility. Washco's steam assets were placed in service in
1986.
In addition to steam produced by NRG's boiler facility, NRG also purchases
steam for its Washco operation from NSP pursuant to an agreement expiring in
December 2006, which was approved by the MPUC in Docket No. E-002/M-86-775. The
contract provides for the recovery by NSP of all its incremental costs plus a
user fee. NRG sells the steam from its Washco operation to Andersen Corporation
and to a Minnesota state correctional facility. Pursuant to a contract with
NSP, Washco also sells waste wood (which NRG obtains primarily from Anderson
Corporation) to NSP for use as a boiler fuel, at NSP's average cost for solid
fuels burned at the NSP plant providing steam to Washco, which contract, as part
of the order approving the sale of steam by NSP, also was approved by the MPUC
in Docket No. E002/M-86-775.
GRAND FORKS. NRG's Grand Forks boiler plant facility consists of seven
boilers located in Grand Forks, North Dakota that were acquired from NSP on
March 1, 1991. As of December 31, 1995, NRG's investment in its Grand Forks
facility was approximately $1 million. The Grand Forks facility buys or
transports gas under contract with NSP, which was approved by the MPUC. The
Grand Forks facility provides a minimum of 400,000 MMBtus of high temperature
water annually to the Grand Forks Air Force Base pursuant to an agreement that
expires in September 2000.
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NRG Energy Center's steam operations and NRG's Waldorf, Washco and Grand
Forks steam operations are not regulated by the MPUC.
CDECCA. Subject to receipt of the consents of Connecticut Light & Power
("CL&P"), Coastal Corp. and the project lenders, NRG has agreed to acquire,
through the acquisition of 100% of the stock of AE FOURTEEN, a wholly owned
subsidiary of Aetna Corp., a 50% interest in the 56 Mw CDECCA natural gas-fired
cogeneration facility in Hartford, Connecticut. NRG is acquiring the stock of
AE Fourteen for approximately $10.2 million. The CDECCA facility is a QF and
sells up to 45 Mw of power to CL&P under a power purchase agreement that expires
in 2008, with the remaining 11 Mw paid for by Aetna under a long-term power
purchase agreement that expires in 2008. Aetna and Energy Networks, Inc. are
the thermal hosts for the facility. Affiliates of Coastal Corp., which own the
remaining 50% interest in the facility, operate the facility and supply gas to
the facility under agreements that expire in 2000 (subject to extension at the
option of such affiliates to 2008). NRG HARTFORD, INC., a wholly-owned
subsidiary of NRG, will hold the real estate on which the facility is located
and will be the lessor of the lease to CDECCA. Approximately $49 million of
project financing for the CDECCA facility is outstanding under a credit facility
that matures in 2003. Under the terms of the stock purchase agreement between
NRG and Aetna, either party has the right to terminate the agreement if the
transaction has not been consummated by January 1, 1996. NRG and Aetna have
orally agreed to extend this date to April 30, 1996. This extension has not
been memorialized in a formal written agreement.
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ANNEX B
INTERNATIONAL OPERATIONS OF NRG
NRG has developed a complex legal structure involving foreign holding
companies, corporations, partnerships and joint ventures through which NRG holds
interests in its international projects. These entities are organized to
maximize available cash flows (by reducing and deferring foreign and U.S. taxes)
and to minimize global tax provisions for accounting purposes. As part of NRG's
global tax strategy, NRG intends to maintain offshore, for permanent
reinvestment in other projects, its dividends and distributions from foreign
investments. Any repatriation of dividends from foreign investments may result
in adverse U.S. income tax consequences.
GLADSTONE. NRG, through the subsidiaries described below, is the operator
of, and a 37.5% joint venture equity participant in, the Gladstone Power Station
in Queensland, Australia. Each participant in the joint venture owns an
undivided interest in the Gladstone Power Station equal to its percentage
interest in the joint venture and is responsible for taking and selling a
proportionate amount of energy and capacity generated by the Gladstone Power
Station. The Gladstone facility is a six unit conventionally designed coal-
fired power generation facility with a total design capacity of 1,680 Mw. The
Gladstone facility provides electricity for the Boyne Island Aluminum Smelter
and the Queensland Transmission and Supply Corporation ("QTSC") under long-term
power purchase agreements. The remaining interests in the Gladstone facility
are owned by investors that also own interests in the Boyne Island Aluminum
Smelter.
The Gladstone Power Station is located in Queensland, Australia,
approximately 540 km north of Brisbane. The Gladstone Power Station consists of
six units, each with a capacity of 280 Mw, which were placed in service between
1975 and 1982. NRG owns its interest in the Gladstone Power Station through its
wholly owned subsidiaries, Sunshine State Power B.V. ("SSP"), which owns 20% and
Sunshine State Power (No. 2) B.V. ("SSP2"), which owns 17.5%. SSP and SSP2 are
each 99% owned by NRGenerating International B.V. ("NRGENERATING") and 1% owned
by Gunwale B.V. ("GUNWALE"), both of which are wholly owned by NRG
International, Inc. ("NRG INTERNATIONAL"), which is wholly-owned by NRG. The
FERC has determined that both SSP and SSP2 are exempt wholesale generators
("EWGs") under Section 32(a)(1) of the Act. Sunshine State Power B.V., 67 FERC
PARA61, 186 (May 16, 1994); Sunshine State Power (No. 2) B.V., 67 FERC
PARA61,185 (May 16, 1994).
NRG Gladstone Operating Services Pty. Ltd. ("NRG GLADSTONE") operates the
Gladstone Power Station under an operation and maintenance agreement expiring in
2011. NRG Gladstone is 99% owned by NRG Operating Services, Inc. ("NRG
OPERATING") and 1% owned by NRG INTERNATIONAL; both NRG Operating and NRG
International are wholly-owned by NRG. The FERC has determined that NRG
Gladstone is an EWG. NRG Gladstone Operating Services Pty. Ltd., 67 FERC
PARA61, 187 (May 16, 1994). NRG Gladstone also performs certain administrative
services on behalf of the participants in connection with the administration of
the sale of each participant's percentage share of capacity and energy under the
long-term power purchase agreements.
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NRG GLADSTONE SUPERANNUATION PTY. LTD. holds the pension assets for the
employees of the Gladstone Power Station. It is wholly owned by NRG Gladstone,
which is 99% owned by NRG Operating and 1% owned by NRG International; both of
which are wholly owned by NRG. NRG continues to pursue business development
opportunities in Australia through NRG AUSTRALIA, LTD., which is wholly-owned by
NRG.
SCHKOPAU. Saale Energie GmbH ("SAALE ENERGIE") is a German limited
liability company owned equally by NRG and PowerGen plc ("PowerGen"). NRG,
through the subsidiaries described below, owns a 20.5% equity ownership in, and
rights to the output of 400 Mw of the capacity of, the 960 Mw Schkopau lignite-
fired power generation facility under construction near Leipzig, Germany. NRG's
50% interest in Saale Energie is owned by NRGENERATING, which is wholly owned by
NRG INTERNATIONAL, which is wholly owned by NRG. The Schkopau facility will
consist of two 425 Mw turbines, one 110 Mw turbine and two boiler units.
Construction of the first 425 Mw unit and the 110 Mw unit is complete and these
units commenced commercial operation in early 1996. The second 425 Mw unit is
scheduled to commence commercial operation in July 1996. VEBA Kraftwerke Ruhr
AG ("VKR"), a German company engaged in the business of developing, owning and
operating power generation facilities, owns the remaining interest in and will
operate the Schkopau facility. Saale Energie will sell its 400 Mw share of
output from the Schkopau facility to Vereinigte Energiewerke AG ("VEAG"), a
major German utility under a 25-year power purchase agreement.
The Schkopau facility is owned by Kraftwerke Schkopau GbR ("KS"), a
partnership between Saale Energie and VKR. Saale Energie and VKR hold interests
of 41.1% and 58.9%, respectively, in KS. Since NRG and PowerGen each own 50% of
Saale Energie, NRG effectively has a 20.5% interest in the Schkopau facility.
PowerGen is one of the two largest privately held generating companies formed
from the divestiture of the United Kingdom electric system and is a large
independent power producer. The FERC has determined that KS is an EWG. 73 FERC
PARA 61,318 (December 15, 1995).
VKR will operate and maintain the Schkopau facility under a 25-year
operation and maintenance contract with Kraftwerke Schkopau Betriebsgesellschaft
mbH ("KSB"), a German limited liability company, in which Saale Energie and VKR
hold interests of 44.4% and 55.6%, respectively (providing NRG an effective 22%
interest), and which is responsible for the operation and maintenance of the
facility pursuant to certain agreements with Saale Energie and VKR. The FERC
has determined that KSB is an EWG. 73 FERC PARA 61,314 (December 15, 1995).
Fuel for the facility will be provided by MIBRAG's Profen lignite mine, which
coal supply agreement is described below under MIBRAG.
NRG's business development activities in Germany are conducted through NRG
ENERGY DEVELOPMENT GMBH, which is wholly-owned by NRGenerating, which is wholly-
owned by NRG International, which is wholly-owned by NRG.
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MIBRAG. A consortium of NRG, PowerGen and Morrison Knudsen Corporation
together own Mitteldeutsche Braunkohlengesellschaft mbH ("MIBRAG"), a former
state-owed industrial complex located near Leipzig, Germany. MIBRAG owns two
open-cast lignite (brown coal) mines, and leases a third lignite mine with total
estimated reserves of approximately 789 million metric tons. MIBRAG also
operates, through MIB GmbH, three power generation facilities with a total
capacity of 200 Mw referred to below. The FERC has determined that MIB GmbH is
an EWG. See 67 FERC PARA 61,391 (June 29, 1994). MIBRAG also directly owns and
operates two plants that manufacture briquettes for residential and industrial
heating. In addition to providing fuel for the MIBRAG power generation
facilities and other customers, MIBRAG will also provide lignite to the Schkopau
facility and to a 1,600 Mw power generation facility to be constructed by VEAG
and various other German companies. MIBRAG will provide virtually all of the
coal needed by the Schkopau facility and, until the 1,600 Mw facility becomes
operational in 1999, over 50% of MIBRAG's coal sales will be to Schkopau.
A 99% interest in MIBRAG is owned by MIBRAG BV in which NRG, PowerGen and
Morrison Knudsen Corporation each own a one-third interest. NRG's 33% interest
is owned as described below. The remaining 1% interest in MIBRAG is owned
separately by affiliates of NRG and its partners in equal proportions, providing
NRG and each of its partners an effective one-third interest in MIBRAG.
MIBRAG is 99% owned by MIBRAG BV, which is 33.3% owned by LAMBIQUE BEHEER
B.V., which is 99% owned by NRGENERATING and 1% by GUNWALE; each of which is
wholly-owned by NRG INTERNATIONAL, which is wholly-owned by NRG.
MIBRAG's cogeneration operations include the 100 Mw Mumsdorf facility, the
60 Mw Deuben facility and the 40 Mw Wahlitz facility. The Wahlitz facility is a
fluidized bed cogeneration plant that commenced operations within the last two
years. The Mumsdorf and Deuben facilities are in the process of being
retrofitted to meet European Union environmental regulations. MIBRAG, through
MIB GmbH, operates these cogeneration facilities under a 13-year agreement
pursuant to which MIBRAG has operating control of, and a 1% interest in, the
facilities. These facilities provide power and thermal energy for MIBRAG's coal
mining operations and its briquette manufacturing plants. All power and thermal
energy not consumed by MIBRAG's internal operations is sold under a ten-year
power purchase agreement with Westsaechsische Energie Aktiengesellschaft
("WESAG"), a recently privatized German electric utility. As stated above,
these generation facilities are operated by MIB GMBH, which is 99% owned by
third party limited partners and 1% owned by MIBRAG BV. MIB GmbH operates the
facilities for MIV GMBH & CO. KG, which is 99% owned by third party limited
partners and 1% owned by MIVB GMBH, a general partner, which in turn is 100%
owned by MIBRAG. The FERC has determined that MIV GmbH & Co. KG is an EWG. See
67 FERC PARA61,391 (June 29, 1994). B&I Vermogensverwaltungs GmbH, 67 FERC
PARA61,391 (June 29, 1994). Under a power consultancy services agreement with
MIBRAG for the life of the facilities, NRG (through Saale Energie GmbH Services
("SAALE ENERGIE SERVICES") and PowerGen jointly provide consulting services, for
a fee, for the operation of the MIBRAG steam and power generation facilities,
the associated electrical and thermal transmission, the distribution system and
the briquette manufacturing plants. Saale Energie Services is 98% owned by
Saale Energie (which is 50%
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owned by NRGenerating) and 1% owned by NRGenerating; NRGenerating is wholly-
owned by NRG International, which is wholly-owned by NRG.
In addition to providing approximately 3 million tons of lignite annually
for MIBRAG's three cogeneration facilities and two briquette facilities, output
from MIBRAG's mines is expected to be sold pursuant to three long-term coal
supply agreements. Pursuant to a long-term coal supply agreement with Saale
Energie and VKR, MIBRAG expects to supply lignite to the Schkopau facility at a
forecasted base-load level of approximately 5.5 million tons per year upon
completion of the Schkopau facility (anticipated in 1996). The price for
lignite sales to Schkopau is based on the heating content of the lignite
supplied, adjusted quarterly based on imported coal prices. As long as the
price is linked to imported hard coal, the German government and MIBRAG have
agreed to provide MIBRAG with revenues from sales to Schkopau based upon a fixed
escalation factor rather than imported hard coal prices. MIBRAG also supplies
coal to various other facilities.
In addition to its power generation and coal mining operations, MIBRAG owns
and operates two briquette manufacturing plants at Deuben and Phoenix (Mumsdorf)
and a coal dust plant at Deuben that dries coal and grinds up the dried coal for
sale to certain manufacturers for fuel. Operations at the Deuben briquette
plant are being phased out due to reduced market demand for briquettes. MIBRAG
also partially owns and is the principal customer of a transportation company,
an insurance brokerage firm, a briquette marketer, a waste management company, a
ground water consulting company and an environmental consulting company, all of
which provide services related to MIBRAG's activities.
LATIN POWER. Latin Power is an investment fund for equity investments in
independent power projects in Latin America and the Caribbean. NRG, through
NRGENERATING (which is wholly-owned by NRG International, which is wholly-owned
by NRG) and NRG INTERNATIONAL (which is wholly-owned by NRG), is one of the four
lead investors in Latin Power, which currently has investor commitments of $100
million. The other lead investors include the International Finance Corporation
(a member of the Word Bank Group), Corporation Andina de Fomento (a multilateral
institution for the Andean region headquartered in Caracas, Venezuela) and CMS
Generation Company (the independent power subsidiary of CMS Energy Corporation).
Each of the four lead investors has committed $25 million and has designated
Scudder, Stevens & Clark, Inc. ("Scudder") as the investment manager of the
fund. NRG has guaranteed the investment commitments of NRGenerating and NRG
International. As of December 31, 1995, NRG had invested $8.6 million of its
$25 million commitment.
Latin Power is organized as two limited duration Cayman Island companies,
Scudder Latin America Power I-P L.D.C. ("SLAP I-P") and Scudder Latin American
Power I-C L.D.C. ("SLAP I-C"), to permit the tax efficient allocation of foreign
source income. NRG, through NRGenerating and NRG International, and each of the
other lead investors in the fund, own 25% of the Class A shares of SLAP I-P and
SLAP I-C, and each is entitled to an equal management fee.
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Latin Power currently holds investments in three projects. The Mamonal
project is a 100 Mw combined-cycle natural gas-fired power generation facility
plant operating near Cartagena, Colombia. The facility is 30% owned by Latin
Power. The facility is leased by the owners to a group of local industrial
firms under a 14-year lease. As of December 31, 1995, NRG's proportionate share
of Latin Power's investment in the Mamonal facility was $1.9 million. The FERC
has determined that this project is an EWG.
Latin Power owns a 31% interest in the ELCOSA power generation facility in
Puerto Cortes, Honduras. ELCOSA is an oil-fired facility with 80 Mw of
generating capacity, which the facility sells pursuant to a 15-year power
purchase agreement to Empresa Nacional de Energia Electrica. The Honduran
government has guaranteed the utility's obligations under the power purchase
agreement. As of December 31, 1995, NRG's proportionate share of Latin Power's
investment in the facility was $2.6 million. The FERC has determined that this
project is an EWG.
Latin Power owns a 35% interest in Jamaica Energy Partners, which owns the
74 Mw Dr. Bird floating diesel-fired power generation facility. The facility is
located at Old Harbor near Kingston. Jamaica Public Service Company, Ltd. has
signed a 20-year power purchase agreement with Jamaica Energy Partners. NRG's
proportionate share of Latin Power's investment was $3.1 million at December 31,
1995. The FERC has determined that this project is an EWG.
The Latin Power project committee recently approved a $23 million
investment in exchange for an 18% interest in a 140 Mw gas turbine plant located
near Pucallpa, Peru. This project will use existing wells and drill seven new
wells to develop an estimated 302 Bcf of gas in the Aguaytia gas field. The
project will be an EWG and will sell its electric output to the wholesale
electricity market at the spot price. NRG is obligated to contribute
approximately $6 million to this project.
KLADNO. Through a joint venture, NRG owns an 18.3% interest in Energeticke
Centrum Kladno, s.r.o. ("KLADNO"), a Czech company that owns and operates a
coal-fired power and thermal energy generation facility in Kladno, Czech
Republic with 28 Mw of power generating capacity and 150 MWt of thermal energy
generating capacity. NRG's interest in Kladno is held by Kladno Power (No. 1)
B.V. ("KLADNO 1"). This is part of a development project in which NRG with
other joint venturers (including the regional power distribution company) would
upgrade Kladno and would explore developing a new power generation facility,
which would supply back-up steam to the district heating system and sell
electricity to the principal regional electric distribution company in Prague
(via an existing transmission line owned by Kladno). It is anticipated that
Kladno would sell or lease the existing facility to ECK Generating CZ, s.r.o.
("ECKG"), in which NRG and two partners would each own a one-third interest.
ECKG would modernize the existing facility and would construct and own the new
facility. NRG, through Kladno Power (No. 2) B.V. ("KLADNO 2") and its partners
would operate both facilities. Kladno 1 and Kladno 2 are each owned 99% by
NRGENERATING and 1% by GUNWALE; each of which is wholly-owned by NRG
INTERNATIONAL, which is wholly owned by NRG. NRG has not sought EWG or FUCO
status in connection with its ownership interest in Kladno, as NRG's interest
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currently represents less than 5% of the voting power of Kladno. Primergy will
seek EWG or FUCO status for the project immediately after it becomes a
registered holding company under the Act. NRG also has another wholly-owned
subsidiary, NRG Energy CZ, s.r.o ("NRG CZ"), which is engaged solely in project
development activities in the Czech Republic.
COLLINSVILLE. An unincorporated joint venture has been formed between
NRGenerating Holdings (No. 1) B.V. ("NRG NO. 1"), which is 99% owned by
NRGENERATING and 1% owned by GUNWALE, and Transfield Collinsville Pty. Limited
to own the 180 Mw coal-fired Collinsville Power Station in Queensland,
Australia. The owners, along with the related companies, NRG, NRG Australia
Ltd., Transfield Holdings Pty. Ltd. and Transfield Corporate Pty. Ltd. signed an
18 year power purchase agreement and an acquisition agreement with the
Queensland Transmission and Supply Corporation for the acquisition and
refurbishment of the Collinsville coal-fired generation facility. COLLINSVILLE
OPERATIONS PTY. LTD., the operator of the power station, is a company owned in
equal shares by NRG Collinsville Operating Services Pty. Ltd. ("NRG
COLLINSVILLE"), which is owned by NRG INTERNATIONAL and Transfield
Infrastructure Investments Pty. Ltd. Transfield Technologies Pty. Ltd. will
perform the facility refurbishment and environmental remediation under the
turnkey contract and perform facility maintenance under a subcontract with
Collinsville Operations Pty. Ltd. NRG expects that its total investment in the
project will be approximately $12 million.
Since the Collinsville generation facility is not currently operating, NRG
has not obtained EWG or FUCO status for its interests in the facility or the
entities that will refurbish the facility. Primergy will seek EWG or FUCO
status for the facility immediately after it becomes a registered holding
company under the Act.
WEST JAVA. NRG, through Sachsen Holding B.V. ("SACHSEN"), is involved in a
joint venture to develop a 432 Mw coal-fired power generation facility in West
Java, Indonesia. Sachsen is owned 99% by NRGENERATING and 1% by GUNWALE; each
of which is wholly-owned by NRG International, which is wholly-owned by NRG.
The joint venture has negotiated a power purchase contract with an
instrumentality of the Indonesian Government and the Government instrumentality
has an option to purchase the project from the joint venture. Sachsen would be
the operator of the project and would have an initial ownership interest of 45%.
If the project is developed, NRG expects that its total investment would be
approximately $65 million. Since the West Java project is still under
development, NRG has not sought EWG or FUCO status for the project. While the
project would qualify for EWG status, Primergy will seek EWG or FUCO status for
the facility immediately after it becomes a registered holding company under the
Act if the project proceeds through development and construction.
RUPALI. NRG through NRGenerating Rupali B.V. ("NRGENERATING 2"), is
developing a 472 Mw oil-fired power generation facility near Lahore, Pakistan.
NRGenerating 2 is owned 99% by NRGENERATING and 1% by GUNWALE; NRGenerating and
Gunwale are each wholly owned by NRG International, which is wholly-owned by
NRG. If the project is developed, NRG would own a 30-50% interest in, and would
operate, the facility. NRG expects that its total investment in the project
would be approximately $35-$50 million. Since this project is under
B-6
<PAGE>
construction, NRG has not sought EWG or FUCO status for the project. Primergy
will seek EWG or FUCO status for the project immediately after it becomes a
registered holding company.
B-7
<PAGE>
ANNEX C
NAMES OF INACTIVE NRG SUBSIDIARIES
Center SynCoal Partnership, L.P.
Cypress Energy Partners, Limited Partnership
Elk River Resource Recovery, Inc.
Gasco 29, Inc. 1*
Golden Gate Energy I, Inc.
Golden Gate Energy II, Inc.
Golden Gate Energy Partners, L.P.
Hanford Cogeneration Partners, L.P.
Hanford Energy I, Inc.
Indian Nation Illuminating Company (Unical)*
Interenergy Limited
Kiksis B.V.
Kissimee Power Partners, Limited Partnership
Matra Powerplant Holding B.V.
Michigan Cogeneration Partners Limited Partnership
Minnesota Farm Company, L.L.C.
Miramar Landfill Gas LLC
NEO Chicopee, Limited Partnership
NEO Colonie, L.L.C.
NEO Granby, Limited Partnership
NEO Haverhill, Limited Partnership
NEO Manchester, LLC
NEO Marion LLC
NEO Memphis, L.L.C.
NEO Pine Grove, L.L.C.
Neomass Chicopee, Inc.
Neomass Granby, Inc.
Neomass Haverhill, Inc.
NRG Construction Services, Inc.
NRG Energy Ltd.
NRG Yallourn Operations I, Inc.
NRG Yallourn Operations II, Inc.
NRGenerating Holdings (No. 3) B.V.
NRGenerating Holdings (No. 4) B.V.
NRGenerating Holdings (No. 5) B.V.
NRGenerating Holdings (No. 6) B.V.
O'Brien (Antioch) Cogen, Inc.*
O'Brien (Riverdale) Cogeneration, Inc.*
* Would be Acquired Through O'Brien
C-1
<PAGE>
O'Brien (South Lee) Cogeneration, Inc.*
O'Brien Biogas, Inc. III*
O'Brien Biogas, Inc. VII*
O'Brien Cogeneration (Hartford) Inc.*
O'Brien Salinas, Inc.*
O'Brien Salinas Supply Corporation*
O'Brien Salinas Supply Corporation, I*
O'Brien Standby Power Energy, Inc.*
O'Brien Supply Inc. I*
O'Brien Supply Inc. II*
Okeechobee Power I, Inc.
Okeechobee Power II, Inc.
Okeechobee Power III, Inc.
Philadelphia Ventures, Inc.*
Powder River SynCoal Partnership, L.P.
Powerent, Inc.*
Power Property Consultants, Inc.*
Power Service Company*
Prairie Wind Energy, Inc.
Prairie Wind Energy Partners, L.P.
SDN Power, Inc.*
STS Heislers, Inc.
Wolverine Energy I, Inc.
Wolverine Energy II, Inc.
* Would be Acquired Through O'Brien
C-2
<PAGE>
ANNEX D
WMIC INVESTMENTS
- --------------------------------------------------------------------------------
NAME OF ENTITY NATURE OF BUSINESS DESCRIPTION OWNERSHIP
OF PERCENTAGE
INVESTMENT
- --------------------------------------------------------------------------------
APPLETON COURT A PARTNERSHIP WHICH OWNS, LIMITED 99.00%
LIMITED LEASES AND OPERATES 64 LOW- PARTNERSHIP
PARTNERSHIP INCOME HOUSING UNITS IN INTEREST
APPLETON, WI.
- --------------------------------------------------------------------------------
ASSISI HOMES A PARTNERSHIP WHICH OWNS, LIMITED 49.50%
LIMITED LEASES AND OPERATES 24 LOW- PARTNERSHIP
PARTNERSHIP II INCOME HOUSING UNITS IN INTEREST
MILWAUKEE, WI.
- --------------------------------------------------------------------------------
CHATHAM COURT A PARTNERSHIP FORMED TO LIMITED 99.00%
APARTMENTS CONSTRUCT 120 LOW-INCOME PARTNERSHIP
LIMITED HOUSING UNITS IN ROCKFORD, INTEREST
PARTNERSHIP IL.
- --------------------------------------------------------------------------------
CORCORAN LIMITED A PARTNERSHIP WHICH OWNS, LIMITED 1.00%
PARTNERSHIP LEASES AND OPERATES A MIXED PARTNERSHIP
USE FACILITY IN MILWAUKEE, INTEREST
WI.
- --------------------------------------------------------------------------------
CURRY-PRICE A PARTNERSHIP WHICH OWNS, LIMITED 99.00%
LIMITED LEASES AND OPERATES A PARTNERSHIP
PARTNERSHIP HISTORIC OFFICE/RETAIL INTEREST
BUILDING IN MILWAUKEE, WI.
- --------------------------------------------------------------------------------
GLENBROOK A PARTNERSHIP WHICH OWNS, LIMITED 99.00%
ASSOCIATES OF LEASES AND OPERATES 72 LOW- PARTNERSHIP
MILWAUKEE INCOME HOUSING UNITS IN INTEREST
LIMITED MILWAUKEE, WI.
PARTNERSHIP
- --------------------------------------------------------------------------------
HISTORIC KING A PARTNERSHIP WHICH OWNS, LIMITED 49.50%
PLACE LIMITED LEASES AND OPERATES 40 LOW- PARTNERSHIP
PARTNERSHIP INCOME HOUSING UNITS AND INTEREST
15,000 SQUARE FEET OF GENERAL .34%
COMMERCIAL OFFICE SPACE IN PARTNERSHIP
MILWAUKEE, WI. INTEREST
- --------------------------------------------------------------------------------
HOUSING EQUITY A PARTNERSHIP INVESTING IN LIMITED 19.98%
FUND 1989 LIMITED PARTNERSHIPS PARTNERSHIP
PARTNERSHIP REHABILITATING OR INTEREST
CONSTRUCTING LOW-INCOME
HOUSING IN MILWAUKEE, WI.
- --------------------------------------------------------------------------------
HOUSING EQUITY A PARTNERSHIP INVESTING IN LIMITED 7.99%
FUND 1990 LIMITED PARTNERSHIPS PARTNERSHIP
PARTNERSHIP REHABILITATING OR INTEREST
CONSTRUCTING LOW-INCOME
HOUSING IN MILWAUKEE, WI.
- --------------------------------------------------------------------------------
HOUSING EQUITY A PARTNERSHIP INVESTING IN LIMITED 7.26%
FUND 1992 LIMITED PARTNERSHIPS PARTNERSHIP
PARTNERSHIP REHABILITATING OR INTEREST
CONSTRUCTING LOW-INCOME
HOUSING IN MILWAUKEE, WI.
- --------------------------------------------------------------------------------
KENOSHA A PARTNERSHIP WHICH OWNS, LIMITED 53.78%
AFFORDABLE LEASES AND OPERATES 120 PARTNERSHIP
HOUSING HOUSING UNITS; 74 UNITS ARE INTEREST
ASSOCIATES, A LOW-INCOME UNITS, IN
WISCONSIN KENOSHA, WI.
LIMITED
PARTNERSHIP
- --------------------------------------------------------------------------------
LINCOLN SCHOOL A PARTNERSHIP WHICH OWNS, LIMITED 65.13%
HISTORIC LEASES AND OPERATES 64 LOW- PARTNERSHIP
APARTMENTS, A INCOME HOUSING UNITS IN INTEREST
WISCONSIN RACINE, WI.
LIMITED
PARTNERSHIP
- --------------------------------------------------------------------------------
D-1
<PAGE>
ANNEX D
WMIC INVESTMENTS
- --------------------------------------------------------------------------------
NAME OF ENTITY NATURE OF BUSINESS DESCRIPTION OWNERSHIP
OF PERCENTAGE
INVESTMENT
- --------------------------------------------------------------------------------
MEADOWOOD A PARTNERSHIP WHICH OWNS, LIMITED 99.00%
APARTMENTS LEASES AND OPERATES 136 PARTNERSHIP
LIMITED LOW-INCOME HOUSING UNITS IN INTEREST
PARTNERSHIP KENOSHA, WI.
- --------------------------------------------------------------------------------
MERRILL CITY A PARTNERSHIP WHICH OWNS, LIMITED 99.00%
HALL ASSOCIATES LEASES AND OPERATES 16 LOW- PARTNERSHIP
LIMITED INCOME HOUSING UNITS IN INTEREST
PARTNERSHIP MERRILL, WI.
- --------------------------------------------------------------------------------
MILWAUKEE WEST A PARTNERSHIP WHICH OWNS, LIMITED 24.75%
DEVELOPMENT LEASES AND OPERATES 179 PARTNERSHIP
LIMITED LOW-INCOME HOUSING UNITS IN INTEREST
PARTNERSHIP MILWAUKEE, WI.
- --------------------------------------------------------------------------------
NEENAH HOUSING A LIMITED LIABILITY COMPANY MEMBER IN 99.00%
ASSOCIATES OF WHICH OWNS, LEASES AND A LLC
WISCONSIN, LLC OPERATES 70 LOW-INCOME
HOUSING UNITS IN NEENAH,
WI.
- --------------------------------------------------------------------------------
NORTH EAST A PARTNERSHIP WHICH OWNS, LIMITED 10.95%
COMMUNITY LEASES AND OPERATES 49 LOW- PARTNERSHIP
LIMITED INCOME HOUSING UNITS IN INTEREST
PARTNERSHIP III MILWAUKEE, WI.
- --------------------------------------------------------------------------------
PARADISE PLACE A PARTNERSHIP WHICH OWNS, LIMITED 99.00%
ASSOCIATES LEASES AND OPERATES 64 LOW- PARTNERSHIP
LIMITED INCOME HOUSING UNITS IN INTEREST
PARTNERSHIP WEST BEND, WI.
- --------------------------------------------------------------------------------
SAUKVILLE A PARTNERSHIP WHICH OWNS, LIMITED 99.00%
ASSOCIATES LEASES AND OPERATES 63 LOW- PARTNERSHIP
LIMITED INCOME HOUSING UNITS IN INTEREST
PARTNERSHIP SAUKVILLE, WI.
- --------------------------------------------------------------------------------
SOUTHSIDE A PARTNERSHIP WHICH OWNS, LIMITED 99.00%
HOUSING PARTNERS LEASES AND OPERATES 14 LOW- PARTNERSHIP
I LIMITED INCOME HOUSING UNITS IN INTEREST
PARTNERSHIP MILWAUKEE, WI.
- --------------------------------------------------------------------------------
SOUTHSIDE A PARTNERSHIP WHICH OWNS, LIMITED 99.00%
HOUSING PARTNERS LEASES AND OPERATES 12 LOW- PARTNERSHIP
II LIMITED INCOME HOUSING UNITS IN INTEREST
PARTNERSHIP MILWAUKEE, WI.
- --------------------------------------------------------------------------------
TCR/MCR LAND A PARTNERSHIP WHICH OWNS LIMITED 0.00%*
LIMITED LAND FOR FUTURE PARTNERSHIP
PARTNERSHIP DEVELOPMENT. THE LAND IS INTEREST
ADJACENT TO EAST POINTE
COMMONS, A HOUSING AND
RETAIL COMPLEX IN
MILWAUKEE, WI.
- --------------------------------------------------------------------------------
TCR/MCR PHASE I A PARTNERSHIP WHICH OWNS, LIMITED 0.00%*
LIMITED LEASES AND OPERATES EAST PARTNERSHIP
PARTNERSHIP POINTE COMMONS, A 168 UNIT INTEREST
HOUSING PROJECT IN
MILWAUKEE, WI.
- --------------------------------------------------------------------------------
THOMPSON MEADOWS, A LIMITED LIABILITY COMPANY MEMBER IN A 99%
LLC FORMED TO CONSTRUCT 100 LLC
LOW-INCOME HOUSING UNITS IN
ST. FRANCIS, WI.
- --------------------------------------------------------------------------------
- ----------------------
* WMIC has 0% ownership in these partnerships but has entered into them in
case WISPARK cannot meet its financial contribution commitments. WISPARK has
made its capital contribution.
D-2
<PAGE>
ANNEX D
WMIC INVESTMENTS
- --------------------------------------------------------------------------------
NAME OF ENTITY NATURE OF BUSINESS DESCRIPTION OWNERSHIP
OF PERCENTAGE
INVESTMENT
- --------------------------------------------------------------------------------
WCC VENTURES II A PARTNERSHIP WHICH OWNS, LIMITED 49.50%
LIMITED LEASES AND OPERATES 14 LOW- PARTNERSHIP
PARTNERSHIP INCOME HOUSING UNITS IN INTEREST
MILWAUKEE, WI.
- --------------------------------------------------------------------------------
WISPARK LAKEVIEW A PARTNERSHIP WHICH OWNS LIMITED 1.00%
LIMITED AND LEASES TWO MULTI-TENANT PARTNERSHIP
PARTNERSHIP BUILDINGS IN KENOSHA, WI. INTEREST
- --------------------------------------------------------------------------------
CAMPUS A CORPORATION WHICH OWNS MORTGAGE N/A
NEIGHBORHOOD AND LEASES RESIDENTIAL NOTE
ASSOCIATES, INC. HOUSING IN MILWAUKEE, WI. RECEIVABLE
- --------------------------------------------------------------------------------
D-3
<PAGE>
ANNEX E
WISPARK INVESTMENTS
- --------------------------------------------------------------------------------
NAME OF ENTITY NATURE OF BUSINESS DESCRIPTION OWNERSHIP
OF PERCENTAGE
INVESTMENT
- --------------------------------------------------------------------------------
CHATHAM COURT A PARTNERSHIP FORMED TO GENERAL 1.00%
APARTMENTS CONSTRUCT 120 LOW-INCOME PARTNERSHIP
LIMITED HOUSING UNITS IN ROCKFORD, INTEREST
PARTNERSHIP IL. NOTE RECEIVABLE N/A
- --------------------------------------------------------------------------------
CORCORAN LIMITED A PARTNERSHIP WHICH OWNS, GENERAL & LIMITED 99.00%
PARTNERSHIP LEASES AND OPERATES A MIXED PARTNERSHIP
USE FACILITY IN MILWAUKEE, INTEREST NOTES N/A
WI. RECEIVABLE
- --------------------------------------------------------------------------------
EAST POINTE A PARTNERSHIP WHICH OWNS LIMITED 81.00%
MARKETPLACE AND LEASES A MULTI-TENANT PARTNERSHIP
LIMITED RETAIL STRIP MALL AND AN INTEREST
PARTNERSHIP UPGRADE GROCERY STORE IN NOTE RECEIVABLE N/A
MILWAUKEE, WI.
- --------------------------------------------------------------------------------
FRED-GERMANTOWN A PARTNERSHIP WHICH IS LIMITED 49.50%
LAND DEVELOPMENT DEVELOPING A RESIDENTIAL PARTNERSHIP
LIMITED SUBDIVISION IN GERMANTOWN, INTEREST
PARTNERSHIP WI.
- --------------------------------------------------------------------------------
GLENBROOK A PARTNERSHIP WHICH OWNS, GENERAL 1.00%
ASSOCIATES OF LEASES AND OPERATES 72 LOW- PARTNERSHIP
MILWAUKEE INCOME HOUSING UNITS IN INTEREST
LIMITED MILWAUKEE, WI. MORTGAGE N/A
PARTNERSHIP NOTE RECEIVABLE
- --------------------------------------------------------------------------------
HARBOURWALK A PARTNERSHIP WHICH OWNS LIMITED 30.00%
HOTEL LIMITED AND MANAGES A RADISSON PARTNERSHIP
PARTNERSHIP HOTEL IN RACINE, WI. INTEREST
MORTGAGE NOTE N/A
RECEIVABLE
- --------------------------------------------------------------------------------
LEASEHOLD CAPITAL A FINANCING COMPANY WHICH COMMON STOCK 80.00%
CORPORATION PROVIDES HIGH YIELDING NOTES RECEIVABLE N/A
FINANCING TO REAL ESTATE
OWNERS TO FUND THE LEASING
AND TENANT IMPROVEMENT
COSTS ASSOCIATED WITH SPACE
LEASES.
- --------------------------------------------------------------------------------
MEADOWOOD A PARTNERSHIP WHICH OWNS, GENERAL 1.00%
APARTMENTS LEASES AND OPERATES 136-LOW PARTNERSHIP
LIMITED INCOME HOUSING UNITS IN INTEREST MORTGAGE N/A
PARTNERSHIP KENOSHA, WI. NOTE RECEIVABLE
- --------------------------------------------------------------------------------
MIDLAND/WP, LLC A DEVELOPER OF AN MEMBER IN A LLC 75.00%
INDUSTRIAL PARK IN NOTE RECEIVABLE N/A
MILWAUKEE, WI.
- --------------------------------------------------------------------------------
MILWAUKEE WEST A PARTNERSHIP WHICH OWNS, MORTGAGE NOTE N/A(1)
DEVELOPMENT LEASES AND OPERATES 179 RECEIVABLE
LIMITED LOW-INCOME HOUSING UNITS
PARTNERSHIP IN MILWAUKEE, WI.
- --------------------------------------------------------------------------------
- ----------------------
(1) WMIC owns a limited partnership interest in this equity.
E-1
<PAGE>
ANNEX E
WISPARK INVESTMENTS
- --------------------------------------------------------------------------------
NAME OF ENTITY NATURE OF BUSINESS DESCRIPTION OWNERSHIP
OF PERCENTAGE
INVESTMENT
- --------------------------------------------------------------------------------
NAC CORP. A CORPORATION WHICH OWNS COMMON STOCK 45.00%
AND LEASES SPACE IN A MORTGAGE NOTE N/A
RETAIL SHOPPING MALL IN RECEIVABLE
APPLETON, WI.
- --------------------------------------------------------------------------------
NEENAH HOUSING A LIMITED LIABILITY COMPANY MANAGING MEMBER 1.00%
ASSOCIATES OF WHICH OWNS, LEASES AND IN A LLC
WISCONSIN, LLC OPERATES 70 LOW-INCOME MORTGAGE NOTE N/A
HOUSING UNITS IN NEENAH, WI. RECEIVABLE
- --------------------------------------------------------------------------------
PARADISE PLACE A PARTNERSHIP WHICH OWNS, MORTGAGE NOTE N/A(1)
ASSOCIATES LEASES AND OPERATES 64 LOW- RECEIVABLE
LIMITED INCOME HOUSING UNITS IN
PARTNERSHIP WEST BEND, WI.
- --------------------------------------------------------------------------------
RIVERWORKS A DEVELOPER OF AN INDUSTRIAL GENERAL 57.97%
PARTNERS PARK IN MILWAUKEE, WI. PARTNERSHIP
INTEREST
- --------------------------------------------------------------------------------
SAUKVILLE A PARTNERSHIP WHICH OWNS, MORTGAGE NOTES N/A(1)
ASSOCIATES LEASES AND OPERATES 63 LOW- RECEIVABLE
LIMITED INCOME HOUSING UNITS IN
PARTNERSHIP SAUKVILLE, WI.
- --------------------------------------------------------------------------------
SOUTHSIDE HOUSING PARTNERSHIPS WHICH OWN, MORTGAGE NOTE N/A(1)
PARTNERS I & II LEASE AND OPERATE 26 LOW- RECEIVABLE
LIMITED INCOME HOUSING UNITS IN
PARTNERSHIP MILWAUKEE, WI.
- --------------------------------------------------------------------------------
SYNDESIS A DEVELOPER OF REAL ESTATE COMMON STOCK 100.00%
DEVELOPMENT IN RACINE, WI. REDEEMABLE 100.00%
CORPORATION PREFERRED STOCK
- --------------------------------------------------------------------------------
TCR/MCR LAND A PARTNERSHIP WHICH OWNS LIMITED 91.30%
LIMITED LAND FOR FUTURE DEVELOPMENT. PARTNERSHIP
PARTNERSHIP THE LAND IS ADJACENT TO EAST INTEREST
POINTE COMMONS, A HOUSING
AND RETAIL COMPLEX IN
MILWAUKEE, WI.
- --------------------------------------------------------------------------------
TCR/MCR PHASE I A PARTNERSHIP WHICH OWNS, LIMITED 99.99%
LIMITED LEASES AND OPERATES EAST PARTNERSHIP
PARTNERSHIP POINTE COMMONS, A 188 UNIT INTEREST
HOUSING PROJECT IN
MILWAUKEE, WI.
- --------------------------------------------------------------------------------
THOMPSON MEADOWS, A LIMITED LIABILITY COMPANY MANAGING MEMBER 1.00%
LLC FORMED TO CONSTRUCT 100 LOW- IN A LLC
INCOME HOUSING UNITS IN ST.
FRANCIS, WI.
- --------------------------------------------------------------------------------
WESTON PINES A PARTNERSHIP WHICH OWNS, GENERAL 1.00%
LIMITED LEASES AND OPERATES 72 LOW- PARTNERSHIP
PARTNERSHIP INCOME HOUSING UNITS IN INTEREST
WAUSAU, WI.
- --------------------------------------------------------------------------------
E-2
<PAGE>
ANNEX E
WISPARK INVESTMENTS
- --------------------------------------------------------------------------------
NAME OF ENTITY NATURE OF BUSINESS DESCRIPTION OWNERSHIP
OF PERCENTAGE
INVESTMENT
- --------------------------------------------------------------------------------
WISCONSIN EQUITY A JOINT VENTURE FORMED MEMBER IN A LLC 33.00%
REAL ESTATE, LLC WITHIN THE STATE OF
WISCONSIN INVESTMENT BOARD
TO INVEST IN VARIOUS REAL
ESTATE PROJECTS IN WISCONSIN
- --------------------------------------------------------------------------------
WISPARK LAKEVIEW A PARTNERSHIP WHICH OWNS GENERAL & LIMITED 99.00%
LIMITED AND LEASES TWO MULTI-TENANT PARTNERSHIP
PARTNERSHIP BUILDINGS IN KENOSHA INTEREST
MORTGAGE NOTE N/A
RECEIVABLE
- --------------------------------------------------------------------------------
E-3
<PAGE>
OTHER ITEMS - NOTES RECEIVABLE
- --------------------------------------------------------------------------------
NAME OF ENTITY NATURE OF BUSINESS DESCRIPTION OWNERSHIP
OF PERCENTAGE
INVESTMENT
- --------------------------------------------------------------------------------
CORUM ZELLER MORTGAGE NOTE N/A
PHASE I RECEIVABLE
- --------------------------------------------------------------------------------
CORUM ZELLER - MORTGAGE NOTE N/A
PARCEL 35 RECEIVABLE
- --------------------------------------------------------------------------------
CORUM ZELLER MORTGAGE NOTE N/A
PHASE I RECEIVABLE
EQUIP. NOTE
- --------------------------------------------------------------------------------
OCENCO CORP. MORTGAGE NOTE N/A
RECEIVABLE
- --------------------------------------------------------------------------------
CORUM ZELLER- MORTGAGE NOTE N/A
NITROBAR RECEIVABLE
- --------------------------------------------------------------------------------
FORM CORP. MORTGAGE NOTE N/A
RECEIVABLE
- --------------------------------------------------------------------------------
CITY OF KENOSHA MORTGAGE NOTE N/A
RECEIVABLE
- --------------------------------------------------------------------------------
CHANCERY EQUIPMENT NOTE N/A
- --------------------------------------------------------------------------------
AMERICAN STEEL MORTGAGE NOTE N/A
RECEIVABLE
- --------------------------------------------------------------------------------
AA METRO CENTER MORTGAGE NOTE N/A
RECEIVABLE
- --------------------------------------------------------------------------------
MANDEL GROUP UNSECURED NOTE N/A
RECEIVABLE
- --------------------------------------------------------------------------------
MANDEL GROUP PHASE I UNSECURED NOTE N/A
RECEIVABLE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OTHER ITEMS - INVESTMENT IN LEASE
- --------------------------------------------------------------------------------
INVESTMENT IN FINANCING EQUIPMENT UNDER N/A
LEASE FINANCING LEASE
- --------------------------------------------------------------------------------
INVESTMENT IN JANJO - ASSIGNMENT OF N/A
LEASE (TENANT IMPROVE.) LEASE INVEST.
- --------------------------------------------------------------------------------
E-4
<PAGE>
ANNEX F
WISVEST INVESTMENTS
- --------------------------------------------------------------------------------
NAME OF ENTITY NATURE OF BUSINESS DESCRIPTION OWNERSHIP
OF PERCENTAGE
INVESTMENT
- --------------------------------------------------------------------------------
QUANTUM CONTROLS, A COMPANY WHICH PROVIDES MEMBER IN A LLC 45.00%
LLC D/B/A ENERGY STRATEGIC ENERGY MANAGEMENT
OASYS SERVICES WITH A FOCUS ON
NATURAL GAS MANAGEMENT.
- --------------------------------------------------------------------------------
BLACKHAWK ENERGY A COMPANY WHICH MARKETS AN MEMBER IN A LLC 50.00%
SERVICES, LLC ADVANCED ENERGY INFORMATION
SYSTEM TO UTILITIES WHICH
GIVES THEM THE ABILITY TO
COMMUNICATE DIRECTLY
WITH ITS CUSTOMERS.
- --------------------------------------------------------------------------------
F-1
<PAGE>
ANNEX G
WITECH INVESTMENTS
- --------------------------------------------------------------------------------
NAME OF ENTITY NATURE OF BUSINESS DESCRIPTION OWNERSHIP
OF PERCENTAGE
INVESTMENT
- --------------------------------------------------------------------------------
AMTEL SYSTEMS MANUFACTURER OF TELEPHONE COMMON STOCK 10.0%
CORPORATION MESSAGING EQUIPMENT THAT
INCREASES PRODUCTIVITY.
- --------------------------------------------------------------------------------
ARI NETWORK PROVIDER OF ELECTRONIC DATA COMMON SHARES 22.1%
SERVICES, INC. INTERCHANGE AND OTHER LINE OF CREDIT N/A
COMPUTERIZED NETWORK AND
INFORMATION SERVICES TO
TARGETED SECTORS OF THE U.S.
AGRIBUSINESS INDUSTRY.
- --------------------------------------------------------------------------------
DELTA GROUP, INC. ALUMINUM SMELTER THAT BUYS CONVERTIBLE 49.0%
SCRAP ALUM. AND TURNS IT PREFERRED STOCK
INTO ALUM. INGOTS ACCORDING WARRANTS FOR
TO CUSTOMER SPECIFICATIONS. PREFERRED STOCK
- --------------------------------------------------------------------------------
DOME CORPORATION REAL ESTATE INVESTMENT COMMON SHARES 8.8%
COMPANY LEASING REAL ESTATE
AND EQUIP. TO GRAHAM CO.
- --------------------------------------------------------------------------------
EMMBER FOODS, INC. VERTICALLY-INTEGRATED MEAT COMMON SHARES 11.0%
PROCESSOR.
- --------------------------------------------------------------------------------
FLORENCE EISEMAN, MANUFACTURER OF HIGH-END CONVERTIBLE 51.0%
INC. CHILDREN'S CLOTHING. PREFERRED STOCK
LINE OF CREDIT N/A
NOTES RECEIVABLE N/A
- --------------------------------------------------------------------------------
GRAY-SOFT, INC. DEVELOPER OF SOFTWARE USED COMMON STOCK 23.0%
IN PROGRAMMABLE LOGIC NOTE RECEIVABLE N/A
CONTROLLERS ("PLC'S").
PLC'S ARE USED IN FACTORIES
TO CONTROL AUTOMATED
MACHINERY.
- --------------------------------------------------------------------------------
MARKWELL MEDICAL A RESEARCH COMPANY WHICH CONVERTIBLE 7.0%
INSTITUTE, INC. HAS DEVELOPED A GLUCOSE PREFERRED STOCK
MONITORING DEVICE.
- --------------------------------------------------------------------------------
MATENAER A COMPANY WHICH STAMPS CONVERTIBLE 85.0%
CORPORATION STEEL INTO WASHERS OF PREFERRED SHARES
VARIOUS SIZES AND GRADES. NOTE RECEIVABLE N/A
- --------------------------------------------------------------------------------
MATERIAL SUPPLIER AND MANAGER OF LOW OPTIONS FOR 28.0%
MANAGEMENT COST (CLASS C) PARTS ON THE SHARES OF COMMON
GROUP, INC. FACTORY FLOOR. STOCK
NOTE RECEIVABLE N/A
- --------------------------------------------------------------------------------
MICROELECTRONIC A COMPANY WHICH DESIGNS, COMMON SHARES 55.0%
MODULES MANUFACTURES AND SELLS NOTE RECEIVABLE N/A
CORPORATION THICK FILM HYBRID CIRCUITS
AND NETWORKS.
- --------------------------------------------------------------------------------
G-1
<PAGE>
ANNEX G
WITECH INVESTMENTS
- --------------------------------------------------------------------------------
NAME OF ENTITY NATURE OF BUSINESS DESCRIPTION OWNERSHIP
OF PERCENTAGE
INVESTMENT
- --------------------------------------------------------------------------------
MILWAUKEE BRUSH MANUFACTURER OF INDUSTRIAL CUMULATIVE 33.0%
MANUFACTURING WIRE BRUSHES PREFERRED STOCK
COMPANY, INC. COMMON SHARES
WARRANTS FOR
COMMON STOCK
NOTES RECEIVABLE N/A
- --------------------------------------------------------------------------------
MILWAUKEE SIGN MANUFACTURER OF INDOOR AND CONVERTIBLE 35.0%
COMPANY, INC. AND OUTDOOR DISPLAY SIGNS. PREFERRED STOCK
- --------------------------------------------------------------------------------
ROMANCE FOODS, A COMPANY WHICH PRODUCES CONVERTIBLE 22.0%
INC. AND MARKETS A LINE OF FRESH, PREFERRED STOCK
MICROWAVEABLE PASTAS AND
SAUCES.
- --------------------------------------------------------------------------------
SERIGRAPH, INC. A HIGH-TECH, SPECIALTY CUMULATIVE 11.0%
PRINTER PREFERRED STOCK
COMMON STOCK
WARRANTS FOR
COMMON STOCK
- --------------------------------------------------------------------------------
STEELTECH MANUFACTURER OF LARGE COMMON SHARES 7.0%
MANUFACTURING, FABRICATED STEEL WELDMENTS NOTE RECEIVABLE N/A
INC.
- --------------------------------------------------------------------------------
THOR TECHNOLOGY DESIGNER & MANUFACTURER OF COMMON SHARES 95.0%
CORPORATION MOTOR CONTROLS. LINES OF CREDIT N/A
- --------------------------------------------------------------------------------
WISCONSIN MANUFACTURER OF CUSTOM COMMON & 100.00%
FURNITURE FURNITURE. PREFERRED SHARES
INDUSTRIES, INC. NOTE RECEIVABLE N/A
SUBORD. LINE OF N/A
CREDIT
- --------------------------------------------------------------------------------
WORLD CLASS A MACHINE SHOP THAT CUTS, REDEEMABLE 72.0%
MANUFACTURING DRILLS AND EXTRUDES RAW PREFERRED STOCK
GROUP, INC. METAL PARTS INTO VARIOUS OPTIONS FOR
PRODUCTS. COMMON STOCK
NOTES RECEIVABLE N/A
LINE OF CREDIT N/A
- --------------------------------------------------------------------------------
FUTURE VALUE A COMPANY ENGAGED IN COMMON SHARES 49.0%
VENTURES VENTURE CAPITAL. CLASS C
PREFERRED SHARES
- --------------------------------------------------------------------------------
VENTURE INVESTORS A COMPANY ENGAGED IN COMMON SHARES 1.0%
OF WISCONSIN VENTURE CAPITAL.
- --------------------------------------------------------------------------------
WISCONSIN VENTURE A COMPANY ENGAGED IN COMMON SHARES 5.0%
CAPITAL FUND VENTURE CAPITAL.
- --------------------------------------------------------------------------------
G-2
<PAGE>
ANNEX H
SALE OF FUEL
LES has an agreement with NSP to provide the Company with uranium
enrichment services. As previously mentioned, NSP has three nuclear reactors.
In the past, NSP obtained 70% of its uranium enrichment services for these
reactors from the Department of Energy (pursuant to a contract which expired in
September 30, 1995) and the remainder from the spot market. Under the terms of
the LES agreement, from October 1, 1995 through September 30, 2005, NSP will
acquire 30% of its uranium enrichment services from LES. NSP will acquire the
remaining 70% on the spot market. No services are currently being provided
under this contract and none are expected in the near future as the LES facility
is not operational. This contract was approved by the MPUC in Docket No.
E002/AI-92-1164.
Washco sells wood by-product purchased from Andersen Corporation to NSP for
use as fuel in generating facilities. The price for the wood by-product equals
the average cost per Mcf of solid fuel delivered to a NSP generating plant
during the calendar year. This contract was approved by the MPUC in Docket No.
E002/M-86-775.
NSP purchases RDF from the Newport facility. This contract was approved by
the MPUC in Docket No. E002/AI-93-821.
OPERATIONAL SERVICES
NSP manages the Renaissance Square Office Building for UP&L. NSP provides
this service in exchange for two percent (2%) of the building's gross annual
rents. This contract was approved by the MPUC in Docket No. E002/AI-94-1188.
NRG operates a municipal solid waste transfer station and Minnesota Waste
Processing's RDF storage facility. The facility collects and distributes
municipal solid waste and stores RDF for distribution to generating facilities.
This contract was approved by the MPUC in Docket No. E002/AI-94-950. NRG also
operates the Elk River RDF facility and the Becker ash landfill on behalf of
NSP. This contract was approved by the MPUC in Docket No. E002/AI-93-770 and in
Docket No. E002/AI-92-148.
CONTROL AND DATA ACQUISITION AND GAS DISPATCHING SERVICES
NSP supplies NSP-W and Viking with gas dispatching services and other
services associated with supervisory control and data acquisition for their gas
businesses (SCADA). This contract was approved by the MPUC in Docket No.
G002/AI-94-831 and by the PSCW. SCADA and gas dispatching are among the
functions a local distribution company (LDC) such as NSP or an interstate
pipeline company like Viking must perform in order to ensure reliable delivery
of natural gas to customers. A SCADA system electronically communicates gas
flow, gas pressure, and gas equipment set point data for the delivery system and
records the data in a computerized data storage system for monitoring and
control purposes. Gas dispatching includes
H-1
<PAGE>
monitoring and controlling the flow, pressures and operating conditions of a
natural gas delivery system through the use of a SCADA. Absent this agreement,
NSP, NSP-W and Viking could each need to own and operate a SCADA system. The
agreement enables the companies to share the costs. The three companies are
each allocated and billed a share of the actual costs incurred by NSP on a
monthly basis. The costs are shared based on the number of metering points
monitored for each company.
NATURAL GAS AND GAS RELATED SERVICES
NSP has authority to release to Cenerprise its firm transportation rights
on both unaffiliated pipelines, and on Viking. This contract was approved by
the MPUC in Docket No. G002/AI-94-433. NSP-W has a similar agreement with
Cenerprise to release pipeline capacity or to purchase pipeline capacity from
one another pursuant to rules and tariff provisions approved by the FERC.
(Docket No. 4220-AU-118). In addition, under an umbrella gas sales agreement,
NSP may purchase interruptible spot gas supplies from Cenerprise. This contract
was approved by the MPUC in Docket No. G002/AI-94-433. Historically, WEPCO
has received a portion of its gas from ANR Pipeline ("ANR") via Viking, an
upstream pipeline to ANR. As part of the unbundling under FERC Order 636,
ANR was ordered to and has released a portion of its Viking capacity to WEPCO
starting in November 1995. As a result of this release, WEPCO has a contract
for pipeline capacity with Viking. This agreement is to be in place until
2003 and is exempt from the at cost standard of the Act under Rule 81.
SALE OF STEAM
NSP sells steam to NRG for its Wascho operations for resale to Andersen
Corporation and to a Minnesota correctional facility. This contract was
approved by the MPUC in Docket No. E002/M-86-775.
NRG purchases steam for its Waldorf process steam operation from NSP's
High Bridge power generation facility. This contract was approved by the MPUC
in Docket No. E002/CI-82-523.
LEASING OF LAND
NSP leases land adjacent to its Wilmarth steam generating facility to
Minnesota Waste Processing. Such land is used to house a solid waste storage
and transfer facility. The storage facility collects and distributes MSW and
stores and distributes RDF to generating stations, including the Wilmarth
facility. This contract was approved by the MPUC in Docket No. E002/AI-94-950.
UP&L leases office space on floors two through eleven of the Renaissance
Square office building to NSP. This contract was approved by the MPUC in Docket
No. E002/AI-90-845. UP&L also leases office space on the first floor and in the
basement of the Renaissance Square office building to NSP. This contract was
approved by the MPUC in Docket No. E002/AI-94-1056.
FMAP leases 14,000 square feet of unimproved storage area in the first and
second floors of the parking garage adjacent to NSP's headquarters. This
contract was approved by the MPUC in Docket No. E002/AI-94-1043. FMAP also
leases 92 parking spaces in the parking facility to NSP. This contract was
approved by the MPUC in Docket No. E002/AI-94-1042.
H-2
<PAGE>
SALE OF ELECTRICITY
Minnesota Methane sells power from its QF facility in Burnsville, Minnesota
to NSP pursuant to a power purchase agreement approved by the MPUC in Docket
No. E002/AI-94-378. Similarly, Landfill Power sells power to NSP from its QF
facilities in Eden Prairie, Minnesota and Inver Grove Heights, Minnesota
pursuant to power purchase agreements approved by the MPUC in Docket
Nos. E002/AI-95-371 and E002/AI-95-570, respectively. NSP entered into these
contracts in accordance with PURPA.
SALE OF HOME AUTOMATION EQUIPMENT
WEPCO has an agreement to purchase home automation equipment from
Quantum, an affiliate of WISVEST. This affiliated interest agreement was
approved by the PSCW on March 6, 1995 in Docket No. 6630-AU-106. This
agreement is exempt from the at cost standards of the Act under Rule 90(d)(2).
H-3
<PAGE>
EXHIBIT I-1
SECURITIES AND EXCHANGE COMMISSION
(RELEASE NO. 35- )
FILING UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
APRIL 15, 1996
NORTHERN STATES POWER COMPANY
WISCONSIN ENERGY CORPORATION
Northern States Power Company ("NSP"), 414 Nicollet Mall, Minneapolis,
Minnesota 55401, a Minnesota combination electric and gas public-utility company
and a holding company exempt from regulation by the Commission under the Act
(except for Section 9(a)(2) thereof) pursuant to Section 3(a)(2) of the Act and
by order of the Commission and Wisconsin Energy Corporation ("WEC," and together
with NSP, the "Applicants"), 231 West Michigan Street, Milwaukee, Wisconsin
53203, a Wisconsin holding company exempt from regulation by the Commission
under the Act (except for Section 9(a)(2) of the Act) pursuant to Section
3(a)(1) of the Act and by order of the Commission, have jointly filed an
application-declaration under sections 2(b), 3(a)(2), 4, 5, 6(a), 7, 8, 9, 10,
11, 12(b), 13, 21, 32 and 33 and rules 42, 80-92 thereunder.
The application-declaration seeks approval relating to the proposed
combination (the "Transaction") of NSP and WEC by which WEC will acquire 100% of
the issued and outstanding common stock of NSP and by which WEC's combination
electric and gas public-utility subsidiary, Wisconsin Electric Power Company, a
Wisconsin corporation ("WEPCO"), will acquire substantially all of the assets of
Northern States Power Company, a Wisconsin corporation ("NSP-W") and a public
utility subsidiary of NSP. Following the Transaction, WEC (which will be
renamed Primergy Corporation ("Primergy") prior to such time) will register with
the Commission under section 5 of the Act.
The Applicants also seek approvals in connection with the
establishment of Primergy Services, Inc. ("Primergy Services") and possibly one
or more other service companies as subsidiary service companies as well as the
services to be rendered by Primergy Services and such other service companies.
Applicants also seek approval with regard to the possible formation of a new
subsidiary which may hold certain of the Primergy system's non-utility
subsidiaries ("Primergy Hold"), all requisite authority to realign certain non-
utility subsidiaries, and the issuance of common stock to Primergy by all such
service and holding company subsidiaries. The Applicants also request approval
for the issuance by Primergy of shares Primergy Common Stock in connection with
the Transaction, as well as the issuance or acquisition by Primergy of shares of
Primergy Common Stock under its shareholder dividend reinvestment and stock
purchase plans and stock incentive plan. The Applicants seek approval for the
retention by Primergy of the gas operations of NSP, NSP-W and WEPCO and the
various
1
<PAGE>
non-utility investments and businesses of NSP, NSP-W and WEC and their direct
and indirect subsidiaries and affiliates, the continuation of certain non-
utility activities conducted by NSP and WEPCO, and all existing and outstanding
intra system debt, guarantees of debt, and contracts. The Applicants also seek
certain exemptions from the at-cost provisions of Rules 90-91 under the Act. In
addition, the Applicants request an order under the Act temporarily exempting
New NSP (as defined below) from the registration requirements of the Act during
the limited period following the NSP Merger (as defined below) that New NSP owns
NSP-W.
NSP is engaged primarily in the generation, transmission and
distribution of electricity throughout a 30,000 square mile service area in
Minnesota, North Dakota and South Dakota. NSP also purchases, distributes and
sells natural gas to retail customers, and transports customer-owned gas, in
approximately 100 communities in this area. Of the more than 2.5 million people
served by NSP, the majority are concentrated in the Minneapolis-St. Paul
metropolitan area. As of December 31, 1995, NSP provided electric utility
service to approximately 1,100,000 customers and gas utility service to
approximately 330,000 customers.
NSP-W is engaged in the generation, transmission, and distribution of
electricity to approximately 208,000 retail customers in an area of
approximately 18,900 square miles in northwestern Wisconsin, to approximately
9,100 electric retail customers in an area of approximately 300 square miles in
the western portion of the Upper Peninsula of Michigan, and to 10 wholesale
customers in the same general area. NSP-W purchases, distributes and sells to
retail customers or transports customer-owned gas, in the same service territory
to approximately 68,200 customers in Wisconsin and 4,700 customers in Michigan.
NSP Common Stock is listed on the New York Stock Exchange, Inc.
("NYSE") and the Chicago and Pacific Stock Exchange. As of December 31, 1995,
there were 68,175,934 shares of NSP Common Stock and 2,400,000 shares of NSP
cumulative preferred stock outstanding. NSP's principal executive office is
located at 414 Nicollet Mall, Minneapolis, Minnesota 55401. NSP-W does not have
any preferred stock outstanding and all of its common stock is owned by NSP. On
a consolidated basis, for the year ended December 31, 1995, NSP's operating
revenues were approximately $3.146 billion, of which approximately $2.401
billion were derived from electric operations, approximately $414 million from
gas operations, and approximately $331 million from other operations. In 1995,
NSP-W provided approximately 15.1% of NSP's consolidated revenues. Consolidated
assets of NSP and its subsidiaries as of December 31, 1995 were approximately
$6.229 billion, consisting of $3.681 billion in net electric utility property,
plant and equipment ($3.135 billion for NSP and $546 million for NSP-W); $376
million in net gas utility property, plant and equipment ($320 million for NSP
and $56 million for NSP-W); and $2.172 billion in other corporate assets.
NSP has seven direct wholly owned subsidiaries that are engaged in
non-utility businesses. These are: Viking Gas Transmission Company, a natural
gas transmission company operating in Minnesota, Wisconsin and North Dakota;
Cenerprise, Inc., a natural gas and electric
2
<PAGE>
power marketing and brokering company which also provides energy conservation
and management services and energy products and services and which has several
energy related businesses; Eloigne Company, an affordable housing investment and
development company which has investments in a variety of low-income housing and
other projects; First Midwest Auto Park, Inc., a company which owns and operates
a parking garage located next to NSP's headquarters; Cormorant Corporation, a
company which engages in oil, gas, lignite and uranium exploration and the
acquisition of fuel resources; United Power & Land Company, a company which owns
and holds and sometimes leases real property which is generally surrounding or
adjacent to property owned and used by NSP in its regulated operations; and NRG
Energy, Inc., a company that develops, builds, acquires, owns and operates
several non-regulated energy related businesses, owns and operates certain
resource recovery businesses and steam and chilled water businesses, and through
subsidiaries and affiliates, is involved in a variety of independent power
projects, energy-related services and fuel enhancement and related projects and
other non-utility businesses both domestic and international.
NSP-W has two wholly owned subsidiaries. These are: Clearwater
Investment, Inc., an affordable housing investment and development company which
has investments in a variety of low-income housing and other projects; and NSP
Lands, Inc., a company which is currently developing for sale land owned by NSP-
W. It also has a 78% owned subsidiary, Chippewa & Flambeau Improvement Company,
a company which builds, maintains and operates dams and reservoirs on the
Chippewa and Flambeau Rivers in Wisconsin.
WEC, which will change its name to Primergy Corporation at the time of
the consummation of the Transaction, has one public utility subsidiary, WEPCO.
WEPCO is engaged in the business of generating, transmitting, distributing and
selling electric energy to approximately 955,616 customers as of December 31,
1995 in a service area of approximately 12,000 square miles with a population
estimated at over 2,200,000 in southeastern (including the Milwaukee area),
central and northern Wisconsin and in the Upper Peninsula of Michigan. WEPCO
also purchases, distributes and sells to retail customers or transports
customer-owned gas to approximately 357,030 customers as of December 31, 1995 in
three distinct service areas in Wisconsin: west and south of the City of
Milwaukee, the Appleton area and the Prairie du Chien area. The gas service
territory, which has an estimated population of over 1,100,000, is largely
within the electric service area of WEPCO. WEPCO also distributes and sells
steam supplied by its Valley Power Plant to approximately 473 space heating and
processing customers as of December 31, 1995 in downtown and near southside
Milwaukee.
WEC Common Stock is listed on the NYSE. As of December 31, 1995,
there were 110,819,337 shares of WEC Common Stock outstanding. WEC has no
shares of preferred stock outstanding. WEC's principal executive office is
located at 231 West Michigan Street, Milwaukee, Wisconsin 53203. All of
WEPCO's common stock is owned by WEC. As of December 31, 1995, there were
304,508 shares of WEPCO preferred stock outstanding. WEPCO's outstanding
preferred stock will not be impacted by the Transaction. On a
3
<PAGE>
consolidated basis, for the year ended December 31, 1995, WEC's operating
revenues were approximately $1.779 billion, of which approximately $1.437
billion were derived from electric operations, approximately $318 million from
gas operations, approximately $15 million from steam operation and approximately
$9 million from other operations. Consolidated assets of WEC and its
subsidiaries as of December 31, 1995, were approximately $4.561 billion,
consisting of $3.907 billion in net electric utility property, plant and
equipment, $387 million in net gas utility property, plant and equipment, $25
million in net steam utility property, plant and equipment and $242 million in
non-utility assets.
WEC has seven wholly owned non-utility subsidiaries devoted primarily
to stimulating economic growth in WEPCO's service areas and to capitalizing on
diversified investment opportunities all of which have been formed under and
pursuant to the requirements and policies of the Wisconsin Holding Company Act.
These are: Badger Service Company, a company which holds coal rights in Indiana;
Minergy Corp., a company engaged in the business of developing and marketing
proprietary technologies designed to convert high volume industrial and
municipal wastes into value-added products and which will build and operate a
paper-sludge recycling facility; WEC Generation International Inc, a company
which will investigate investment opportunities and which has two, currently
inactive, international subsidiaries; Wisconsin Michigan Investment Corporation,
a company which engages in investment and financing activities which include
advances to affiliated companies and investments in financial instruments and
partnerships developing affordable housing and other businesses; WISPARK
Corporation, a real estate development company which engages in all aspects of
real-estate development and which holds investment and ownership positions in a
variety of real estate projects; WISVEST Corporation, a company which invests in
energy-related activities and holds investments in several energy-related
companies; and WITECH Corporation, a company which provides venture capital and
holds equity and other positions in a variety of businesses. In addition, WEC
holds a 50% interest in Custometrics LLC, a joint venture which will provide
systems solutions relating to billing and other aspects of the customer service
segment of the energy services industry.
Pursuant to an Agreement and Plan of Merger, dated as of April 28,
1995, as amended and restated as of July 26, 1995 (the "Merger Agreement"),
entered into by NSP, WEC, Northern Power Wisconsin Corp. ("New NSP")1
and WEC Sub Corp. ("WEC Sub")2, the
- ----------------------
1 New NSP, a Wisconsin corporation and a wholly owned subsidiary of NSP has
not had, and prior to the consummation of the Transaction will not have,
any operations other than the activities contemplated by the Merger
Agreement necessary to accomplish the combination of New NSP and NSP.
2 WEC Sub, a Wisconsin corporation and wholly owned subsidiary of WEC has not
had, and prior to the consummation of the Transaction will not have, any
operations other than the activities contemplated by the Merger Agreement
necessary to accomplish the combination of WEC Sub and New NSP.
4
<PAGE>
Transaction will be accomplished through a three-stage process. In the first
stage, NSP will reincorporate in Wisconsin by merging into New NSP. Immediately
prior to this merger and for state regulatory reasons, NSP-W will transfer the
gas utility assets necessary to furnish gas utility services to the communities
of LaCrosse and Hudson, Wisconsin to New NSP (the "Designated Gas Utility
Assets"). In the second stage, WEC Sub will merge with and into New NSP, with
New NSP left as the surviving corporation. In the third stage, NSP-W will merge
into WEPCO and ownership of all other NSP subsidiaries will be transferred from
NSP to Primergy or to Primergy Hold if it is formed. Also in connection with
the Transaction, WEPCO will be renamed Wisconsin Energy Company.
Specifically, the Merger Agreement provides for: (i) the merger of NSP
with and into New NSP (the "Reincorporation Merger") pursuant to which (a) each
issued and outstanding share of common stock, par value $2.50 per share, of NSP
("NSP Common Stock") (except shares held by NSP shareholders who perfect
dissenters' rights with respect thereto ("NSP Dissenting Shares")) will be
canceled and converted into one share of common stock, par value $2.50 per
share, of New NSP ("New NSP Common Stock"), and (b) each issued and outstanding
share of cumulative preferred stock, par value $100.00 per share, of NSP ("NSP
Preferred Stock") (except NSP Dissenting Shares) will be canceled and converted
into one share of cumulative preferred stock, par value $100.00 per share, of
New NSP ("New NSP Preferred Stock") with terms (including dividend rates and
general voting rights) and designations under New NSP's Articles of
Incorporation identical to those of the canceled shares of NSP Preferred Stock
under NSP's existing Restated Articles of Incorporation, and (ii) the merger of
WEC Sub with and into New NSP (the "NSP Merger," together with the
Reincorporation Merger , the "Mergers") pursuant to which (a) each issued and
outstanding share of New NSP Common Stock will be canceled and converted into
1.626 (the "Ratio") shares of common stock, par value $.01 per share, of
Primergy ("Primergy Common Stock") and (b) each issued and outstanding share of
New NSP Preferred Stock will remain outstanding and shall be unchanged thereby
(except for any shares of New NSP Common Stock and New NSP Preferred Stock owned
directly or indirectly by New NSP or WEC, which will be canceled and will not be
converted or remain outstanding). Each issued and outstanding share of common
stock, par value $.01 per share, of WEC ("WEC Common Stock") will remain
outstanding and unchanged, as one share of Primergy Common Stock. Based upon
the capitalization of NSP and WEC on April 28, 1995 (the date the Merger
Agreement was initially signed) and the Ratio, holders of NSP Common Stock and
WEC Common Stock would each have held 50% of the aggregate number of shares of
Primergy Common Stock that would have been outstanding if the Mergers had been
consummated as of such date. The Applicants state that the proposed Transaction
qualifies for treatment as a pooling of interests.
Upon completion of the Transaction, Primergy will own two combination
electric and gas utility companies, NSP and WEPCO. NSP will continue to operate
and own the same utility facilities at the same locations outside Wisconsin as
prior to the Transaction, along with the Designated Gas Utility Assets formerly
owned by NSP-W. WEPCO will own and operate
5
<PAGE>
the same utility facilities at the same locations as prior to the Transaction,
along with the balance of the gas and electric utility assets of NSP-W. The
Merger Agreement provides that Primergy's principal corporate offices will be in
Minneapolis, Minnesota. NSP and WEC will retain offices in Minneapolis and
Milwaukee respectively as their regional headquarters. Primergy's board of
directors will consist of a total of 12 directors, 6 of whom will be designated
by NSP and 6 of whom will be designated by WEC.
The Applicants also request authorization with respect to the
activities of Primergy Services and, if formed, certain other additional service
companies. Primergy Services and the additional services companies may provide
NSP and WEPCO pursuant to a Service Agreement and the non-utility subsidiaries
of the Primergy system pursuant to a Non-utility Service Agreement with one or
more of the following: administrative, management and support services,
including services relating to information systems, meters and transportation,
electric and gas system maintenance, marketing and customer relations,
transmission and distribution, engineering and construction, power engineering
and construction, human resources, materials management, facilities, accounting,
power planning, public affairs, legal, rates, finance, rights of way, internal
auditing, environmental affairs, fuels, investor relations, strategic and
operations planning, and general administrative and executive management
services. It is anticipated that such service companies will be staffed
primarily by transferring personnel from the current employee rosters of NSP,
WEPCO, and their subsidiaries. The Applicants state that the accounting and
cost allocation methods and procedures of all such service companies which are
formed including Primergy Services will comply with the Commission's standards
for service companies in registered holding-company systems, and that the
billing systems of all such service companies including Primergy Services will
use the Commission's "Uniform System of Accounts for Mutual Service Companies
and Subsidiary Service Companies." Except as permitted under the Act or by the
Commission, all services provided by such service companies to affiliated
companies will be on an "at cost" basis as determined by Rules 90 and 91 of the
Act. The Applicants have requested an exemption from Rules 90 and 91 in
connection with the provision of services by Primergy Services and such other
service companies as may be formed to certain affiliated Qualifying Facilities
("QFs"), Independent Power Projects ("IPPs"), Exempt Wholesale Generators
("EWGs") and Foreign Utility Companies ("FUCOs") as well as certain other
affiliated and associated companies.
The Applicants also request authorization with respect to certain
subsidiaries and associates which provide services, including operation and
maintenance, and sell goods to certain foreign EWGs, FUCOs, EWGs and QFs or to
entities which will qualify as EWGs, FUCOs or QFs following the Transaction.
The Applicants request that the Commission permit these companies and certain
other companies to continue such transactions without compliance with the at
cost provisions of Section 13(b) and the rules and regulations thereunder. In
addition, the Applicants request an exemption with respect to the provision of
services to certain affiliates that own interests in QFs that sell power to NSP
pursuant to PURPA contracts approved by the Minnesota Public Utility Commission
("MPUC") and with respect to various additional existing
6
<PAGE>
contracts, and outstanding and committed intercompany loans and guarantees of
indebtedness among affiliates following the Transaction which have previously
been approved by the MPUC or the Public Service Commission of Wisconsin.
For the Commission, by the Division of Investment Management, pursuant
to delegated authority.
7
<PAGE>
EXHIBIT J.1
NORTHERN STATES POWER COMPANY (MINNESOTA) [NSP(M)]
NORTHERN STATES POWER COMPANY (WISCONSIN) [NSP(W)]
ANALYSIS OF THE ECONOMIC IMPACT
OF A DIVESTITURE OF THE GAS OPERATIONS OF
NSP(M) AND ITS NSP(W) SUBSIDIARY
This Study was undertaken by the management and staff of Northern States
Power Company ("NSPM") and its wholly-owned subsidiary Northern States Power
Company (Wisconsin) ("NSPW"). The objective of the study is to quantify the
economic impact on shareholders and customers of divesting NSPM of its natural
gas utility assets and business in the States of Minnesota and North Dakota, and
of divesting NSPW of its natural gas utility assets and business in the States
of Wisconsin and Michigan.
March 18, 1996
<PAGE>
TABLE OF CONTENTS
Page
----
I. EXECUTIVE SUMMARY 1
II. CONCLUSIONS 3
III. SPIN-OFF ASSUMPTIONS 6
IV. GENERAL STUDY ASSUMPTIONS 7
V. GAS COMPANY OF MINNESOTA ANALYSIS 9
VI. GAS COMPANY OF WISCONSIN ANALYSIS 17
VII. OTHER CUSTOMER IMPACTS 25
VIII. BILL COMPARISON OF GAS COMPANY OF MINNESOTA AND
GAS COMPANY OF WISCONSIN 26
IX. EFFECT ON REMAINING ELECTRIC COMPANIES 27
APPENDIX A. COMPARISON OF NSP(M) AND NSP(W) GAS TO REGIONAL
GAS UTILITIES
APPENDIX B. ORGANIZATION CHART NEW GAS COMPANY OF MINNESOTA
APPENDIX C. ORGANIZATION CHART NEW GAS COMPANY OF WISCONSIN
<PAGE>
I. EXECUTIVE SUMMARY
Northern States Power Company (NSP) management and staff have undertaken this
Analysis of the Economic Impact of a Divestiture of the Gas Operations of
Northern States Power Company (Minnesota) ("NSP(M)") and its Northern States
Power Company (Wisconsin) ("NSP(W)") (Study). The purpose of the Study is to
quantify the economic impact on its shareholders and its customers of spinning
off NSP(M)'s and NSP(W)'s natural gas assets and businesses. NSP is currently
an exempt holding company under the Public Utility Holding Company Act of 1935
(PUHCA) providing electric and natural gas service in a major portion of the
States of Minnesota, North Dakota and South Dakota. NSP(W) is a wholly-owned
subsidiary of NSP providing electric and natural gas service in and around Eau
Claire, Wisconsin, and the Upper Peninsula of Michigan.
The Study quantifies the economic impacts of operating the following two
entities as independent, stand-alone companies if they were dis-aggregated from
NSP's combined utility businesses:
- - The Minnesota and North Dakota portion of NSP(M)'s gas business spun-off
into a new organization called, for the purpose of this Study, Gas Company
of Minnesota and
- - NSP(W)'s gas business spun-off into a new organization called, for the
purpose of this Study, Gas Company of Wisconsin.
The Study evaluates the increased costs or "Lost Economies" associated with
divestiture of these businesses from two perspectives - shareholders and
customers. The effect on shareholders is the direct result of the increased
costs or lost economies resulting from a spin-off or divestiture, absent
regulatory rate relief to recoup these lost economies. The effect on customers
assumes recovery of these lost economies through rate increases, and is divided
into two parts. The potential effects on customers have first been evaluated in
terms of increased revenue requirements and rates, and, second in terms of the
impact of other quantifiable and non-quantifiable costs.
The projected impacts on the shareholders of the lost economies resulting from
the spin-off of NSP's gas business into Gas Company of Minnesota and the spin-
off of NSP(W)'s gas business into Gas Company of Wisconsin, assuming no rate
adjustments to recover the lost economies and associated incomes taxes, are
shown in Table I-1.
<PAGE>
TABLE I-I
ANNUAL SHAREHOLDER IMPACT OF LOST ECONOMIES
<TABLE>
<CAPTION>
LOST ECONOMIES AS GAS COMPANY GAS COMPANY
A PERCENT OF: OF MINNESOTA OF WISCONSIN
<S> <C> <C>
Total Gas Operating Revenue 8.74% 11.73%
Total Gas Operating Rev Deductions 9.79% 13.12%
Gross Gas Income 81.46% 111.05%
Net Gas Income 110.20% 165.16%
</TABLE>
In Table I-1, Total Gas Operating Revenue is the sum of rate and other revenue
for the 12 months ending December 31, 1995 (Base Case)(1). Total Gas Operating
Revenue Deductions includes all operation and maintenance expenses,
administrative and general expenses, depreciation and all taxes, except income
taxes. Gross Gas Income is the difference between Total Gas Operating Revenue
and Total Gas Opt rating Revenue Deductions. Net Gas Income is Gross Gas Income
minus Income Taxes.
Alternatively, and assuming that each organization is allowed to increase its
rate revenue to recover these lost economies and attendant income taxes through
rate increases, the projected impact on NSP(M)'s and NSP(W)'s gas customers is
shown in Table I-2.
TABLE I-2
ANNUAL GAS CUSTOMER IMPACT OF LOST ECONOMIES
<TABLE>
<CAPTION>
GAS COMPANY GAS COMPANY
RATE REVENUE: OF MINNESOTA OF WISCONSIN
<S> <C> <C>
Pre Spin-off $336,082,000 $78,015,000
Post Spin-off $366,184,000 $87,304,000
Increase $30,102,000 $9,289,000
Percent Increase 8.96% 11.91%
</TABLE>
- --------------------
(1) The dollar amounts contained in the study are expressed in 1995 dollars.
<PAGE>
In addition to the foregoing impacts, the following table sets forth the impact
on the remaining electric companies (comprised of NSP(M)'s and NSP(W)'s current
electric businesses). This impact is primarily due to the expense of additional
employees required to perform the multitude of functions accomplished by
employees who currently work for both the electric and gas businesses and
assumes that pass
through of the lost economies and attendant income taxes is allowed by the
appropriate regulatory agencies.
TABLE I-3
ANNUAL ELECTRIC CUSTOMER IMPACT OF LOST ECONOMIES
<TABLE>
<CAPTION>
RATE REVENUE: NSP(M) REMAINING NSP(W) REMAINING
ELECTRIC ELECTRIC
<S> <C> <C>
Pre Spin-off $2,019,831,000 $310,790,000
Post Spin-off $2,036,690,000 $3 15,140,000
Increase $16,859,000 $4,350,000
Percent Increase 0.8% 1.4%
</TABLE>
Finally, both NSP(M)'s and NSP(W)'s gas customers would incur increased personal
costs such as postage on a separate envelope and additional check costs to mail
payments to two utilities rather than one. This does not include additional
customer confusion resulting from doing business with two utilities rather than
one. The increased postage expense alone of $3.84 per customer per year for all
customers is shown in Table I-4.
TABLE I-4
OTHER ANNUAL CUSTOMER IMPACTS
<TABLE>
<CAPTION>
NSP(M) POSTAGE NSP(W) POSTAGE
<C> <C>
$1,356,000 $275,000
</TABLE>
II. CONCLUSIONS
The spin-off of NSP(M)'s and NSP(W)'s current gas businesses into two
stand-alone companies is estimated to result in a substantial increase in costs
and therefore a substantial decrease in earnings to NSP shareholders absent rate
relief to recoup these decreased earnings. Without an increase in rates, the
immediate negative effect on shareholders' earnings would be substantial. For
example, the earnings contribution relating to NSP(M)'s and NSP(W)'s gas
<PAGE>
businesses would be decreased by approximately 110 percent and 165 percent,
respectively, as shown in Table I-1. Such a decline would make ownership of
shares in these stand-alone companies unattractive.
The pass-through of these cost increases to gas customers in Minnesota, North
Dakota, Wisconsin and Michigan will result in a significant increase in the
level of cost borne by these customers with no attendant increase in the
level or quality of service. The rate increases required to provide the
level of revenue needed to cover costs to operate Gas Company of Minnesota
and Gas Company of Wisconsin will be significant, amounting to approximately
$39.4 million, as shown in Table 1-2. Such rate increases would make the new
gas companies less competitive at a time when competition in the energy
industry is rapidly increasing due to Federal Energy Regulatory Commission
(FERC) Order 636 and other FERC and state regulatory restructuring
initiatives. By comparison, retention of the gas businesses would allow rate
reductions to consumers.
The potential by-pass of Local Distribution Companies (LDCS) is becoming a
reality that LDCs must face daily, along with the commensurate possibility of
a decreasing customer base, resultant rate increases, and potential stranded
costs. The FERC has sanctioned the bypass of LDC systems by interstate
pipelines in recent years in the interest of competition. In addition,
natural gas service continues to compete with alternative files.
The focus on competition is beginning to require the unbundling of LDC
services. This trend is occurring as state commissions, LDCS, and their
customers, call for a change in the way LDCs do business. While the
objectives of these groups are not always consistent, the result will likely
be the same-increased competition. LDCs already face fierce price
competition, and must remain competitive to avoid shareholder losses and a
reduced customer base. As a result of the increased costs discussed herein,
bundled or unbundled services may become uncompetitive as the pass through of
these increases could potentially result in rates that few customers would
pay when compared to other competitive options they may have.
In addition, the FERC's ongoing electric Notice of Proposed Rulemaking
Promoting Wholesale Competition Through Open Access Nondiscriminatory
Transmission Services by Public Utilities (RM95-8-000, et al.) and state
retail wheeling initiatives are expected to increase competition in the
electric industry. The lost economies estimated for NSP(M)'s and NSP(W)'s
remaining electric companies, if divestiture of gas operations were required,
would also have an adverse impact on their ability to successfully compete in
the electric industry. A forced divestiture as a result of the proposed
merged company would result in the remaining companies becoming less
competitive than they would be as part of a merged company. A graphic
comparison of typical residential and commercial gas bills in Minnesota,
North Dakota, Wisconsin and Michigan, illustrating the loss of each new Gas
Company's relative position resulting from a spin-off, as compared to other
utilities, is contained in Table VII-1 of Exhibit J.2-Wisconsin Energy
Corporation "Analysis of Economic Impact of a Divestiture of Wisconsin Energy
Corporation's Gas Operations."
<PAGE>
As opposed to the negative results of the economic impact, two positive
conclusions were noted.
- - First, it is expected that after divestiture, the two segments of NSP(M)
and NSP(W)'s business analyzed in this Study would continue to be managed
locally, as they currently are. NSP(M)'s gas business would continue to be
managed from and based in St. Paul, Minnesota, and from other
local/regional parts of North Dakota and Minnesota where management is
currently based. NSP(W)'s gas business would continue to be locally based
in the City of Eau Claire, Wisconsin. Therefore, the benefits and costs of
localized management will continue to be realized.
- - Second, it is expected that after divestiture the Minnesota Public
Utilities Commission (MPUC), North Dakota Public Service Commission
(NDPSC), the Wisconsin Public Service Commission (PSCW), and Michigan
Public Service Commission (MPSC) would continue to have and exercise the
same jurisdictional authority over the regulated businesses as they do
today. NSP(M)'s gas business would continue to be regulated primarily by
the MPUC and NDPSC, and NSP(W)'s gas business would continue to be
regulated primarily by the PSCW and MPSC. Therefore, the state commissions
will continue as the primary agencies responsible for the regulation of the
LDCS.
However, it should be noted that these same conditions (continued local
management and state regulatory jurisdiction) would exist if the gas
businesses remain with the new merged entity.
As previously discussed in the Executive Summary, there is a combination of
approximately $39.4 million in revenue increases needed for the New Gas
Companies, shown in Table I-2, and an additional $21.2 million in revenue
increases as a result of lost economies, including income taxes, that will
impact the remaining NSP(M) and NSP(W) electric companies, and potentially
their customers shown in Table I-3. Therefore, the total revenue increases
that would be required is approximately $60.6 million.
Based on the foregoing conclusions, NSP believes that spinning off the gas
businesses would adversely impact NSP's shareholders and both electric and
gas customers. Therefore, NSP recommends that it is in the best interest of
its shareholders and customers that NSP(M) and NSP(W) retain their existing
gas assets and businesses.
III. SPIN-OFF ASSUMPTIONS
The Study assumes that two segments of NSP's current business can, in fact,
be spun-off into stand-alone companies. These two potential stand-alone
businesses are currently part of the combined companies as described below.(2)
- --------------------
(2) For a comparison of NSP(M) and NSP(W) gas operations relative to other
utilities based on 1994 data, see Appendix A of Exhibit J.2 - Wisconsin Energy
Corporation "Analysis of Economic Impact of a Divestiture of Wisconsin Energy
Corporation's Gas Operations."
<PAGE>
Within Minnesota, North Dakota and South Dakota, NSP(M) is primarily a
combination electric and gas utility, engaged in the generation, purchase,
transmission, distribution and sale of electricity, and in the purchase,
transmission, distribution, sale and transportation of natural gas. (NSP
presently provides only electric service in South Dakota; NSP does not presently
provide gas service in South Dakota).
NSP(M)'s gas business includes an extensive distribution system serving
numerous communities throughout Minnesota and North Dakota. NSP(M)'s gas system
serves over 353,000 residential, commercial, industrial, and transportation
customers. Total annual gas revenues are approximately $336 million. Annual
gas deliveries are nearly 96 billion cubic feet (Bcf). The Study assumes that
the gas portion of NSP(M) is spun-off into a stand-alone gas company-New Gas
Company of Minnesota.
NSP(M)'s electric business, which includes generation, transmission, and
distribution facilities located statewide, provides service to nearly 1.2
million customers throughout a large portion of Minnesota, North Dakota and
South Dakota. Total annual electric revenues are approximately $2.0 billion and
annual sales are nearly 36 million megawatt hours (Mwh).
NSP's wholly-owned subsidiary, NSP(W), operates a combination electric and
gas business in Wisconsin and the Upper Peninsula of Michigan. NSP(W) is
engaged in the generation, transmission, distribution and sale of electricity,
and in the purchase, distribution, sale and transportation of natural gas.
The NSP(W) gas distribution system serves over 71,550 customers. Total
annual gas revenues are approximately 78.0 million. Annual gas deliveries are
nearly 19 billion cubic feet (Bcf). The Study assumes that the gas portion of
NSP(W) is spun-off into a stand-alone gas company: New Gas Company of Wisconsin.
The NSP(W) electric system consists of generation, transmission and
distribution facilities and serves over 211,550 customers. Total annual
electric revenues are approximately $310.8 million and annual sales are
approximately 5.5 million megawatt hours (Mwh).
The Study assumes that it would be possible to spin-off NSP(M)'s gas business
and its NSP(W)'s gas business from their respective combined gas and electric
businesses for the following reasons:
- - The electric and gas systems are physically separate;
- - A large number of personnel who are directly involved in the day-to-day
operations of the electric and gas physical plant ("systems") are dedicated
electric-only or gas-only;
- - The regulatory treatment of the respective electric and gas revenue
requirements, rate design, and tariff filings is, for the most part,
handled separately; and,
<PAGE>
- - In other parts of the country, stand-alone electric and gas companies
routinely share overlapping service territories.
In addition, the Study analyzes the Gas Company of Minnesota and Gas Company of
Wisconsin organizations as two stand-alone companies rather than one
combined-gas-company for the following reasons:
- - NSP(W) is a wholly-owned subsidiary of NSP(M) with existing separate
management and its own Board of Directors: Two separate corporations would
need to be merged to effectuate a single combined gas company.
- - NSP(M)'s gas business and NSP(W)'s gas business are currently regulated by
different State commissions. NSP(M) is regulated by the MPUC and NDPSC,
while NSP(W) is regulated by the PSCW and MPSC (3)
- - The NSP(M) and NSP(W) gas systems can be operated independently; and, (4)
- - A significant number of personnel who oversee and maintain the operation of
the two systems are employees of NSP(M) only or NSP(W) only.
IV. GENERAL STUDY ASSUMPTIONS
The assumptions, information and data utilized in the analyses undertaken in
this Study are based on the energy industry expertise and experience possessed
by the management and staff of NSP(M) and NSP(W). Employees with experience in
all major facets of the operations of NSP(M) and NSP(W) were consulted and
provided input. The Study's aggregate conclusions are the result of many
independent inputs and analyses from highly qualified individuals throughout the
companies.
The Base Cases for the Study are founded upon actual sales, revenues, costs, and
rates of return from the 1995 gas utility of NSP(M) and NSP(W).
NSP made an exhaustive analysis of the major cost components that may be
associated with a divestiture. As a result of discussions with numerous
personnel at NSP(M) and NSP(W), the
- --------------------
(3) Both NSP(M) and NSP(W) are regulated to a minor extent by the FERC under
the provisions of limited jurisdiction certificates pursuant to Section 7(C) of
the Natural Gas Act of 1938.
(4) As discussed in the Application/Declaration on Form U-1 of Primergy to
which this study is an exhibit, the NSP(M) and NSP(W) gas systems together
constitute an "integrated public utility system" within the meaning of Section
2(a) (29) of the Public Utility Holding Company Act of 1935.
<PAGE>
major cost components that may be associated with a divestiture were identified,
quantified, and included in the Study results. A more exhaustive analysis would
probably produce additional costs and diseconomies from divestiture of NSP(M)
and NSP(W) gas operations.
The remainder of this section discusses the major assumptions that were employed
in developing the Study.
A. For the purposes of developing the impacts of a spin-off on the various
organizations, it is assumed that each of the organizations to be spun-off
will operate as an independent, stand-alone company Therefore, they will
have all of the necessary management and personnel, along with the computer
systems, facilities, equipment, materials and supplies required to operate
as stand-alone companies.
B. For the purpose of determining the staffing requirements of each stand-
alone company, the guiding principle was that a sufficient number of
employees be included in order to assure that all present functions
applicable to the stand-alone organization are performed, and that the
present level and quality of service remain unchanged.
C. Labor costs are based on an assessment of straight-time, overtime, and
pension and benefit costs for each employee of the stand-alone
organizations. Benefit levels will remain unchanged in the New Gas
Companies.
D. Unless otherwise discussed, the non-labor costs would remain essentially
unchanged from those costs allocated to the organization to be spun-off.
All gas related costs, such as the cost of gas, have been included in each
gas organization's costs.
E. Annual facility costs relating to the additional employees required to
maintain the current levels of service have been incorporated into the
analyses.
F. For the purpose of showing the final impact on each company's customers, it
is assumed that full pass-through of all of the lost economies, including
income taxes, will be allowed in a formal rate proceeding after
divestiture, and that the current rate levels remain unchanged until that
time.
G. For the purposes of developing the impact of the spin-off on each
organization, a comparison is made to a Base Case. The Base Case for each
company is the actual results of gas operations for NSP(M) and NSP(W), for
the twelve months ended December 31, 1995, as discussed earlier, including
all currently approved regulatory cost of service allowances.
H. It is assumed that each organization will be subject to the regulation of
the same state & federal agencies that presently regulate each
organization.
I. If there currently exists a contract for services from independent third-
parties, the contract will continue for the spun-off organizations.
<PAGE>
J. Only the categories of costs that are expected to change significantly were
analyzed. Clearly many other costs beyond those presented in this Study
will be impacted by a divestiture.
K. Incentive compensation for management and executive employees has not been
included when determining the new gas companies labor costs. However, it
is assumed that a plan similar to the present NSP plan would be developed.
L. At the time of divestiture of NSP(M) and NSP(W) gas businesses, a release
of all gas properties from the existing bond indentures from Harris Trust &
Savings Bank and Firstar Trust Company would be required. New bond
indentures would be written for the two new gas companies.
V. GAS COMPANY OF MINNESOTA
A detailed study has been undertaken to analyze the potential impact on both the
shareholders and customers of NSP(M) if it were ordered to divest its Minnesota
and North Dakota gas business. In order to accomplish that study, the
management of NSP(M) provided estimates of the staffing levels of a Gas Company
of Minnesota, as well as any other operational and administrative changes that
would have to be made in order to maintain the same level and quality of service
to its customers after a spin-off of the gas business.
A. Specific Assumptions
In addition to the General Study Assumptions cited earlier, the following
specific assumptions have been incorporated into the analysis of the spin-off of
the gas operations of NSP(M) into Gas Company of Minnesota.
Labor Assumptions
a. The NSP(M) organization as of December 31, 1995 was used as the template
for developing the Gas Company of Minnesota organization structure.
b. Where practical, some management positions were combined, eliminated or
replaced with non-management positions. Some further consolidation of
management positions may be possible, particularly within the staff
organizations. However, the overall span of control (the ratio of
nonmanagement employees to management employees) for Gas Company of
Minnesota is greater than the span of control in the NSP(M) organization.
As of December 31, 1995, NSP(M) had 691 management and 5,531 nonmanagement
employees, yielding a span of control of 8.0 employees per manager. Gas
Company of Minnesota would have 47 management and 789 non-management
employees, resulting in a span of control of 16.8 (i.e., less managers per
non management employee than the organization). This higher span of
control is due to the following:
<PAGE>
1) Management employees required in the operations areas, but with a
higher non-management employee count due to the elimination of
electric and corporate resources that are currently providing both
electric and gas services, and,
2) The number of management personnel required in the staff organization,
but with some increases in non-management staff size due to the
elimination of support for electric and corporate functions that were
currently providing both electric and gas services.
C. To provide an equivalent quality of customer service an analysis was made
of the Customer Service Area to determine the number of employees required
for Gas Company of Minnesota. The staffing levels required in the Gas
Company of Minnesota compared to the current combined company for the
following functional areas of Customer Service are as follows:
Meter Reading 69 Additional (39% over current levels)
Customer Service 114 Additional (39% over current levels)
Billing/Statements 2 Additional (33% over current levels)
Payment Processing 10 Additional (40% over current levels)
These functions are accomplished by a relatively small number of personnel
and a spin off of gas responsibilities would not significantly affect the
employees required to accomplish electric only functions.
d. The Customer Service cost for Gas Company of Minnesota was based on the
current cost of providing customer service (meter reading, customer service,
billing and payment processing) for both electric and gas customers. This
amount was multiplied by the number of current gas customers as of December
31, 1995. The staffing levels were based on an employee per customer ratio.
This ratio was applied to the gas customers to determine the required staff
size per Customer Service function.
e. Executive salaries were based on a composite industry service data from
Mercer, American Gas Association (AGA), Towers Perrin, Edison Electric
Institute (EEI), and Wyatt.
f. All non-executive salaries were based on the current compensation levels for
the functional areas.
g. Pensions and benefits were estimated as a percent of the labor cost.
Currently, pension and benefits are approximately 37 percent above the base
cost of labor. Therefore, after the base cost of labor was determined, an
additional 37 percent was added to include pension and benefit costs.
2. Operations & Maintenance (O&M) and Administrative and General (A&G)
Assumptions:
<PAGE>
a. Annual facility costs relating to the additional employees and
building needs for the trucks, trailers backhoes required to operate
the stand-alone companies have been incorporated into the Study.
b. Separate arrangements would be made for external auditing of the books
and accounts of Gas Company of Minnesota.
c. Executive and administrative support from NSP(M) would cease upon any
divestiture, and these functions have been provided for in the Gas
Company of Minnesota organizational structure.
d. Separate gas bills would be provided to customers of Gas Company of
Minnesota.
e. Specific shared activities such as locating and customer support were
examined and included in the analysis.
<PAGE>
f. The Customer Service center needed for a Gas Company of Minnesota will
be leased at an annual cost of $625,000.
3. Capital Expenditure and Cost Assumptions
a. With the exception of Information Technology computer hardware to
handle the various accounting and operating systems, estimated at $3.0
million, and facilities costs related to work stations, estimated at
$1.6 million, no additional capital expenditures will be made by Gas
Company of Minnesota as a direct consequence of spinning of the gas
facilities from NSP(M). This, of course, does not include planned
capital expenditures to be made in the normal course of business in
order to maintain existing levels of service and provide service to
new customers.
b. In the event NSP(M) is required to divest its gas operations, and
assuming the assets are spin-off into a new stand-alone corporation,
the requirements of the existing indentures would result in the need
to recapitalize at market rates in effect at the time of the spin-off.
Additionally, costs associated with the issuance of securities would
be incurred and ultimately included in the Gas Company of Minnesota
cost of service.
The current capital structure of NSP(M) is used for the purpose of
analyzing capital costs for Gas Company of Minnesota. This structure is
equal to the capital structure approved by the MPUC in NSP(M)'s most
recent gas rate proceeding, Docket No. GOO2/GR-92-1186. As of December
31, 1995, NSP(M)'s gas rate base was capitalized as follows:
<TABLE>
<CAPTION>
RATIO COST COMPOSITE COST
----- ---- --------------
<S> <C> <C> <C>
Long/Short Term Debt 43.35% 7.61% 3.30%
Preferred Stock 8.26% 5.57% 0.46%
Common Equity 48.39% 11.47% 5.55%
------ ------ -----
Total: 100.00% 9.31%
</TABLE>
This Study assumes that Gas Company of Minnesota would have access to
capital at a cost similar to that of NSP(M). The difference expected from
the rates listed above would result from an increased equity ratio. The
study assumes that gas utilities have an equity ratio about 3% higher, than
electric utilities.(5) NSP(M)'s electric business encompasses about 90% of
the combined rate base. The study assumes the capital structure is really
a function of the electric business and therefore a capital structure for
an electric only NSP(M) would be the same as the current combined capital
structure. The cost of debt was not changed because the marginal cost of
debt for a double-A utility should be about the same as the embedded rate.
- ----------------------
(5) Regulatory Research Associates Major Rates Cases for 1995, page 5.
<PAGE>
The cost of common equity is 11.47 percent which was established by the
MPUC, Docket No G002/GR-92-1186. Common equity would require the sale of
new securities, as new stock certificates would be issued to future
shareholders of Gas Company of Minnesota. Gas Company of Minnesota would
capitalize through an initial public offering (IPO) of 20% of the equity
value and spinning off 80% to existing NSP shareholders, and debt issuance
in the above reference capital structure ratios at an aggregated cost of
$4.4 million. Annual cost over 30 years would be $145,000. This cost
would be charged as a transition cost to be recovered over 30 years.
4. Transition Cost Assumptions. In addition to the increased amount of equity
discussed above, the new gas companies of Minnesota and Wisconsin would
incur transition costs associated with the new separate gas utilities being
formed. Gas franchises would be assigned to the new gas companies by
providing notice to the cities at minimal or zero cost.
5. Foregone Merger Savings. The Primergy merger filing includes anticipated
merger savings for the gas utilities. The Study assumed these savings
would be lost as a result of divestiture. The levied annual impact is $7.9
million.
B. ORGANIZATION OF GAS COMPANY OF MINNESOTA
The functional organization chart of Gas Company of Minnesota is contained
in Appendix B.
DESIGN OF GAS COMPANY OF MINNESOTA ORGANIZATION - The NSP(M) organization
at December 31, 1995, was used as the pattern for developing the Gas
Company of Minnesota organization structure. In order to develop the new
structure for the stand-alone company, management was contacted for input
regarding staffing levels.
BOARD OF DIRECTORS -The Board of Directors is assumed to consist of twelve
directors based on the size and scope of Gas Company of Minnesota.
CHIEF EXECUTIVE OFFICER(CEO) - The CEO reports to the Board of Directors
and is responsible for overseeing the entire Company. The CEO oversees
five direct-report executives (Chief Operating Officer; Chief Financial
Officer, Customer Service Vice President, Human Resources Vice President,
and General Counsel) and is responsible for Corporate Communications and
Audit Services. The Executive Organization totals 29 employees, and is
composed of 6 executives, 2 managers, 15 non-management, and 6 executive
assistants.
CHIEF OPERATING Officer (COO) - The COO reports directly to the CEO and is
responsible for the overall operating activities of the Company. The COO
oversees the work of three directors (Operations; Gas Supply, Gas Control
and Engineering; and Supply and Operational Services). The organization
managed by the COO totals 457 employees, and is composed of 22 managers,
and 435 non-management personnel.
<PAGE>
DIRECTOR SUPPLY, CONTROL AND ENGINEERING - The Director of Gas Supply, Gas
Control and Engineering is responsible for measurement, acquiring
interstate gas transportation capacity, forecasting requirements, making
gas purchases, system design (pipelines, storage reservoirs, and
compressors), LNG and propane plants; and gas system control coordination.
Supply, Control and Engineering totals 71 employees, composed of 4
management and 67 non-management personnel.
DIRECTOR, OPERATIONS - The Director of Operations is responsible for all
major distribution functions such as safety, environmental training,
regional management, pipeline construction, and distribution system support
services. Operations totals 346 employees, composed of 14 management and
322 non-management personnel.
DIRECTOR, SUPPLY & OPERATIONAL SERVICES(SOS) - The Director of Supply and
Operational Services is responsible for facilities maintenance,
purchasing, transportation, contracts and material management. Supply and
Operational Services total 40 employees, composed of 4 management and 36
non-management personnel.
CHIEF FINANCIAL OFFICER (CFO) - The CFO reports directly to the CEO and is
responsible for rates and regulatory relations, finance, treasury,
information technology, and accounting functions. The CFO oversees the
work of six managers (Rates & Regulatory Relations; Investor Relations;
Treasury; Information Technology; Risk Management; and the Controller.) The
organization managed by the CFO totals 84 employees, and is composed of 6
management and 78 non-management personnel.
GENERAL COUNSEL - The General Counsel reports directly to the CEO and
oversees the Legal Affairs and the Governmental Affairs Group. The General
Counsel is responsible for federal, state and metro public affairs,
environmental compliance, SEC compliance, litigation, regulatory, tariffs,
labor and benefit legal matters, contracts and corporate governance. The
organization managed by the General Counsel totals 10 employees, and is
composed of 2 management and 8 non-management personnel.
HUMAN RESOURCES VICE PRESIDENT - The Human Resources Vice President reports
directly to the CEO and oversees company staffing, compensation, training,
benefits, health services, employee services and security. The
organization managed by the Human Resources Vice President totals 16
employees, and is composed of 5 management and I I non-management
personnel.
CUSTOMER SUPPORT VICE PRESIDENT - The Customer Support Vice President
reports directly to the CEO and is responsible for the day-to-day interface
with customers, customer accounts, meter reading, credit, billing and
customer information service. The Vice President is also responsible for
marketing, sales, market research, conservation programs, program
development and evaluation. Two non-regulated positions also report to the
Customer Support Vice President. Distribution Management Services provides
engineering, operational and technical support to communities that want
natural gas but
<PAGE>
are outside NSP's service territory. Advantage Service is a non-regulated
appliance service business. Customer Support totals 240 employees and is
composed of 4 management and 236 non-management personnel.
C. ANNUAL COST INCREASES
Based upon the foregoing general and specific assumptions, and the staffing
requirements of the organizational structure, the following increased
annual costs have been developed for Gas Company of Minnesota:
<TABLE>
<CAPTION>
<S> <C>
1. Chief Financial Officer $8,543,000
2. Customer Support $6,010,000
3. Chief Operating Officer $3,495,000
4. General Counsel $1,137,000
5. Chief Executive Officer, Audit Services $ 668,000
and Communication
6. Human Resources $ 422,000
7. Board of Directors Fees $ 108,000
----------
Total: $20,383,000
</TABLE>
D. CAPITALIZATION COST INCREASES
Using the allowed cost of equity as discussed earlier, and recasting the
cost of capitalizing the gas assets using NSP(M)'s existing capital
structure as a proxy for Gas Company of Minnesota results in the following:
<TABLE>
<CAPTION>
RATIO COST COMPOSITE COST
----- ---- --------------
<S> <C> <C> <C>
Long/Short Term Debt 40.35% 7.58% 3.06%
Preferred Stock 8.26% 5.57% 0.46%
Common Equity 51.39% 11.47% 5.89%
------ ------ -----
Total: 100.00% 9.41%
</TABLE>
The actual interest rates and preferred stock yields in effect at the time
of divestiture could be substantially higher or lower than the forecasts
employed here.
Applying the Foregoing capital cost to Gas Company of Minnesota results in
the following increased annual capital costs:
1. Capitalized Cost $915,000
E. TRANSITION COST INCREASES
<PAGE>
The following is a summary of the principal transition costs that will be
incurred as a result of a spin-off of the gas business of NSPM and their
annual costs:
ANNUAL
COST INCREASE
-------------
1. IPO and Debt Issuance Cost $145,000
F. FOREGONE MERGER SAVINGS
The following is a summary of the foregone merger savings lost if the spin-
off occurs:
1. Foregone Merger Savings $7,931,000
G. TOTAL LOST ECONOMIES
Summarizing the foregoing increased annual costs, capital costs, foregone
merger savings, and amortized transition costs which were developed in the
Base Case Study yields the following total lost economies before the effect
of income taxes:
TOTAL LOST ECONOMIES: $29,374,000
H. INCOME TAXES
Recovery of the foregoing lost economies in a general rate proceeding would
also require an increase to recover income taxes associated with the lost
economies. The following is a summary of the revenue effect of income
taxes:
TOTAL INCOME TAXES: $728,000
<PAGE>
I. BASE CASE - 12 MONTHS ENDED DECEMBER 31, 1995
The following is a summary of the key components of the Base Case (the
definition of each item is the same as in the Executive Summary):
1. Total Gas Operating Revenue $336,082,000
2. Total Gas Operating Revenue Deductions $300,024,000
3. Gross Gas Income $ 36,058,000
4. Net Gas Income $ 26,655,000
J. COMPARISON OF THE TOTAL LOST ECONOMIES OF GAS COMPANY OF MINNESOTA TO THE
BASE CASE
The Total Lost Economies, before the effect of income taxes as a percent of
the key components of the Base Case are:
1. Percent of Total Gas Operating Revenue 8.74%
2. Percent of Total Gas Operating Revenue Deductions 9.79%
3 Percent of Gross Gas Income 81.46%
4. Percent of Net Gas Income 110.20%
K. COMPARISON OF RATES OF RETURN ON RATE BASE
The following is a comparison of the rates of return on rate base for the
gas operations before and after an assumed spin-off:
1. Rate of Return - Base Case 8.86%
2. Pro Forma Rate of Return after Spin-off 3.07%
3. Required Rate of Return based on Gas Company 9.41%
of Minnesota Cost of Capital
VI. GAS COMPANY 0F WISCONSIN ANALYSIS
As was the case with NSP(M) a detailed study has been undertaken to analyze
the potential impact on both the shareholders and customers of NSP(W) if it
were ordered to divest its gas business.
In order to accomplish that study, the management of NSP(W) provided
estimates of the staffing levels of a Gas Company of Wisconsin, as well
as any other operational and administrative changes that would have to be
made in order to maintain the same level and quality of service to its gas
customers after a spin-off of the gas properties.
A. SPECIFIC ASSUMPTIONS
<PAGE>
In addition to the General Study Assumptions cited earlier, the following
specific assumptions have been incorporated into the analysis of the spin-
off of the gas operations of NSP(W) into a Gas Company of Wisconsin.
1. Labor Assumptions:
a. As was the case with Gas Company of Minnesota, the NSP(W)
organization at December 31, 1995, was used as the template for
developing the Gas Company of Wisconsin organization structure.
b. Where practical, some management positions were combined,
eliminated or replaced with non-management positions. Some
further consolidation of management positions may be possible,
particularly within the staff organizations. However, the
overall span of control (the ratio of nonmanagement employees to
management employees) for Gas Company of Wisconsin is less than
the span of control in the NSP(W) organization. As of December 3
1, 1995, NSP(W) had 112 management and 838 nonmanagement
employees, yielding a span of control of 7.5 employees per
manager. Gas Company of Wisconsin has 24 management and 138
nonmanagement employees, resulting in a span of control of 5.8
(i.e., more managers per non management employee than the
organization). This lower span of control is due to the
following:
1) A duplicate executive organization due to the need of
having a separate set of executives for the new
organization;
2) Additional management employees required in the
operations areas due to the elimination of electric
resources that are currently providing both electric
and as supervision, and,
3) Additional management personnel required in the staff
organization due to the elimination of support for
electric functions that were currently providing both
electric and gas supervision.
c. To provide an equivalent quality of customer service an analysis
was made of the Customer Service Area to determine the number of
employees required for Gas Company of Wisconsin. The staffing
levels in the Gas Company of Wisconsin requires 40 employees,
approximately 33% of the combined company customer service level.
These functions are accomplished by a relatively small number of
personnel and a spin-off of gas responsibilities would not affect
the number of employees required to accomplish electric only
functions.
<PAGE>
d. The Customer Service cost for Gas Company of Wisconsin was based
on the current cost of providing customer service from the Gas
Company of Minnesota Study (meter reading, customer service,
billing and payment processing) for both electric and gas
customers. This amount was multiplied by the number of current
gas customers as of December 31, 1995, The staffing levels were
based on an employee per customer ratio. This ratio was applied
to the gas customers to determine the required staff size per
Customer Service function.
e. Executive salaries are based on national survey data. Since the
size of the organization is smaller than Gas Company of
Minnesota, the executive salaries are assumed to be less for Gas
Company of Wisconsin.
f. All non-executive salaries are based on current average
compensation for the appropriate job level.
g. After the base cost of labor was determined, an additional 30
percent was added to determine pension and benefit costs. This
percent is based on NSP(W)'s approximate current percentage in
order to keep benefits similar for Gas Company of Wisconsin.
2. Operation & Maintenance and Administrative and General Assumptions:
a. In addition to the General Study Assumptions cited earlier, it is
assumed that certain minor administrative functions now performed
by employees of NSP(M) and billed to NSP(W) would be performed by
Gas Company of Wisconsin. For example, audit services and
investor relations functions are currently being performed by
NSP(M), and if divestiture of NSP(W)'s gas operations were
ordered, Gas Company of Wisconsin would perform those functions.
b. Annual facility costs relating to the additional employees and
building needs for trucks, trailers and backhoes required to
operate the Gas Company of Wisconsin have been incorporated into
the Study.
c. Separate arrangements would be made for external auditing of the
books and accounts of Gas Company of Wisconsin.
d. In like manner, legal assistance, billing and record-keeping
assistance would be required, and it is assumed that Gas Company
of Wisconsin would be able to acquire these services for
substantially the same fees as it is now incurring.
e. Executive and administrative support from NSP(W) would cease upon
any divestiture, and these functions have been provided for in
the Gas Company of Wisconsin organizational structure.
<PAGE>
f. Separate gas bills would be provided the customers of Gas Company
of Wisconsin.
3 Capital Expenditure and Cost Assumptions
a. No additional capital expenditures will be made by Gas Company of
Wisconsin as a direct consequence of spinning off the gas
facilities from NSP(W). This, of course, does not include
planned capital expenditures to be made in the normal course of
business in order to maintain existing levels of service and
provide service to new customers.
b. In the event NSP(W) is required to divest its operations, and
assuming the assets are spun-off into a new stand-alone
corporation, the requirements of the existing indentures would
result in the need to recapitalize at market rates in effect at
the time of the spin-off. Additionally, costs associated with
the issuance of securities would be incurred and ultimately
included in the Gas Company of Wisconsin cost of service.
The current capital structure of NSP(W) is used for the purpose
of analyzing capital costs for Gas Company of Wisconsin. This
structure is equal to the capital structure approved by the PSCW
and NSP(W)'s Docket No. 4220-UR-107. As of December 23, 1993,
NSP(W)'s gas rate base was capitalized as follows:
<TABLE>
<CAPTION>
RATIO COST COMPOSITE COST
----- ---- --------------
<S> <C> <C> <C>
Long/Short Term Debt 45.09% 7.41% 3.34%
Common Equity 54.91% 11.40% 6.26%
------ ------ -----
Total: 100.00% 9.60%
</TABLE>
This Study assumes that Gas Company of Wisconsin would have access to
capital at a cost similar to that of NSP(W). The difference expected from
the rates listed above would result from an increased equity ratio. The
study assumes that gas utilities have an equity ratio about 3% higher than
electric utilities. NSP(W)'s electric business encompasses about 90% of
the combined rate base, the study assumes that the capital structure is
really a function of the electric business and therefore a capital
structure for an electric only NSP(W) would be the same as the current
combined capital structure. The cost of debt was not changed because the
marginal cost of debt for a double-A utility should be about the same as
the embedded rate.
The cost of common equity is 11.40 percent which was established by the
PSCW on December 23, 1993, in NSP(W)'s Docket No. 4220-UR-107. Common
equity would require the sale of new securities, as new stock certificates
would be issued to future shareholders of Gas Company of Wisconsin. Gas
Company of Wisconsin would capitalize through an initial public offering
(IPO) of 20% of the equity value and spinning
<PAGE>
off 80% to existing NSP shareholders, and debt issuance in the above
reference capital structure ratios at an aggregated cost of $838,000.
Annual cost over 30 years would be $28,000. This cost would be charged
as a transition cost to be recovered over 30 years.
4. Transition Cost Assumptions. Transition costs for Gas Company of Wisconsin
have been previously discussed, and would be amortized over the appropriate
life of the asset.
5. Foregone Merger Savings. The Primergy merger filing includes anticipated
merger savings for the gas utilities. The Study assumed these savings
would be lost as a result of divestiture. The levelized annual impact is
$2.4 million.
B. ORGANIZATION OF GAS COMPANY OF WISCONSIN
The functional organization chart of Gas Company of Wisconsin is contained
in Appendix C.
DESIGN OF GAS COMPANY OF WISCONSIN ORGANIZATION - The NSP(W) organization
at December 31, 1995, was used as the pattern for developing the Gas
Company of Wisconsin organization structure. In order to develop the new
structure for the stand-alone company, management was contacted for input
regarding staffing levels.
BOARD OF DIRECTORS -The Board of Directors is assumed to consist of six
directors based on the size and scope of Gas Company of Wisconsin.
<PAGE>
CHIEF EXECUTIVE OFFICER(CEO) - The CEO reports to the Board of Directors
and is responsible for overseeing the entire Company. The CEO oversees
five direct-report executives (Chief Operating Officer; Chief Financial
Officer; Customer Service Vice President; Human Resources Vice President;
and General Counsel) and is responsible for Corporate Communications and
Audit Services. The Executive Organization totals 13 employees, and is
composed of 6 executives, 2 managers, 3 non-management, and 2 executive
assistants.
CHIEF OPERATING OFFICER (COO) -The COO reports directly to the CEO and is
responsible for the overall operating activities of the Company. The COO
oversees the work of two directors (Operations; Gas Supply, Gas Control,
Engineering, and Supply and Operational Services). The organization
managed by the COO totals 61 employees, and is composed of 9 managers, and
52 non-management personnel.
DIRECTOR SUPPLY, CONTROL, ENGINEERING AND SOS - The Director of Gas Supply,
Gas Control. Engineering, and SOS is responsible for measurement,
acquiring interstate gas transportation capacity, forecasting gas
requirements, making gas purchases, system design (pipelines, storage
reservoirs, and compressors), gas system control coordination, facilities,
warehousing, and purchasing. The organization totals 25 employees,
composed of 2 management and 23 non-management personnel.
DIRECTOR, OPERATIONS - The Director of Operations is responsible for all
major distribution functions such as safety, environmental training,
regional management, pipeline construction, and distribution system support
services. Support totals 36 employees, composed of 7 management and 29
non-management personnel.
CHIEF FINANCIAL OFFICER (CFO) - The CFO reports directly to the CEO and is
responsible for regulatory relations, finance, treasury, information
technology, and accounting functions. The CFO oversees the work of three
managers (Treasury, Information Technology; and the Controller. The
organization managed by the CFO totals 23 employees, and is composed of 3
management and 20 non-management personnel.
GENERAL COUNSEL - The General Counsel reports directly to the CEO and
oversees legal and the governmental affairs group. The General Counsel is
responsible for federal, state and metro public affairs, environmental
compliance, SEC compliance, litigation, regulatory affairs, labor and
benefit legal matters, contracts and corporate governance. The organization
managed by the General Counsel totals 2 employees, and is composed of 2
non-management personnel.
HUMAN RESOURCES VICE PRESIDENT - The Human Resources Vice President reports
directly to the CEO and oversees company staffing, compensation, training,
benefits, health services, employee services and security. The
organization managed by the Human Resources Vice President totals 3
employees, and is composed of 2 management and 1 non-management personnel.
<PAGE>
CUSTOMER SUPPORT VICE PRESIDENT - The Customer Support Vice President
reports directly to the CEO and is responsible for the day-to-day interface
with customers, customer accounts, meter reading, credit, billing and
customer information service. The Vice President is also responsible for
marketing, sales, market research, conservation programs, program
development and evaluation. Customer Support totals 60 employees and is
composed of 2 management and 58 non-management personnel.
C. ANNUAL COST INCREASES
Based upon the foregoing general and specific assumptions, and the staffing
requirements of the organizational structure, the following increased
annual costs have been developed for Gas Company of Wisconsin:
<TABLE>
<CAPTION>
<S> <C>
1. Chief Financial Officer $3,795,000
2. Customer Support $ 946,000
3. Chief Executive Officer, Audit Services $ 631,000
and Communication
4. Chief Operating Officer $ 539,000
5. General Counsel $ 333,000
6. Board of Directors' Fees $ 190,000
7. Human Resources $ 105,000
----------
Total: $6,539,000
</TABLE>
D. CAPITAL COST INCREASES
Using the capital structure, allowed cost of equity and debt costs for Gas
Company of Wisconsin discussed earlier, the resulting weighted composite
cost of capital for the stand-alone gas company would be:
<TABLE>
<CAPTION>
RATIO COST COMPOSITE COST
----- ---- --------------
<S> <C> <C> <C>
Long/Short Term Debt 42.09% 7.39% 3.11%
Common Equity 57.91% 11.40% 6.60%
------ -----
Total: 100.00% 9.71%
</TABLE>
The actual interest rates in effect at the time of divestiture could be
substantially higher or lower than the forecasts employed here.
Applying the foregoing capital cost to Gas Company of Wisconsin results in
the following increased capital costs:
Capitalized Cost $171,000
E. TRANSITION COST INCREASES
<PAGE>
The following is a summary of the principal transition costs that will be
incurred as a result of a spin-off of the gas business of NSP(W) and their
annual costs:
ANNUAL
COST INCREASE
-------------
IPO and Debt Issuance Costs $28,000
F. FOREGONE MERGER SAVINGS
The following is a summary of the foregone merger savings lost if the spin-
off occurs:
Foregone Merger Savings $2,417,000
G. TOTAL LOST ECONOMIES
Summarizing the foregoing increased annual costs, capital costs, and
amortized transition costs as developed in the Base Case Study, yields the
following total lost economies before the effect of income taxes:
Total Lost Economies: $9,155,000
H. INCOME TAXES
Recovery of the foregoing, lost economies in a general rate proceeding
would also require an increase to recover income taxes associated with the
lost economies. The following is a summary of the revenue effect of income
taxes:
Total Income Taxes: $134,000
<PAGE>
I. BASE CASE - 12 MONTHS ENDED DECEMBER 31, 1995
The following is a summary of the key components of the Base Case (the
definition of each item is the same as in the Executive Summary):
1. Total Gas Operating Revenue $78,015,000
2. Total Gas Operating Revenue Deductions $69,771,000
3. Gross Gas Income $ 8,244,000
4. Net Gas Income $ 5,543,000
J. COMPARISON OF THE LOST ECONOMIES OF GAS COMPANY OF WISCONSIN TO THE BASE
CASE
The Total Lost Economies, before the effect of income taxes as a percent of
the key components of the Base Case are:
1. Percent of Total Gas Operating Revenue 11.73%
2. Percent of Total Gas Operating- Revenue Deductions 13.12%
3. Percent of Gross Gas Income 111.05%
4. Percent of Net Gas Income 165.16%
K. COMPARISON OF RATES OF RETURN ON RATE BASE
The following is a comparison of the rates of return on rate base for the
gas operations before and after an assumed spin-off-.
1. Rate of Return - Base Case 9.85%
2. Pro Forma Rate of Return after Spin-off 0.12%
3. Required Rate of Return based on Gas Company 9.71%
of Wisconsin Cost of Capital
VII. OTHER CUSTOMER IMPACTS
A. QUANTIFIABLE POSTAGE COSTS
Customers who currently pay their monthly bill with one check and one
stamp will be required to use two separate checks and two separate
stamps in paying the remaining electric company and the two new gas
companies. For the gas and electric customers of the existing NSP(M) and
NSP(W) companies, the doubling of postage cost alone, not counting check
and envelope costs, will result in a total annual out-of-pocket cost
increase to customers of over $1.6 million. These annual postage costs are
broken downs as follows:
<PAGE>
POSTAGE COSTS
-------------
Gas Company of Minnesota Customers $1,356,000
Gas Company of Wisconsin Customers $ 275,000
----------
Total: $1,631,000
B. NON-QUANTIFIABLE
In addition to the quantifiable increased costs or lost economies which
have been evaluated and included in the Study, there are other non-
quantifiable costs which have not been included. The reason for not
attempting to quantify these costs is that a meaningful estimate of these
costs is beyond the scope of NSP's present analysis. However these costs
do exist, and the following are a few examples of these non-quantifiable
costs.
- - The cost of additional regulation for both the MPUC, NDPSC, PSCW and MPSC.
The staffs of these agencies would undoubtedly experience additional duties
and responsibilities as a result of dealing with an additional utility.
- - The cost to customers as a result of doing business with two utilities
instead of one, including additional telephone calls for service questions
or bill inquiries.
- - The cost to customers of providing access to meters and other facilities
for two utilities.
- - The cost to customers, especially contractors and builders, of dealing with
two utilities rather than one.
VIII BELL COMPARISON OF GAS COMPANY OF MINNESOTA AND GAS
COMPANY OF WISCONSIN TO OTHER UTILITIES
For a comparison of average annual bills for various utilities with which
NSP competes see Table VII-1 of Exhibit J.2 - Wisconsin Energy Corporation
"Analysis of the Economic Impact of a Divestiture of Wisconsin Energy
Corporation's Gas Operations."
IX. EFFECT ON REMAINING ELECTRIC COMPANIES -
A. NSP(M)
As a result of any divestiture, the remaining Electric Company of Minnesota
would experience increased costs in addition to those experienced by Gas
Company of Minnesota. These increased costs, as outlined earlier, are
largely the result of increased labor costs associated with the additional
personnel required to replace those who are currently working in both gas
and electric operations and additional postage costs incurred since
electric billings would no longer share postage with the gas billings is
$16.9 million. The total of these additional costs equates to
approximately 0.8 percent of electric rate revenues.
<PAGE>
A summary of the increased annual costs applicable to Electric Company of
Minnesota is as follows:
1. Customer Service $5,990,000
2. Chief Financial Officer $4,465,000
3. Human Resources $2,748,000
4. Chief Operating Officer $1,962,000
5. Chief Executive Officer, Audit $ 912,000
6, General Counsel $ 496,000
7. Board of Directors Fees $ 286,000
----------
Total $16,859,000
B. NSP(W)
Similarly, the remaining Electric Company of Wisconsin would experience
additional costs due to labor and postage. The additional labor is due to
replacing those personnel who currently work in both gas and electric operations
and additional postage costs incurred since electric billings would no longer
share postage with the gas billings. The total of these additional costs Is
$4.3) million, which is approximately 1.4 percent of electric rate revenues.
A summary of the increased annual costs applicable to Electric Company of
Wisconsin is as follows:
1. Customer Service $1,576,000
2. Chief Operating Officer $ 976,000
3. Chief Financial Officer $ 887,000
4. Chief Executive Officer (Includes BOD Fees) $ 512,000
5. Human Resources $ 300,000
6. General Counsel $ 99,000
----------
Total $4,350,000
<PAGE>
APPENDIX A
COMPARISON OF NSP(M) AND NSP(W) GAS TO REGIONAL GAS UTILITIES
See Appendix A of Exhibit J.2 - Wisconsin Energy Corporation "Analysis of the
Economic Impact of a Divestiture of Wisconsin Energy Corporation's Gas
Operations."
<PAGE>
WISCONSIN ENERGY CORPORATION
ANALYSIS OF THE ECONOMIC IMPACT OF A DIVESTITURE OF
WISCONSIN ELECTRIC POWER COMPANY'S GAS OPERATIONS
EXHIBIT J-2
This Study was undertaken by the management and staff of Wisconsin Electric
Power Company. The objective of the Study is to quantify the economic impact on
shareholders and customers of divesting Wisconsin Electric Power of its natural
gas assets and business.
April 2, 1996
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
I: Executive Summary 1
II: Conclusions 3
III: Spin-off Assumptions 5
IV: General Study Assumptions 6
V: NewGasCo-WE Analysis 8
VI: Other Customer Impacts 14
VII: Bill Comparison to Other Utilities 15
VIII: Effect on Remaining Electric Company 16
APPENDIX A: Comparison of WE and NSP Gas Operations to other Regional Gas
Utilities
APPENDIX B: Organization Chart for NewGasCo-WE
- --------------------------------------------------------------------------------
<PAGE>
I: EXECUTIVE SUMMARY
Wisconsin Electric Power Company's (WE) management and staff have undertaken
this "Analysis of the Economic Impact of a Divestiture of Wisconsin Electric
Power Company's Gas Operations" (Study) in order to quantify the economic impact
on its shareholders and its customers of spinning off its natural gas assets and
businesses. WE is a public utility subsidiary of Wisconsin Energy Corporation,
which is currently an exempt holding company under the Public Utility Holding
Act of 1935 (PUHCA). WE provides electric and natural gas service in a major
portion of the State of Wisconsin and the upper peninsula of Michigan.
The Study quantifies the economic impacts of operating the gas entity as an
independent, stand-alone company if the gas business and assets were
disaggregated from WE's combined business:
- - The WE gas business would be spun-off into a new organization called, for
the purpose of this Study, NewGasCo-WE
The Study evaluates the increased costs, or "lost economies," associated with
divestiture of this business from two perspectives--shareholders and customers.
The effect on shareholders is the direct result of the increased costs or lost
economies resulting from a spin-off or divestiture, absent regulatory rate
relief to recoup these lost economies. The effect on customers assumes recovery
of these lost economies through rate increases, and is divided into two parts.
The potential effects on customers have first been evaluated in terms of
increased revenue requirements and rates, and second in terms of the impact of
other non-quantifiable costs.
The projected impacts on the shareholders of the lost economies resulting from
the spin-off of WE's gas business into NewGasCo-WE assuming no rate adjustments
to recover the lost economies and associated income taxes, are shown in Table
I-1.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE I-1
ANNUAL SHAREHOLDER IMPACT OF LOST ECONOMIES
- --------------------------------------------------------------------------------
LOST ECONOMIES AS A PERCENT OF: NEWGASCO-WE
- --------------------------------------------------------------------------------
<S> <C>
Total Gas Operating Revenue 11.30%
- --------------------------------------------------------------------------------
Total Gas Operating Revenue Deductions 13.26%
- --------------------------------------------------------------------------------
Gross Gas Income 76.51%
- --------------------------------------------------------------------------------
Net Gas Income 112.62%
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
PAGE 1
<PAGE>
In Table I-1, Total Gas Operating Revenue is the sum of rate and other revenues
for the 12 months ending December 31, 1995 (Base Case).(1) Total Gas Operating
Revenue Deductions includes all operation and maintenance expenses,
administrative and general expenses, depreciation and all taxes, except income
taxes. Gross Gas Income is the difference between Total Gas Operating Revenue
and Total Gas Operating Revenue Deductions. Net Gas Income is Gross Gas Income
minus income taxes.
Alternatively, and assuming that NewGasCo-WE is allowed to recover these lost
economies and attendant taxes through rate increases, the projected impact on
WE's gas customers is shown in Table I-2.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE I-2
ANNUAL GAS CUSTOMER IMPACT OF LOST ECONOMIES
- --------------------------------------------------------------------------------
RATE REVENUE NEWGASCO-WE
- --------------------------------------------------------------------------------
<S> <C>
Pre-spin-off $318,261,433
- --------------------------------------------------------------------------------
Post-spin-off $354,687,826
- --------------------------------------------------------------------------------
Increase $36,426,393
- --------------------------------------------------------------------------------
Percent Increase 11.45%
- --------------------------------------------------------------------------------
</TABLE>
In addition to the foregoing impacts, Table I-3 sets forth the impact of a gas
divestiture on WE's remaining electric business. This impact is primarily due
to the expenses of additional employees required to perform the multitude of
functions accomplished by employees who currently work for both the electric and
gas businesses and assumes that pass through of the lost economies and attendant
taxes is allowed by the appropriate regulatory agencies.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE I-3
ANNUAL ELECTRIC CUSTOMER IMPACT OF LOST ECONOMIES
- --------------------------------------------------------------------------------
RATE REVENUE REMAINING ELECTRIC
- --------------------------------------------------------------------------------
<S> <C>
Pre-spin-off $1,437,480,000
- --------------------------------------------------------------------------------
Post-spin-off $1,440,252,971
- --------------------------------------------------------------------------------
Increase $2,772,971
- --------------------------------------------------------------------------------
Percent Increase 0.19%
- --------------------------------------------------------------------------------
</TABLE>
- ----------------------
(1)The dollar amounts contained in this study are expressed in 1995 dollars.
- --------------------------------------------------------------------------------
PAGE 2
<PAGE>
II: CONCLUSIONS
The spin-off of WE's current gas business into one stand-alone company is
estimated to result in a substantial increase in costs and therefore a
substantial decrease in earnings to WE shareholders, absent rate relief to
recoup these decreased earnings. Without an increase in rates, the immediate
negative effect on shareholders earnings would be substantial. For example, the
earnings contribution relating to WE's gas business would be decreased by
approximately 113%, as shown in Table I-1. Such a decline would make ownership
of shares in this company unattractive.
The pass through of these cost increases to customers in Wisconsin will result
in a significant increase in the level of cost borne by these customers with no
attendant increase in the level or quality of service. The rate increase
required to provide the level of revenue needed to cover costs to operate
NewGasCo-WE will be significant, amounting to approximately $36.4 million as
show in Table I-2. Such a rate increase would make NewGasCo-WE less competitive
at a time when competition in the energy industry is rapidly increasing due to
Federal Energy Regulatory Commission (FERC) Order 636 and other FERC and state
regulatory initiatives.
WE, like all other gas companies, will continue to face significant competition.
For example, the threat of by-pass and alternative fuels continues to apply
downward pressure on gas rates. The focus on competition is beginning to require
the unbundling of Local Distribution Company (LDC) services. This trend is
occurring as state commissions, LDCs, and their customers, call for a change in
the way LDCs do business. While the objectives of these groups are not always
consistent, the result will likely be the same--increased competition. LDCs
already face price competition, and must remain competitive to avoid shareholder
losses and a reduced customer base. As a result of the increased costs
discussed in this Study, both bundled and unbundled gas services will become
less competitive in comparison to other alternatives.
In addition, the FERC's ongoing electric Notice of Proposed Rulemaking Promoting
Wholesale Competition Through Open Access Nondiscriminatory Transmission
Services by Public Utilities (RM 95-8-000, et. al.) and state retail wheeling
initiatives are expected to increase competition in the electric industry. The
lost economies estimated for WE's remaining electric company, if divestiture of
gas operations were required, would also have an adverse impact on their ability
to successfully compete in the electric industry. A forced divestiture as a
result of the proposed merged company would result in the remaining
company becoming less competitive than it would be as part of a merged company.
A comparison of typical residential and commercial gas bills in Wisconsin
illustrating the loss of NewGasCo-WE's relative position resulting from a spin-
off as compared to other utilities is contained in Section VII.
- --------------------------------------------------------------------------------
PAGE 3
<PAGE>
As opposed to the negative results of the economic impact, two positive
conclusions were noted.
- First, it is expected that after divestiture, NewGasCo-WE's gas
business analyzed in this Study would continue to be managed locally
as is currently the case. NewGasCo-WE would be managed from and based
in Lake Geneva, WI and other local/regional parts of Wisconsin where
management is currently based. Local/regional areas would be
primarily southeastern Wisconsin with other facilities in the Appleton
and Prairie du Chien areas.
- Second, it is expected that after divestiture, the Public Service
Commission of Wisconsin (PSCW) would continue to have and exercise the
same jurisdictional authority over the regulated businesses as they do
today. Therefore, the state commission will continue as the primary
agency responsible for the regulation of the LDCs.
However, it should be noted that these same conditions (continued local
management and state regulatory jurisdiction) would exist if the gas business
remains with the new merged entity.
As previously discussed in the Executive Summary, there is a combination of
approximately $36.4 million in revenue increases needed for NewGasCo-WE, shown
in Table I-2 and an additional $2.8 million in revenue increases as a result of
lost economies, including income taxes, that will impact the remaining Wisconsin
Electric Power Company and potentially their customers shown in Table I-3.
Therefore, the total revenue increases that would be required is approximately
$39.2 million.
Based on the foregoing conclusions, WE believes that spinning off the gas
business would adversely impact WE's shareholders and both gas and electric
customers. Therefore, WE recommends that it is in the best interests of its
shareholders and customers that WE retain its existing gas assets and business.
- --------------------------------------------------------------------------------
PAGE 4
<PAGE>
III: SPIN-OFF ASSUMPTIONS
The Study assumes that the gas segment of WE's current business can, in fact, be
spun-off into one stand-alone company. This potential stand-alone business is
currently part of the combined company as described below:(2)
- Within Wisconsin, WE is primarily a combination electric and gas
utility engaged in the generation, purchase, transmission,
distribution, and sale of electricity, and in the purchase,
transmission, distribution, sale, and transportation of natural gas.
- WE's gas business includes an extensive pipeline system serving
numerous communities throughout Wisconsin. WE's gas system services
over 357,000 residential, commercial, industrial, and transportation
customers. Total annual gas revenues are approximately $318 million.
Annual gas deliveries are nearly 887 million therms. The Study
assumes that the gas portion of WE is spun-off into a stand-alone gas
company--NewGasCo-WE.
- WE's electric business, which includes generation, transmission, and
distribution facilities located statewide, provides service to
approximately 956,000 customers throughout southeastern Wisconsin,
areas surrounding Appleton, Wisconsin and in the upper peninsula of
Michigan. Total annual electric revenues are approximately $1.4
billion and annual sales are nearly 27 million megawatt hours (MWh).
The Study assumes that it would be possible to spin-off WE's gas business from
the combined Wisconsin Electric Power Company gas and electric business for the
following reasons:
- The electric and gas systems are physically separate;
- A large number of personnel who are directly involved in the day-to-
day operations of the electric and gas physical plant ("systems") are
dedicated electric-only or gas-only employees;
- The regulatory treatment of the respective electric and gas revenue
requirements and tariff filings is, for the most part, handled
separately;
- In other parts of the country, stand-alone electric and gas companies
routinely share overlapping service territories; and,
- WE's gas system can be operated independently.
- ----------------------
(2)For a comparison of WE's gas operations relative to other utilities based on
1994 data, see Appendix A.
- --------------------------------------------------------------------------------
PAGE 5
<PAGE>
IV: GENERAL STUDY ASSUMPTIONS
The assumptions, information, and data used in the analyses undertaken in this
Study are based primarily on the energy industry expertise and experience
possessed by the management and staff of WE. Employees with experience in all
major facets of the operations of the company were consulted and provided input.
The Study's aggregate conclusions are the result of many independent inputs and
analyses from area experts throughout WE and external to the company. As a
result of discussions with these area experts, the major cost components
associated with a divestiture were identified, quantified and incorporated in
the study results. A more detailed analysis would likely produce additional
costs and lost economies associated with a divestiture of WE's gas operations.
The remainder of this section discusses the major assumptions that were employed
in developing the Study.
A. For the purposes of developing the impacts of the spin-off, it is
assumed that the spun-off organization will operate as an independent,
stand-alone company. Therefore, it will have all of the necessary
management and personnel, along with the computer systems, facilities,
equipment, materials and supplies required to operate as a stand-alone
company.
B. For the purpose of determining staffing requirements, the guiding
principle used was that a sufficient number of employees be included
in order to assure that all present functions applicable to the stand-
alone organization are performed, and that the present level and
quality of service to customers remain unchanged.
C. Staffing levels are based on an analysis of the requirements within
each department within NewGasCo-WE.
D. Average salaries were applied after accounting for the average percent
of labor that is capitalized.
E. O&M labor costs for each department within NewGasCo-WE were compared
against the 1995 actual O&M labor cost allocated to the WE gas
business to determine the incremental O&M labor costs.
F. An overhead rate of 44.9% was applied to the incremental O&M labor
costs to capture the additional costs of health benefits, pensions,
and materials and supplies.
G. Facility costs were analyzed separately to determine the incremental
office and other space costs associated with the additional employees
required.
H.
- --------------------------------------------------------------------------------
PAGE 6
<PAGE>
All services that are currently provided by organizations outside of WE
(i.e., outsourced) will continue to be provided by those organizations at a
cost, based on the scope of services required by NewGasCo-WE.
I. Transaction costs to cover the expenses associated with the spin-off
(e.g., financial advisory fees, legal fees, etc.) were included and
amortized over a thirty-year period even though we believe such period
is much too long. Other one-time transition costs (e.g. hiring,
training, etc.) were amortized over a four- year period.
J. The merger benefits that would have accrued to the WE gas customers
over a ten-year period were present valued and levelized to determine
the annual impact.
K. For the purpose of showing the final impact on customers, it is
assumed that full pass-through of all of the lost economies, including
the Wisconsin gross receipts tax of 0.97%, will be allowed.
L. It is assumed that each organization will be subject to the regulation
of the same state and federal agencies that presently regulate each
organization.
- --------------------------------------------------------------------------------
PAGE 7
<PAGE>
V: NEWGASCO-WE ANALYSIS
A detailed study has been undertaken to analyze the potential impact on both the
shareholders and customers of WE if it were ordered to divest its Wisconsin gas
business. In order to accomplish that study, the management of WE provided
estimates of the staffing levels of a NewGasCo-WE, as well as any other
operational and administrative changes that would have to be made in order to
maintain the same level and quality of service to its gas customers after a
spin-off of the gas business.
SPECIFIC ASSUMPTIONS
In addition to the General Study Assumptions cited earlier, the following
specific assumptions have been incorporated into the analysis of the spin-off of
the gas operations of WE into a NewGasCo-WE.
1. Labor Assumptions
a) The WE organization as of December 31, 1995 was used as the
template for developing the NewGasCo-WE organization structure.
b) O&M labor costs were calculated by applying an average salary and
then determining the amount of labor that is expensed versus
capitalized. This amount was compared with 1995 actual labor
costs to determine the incremental O&M labor cost.
c) An overhead burden of 44.9% was applied to each incremental O&M
dollar to capture the cost of pensions, benefits, materials and
supplies, etc.
d) Executive salaries were based on American Gas Association
(A.G.A.) and Edison Electric Institute (EEI) compensation
studies.
e) Non-executive salaries are based on current WE average
compensation by functional area.
Incentive compensation for management and executive employees has not been
included when determining the NewGasCo-WE labor costs. Note, however, that it
is estimated that a plan similar to the present WE plan would result in the
following additional annual costs:
<TABLE>
<CAPTION>
---------------------------------------------------------------
Management Percent of Base Salary
---------------------------------------------------------------
<S> <C>
Executive Incentive Plan (STPP) 10.0%
---------------------------------------------------------------
Management Incentive Plan (VIPP) 7.5%
---------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
PAGE 8
<PAGE>
2. Operations & Maintenance (O&M) and Administrative and General
Assumptions (A&G)
a) The additional cost of office space required for NewGasCo-WE was
determined on a case-by-base basis. Additional space was
determined to be needed at the Appleton, Watertown, and Fort
Atkinson service centers. In addition, space will be required
for a new call center. All space was assumed to be leased.
b) All information systems that are required for NewGasCo-WE to
provide the same level of service were identified. The cost of
providing these systems and the hardware to operate the systems
was estimated.
3. Spin-off Transition Assumptions
a) In the event that WE would be required to divest its gas
operations and assuming the assets were spun-off into a new
stand-alone corporation, new debt would be obtained to finance
long-term debt related to the gas business. Additionally, costs
associated with the issuance of securities would be incurred and
ultimately included in the NewGasCo-WE cost of service.
b) The costs associated with the divestiture transaction were also
determined. These include legal and financial advisory fees.
These expenses were amortized over 30 years. Other one-time
transition costs (e.g. hiring, training, etc.) were amortized
over a four-year period. While we have used the 30 year period
for amortization of these costs for purposes of this study, we
believe such a period is unrealistically long and should
divestiture be required we would seek to amortize such costs over
a significantly shorter period.
ORGANIZATION OF NEWGASCO-WE
The functional organization chart of NewGasCo-WE is contained in Appendix B.
DESIGN OF NEWGASCO-WE ORGANIZATION--The organization at December 31, 1995 was
used as the pattern for developing NewGasCo-WE's organizational structure. In
order to develop the new structure for the stand-alone company, management
representing each organization provided input regarding functions/activities
performed and resource requirements needed to provide the same level of service.
BOARD OF DIRECTORS--The Board of Directors is assumed to consist of 12 directors
based on the size and scope of NewGasCo-WE.
EXECUTIVE OFFICER--The CEO reports to the Board of Directors and is responsible
for overseeing the entire Company. The CEO oversees six direct-report
executives; the Chief Financial Officer; Vice President, Customer Operations;
Vice President, Customer Service; Vice President, Corporate Support; General
Counsel; and the General Auditor. The Executive organization, including the
legal and auditing departments, is comprised of 25 employees.
- --------------------------------------------------------------------------------
PAGE 9
<PAGE>
GENERAL COUNSEL--The General Counsel reports directly to the CEO and is
responsible for governmental affairs, legal services, and liability risk
management. The organization managed by the General Counsel is comprised of 8
employees.
GENERAL AUDITOR--The General Auditor reports directly to the CEO and is
responsible for ensuring the company meets procedural, operational and
regulatory requirements. The Audit area is comprised of 5 employees.
VICE PRESIDENT, CUSTOMER OPERATIONS--The Vice President (VP) of Customer
Operations reports directly to the CEO and is responsible for the management of
the gas supply and forecasting, acquisition, dispatching and delivery of
services to customers, including new service installations, pipeline
construction and maintenance, field service to customers and asset/inventory
management. The VP of Customer Operations oversees two executives, Director of
Operations and Director of Gas Supply. The organization managed by the VP of
Customer Operations is comprised of 430 employees.
VICE PRESIDENT, CUSTOMER SERVICE--The Vice President (VP) of Customer Service is
responsible for day to day interface with customers. Specifically, this
includes activities relating to the development of new business and servicing
customer accounts. Included are the functions of residential and wholesale
marketing, sales to large commercial and industrial customers, market research,
new product development, market/economic development, customer service, meter
reading, and customer accounting. The Customer Services area is comprised of 196
employees.
VICE PRESIDENT, CORPORATE SUPPORT--The Vice President (VP) of Corporate Support
is responsible for services needed by the business areas including Human
Resources, Information Resources, Facilities Management, Environmental, and
Corporate Communications. The Corporate Support area is comprised of 91
employees.
CHIEF FINANCIAL OFFICER (CFO)--The CFO reports directly to the CEO and is
responsible for six key areas; Planning, Treasury, Controller, Regulatory
Relations, Investor Relations, and Risk Management. The organization managed by
the CFO is comprised of 46 employees.
OTHER CONSIDERATIONS:
The Information Resources group is responsible for acquiring/developing,
managing and maintaining all PC and mainframe-based systems for NewGasCo-WE. As
is currently the case, mainframe related resources (equipment and staff to run
NewGasCo-WE's applications) will continue to be outsourced to a third party
provider. As a result, NewGasCo-WE will not have to purchase any mainframe
computing capabilities. The costs associated with the outsourcing contract is
anticipated to increase by approximately 5% due to the loss of economies of
scale.
- --------------------------------------------------------------------------------
PAGE 10
<PAGE>
Although not included in this analysis, if WE's gas business were divested, both
NewGasCo-WE and the remaining WE electric business would have to independently
pursue the development of a number of critical information systems that
currently need to be replaced. These systems are outdated and no longer provide
the needed functionality to operate in an increasingly competitive environment.
For example, WE is currently in various stages of replacing its Customer
Information System, Field Operation System and Financial/Administration Systems.
ANNUAL COST INCREASES
Based upon the foregoing general and specific assumptions, and the staffing
requirements of the organizational structure, the following incremental
annualized costs have been identified for NewGasCo-WE:
<TABLE>
<CAPTION>
INCREMENTAL ANNUALIZED COST
LABOR AND OVERHEAD EXPENSES INCREASE
<S> <C> <C>
- Executive Office $1,276,158
- Customer Operations $725,948
- Customer Service $2,718,891
- Corporate Support $6,071,067
- Chief Financial Officer $1,731,966
----------
TOTAL LABOR EXPENSE $12,524,031
NON-LABOR O&M EXPENSES $4,733,614
----------
TOTAL $17,257,645
-----------
-----------
</TABLE>
FOREGONE MERGER BENEFITS
As a result of the merger of Wisconsin Energy and Northern States Power,
significant savings are expected to accrue to both the electric and gas
operations of WE. If the gas business was divested, the gas customers of
NewGasCo-WE would not have the opportunity to benefit from their share of these
savings. The annualized, levelized present value of these savings is estimated
to be $17,678,000.
CAPITAL COST INCREASES
Issuance of new debt securities by NewGasCo-WE would be required at the time of
divestiture because, under the Wisconsin Electric Power Company First Mortgage
and Deed of Trust, dated October 28, 1938, the gas property of the former
Wisconsin Natural Gas Company became subject to the lien of the WE Mortgage upon
the merger of Wisconsin Natural Gas Company into WE. As a result, NewGasCo-WE
will require financing of $67,000,000 of long-term debt. This new debt would be
expected to be issued at then prevailing market rates, which are assumed to be
at 7.72%. The current embedded cost rate
- --------------------------------------------------------------------------------
PAGE 11
<PAGE>
for long-term debt is 7.17%. This increase in debt cost would result in an
annual cost increase of $380,000.
TRANSITION COST INCREASES
The following is a summary of the principal transition and divestiture costs
that would be incurred as the result of a spin-off of WE's gas business to form
NewGasCo-WE:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL COSTS ANNUALIZED COSTS
- --------------------------------------------------------------------------------
<S> <C> <C>
Initial Public Offering and Related Fees(1) $4,539,360 $151,312
- --------------------------------------------------------------------------------
Employee Related Transition Costs(2)
(hiring, training and pension/benefits plans) $2,595,200 $648,800
- --------------------------------------------------------------------------------
Information Systems Transition(2) $957,000 $239,250
- --------------------------------------------------------------------------------
TOTAL $8,091,560 $1,039,362
- --------------------------------------------------------------------------------
</TABLE>
1) 30 YEAR AMORTIZATION
2) 4 YEAR AMORTIZATION
TOTAL LOST ECONOMIES
Summarizing the foregoing increased annual costs, capital costs, and amortized
transition costs which were developed in the Base Case Study yields the
following total lost economies before the effect of income taxes:
Total Lost Economies: $35,975,007
INCOME TAXES
Recovery of the foregoing lost economies in a general rate proceeding would also
require an increase to recover income taxes associated with the lost economies.
The following is a summary of the revenue effect of income taxes:
Total Income Taxes: $101,444
- --------------------------------------------------------------------------------
PAGE 12
<PAGE>
GROSS RECEIPTS TAX
The State of Wisconsin levies a gross receipts tax of 0.97% on gross revenues.
Recovery of lost economies would result in additional gross receipts tax charged
to customers. The effect of this would be to increase revenue requirements by:
Total Gross Receipts Tax: $349,942
BASE CASE--12 MONTHS ENDED DECEMBER 31, 1995
The following is a summary of the key components of the Base Case (the
definition of each item is the same as in the Executive Summary):
Total Gas Operating Revenue $318,261,433
Total Gas Operating Revenue Deductions $271,238,964
Gross Gas Income $47,022,469
Net Gas Income $31,944,293
COMPARISON OF THE TOTAL LOST ECONOMIES OF NEWGASCO-WE TO THE BASE CASE
The Total Lost Economies, before the effect of income and gross receipts taxes
as a percent of the key components of the Base Case are:
Percent of Total Gas Operating Revenue 11.30%
Percent of Total Gas Operating Revenue Deductions 13.26%
Percent of Gross Gas Income 76.51%
Percent of Net Gas Income 112.62%
COMPARISON OF RATES OF RETURN ON RATE BASE
The following is a comparison of the rates of return on rate base for the gas
operations before and after an assumed spin-off:
1995 Actual Rate of Return 12.68%
Pro Forma Rate of Return after Spin-off 4.11%
Currently Authorized Rate of Return based on 10.29%
WE Cost of Capital
- --------------------------------------------------------------------------------
PAGE 13
<PAGE>
VI: OTHER CUSTOMER IMPACTS
NON-QUANTIFIABLE
In addition to the quantifiable increased costs or lost economies which have
been evaluated and included in the Study, there are other non-quantifiable costs
which have not been included. The reason for not attempting to quantify these
costs is that a meaningful estimate of these costs is beyond the scope of WE's
present analysis. However, these costs do exist, and the following are a few
examples of these non-quantifiable costs:
- The cost of additional regulation for the PSCW. The staff of this
agency would undoubtedly experience additional duties and
responsibilities as a result of dealing with an additional utility.
- The cost to customers as a result of doing business with two utilities
instead of one, including additional telephone calls for service
questions or bill inquiries.
- The cost to customers of providing access to meters and other
facilities for two utilities.
- The cost to customers, especially contractors and builders, of dealing
with two separate utilities rather than one.
- --------------------------------------------------------------------------------
PAGE 14
<PAGE>
VII: BILL COMPARISON TO OTHER UTILITIES
The following is a comparison of average annual bills for various regional
utilities. The average bills are based on the total annual revenues per
customer class divided by the average number of customers.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE VII-1
BILL COMPARISON TO OTHER UTILITIES
1994 DATA
UTILITIES ARE RANKED IN ASCENDING ORDER OF TOTAL ANNUAL RESIDENTIAL CHARGE
- --------------------------------------------------------------------------------
TOTAL AVERAGE
ANNUAL CHARGE
- --------------------------------------------------------------------------------
NAME OF UTILITY STATE RESIDENTIAL COMMERCIAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Mid-American Energy* IA $519.73 $2,827.23
- --------------------------------------------------------------------------------
Northwestern Public Service Co. SD $528.35 $1,746.74
- --------------------------------------------------------------------------------
Wisconsin Electric Power
- --------------------------------------------------------------------------------
Company (Wisconsin Natural Gas) WI $563.45 $3,178.41
- --------------------------------------------------------------------------------
Montana-Dakota Utilities Co. ND $568.84 $3,373.01
- --------------------------------------------------------------------------------
Interstate Power Co. IA $588.74 $3,461.32
- --------------------------------------------------------------------------------
Central Illinois Public Service Co. IL $593.38 $2,569.27
- --------------------------------------------------------------------------------
Wisconsin Public Service Company WI $593.40 $3,704.21
- --------------------------------------------------------------------------------
Minnegasco MN $611.36 $3,069.80
- --------------------------------------------------------------------------------
Northern States Power-WI WI $612.79 $2,610.03
- --------------------------------------------------------------------------------
Northern States Power-MN MN $613.23 $3,334.10
- --------------------------------------------------------------------------------
Wisconsin Fuel and Light Co. WI $617.96 $5,137.16
- --------------------------------------------------------------------------------
NewGasCo-WE WI $627.97 $3,542.34
- --------------------------------------------------------------------------------
Gas Company of Minnesota MN $668.17 $3,632.83
- --------------------------------------------------------------------------------
Wisconsin Gas Company WI $684.85 $2,629.48
- --------------------------------------------------------------------------------
Gas Company of Wisconsin WI $685.78 $2,920.89
- --------------------------------------------------------------------------------
</TABLE>
Source: Resource Data International
*Sum of Iowa-Illinois Gas & Electric Company and IES Industries, Inc.
- --------------------------------------------------------------------------------
PAGE 15
<PAGE>
VIII: EFFECT ON REMAINING ELECTRIC COMPANY
WISCONSIN ELECTRIC POWER COMPANY
As a result of any divestiture, the remaining NewElectricCo-WE would experience
increased costs in addition to those experienced by NewGasCo-WE. These
increased costs, as outlined earlier, are largely the result of increased labor
costs associated with the additional personnel required to replace those who are
currently working in both gas and electric operations. The total of these
additional costs is $2.8 million, which is approximately 0.19% of electric rate
revenues.
- --------------------------------------------------------------------------------
PAGE 16
<PAGE>
APPENDIX A
COMPARISON OF
WE AND NSP TO REGIONAL GAS UTILITIES
1994 DATA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1994 OPERATING OPERATING OPERATING NET PLANT
NAME OF UTILITY NUMBER OF GAS SALES REVENUES REVENUES INCOME AT12/31/94
(ALPHABETICAL ORDER) CUSTOMERS (MMCF) ($000) ($/MCF) ($000) ($000)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Central Illinois Public Service Co. 165,500 23,559 $138,418 $5.88 $8,052 $131,582
- ---------------------------------------------------------------------------------------------------------------------------------
Interstate Power Co. 48,095 1,014 $53,709 $5.36 $575 $38,534
- ---------------------------------------------------------------------------------------------------------------------------------
Mid-American Energy* 244,110 40,236 $199,129 $4.95 $9,353 $138,526
- ---------------------------------------------------------------------------------------------------------------------------------
Minnegasco 603,654 128,982 $573,901 $4.45 $32,784 $358,859
- ---------------------------------------------------------------------------------------------------------------------------------
Montana-Dakota Utilities Co. 192,150 30,113 $155,319 $5.16 $3,948 $83,434
- ---------------------------------------------------------------------------------------------------------------------------------
Northern States Power-MN 340,000 83,000 $331,000 $3.99 $20.483 $293,641
- ---------------------------------------------------------------------------------------------------------------------------------
Northern States Power-WI 68,210 17,000 $77,000 $4.53 $4,820 $52,783
- ---------------------------------------------------------------------------------------------------------------------------------
Northwestern Public Service Co. 74,982 13,770 $62,141 $4.51 $1,931 $39,090
- ---------------------------------------------------------------------------------------------------------------------------------
Wisconsin Electric Power 347,080 57,058 $324,349 $5.68 $22,715 $248,031
- ---------------------------------------------------------------------------------------------------------------------------------
Company (Wisconsin Natural Gas) 45,891 10,177 $47,598 $4.68 $2,465 $24,631
Wisconsin Fuel and Light Co.
- ---------------------------------------------------------------------------------------------------------------------------------
Wisconsin Gas Company 495,129 107,728 $556,587 $5.17 $44,364 $182,995
- ---------------------------------------------------------------------------------------------------------------------------------
Wisconsin Public Service Company 196,549 34,710 $182,058 $5.25 $8,018 $106,017
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SOURCE: Pipeline & Gas Journal, SEPTEMBER 1995
*Sum of Iowa-Illinois Gas & Electric Company and IES Industries,
Inc.
<PAGE>
Appendix B
NewGasCo - WE
<TABLE>
<CAPTION>
<S><C>
CEO
---
General Audit
Counsel
------- -----
Customer Customer CFO Corporate
Operations Service Support
---------- -------- --- ---------
Operations Gas Marketing/ Meter Customer Tres. Cont. Reg. Risk Inv. Plan. Fac. HR IR Env. Comm.
Supply Sales Reading Service Ref. Mgt. Rel. Mgt.
- ---------- ------ ---------- ------- -------- ---- ---- ---- ---- ---- ----- ---- -- -- ---- -----
</TABLE>
<PAGE>
EXHIBIT J-1
APPENDIX B
The following is a description of the organizational chart contained in
Annex B. The Board of Directors of Gas Company of Minnesota has three
functional areas which report directly to it, including the offices of Corporate
Communications, Chief Executive Officer and Audit Services.
Five executives report directly to the Chief Executive Officer, including
the Chief Operating Officer, Chief Financial Officer, General Counsel, Vice
President of Customer Support and the Vice President of Human Resources.
Five managers report directly to the Vice President of Human Resources,
including the managers for Security, Employee and Labor Relations, Health and
Safety, Compensation & Benefits, and Staffing & Diversity.
Four managers report directly to the Vice President of Customer Support,
including the managers of Gas Sales & Marketing, Customer Service, Distribution
Management Service and Advantage Service.
Two managers report directly to the General Counsel, including the manager
of Government Affairs and the manager of Legal Affairs.
Six managers report directly to the Chief Financial Officer, including
managers of Rates & Regulatory Relations, Investor Relations, Information
Technology, Controller, Treasury and Risk Management.
Three directors report directly to the Chief Operating Officer, including
the directors of Operations; Gas, Gas Control, Engineering and Supply and
Operational Services.
Three managers report to the director of Supply and Operational Services,
including the manager of Facilities Services, the manager of Material Services
and the manager of Procurement & Fleet Services.
Three managers report directly to the director of Supply, Control and
Engineering, including the manager of Gas Supply & Regulatory Affairs, the
manager of Gas Control & Plants and the manager of Gas Engineering.
Thirteen managers report to the director of Operations, including the
managers of Wyoming, White Bear, St.. Paul, Newport, Northwest, Southeast, Lakes
Area, Safety & Training, Operations Development, Operations Support,
Cont/Locators, Disp/Trouble and North Dakota.
<PAGE>
EXHIBIT J-1
APPENDIX C
The following is a description of the organizational chart contained in
Annex C. The Board of Directors of Gas Company of Wisconsin has three functional
areas that directly report to it, including the offices of Corporate
Communications, Chief Executive Officer and Audit Services.
Five executives report to the Chief Executive Officer, including the Chief
Operating Officer, the Chief Financial Officer, the General Counsel, the Vice
President of Customer Support and the Vice President of Human Resources.
Two managers report directly to the Vice President of Human Resources,
including the manager of Employee Relations, Health & Safety and the manager of
Compensation, Benefits and Staffing.
Two managers report directly to the Vice President of Customer Support,
including the manager of Gas Sales & Marketing, and the Manager of Customer
Service.
The General Counsel oversees the activities of the Government Affairs and
Legal department.
Three managers report directly to the Chief Financial Officer, including
the Controller, the manager of Information Technology and the manager of
Treasury, Investor Relations and Risk Management.
The Chief Operating Officer oversees the work of two directors: the
director of Operations and the director of Supply, Control, Engineering and
Supply and Operational Services.
Five managers report directly to the director of Operations, including the
managers of Northern, Central, Southern, Metro and Operational Support.
Two managers report directly to the director of Supply, Control,
Engineering and Supply and Operational Services, including the manager of Gas
Supply, Control, Engineering and Supply and Operational Services and the manager
of Supply and Operational Services.
<PAGE>
EXHIBIT J-4
LEGAL MEMORANDUM ON THE RETENTION OF GAS
DIVISION BY PRIMERGY CORPORATION
<PAGE>
EXHIBIT J-4
LEGAL MEMORANDUM ON THE RETENTION OF GAS
DIVISION BY PRIMERGY CORPORATION
INTRODUCTION
The combination of Northern States Power Company ("NSP") and Wisconsin
Energy Corporation ("WEC"), both of which currently are exempt holding companies
under the Act, in a merger transaction (the "Transaction") will result in NSP
and WEC becoming wholly owned subsidiaries of Primergy Corporation ("Primergy"),
a holding company which will be registered under the Public Utility Holding
Company Act of 1935 (the "Act"). Primergy has filed an Application/Declaration
on Form U-1 ("U-1" or the "Application") seeking the approval of the Securities
and Exchange Commission (the "Commission") under the Act for the Transaction and
related matters. In addition, the Application seeks the Commission's
authorization for NSP and WEC to retain their gas utility systems following the
consummation of the Transaction. This memorandum supplements the Application
with respect to legal issues related to Primergy's request for authority to
retain these gas systems following its registration as a holding company under
the Act.
SUMMARY
Both the legislative history of the Act as well as the Commission's
early interpretation of the Act indicate that the purpose of the Act was to
facilitate the process by which state utility regulatory commissions determine
whether or not registered combination gas and electric holding company systems
are permissible, and not to impose a federal ban on such systems. As the
Commission noted in a number of early decisions, the Act was intended to provide
for a flexible regulatory scheme that would be capable of adapting to changes in
the utility industry as the industry evolved. That evolution has consistently
progressed and the industry is in the process of its most radical change (from
regulation to competition) since that which occurred as a result of the adoption
of the Act. It is clear that the industry is currently evolving in a direction
that requires utility company systems to offer their customers a range of energy
options in order to remain competitive. Thus, the Commission should analyze the
retention of NSP's and WEC's gas systems by focusing on those sections of the
Act (Sections 8 and 21) that give primacy to state utility commission decisions
with regard to combination registered holding companies and should "watchfully
defer" to such local decision-makers who are in the optimum position to regulate
the combination utility. Under such analysis, Primergy must be allowed to
retain the gas systems of NSP and WEC as long as the Minnesota Public Utilities
Commission (the "MPUC"), the Public Service Commission
<PAGE>
-2-
of Wisconsin (the "PSCW"), the North Dakota Public Service Commission ("NDPSC")
and the Michigan Public Service Commission ("MPSC"), who have, and will continue
to have, direct jurisdiction over Primergy's gas operations in their respective
states, permit the continued existence of a combination system. SEE U-1 at Item
3.A.2.(b).(i).
Even if the Commission chooses not to focus on state commission
determinations, Section 11 of the Act contains additional provisions that permit
the retention of NSP's and WEC's gas systems -- namely, the case-specific A-B-C
clauses (the "A-B-C Clauses") of Section 11(b)(1) under which the Commission in
the past has permitted retention of an additional gas or electric utility system
in addition to the larger electric utility system within a particular registered
holding company system. Again, the standards set forth in this section should
be read in light of the current changes in the utility industry and Primergy
without a doubt meets these standards with regard to the retention of the gas
operations discussed herein and in the U-1 at Item 3.A.2.(b)(ii).
DISCUSSION
I. SECTION 8
1. GENERAL
Section 8 of the Act states:
Whenever a state law prohibits, or requires approval or authorization
of, the ownership or operation by a single company of the utility
assets of an electric utility company and a gas utility company
serving substantially the same territory, it shall be unlawful for a
registered holding company, or any subsidiary thereof . . . (1) to
take any step, without the express approval of the State commission of
such State, which results in its having a direct or indirect interest
in an electric utility company and a gas utility company serving
substantially the same territory; or (2) if it already has any such
interest, to acquire, without the express approval of the State
commission, any direct or indirect interest in an electric utility
company or gas utility company serving substantially the same
territory as that served by such companies in which it already has an
interest.
On its face, this section indicates that, with approval of the relevant state
utility commissions, a registered holding company can include a combination of
electric and gas utility systems. A careful reading of the section indicates
that the thrust of the section is to preclude the use of the registered holding
company form to circumvent any state law restrictions on the
<PAGE>
-3-
ownership of gas and electric assets by the same company. NSP and WEC believe
that a re-emphasis by the Commission on Section 8, which would allow registered
combination companies if, as is the case here, they are permitted by the
affected states, is consistent both with the Act and its policy objectives.
Indeed, over time the Commission has emphasized different aspects of Section 8
and its interplay with Section 11 -- initially allowing registered holding
companies to own both gas and electric systems under Section 8, then focusing on
Section 11 as controlling determinations regarding combination companies and
requiring the second system to meet a strict interpretation of the A-B-C Clauses
of Section 11(b)(1).
2. EARLY CASES
In its early decisions, the Commission adhered to the concept that the
decision as to whether or not to allow combination companies was one that the
states should make (although the Commission might have to implement it in
certain cases) and, where such systems were permissible, the role of the
Commission was to ensure that both such systems were integrated as defined in
the Act.
The Commission's most notable decision in this line is AMERICAN WATER
WORKS AND ELECTRIC CO., HCAR No. 949, 2 S.E.C. 972 (Dec. 30, 1937). In that
case, the Commission approved the applicant's voluntary reorganization plan
under Section 11(e) of the Act and permitted the newly reorganized registered
holding company to retain both its electric and its gas operations. While
specifically noting that the Act does not contain a definition of single
integrated utility in the context of a combination company, the Commission
stated that:
We believe, however, that it is proper to regard such a combined
property as a single integrated system, provided that all of the
electric properties are integrated and all of the properties, both gas
and electric, are in fairly close geographic proximity and are so
related that substantial economies may be effectuated by their
coordination under common control. The question of public policy as
to the common ownership of gas and electric facilities in the same
territory is apparently left by the statute to the decision of the
states.
ID. at 983 & n.3.
Thus, since the combination company did not violate state policy,
there was no need for the Commission to exercise jurisdiction to implement state
policy by requiring divestiture of gas and electric operations. In that case
the Commission's concern under the Act was that each system was an integrated
system and otherwise met the standards of Section 11 of the Act.
<PAGE>
-4-
3. OTHER CASES
By the 1940s the Commission, faced with further perceived abuses,
de-emphasized its role as the implementer of state policy on combination
companies and focused on a narrow interpretation of the standards of Section 11
as the basis for a policy, adopted and implemented in simplification
proceedings, that the Commission should not allow registered holding companies
to own both gas and electric companies unless the smaller system qualified for
retention under the A-B-C Clauses. The Commission revisited and reinterpreted
its AMERICAN WATER WORKS decision by noting that the case would have reached the
same result under the A-B-C Clauses.(1) Thus, most Section 11 proceedings
involving the question of combination companies from that time forward discussed
retention of the gas system solely in the context of whether or not it was a
permissible "additional system" meeting the requirements of the A-B-C
Clauses.(2) In connection with this analysis, the Commission noted a policy
concern existing at that time that favored separating the management of gas
utility operations from the management of electric utility operations. This
policy originated in the belief that gas utilities benefited from having a
separate management focusing their entire efforts on the gas business, as
opposed to being part of a combination company where management might focus on
electric utility operations at the expense of the gas utility operations.(3) In
other words, there was a perception of competition in internal management
between gas and electric operations that could be detrimental to the gas
operations and, in turn, to consumers.
The Supreme Court addressed the interplay between Sections 8 and 11 of
the Act in its decision S.E.C. v. NEW ENGLAND ELECTRIC SYSTEM ("NEES I"), 384
U.S. 176 (1966). In NEES I, the Court noted:
To some extent, local policy was expected to govern, with Section 8
serving to prevent circumvention of that policy . . . . At the same
time, Section 11 was expected to assist in imposing restrictions with
regard to the combination of
- ------------------
(1) SEE, E.G., COLUMBIA GAS & ELECTRIC CORP., HCAR No. 2477, 8 S.E.C.
443, 463 (Jan. 10, 1941); UNITED GAS IMPROVEMENT CO., HCAR No.
2692, 9 S.E.C. 52 (Apr. 24, 1941).
(2) SEE, E.G., NORTH AMERICAN CO., HCAR No. 3446, 11 S.E.C. 194, 216
(Apr. 14, 1942); ENGINEERS PUBLIC SERVICE CO., HCAR No. 3796, 12
S.E.C. 41, 56 (Sept. 16, 1942); UNITIL CORP., HCAR NO. 25524, 51,
S.E.C. Docket 562 (Apr. 24, 1992).
(3) SEE PHILADELPHIA CO., HCAR No. 8242, 28 S.E.C. 35, 48 (June 1,
1948); NORTH AMERICAN CO., HCAR No. 10320, 32 S.E.C. 169, 179-80
(Dec. 28, 1950); ILLINOIS POWER CO., HCAR No. 16574, 44 S.E.C. 140
(Jan. 2, 1970).
<PAGE>
-5-
gas and electricity in one system. Discussing the interplay between Section 8
and Section 11, the Senate Committee noted that Section 8 only applied to future
acquisitions [and] "the policy upon which this section was based was essential
in the formulation of any Federal legislation on utility holding companies, it
did not think that the section should make it unlawful to retain (up to the time
that Section 11 may require divestment) interests in businesses in which the
companies were lawfully engaged on the date of enactment of the title."
ID. at 183 n.14.(4)
The Commission's policy with regard to exempt combination holding
companies, however, gave, and continues to give, primacy to state
determinations. In prior cases, the Commission has considered whether or not it
could approve transactions and grant exemptions to combination holding companies
under the Act as being in the public interest in light of the dictates of
Section 11(b)(1) and its single integrated utility requirement. In a 1954
decision granting an exemption from the Act to NSP, the Commission considered
whether or not the holding company was eligible for the exemption because it
conducted both gas and electric utility operations and such operations could be
considered detrimental to the public interest as violative of Section 11(b)(1).
In this case the Commission first decided that "the mere existence of the
combined electric and gas operations does not of itself require the denial of an
exemption." NORTHERN STATES POWER CO., HCAR No. 12655, 36 S.E.C. 1, 8
(Sept. 16, 1954).
The final decision on whether or not the combined system was in the
public interest was based on the concept that:
competition in the field of distribution of gas and electric energy is
"essentially a question of state policy." The considered conclusions
of the local authorities, deriving their power from specific State
legislation, should be given great weight in determining whether the
public interest would be adversely affected
- -------------------
(4) The dissenting opinion in NEES I specifically disputed this
conclusion, noting that "the House and Senate Committees in
identical language expressly stated that common ownership of
competing forms of energy was 'a field which is essentially a
question of state policy'; the present Section 8 was enacted to
support this approach by using federal power to limit common
ownership only where it is contrary to state law." ID. at 190
(Harlan, J., dissenting).
<PAGE>
-6-
by the retention of combined operations. In the absence of a compelling
showing in the record to the contrary, we would not be warranted in
rejecting the appraisal of such authorities that the local public interest
. . . is served by retention of the combined operation.
ID. at 8 (citations omitted).
The Commission made a number of similar determinations in subsequent
decisions relating to exempt holding companies, including WEC.(5) For example,
in a 1988 case involving Section 9(a)(2) approval of an acquisition and
subsequent exemption, the Commission reviewed its precedent and determined:
the judgment of a state's legislature and public service commission as
to what will benefit their constituents is entitled to considerable
deference . . . . [W]e do not believe that the pro-competitive thrust
of the Act expresses an absolute Federal policy against combination
gas and electric operations . . . . Neither the Act nor the NEES
decisions require that the [S.E.C.] adopt such an inflexible rule.(6)
4. LEGISLATIVE HISTORY AND RECENT DEVELOPMENTS
A review of the legislative history of the Act together with the
recent evolution of the utility industry and the regulatory environment in which
it operates, indicates that now is a propitious time for the Commission to
revisit its interpretations and allow combination registered holding companies
where permitted under relevant state law without violating the letter or the
spirit of the remaining sections of the Act.
As embodied throughout Section 1 of the Act, one of the principal
"evils" that the Act was designed to remedy was that multistate holding
companies with activities "extending over many States are not susceptible of
effective control by any State and make difficult, if not impossible, effective
State regulation of public utility companies." Thus, the Act attempts to
simplify the corporate structures of holding company systems to enable states to
regulate the production and distribution of energy. In general, the Act is not
concerned with those types of holding companies that can indeed be effectively
regulated on the state
- ---------------------
(5) SEE, E.G., DELMARVA POWER & LIGHT CO., HCAR No. 19717, 46 S.E.C. 7(Oct. 19,
1976); WISCONSIN ENERGY CORP., HCAR No. 24267, 37 S.E.C. Docket 296
(Dec. 18, 1986).
(6) WPL HOLDINGS, INC., HCAR No. 24590, 40 S.E.C. Docket 491, 497, 498
(Feb. 26, 1988).
<PAGE>
-7-
level and provides exemptions for them in Sections 3(a)(1)(7) and Section
3(a)(2).(8) The Act creates federal jurisdiction to regulate those holding
companies that could otherwise escape state and local regulation, but there is
no indication in the Act that it should be used to override effective state
policy.(9)
Section 8 in particular provides for the use of the Act as a tool to
further state policy with regard to combination companies within registered
holding company systems by prohibiting such companies where state law prohibits
them and, implicitly, allowing such companies where state law and state
regulatory officials do not object. A review of the legislative history of
Section 8 clarifies this intent. In its 1935 report, the Senate Committee on
Interstate Commerce noted that the provision in Section 8 concerning combination
gas and electric companies "is concerned with competition in the field of
distribution of gas and electric energy -- a field which is essentially a
question of State policy, but which becomes a proper subject of Federal action
where the extra-State device of a holding company is used to circumvent state
policy."(10) Conversely, when the holding company is not attempting to
circumvent state policy, there does not appear to be any need for the federal
government to exercise its jurisdiction. As noted in the report of the
National Power Policy Committee on Public-Utility Holding Companies, which
is attached to the Senate report cited above, the policy of Section 8 is:
Unless approval of a State commission can be obtained, the [S.E.C.]
should not permit the use of the holding-company form to combine a gas
and an electric utility servicing the same territory where local law
prohibits their combination in a single entity.
- -------------------------
(7) This exemption applies where the holding company and all material utility
subsidiaries are incorporated in and operate predominantly in the same
state.
(8) This exemption applies where the holding company is predominantly a utility
company whose operations do not extend beyond the state in which it is
incorporated and states contiguous thereto.
(9) Indeed, Section 21 of the Act specifically indicates that "nothing in [the
Act] shall affect . . . the jurisdiction of an other commission, board,
agency, or officer of . . . any State . . . insofar as such jurisdiction
does not conflict with any provision of [the Act]."
(10) S. Rep. No. 2796, 74th Cong., 1st Sess., pt. 1 (Report of Sen. Wheeler from
the Committee on Interstate Commerce) (the "1935 Senate Report") at 29-30
(1935).
<PAGE>
-8-
1935 Senate Report at 59. Nothing in this history suggests a congressional
desire to prohibit outright all combination companies where such approval can be
obtained.
Recent changes in the competitive nature of the utility industry
indicate that any perceived need for regulation by the Commission due to a
concern that the managements of combination companies may emphasize one form of
energy over the other has been eliminated by market forces providing customers
the ability to select the form and supplier of their energy needs, which in turn
mandates that utility companies offer a range of options to compete effectively.
As the division of investment management indicated in its recent report entitled
THE REGULATION OF PUBLIC-UTILITY HOLDING COMPANIES, "[T]he utility industry is
evolving toward the creation of one-source energy companies that will provide
their customers with whatever type of energy supply they want, whether
electricity or gas."(11) Thus, now that the fundamental restructuring of holding
company systems has been completed(12) and the industry is undergoing structural
changes that will shift control over certain matters from utilities to consumers
able to choose services offered by competing utilities, the Commission should
reemphasize the provisions of Section 8 and the initial policy impetus of the
Act by allowing combination registered holding companies to compete in the
market as long as they can be regulated effectively on the state level. The
Commission should again use the Act as a tool to implement state policy rather
than as a device to impose additional unneeded and burdensome protections
against evils that no longer exist and are not threatened to recur.
This re-emphasis on Section 8 fits within the overall regulatory
scheme of the Act. Section 11 is flexible and was designed to change as the
policy concerns over the regulation of utility holding companies changed.(13)
The utility industry and the regulation of that industry has changed
dramatically in recent years and it is competitive forces (the very thing that
the Act was designed to promote) that are pushing holding companies to offer
- -------------
(11) The Division of Investment Management, U.S. Securities and Exchange
Commission, THE REGULATION OF PUBLIC-UTILITY HOLDING COMPANIES (the "1995
Report") at 75-6 (1995).
(12) 1995 Report at 63 (citing the SEC ANNUAL REPORT OF 1952 reporting that the
simplification proceedings required under the Act were nearly completed).
(13) MISSISSIPPI VALLEY GENERATING CO., HCAR No. 12794, 36 S.E.C. 159 (Feb. 9,
1955) (noting that Congress intended the concept of integration to be
flexible); UNITIL CORP., SUPRA note 2 (noting that Section 11 contains a
flexible standard designed to accommodate changes in the industry).
<PAGE>
-9-
alternative forms of energy.(14) Moreover, a registered holding company would
still be required to demonstrate that any acquisition or transaction by which it
would become a combination company would not be detrimental to the carrying out
of the provisions of Section 11 of the Act. In other words, its electric system
would have to constitute an integrated electric system and its gas system would
have to constitute an integrated gas system and both systems would have to be
capable of efficient operation. Thus, the standards of Section 11 would still
have to be met, but the application of those standards should take into account
the fundamental policy of the Act to allow local regulations to make the
threshold determination with regard to combination companies.
Each of NSP and WEPCO as a combination company is permissible pursuant
to the terms of Section 8 of the Act because the affected states are expected to
approve the continued combined activities, and each is in the public interest.
Furthermore, as required by Section 11, in addition to the fact that NSP's and
WEPCO's electric systems constitute an integrated electric system, the gas
systems of each together will constitute an integrated gas system as explained
in detail under Item 3.A.2.d.(ii) of the Application.
With respect to Section 8, the combination of electric and gas
operations is lawful under all applicable state laws for each of NSP and WEPCO
and has been considered and approved indirectly on numerous occasions by
Wisconsin, Minnesota, North Dakota and Michigan regulators who have, and will
continue to have, direct jurisdiction over the Primergy gas operations. The use
of Primergy as a holding company for two combination companies will not
circumvent any state regulations by the relevant jurisdictions. In addition, in
their applications for approval of the Transaction by the Minnesota, Wisconsin,
Michigan and North Dakota regulatory commissions -- who have, and will continue
to have, direct jurisdiction over the Primergy system's gas utility operations
located in their respective states -- NSP and WEC expect these commissions to
either order or express approval for NSP and WEPCO to continue as combination
electric and gas utility companies through the retention of NSP's and WEPCO's
gas operations and of Primergy as a holding company of NSP and WEPCO. Such
actions will reflect the recognition by these commissions that the existence of
both gas and electric systems in the Primergy holding company system will allow
Primergy's customers greater choice to meet their energy needs, especially given
the fact that the electric and gas systems operate in substantially the same
territory, while sharing in the synergies that result from the Transaction.
Moreover, the prior fear that a holding company such as Primergy would be able
to greatly emphasize one form of energy over the other based on its own agenda
has dissipated both because of the competitive nature of the energy market,
which
- ----------------
(14) SEE GENERALLY the 1995 Report for a discussion of the recent changes in the
industry and the regulation thereof.
<PAGE>
-10-
requires utilities to meet customer energy supply requirements or risk losing
the customer to a competing supplier, and because state regulators will have
sufficient control over, and would be unlikely to approve, a combination company
that attempts to undertake such actions.
Furthermore, the Commission has had the opportunity to review the gas
utility operations of NSP and WEC in prior orders. SEE NORTHERN STATES POWER
CO., SUPRA, 36 S.E.C. 1 (1954); NORTHERN STATES POWER CO., HCAR No. 22334, 24
S.E.C. Docket 405 (Dec. 23, 1981). The 1954 NORTHERN STATES POWER CO. decision,
SUPRA, is noteworthy for the Commission's grant of an exemption to NSP under
Section 3(a)(2) despite the Staff's strenuous objections to NSP retaining its
gas utility properties in St. Paul, Minnesota. In this regard, the Commission
noted:
Before considering the Division's contentions, it should be observed
that the continuance of combined gas and electric service by Northern
States in St. Paul not only does not circumvent state law or policy
but is affirmatively desired by the local authorities concerned. The
State of Minnesota has home-rule legislation and the City of St. Paul
has authorized and actively favors the continuance by Northern States
of combined gas and electric service, and urges that the exemption be
granted. The report of the Senate Committee on Interstate Commerce
pointed out in connection with its comments on Section 8 of the Act
that competition in the field of distribution of gas and electric
energy is "essentially a question of State policy."(15)
In the 1981 NORTHERN STATES POWER CO. decision, SUPRA, the Commission continued
NSP's Section 3(a)(2) exemption virtually without discussion. In WISCONSIN
ENERGY CORP., HCAR No. 24267, 37 S.E.C. Docket 296 (Dec. 18, 1986), the
Commission reviewed at length its prior decisions on ownership of electric and
gas utility operations by exempt holding companies and noted the extensive
regulation by the PSCW of holding companies. The Commission granted WEC an
exemption under Section 3(a)(1) and reserved jurisdiction over its retention of
the gas utility operations of WNG.
For all of these reasons, the Commission should approve the retention
by NSP and WEPCO of their respective gas properties as contemplated by the
Transaction. No policy would be furthered by requiring divestiture, and,
indeed, state policy would be thwarted by such a requirement.
II. SECTION 11(B)(1) IS SATISFIED
- -----------------------
(15) 1935 Senate Report at 29.
<PAGE>
-11-
Primergy meets the standards for retention of the gas operations of
NSP and WEC pursuant to Section 11(b)(1) of the Act as well. Under the A-B-C
Clauses, a registered holding company is entitled to retain one or more
additional integrated public utility systems if:
(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,
adjoining states, or 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 so affected) as to impair the advantages of localized management,
efficient operation, or the effectiveness of regulation.
In fact, the Commission has held that the retention of existing gas
properties is governed by less stringent standards than the acquisition of new
gas properties,(16) and has allowed at least two registered electric systems to
retain long-standing gas utility properties without a showing of compliance with
the A-B-C clauses, subject to re-examination by the commission when more
information became available.
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(16) SEE, E.G., WISCONSIN'S ENVIRONMENTAL DECADE, INC. v. SEC, 882 F.2d 523,
527-28 (D.C. Cir. 1989); DELMARVA POWER & LIGHT CO., SUPRA note 5, at 715
(distinguishing between stricter standards applicable to the acquisition of
new combination properties and the mere "continued existence of a
combination company which had been in operation for thirty years");
COLUMBIA GAS & ELECTRIC CORP., SUPRA note 1, at 462-63; UNION ELECTRIC CO.,
HCAR No. 18368, 45 S.E.C. 489, 503-06 (Apr. 10, 1974) ("Acquisitions are
measured by standards more stringent than those governing retainability of
existing properties."), AFF'D WITHOUT OP. SUB NOM. CITY OF CAPE GIRARDEAU
v. S.E.C., 521 F.2d 324 (D.C. Cir. 1975); AMERICAN GAS AND ELECTRIC CO.,
HCAR No. 6639, 22 S.E.C. 808 (May 17, 1946).
(17) SEE MIDDLE SOUTH UTILITIES, INC., HCAR No. 11782, 35 S.E.C. 1, 14-15 (Mar.
20, 1953) (gas properties retained by New Orleans Public Service Inc.);
NORTH AMERICAN CO., SUPRA note 3 and UNION ELECTRIC COMPANY OF MISSOURI,
HCAR No. 12262, 35 S.E.C. 483 (Dec. 15, 1953) (retention by Union Electric
Company of Missouri of gas properties of Missouri Power & Light Company and
Missouri Edison Company, respectively).
<PAGE>
-12-
In its Application and supporting exhibits, NSP and WEC have shown
that clause (A) above will be satisfied because the gas divisions of NSP and of
WEC will both suffer substantial losses of economy if they are separated from
the Primergy system and forced to operate on a stand-alone basis. This evidence
is presented in the "Analysis of the Economic Impact of A Divestiture of the Gas
Operations of NSP(M) and its NSP(W) Subsidiary" conducted by management of NSP
(the "NSP Divestiture Study"), Exhibit J-1 to the Application, and in the
"Analysis of the Economic Impact of a Divestiture of Wisconsin Energy
Corporation's Gas Operations conducted by the management of WEC (the "WEC
Divestiture Study"), Exhibit J-2 to the Application. These studies are referred
to collectively as the "Gas Studies." In addition, following the effectiveness
of the transaction, Primergy will satisfy the criteria of clause (B) as its gas
utility operations will be confined to the contiguous states of Wisconsin,
Minnesota, Michigan and North Dakota. Finally, the Primergy gas system will not
be so large as to impair local management, efficient operation or effective
regulation under clause (C).
A. THE A-B-C ANALYSIS SHOULD BE LIBERALIZED.
Since 1968, in interpreting clause (A) of Section 11(b), the
Commission has historically looked to the Supreme Court decisions in NEES I,
SUPRA, and S.E.C. v. NEW ENGLAND ELECTRIC SYSTEM, 390 U.S. 207 (1968) ("NEES
II") (collectively the "NEES decisions"). In NEES I, the Supreme Court accepted
the Commission's interpretation of the "loss of substantial economies" language
of clause (A) to require an applicant seeking to own an electric and gas utility
system to show that the additional system, if separated from the principal
system, would be incapable of independent economic operation. The Court in NEES
I accepted the Commission's then-current interpretation of clause (A), despite
earlier S.E.C. interpretations permitting the Commission to use business
judgment and expertise to apply the statutory phrase "loss of substantial
economies." In NEES I, the Court specifically recognized that the language of
clause (A) was "admittedly not crystal clear" and deferred to the agency's
"EXPERTISE on the total competitive situation." NEES I, 384 U.S. at 185
(emphasis in original). In NEES II, the Court reiterated and strengthened its
earlier statement of deference to the Commission. NEES II, 390 U.S. at 219.
The Division recognized in the 1995 Report that the Commission was no
longer bound by the narrow interpretation of clause (A) under the NEES
decisions. In so doing, the Division stated:
As discussed above, the S.E.C. has generally required electric
registered holding companies that seek to own gas utility properties
to satisfy the requirements of the A-B-C clauses concerning additional
integrated systems.
<PAGE>
-13-
In contrast, exempt holding companies have generally been permitted to
retain or acquire combination systems so long as combined ownership of
gas and electric operations is permitted by state law and is supported
by the interested regulatory authorities.
In the past, the S.E.C. has construed the A-B-C clauses narrowly to permit
retention only where the additional system, if separated from the principal
system, would be incapable of independent economic operations. Although
the Supreme Court upheld the S.E.C.'s reading, two justices dissented,
contending that the "serious impairment" standard was at odds with the
wording of the Act, had little basis in the statutory history or aims of
the Act, and could not be sustained by agency or judicial precedent. The
dissenting justices believed that the statutory language "called for a
business judgment of what would be a significant loss."
Applicants in recent matters have argued that, in a competitive
utility environment, any loss of economies threatens a utility's
competitive position, and even a "small" loss of economies may render
a utility vulnerable to significant erosion of its competitive
position. There is general support for a more relaxed standard. A
number of commenters emphasize that these are essentially state
issues. It does not appear that the S.E.C.'s precedent concerning
additional systems precludes the S.E.C. from relaxing its
interpretation of section 11(b)(1)(A). Indeed, the S.E.C. has
recognized that section 11 does not impose "rigid concepts" but rather
creates a "flexible" standard designed "to accommodate changes in the
electric utility industry."
Congress, in 1935, recognized that competition in the field of
distribution of gas and electric energy is essentially a question of
state policy. The Act was intended to ensure compliance with state
law in this regard. Moreover, it appears that the utility industry is
evolving toward the creation of one-source energy companies that will
provide their customers with whatever type of energy supply they want,
whether electricity or gas. Accordingly, the Division believes it is
appropriate to reconcile the treatment of registered and exempt
companies in this regard, and so recommends that the S.E.C. permit
registered holding companies to own gas and electric utility systems
pursuant to the A-B-C clauses of section 11(b)(1), where the affected
states agree.(18)
- ----------------------
(18) 1995 Report at 74-76 (footnotes omitted).
<PAGE>
-14-
In NEES I (and NEES II), the Court accepted the Commission's
interpretation of clause (A) as a "construction . . . well within the
permissible range given to those who are charged with the task of giving an
intricate statutory scheme practical sense and application." NEES I, 384 U.S.
at 185. However, there is strong support in Supreme Court case law for the
Commission's application in this case of its current interpretation of clause
(A), based upon current competitive facts and current policy, as stated in the
1995 Report. In CHEVRON USA, INC. v. NATIONAL RESOURCES DEFENSE COUNCIL, INC.,
467 U.S. 837 (1984), the Court outlined the parameters for changing agency
interpretations of statutory language based on policy considerations and agency
expertise:
When a court reviews an agency's construction of the statute which it
administers, it is confronted with two questions. First, always, is
the question whether Congress has directly spoken to the precise
question at issue. If the intent of Congress is clear, that is the
end of the matter; for the court, as well as the agency, must give
effect to the unambiguously expressed intent of Congress. If,
however, the court determines Congress has not directly addressed the
precise question at issue, the court does not simply impose its own
construction on the statute, as would be necessary in the absence of
an administrative interpretation. RATHER, IF THE STATUTE IS SILENT OR
AMBIGUOUS WITH RESPECT TO THE SPECIFIC ISSUE, THE QUESTION FOR THE
COURT IS WHETHER THE AGENCY'S ANSWER IS BASED ON A PERMISSIBLE
CONSTRUCTION OF THE STATUTE.
467 U.S. at 842-43 (citations omitted; emphasis added). Justice Scalia, the
present dean of Supreme Court interpretations of administrative law, pointed out
that the Court's CHEVRON opinion clearly "announced the principle that the
courts will accept an agency's reasonable iNTERPRETATION OF THE AMBIGUOUS TERMS
OF A STATUTE THAT THE AGENCY ADMINISTERS." THE HONORABLE ANTONIN SCALIA,
JUDICIAL DEFERENCE TO ADMINISTRATIVE INTERPRETATIONS OF LAW, 1989 Duke L.J. 511,
511 (1989).
In the NEES I opinion, the Supreme Court specifically pointed out that
"[t]he phrase 'without the loss of substantial economies' is admittedly not
crystal clear." NEES I, 384 U.S. at 185. Thus, the first prong of the analysis
under CHEVRON is clearly met. As Justice Scalia pointed out, under CHEVRON:
the agency is free to give the statute whichever of several possible
meanings it thinks most conducive to accomplishment of the statutory
purpose. Under the latter regime, there is no apparent justification
for holding the agency to its first answer, or penalizing it for a
change of mind.
<PAGE>
-15-
Scalia, SUPRA, 1989 Duke L.J. at 516. Justice Scalia convincingly argues that a
primary point of CHEVRON is to allow agencies flexibility to change their
statutory interpretations based upon current economic (and even political)
considerations. Under CHEVRON, it is entirely appropriate for the Commission to
interpret clause (A) based on its CURRENT "expertise on the total competitive
situation." NEES I, 384 U.S. at 185.
Applicants believe that the Division's recommendation would
represent sound policy by the Commission. From a policy perspective, the
Commission's historic concern underpinning NEW ENGLAND ELECTRIC SYSTEM, HCAR
No. 15035, 41 S.E.C. 888 (Mar. 19, 1964), and a host of earlier decisions
where the retainability of gas properties by registered electric systems was
at issue -- namely, of fostering competition between electric and gas -- is
simply no longer valid given the current "state of the art" in the electric
and gas utility industries. In the generation since the Commission decided
the NEES case, profound economic and regulatory factors have wrought a
fundamental transformation in the gas supply and electric generation
industry, rendering obsolete the Commission's earlier premises regarding the
primacy of competition between gas and electric service and the lack of
competition within electric and gas service.
In the gas area, regulatory changes have introduced competition into
what was formerly a monopoly and have expanded the availability of non-utility
"transportation-only service" as an alternative to sales services from the local
gas utility company. The NSP, NSP-W and WEPCO gas operations all have "open
access" transportation-only service tariffs on the file with their respective
state commissions, and approximately 20.1% of the gas delivered by them in 1995
was directly purchased by customers. Combination utilities therefore have less
ability than they did in 1935 to "favor" electric -- the principal policy
concern in decisions ordering the separation of gas and electric systems -- by
curtailing the availability or increasing the price of gas.(19) Combination
utilities also have less incentive to favor electric over gas in light of the
increasing importance of demand-side management, the costs and risks involved in
the construction of new generating capacity and the incentives to avoid such
construction, and, as noted in the June 1994 issue of THE ELECTRICITY JOURNAL,
the emergence of integrated resource planning involving both gas and electric
service.
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(19) SEE, E.G., NEES I. It is important to note that this issue -- basically an
anti-trust issue -- was the principal concern in previous decisions
ordering the separation of gas and electric systems and clearly is no
longer applicable to the changed utility competitive environment.
<PAGE>
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In the electric area, the Energy Policy Act of 1992 and the Public
Utility Regulatory Policies Act of 1978 have introduced competition into the
electric utility business. As the chairman of the Senate Banking Committee
stated recently:
[The Act] was substantially changed by the Energy Policy Act of 1992.
That law restructured the utility industry to promote greater
competition for the benefit of ENERGY customers. The Energy Policy
Act of 1992 was the product of a cooperative effort on the part of the
Banking Committee and the Energy Committee to create a more market-
oriented regulatory framework for the ENERGY industry.
Hearing on S. 182, The Communications Act of 1994 Before the Comm. on Commerce,
Science and Transportation, 103d Cong., 2d Sess., 34-345 (1994) (Prepared
Statement of Senator Riegle) (emphasis added).
In addition, many states have "retail wheeling" measures under
discussion which are likely to have the effect of extending electric supply
competition to the retail level. Minnesota, Wisconsin, Michigan and North
Dakota are each in the process of evaluating various options that could increase
electric supply competition at the retail level.(20)
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(20) On December 12, 1995, the PSCW announced a determination outlining the
general direction of electric utility regulation in Wisconsin. It includes
a restructuring of the industry providing choice of electricity provider
for all consumers by the year 2000 as well as establishment of a
competitive generation business. The transmission and distribution
functions would remain regulated. In a February 22, 1996 Report to the
Wisconsin Legislature, the PSCW identified a 32-step workplan that it would
follow for Electric Utility Restructuring in Wisconsin. In the plan, the
PSCW indicated that during 1996 it will begin activities on 12 of these
steps, some of which would seek changes in applicable administrative rules
under its jurisdiction, including affiliated interest standards and quality
of service standards. The PSCW experts are to present an electric utility
restructuring plan to the Wisconsin Legislature in 1997.
The PSCW also continued a generic investigation of the natural gas industry
in Wisconsin and addressed the extent to which traditional regulation
should be replaced with a different approach. In conjunction with this
generic investigation, the PSCW staff is reviewing the use of the current
purchased gas adjustment ("PGA") mechanism which is designed to pass on to
gas customers increases or decreases in the cost natural gas purchased for
resale. A separate docket has been established to review the PGA.
<PAGE>
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Instead of relying on the blunt instrument of competition BETWEEN gas
and electric, national policy has now created direct competition WITHIN the gas
and electric utility industries. Thus, combination ownership does not
eliminate competition, since a combination utility now has competitors for both
gas and electric service. Moreover, competition is not an end in itself, but is
merely a means to the end of efficient, cost-effective service. Since
combination ownership creates efficiencies and no longer has the effect of
eliminating competition, there is no reason for the Commission to prohibit
combination ownership, at least under the circumstances presented here.
Nothing in the Supreme Court's NEES decisions compels a different
result. First, as the Commission noted in its UNION ELECTRIC decision, the
Supreme Court's NEES decisions attached "great weight . . . to [the
Commission's] expertise in the administration of the Act." UNION ELECTRIC CO.,
HCAR No. 16368, 45 S.E.C. 489, 509 n.77 (Apr. 10, 1974). The NEES decisions and
the Court's reasoning in CHEVRON therefore leave the Commission free to apply
its expertise to administer the Act in light of changes in legal, regulatory and
economic circumstances which were not foreseen at the time of the NEES
decisions, including federal legislation which has "substantially changed" the
Act. SEE CHEVRON, 467 U.S. at 842.
Second, as noted by the Commission in UNION ELECTRIC and later
decisions, the NEES decisions are based on premises and policies that are no
longer operative. SEE DELMARVA POWER & LIGHT CO., HCAR No. 19717, 46 S.E.C.
710, 716 (Oct. 19, 1976) ("[T]he objective of promoting retail competition
between gas and electricity, which was stressed in the NEES opinions is less
critical now."); UNION ELECTRIC CO., SUPRA, 45 S.E.C. at 510 (describing as
"outmoded" the Commissions' previous policy to "promot[e] the 'wider . . . use
of gas and electric energy'" and to "foster . . . variegated competition between
gas and electricity and the attendant promotion of the use of each"; holding
that "the maximization of energy use seems a questionable public policy
objective" and that "[i]n today's world the public interest and the long-run
consumer interest seem to call for prudent conservation and rational allocation"
of resources), AFF'D WITHOUT OP. SUB NOM. CITY OF CAPE GIRARDEAU v. S.E.C., 521
F.2d 324 (D.C. Cir. 1975).
B. CLAUSE A OF SECTION 11(B)(1) IS SATISFIED.
Historically, assuming no liberalization, as a "guide" to determining
whether lost economies are "substantial" under Section 11(b)(1)(A), under its
previous narrow interpretation of this section, the Commission had given
consideration to four ratios, which measure the projected loss of economies as a
percentage of: (1) total gas operating revenues; (2) total gas expense or
"operating revenue deductions"; (3) gross gas income and (4) net gas income or
net gas utility operating income. Although the Commission has declined to draw
a
<PAGE>
-18-
bright-line numerical test under Section 11(b)(1)(A), it has indicated that cost
increases resulting in a 6.78% loss of operating revenues, a 9.72% increase in
operating revenue deductions, a 25.44% loss of gross gas income and a 42.46%
loss of net income would afford an "impressive basis for finding a loss of
substantial economies." ENGINEERS PUBLIC SERVICE CO., HCAR No. 3796, 12 S.E.C.
41, 59 (Sept. 16, 1942).
DIRECT LOSS OF ECONOMIES. As noted above, NSP and WEPCO have each
prepared separate studies of their respective gas utility operations that
analyze the lost economies that their gas utility operations would suffer upon
divestiture when compared to their retention pursuant to the Transaction. As
set forth in the Gas Studies, if the gas operations of NSP and WEC were operated
on a stand-alone basis, lost economies from the need to replicate services, the
loss of economies of scale, the costs of reorganization, and other factors would
be immediate and substantial. In the absence of rate relief, those lost
economies would substantially injure the shareholders of NSP and WEC upon the
divestiture of those gas operations. As the studies further show, if rate
relief were granted with respect to the lost economies, then consumers would
bear those substantial costs over what they would have to pay if the properties
were retained as contemplated by the Transaction.
As set forth in the Gas Studies, divestiture of the gas operations of
WEPCO, NSP and NSP-W into stand-alone companies would result in lost economies
of $36.4 million for WEPCO, $30.1 million for NSP and $9.3 million for NSP-W.
The lost economies compare with gas operating revenues of $318 million for
WEPCO, $336 million for NSP and $78 million for NSP-W; gas operating revenue
deductions of $271 million for WEPCO, $300 million for NSP and $69.7 million for
NSP-W; gas gross income of $47 million for WEPCO, $36 million for NSP and $8.2
million for NSP-W; and gas net income of $31.9 million for WEPCO, $26.6 million
for NSP and $5.5 million for NSP-W.
On a percentage basis, the lost economies amount to 112.62% of 1995
gas net income in the case of WEPCO, 110.20% of gas net income in the case of
NSP and 165.16% of gas net income in the case of NSP-W -- far in excess of the
loss of net income in UNITIL, where the Commission allowed the retention of gas
utility operations, and the 30% loss in NEW ENGLAND ELECTRIC SYSTEM that the
Commission has described as the highest loss of net income in any past
divestiture order.(21) As a percentage of 1995 gas operating revenues, these
lost economies described in the Gas Studies amount to 11.30% in the case of
WEPCO, 8.74%
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(21) SEE UNITIL CORP., SUPRA note 2, at 567 n.42 ("The Commission has required
divestment where the anticipated loss of income of the stand-alone company
was approximately 30% . . ." or "29.9% of net income before taxes," citing
S.E.C. v. NEW ENGLAND ELECTRIC SYSTEM, 390 U.S. 214 n.11 (1968)).
<PAGE>
-19-
in the case of NSP and 11.73% in the case of NSP-W -- losses substantially
higher than the losses in any past divestiture order.(22) As a percentage of
1995 gas operating revenue deductions, the lost economies described in the
Gas Studies would amount to 13.26% in the case of WEPCO, 9.79% in the case of
NSP, and 13.12% in the case of NSP-W, higher than the losses in any past
divestiture order and, in ENTERGY, another case in which the Commission
authorized the retention of gas operations. As a percentage of 1995 gross
income, the lost economies described in the Gas Studies amount to 76.51% in
the case of WEPCO, 81.46% in the case of NSP and 111.05% in the case of
NSP-W, far in excess of the highest loss of gross income in any divestiture
order.
In order to recover these lost economies, WEPCO's gas division would
need to increase rate revenue by $36.4 million or 11.45%, NSP would have to
increase revenues by $30.1 million or 8.96% and NSP-W would have to increase
rate revenue by $9.3 million or 11.91%. These increases in rate revenues would
have a direct and immediate negative impact on the rates charged to customers
for gas services. In addition, the customers of WEPCO and NSP gas utility
businesses who are also customers of their respective electric utility
businesses will experience a doubling of their postage costs to pay separate
bills. The total
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(22) The highest loss of operating revenues in any case ordering divestiture is
commonly said to be 6.58%. SEE, E.G., UNITIL CORP., SUPRA note 2, at 567
("[o]f cases in which the Commission has required divestment, the highest
estimated loss of operating revenues of a stand-alone company was
6.58% . . . ," citing ENGINEERS PUBLIC SERVICE CO., SUPRA note 2). In
fact, however, the 6.58% ratio is not cited in ENGINEERS and is a post hoc
calculation derived from claimed cost increases which the Commission had
found were "overstated" and "doubtful" in a number of respects. ENGINEERS
PUBLIC SERVICE CO., SUPRA note 2, at 80-81. SEE ALSO PHILADELPHIA CO.,
SUPRA note 3, at 51 n.26 (June 1, 1949) (Engineers' "estimate . . . of
increased expenses . . . was overstated in several respects."). While the
Commission made no finding as to actual cost increases or ratio for the
Gulf States gas properties, it found that Engineers' estimate of
divestiture-related ratios cost increases or ratio for certain sister gas
properties in Virginia were also overstated and cut them and the resulting
ratios in half. ENGINEERS PUBLIC SERVICE CO., SUPRA, note 2, at 60. If
the same 50% discount were applied to Engineers's Gulf States gas
properties, the loss of operating revenues would have been 10.43%, and the
loss of net income would have been 12.63%. Disregarding the 6.58% ratio
incorrectly attributed to the Engineers/Gulf State case, the highest loss
of operating revenues in any past divestiture order was 5.8%. SEE table of
ratios in NEW ENGLAND ELECTRIC SYSTEM, HCAR No. 15035, 41 S.E.C. 888, app.
at 905 (Mar. 19, 1964) (The North American Company). This figure would be
even lower if adjusted for the increases in purchased gas costs since the
1940s.
<PAGE>
-20-
estimated increase in such postage costs is $3.84 per customer per year or
$1,631,000 in the aggregate ($1,356,000 for NSP gas customers and $275,000 for
NSP-W gas customers).
LOSS OF "ENERGY SERVICE COMPANY ECONOMIES." Divestiture would also
result in the loss to consumers of the economies offered by the "energy
services" approach of NSP and WEC to the utility business. While the losses
cannot now be fully quantified, they are substantial. At the center of the
energy services company concept is the idea that providing gas and electric
products is only the start of the utility's job. In addition, the utility must
provide enhanced service to the consumer by providing an entire package of both
energy products and services. In this area, NSP's and WEC's efforts are part of
a trend by utilities to organize themselves as energy service companies, that
is, as providers of a total package of energy services rather than merely
suppliers of gas and electric products. The goal of an energy service company
is to retain its current customers and obtain new customers in an increasingly
competitive environment by meeting customers' needs better than the competition.
An energy service company can provide the customer with a low cost energy (I.E.,
gas, electricity, or conservation) option without inefficient subsidies.
Through the adoption of the energy services concept, combination
utilities benefit all utility stockholders. For customers, a service company
provides the convenience and efficiency of service by a single energy provider
and reduces transaction cost incurred in gathering and analyzing information,
contacting energy suppliers, negotiating terms of services and paying bills.
For the communities in which an energy service company operates, combining gas
and electric operations simplifies community planning on energy-related matters.
For society, an energy service company is best able to ensure an environmentally
efficient allocation of energy. For utility shareholders and employees, an
energy service company is better able to respond to a competitive environment
and to remain an attractive investment opportunity for shareholders and an
appealing employer for utility employees.
C. CLAUSES (B) AND (C) OF SECTION 11(B)(1) ARE SATISFIED.
The remaining requirements of Section 11(b)(1) are met because the gas
operations of WEPCO, NSP and NSP-W are located in adjoining states Wisconsin,
Minnesota, Michigan (Upper Peninsula), and North Dakota and because the
continued combination of the gas operations under Primergy 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. The gas systems are confined to a relatively small area and are
not as large as other gas systems in the same area and will preserve the
advantages of localized management, efficient operation and effectiveness of
regulation. Moreover, as the Commission has recognized elsewhere, the
determinative consideration is not size alone or size in an absolute sense,
either big or small, but size in
<PAGE>
-21-
relation to its effect, if any, on localized management, efficient operation and
effective regulation.(23) The Commission must "exercise its best judgment as to
the maximum size of a holding company in a particular area, considering the
state of the art and the area or region affected.(24) From these perspectives,
it is clear that the continued combination of the gas operations under Primergy
is not too large.
Even after the combination, the gas operations of NSP and WEPCO, with
some 750,000 customers combined, will be smaller than Northern Illinois Gas
Company (1,769,800 customers) and People's Gas Light and Coke Company (842,510
customers), primary competitors in the region.
The Commission's past decisions on "localized management" have
evaluated localized management in terms of such factors as responsiveness to
local needs,(25) whether management and directors were drawn from local
utilities, the preservation of corporate identities,(26) the preservation of
corporate identities,(27) the ease of communication,(28) and other factors.
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(23) SEE, E.G., ENTERGY CORP., HCAR No. 25952, 55 S.E.C. Docket 2035, 2040 (Dec.
17, 1993); CENTERIOR ENERGY CORP., HCAR No. 24073, 35 S.E.C. Docket 769,
771 (Apr. 29, 1986); AMERICAN ELECTRIC POWER CO., HCAR No. 20633, 15 S.E.C.
Docket 375, 383-4 (July 21, 1978).
(24) AMERICAN ELECTRIC POWER CO., SUPRA note 23, at 381.
(25) ENTERGY CORP., SUPRA note 23, at 2046 n.83; AMERICAN ELECTRIC POWER CO.,
SUPRA note 23, at 383 (advantages of localized management evaluated in
terms of whether an enlarged system could be "responsive to local needs");
GENERAL PUBLIC UTILITIES CORP., HCAR No. 13116, 37 S.E.C. 28, 36 (Mar. 2,
1956) (localized management evaluated in terms of "local problems and
matters involving relations with consumers").
(26) SEE CENTERIOR ENERGY CORP., SUPRA note 23, 35 S.E.C. Docket at 775
(advantages of localized management would not be compromised by the
affiliation of two electric utilities under a new holding company because
the new holding company's "management [would be] drawn from the present
management" of the two utilities); NORTHEAST UTILITIES, HCAR No. 25221, 47
S.E.C. Docket 1270, 1285 (Dec. 21, 1990) (advantages of localized
management would be preserved in part because the board of New Hampshire
utility, which was to be acquired by an out-of-state holding company,
included "four New Hampshire residents").
(27) SEE NORTHEAST UTILITIES, SUPRA note 26, at 1285 (utilities "will be
maintained as separate New Hampshire corporations . . . . [t]herefore the
advantages of localized management will be preserved"); COLUMBIA GAS
SYSTEM, INC., HCAR No. 24599, 40 S.E.C. Docket
<PAGE>
-22-
In addition, the Commission has held that so long as there is evidence
as to the local nature of important policy determinations, the advantages of
localized management are not necessarily impaired by central control. NORTH
AMERICAN CO., HCAR No. 3446, 11 S.E.C. 194, 237 (Apr. 14, 1992). The
localization of policy determinations can be effectively achieved where
management's time and efforts are concentrated in the area served by the
principal system (here, the electric system). SOUTHERN UNION GAS CO., HCAR
No. 3802, 12 S.E.C. 116, 142 (Sept. 19, 1942). It can also be achieved where
the systems are in close proximity to each other. ENGINEERS PUBLIC SERVICE CO.,
SUPRA, 12 S.E.C. at 66 (Sept. 16, 1942). The retention of the gas properties
under Primergy satisfies all of these considerations.
As a result of the Transaction, the gas utility operations of NSP-W
(other than the Designated Gas Utility Assets) will become part of WEPCO and the
Designated Gas Utility Assets (I.E. the distribution systems servicing towns of
LaCrosse and Hudson, Wisconsin) will become part of NSP. The centralized
functions of NSP (including the Designated Gas Utility Assets) will be managed
from St. Paul, Minnesota, and the local functions will continue to be handled
from regional offices, including offices in or near LaCrosse and Hudson.
Similarly, the central gas utility functions for WEPCO (including the gas
utility business acquired from NSP-W) will continue to be run from Milwaukee and
local matters will be handled by regional offices. No reduction in customer
service or support crews is expected. Management will therefore remain
geographically close to the gas operations, thereby preserving the advantages of
localized management. From the standpoint of regulatory effectiveness, NSP
already operates a multi-jurisdictional (Minnesota and North Dakota) gas
utility, as does NSP-W (Wisconsin and Michigan). In addition, several other gas
utilities in the region serve customers in several states. Thus, the regulatory
agencies in the four states are currently regulating multi-jurisdictional gas
utilities and will be able to effectively regulate the gas utility operations of
Primergy. In addition, it is expected that: (i) the Wisconsin and Michigan
regulatory authorities will indicate their support for or order the retention of
the existing gas system by WEPCO and will approve WEPCO's acquisition of NSP-W's
gas utility business, (ii) that the North Dakota and Minnesota regulatory
authorities will support the retention of the existing gas system of NSP and
(iii) the Wisconsin Commission will approve NSP's acquisition of the Designated
Gas Utility Assets, thereby indicating that they can regulate these systems
effectively. With respect to efficient operation,
(..continued)
654, 656 (March 15, 1988) (benefits of local management maintained where
the utility to be added would be a separate subsidiary).
(28) SEE AMERICAN ELECTRIC POWER CO., SUPRA note 23, at 383-84 (distance of
corporate headquarters from local management was a "less important factor
in determining what is in the public interest" given the "present-day ease
of communication and transportation").
<PAGE>
as described above, as part of the Primergy System, the gas operations of NSP
and WEPCO are expected to reduce purchased gas costs by $102 million from 1997
to 2000 and 100% of these savings will be passed on directly to customers. Far
from impairing the advantages of efficient operation, the combination of the gas
operations under Primergy will facilitate and enhance the efficiency of gas
operations.
CONCLUSION
For the reasons set forth above, and in Primergy's Application and
supporting exhibits, it is respectfully submitted that the Commission should
allow Primergy to retain the gas utility operations of NSP and WEC following the
consummation of the Transaction and the registration of Primergy as a holding
company under the Act.
Cahill Gordon & Reindel
