File No. 70-9197
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________
FORM U-1/A
Amendment No. 4
to
APPLICATION OR DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
_________________________________________________________
NIPSCO Industries, Inc.
801 East 86th Avenue
Merrillville, Indiana 46410
(Name of company filing this statement and
address of principal executive offices)
_____________________________________________________
None
(Name of top registered holding company parent)
______________________________________________________
Peter V. Fazio, Jr., General Counsel
NIPSCO Industries, Inc.
801 East 86th Avenue
Merrillville, Indiana 46410
(Name and address of agent for service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application/Declaration to:
Mark T. Maassel, Vice President Andrew F. MacDonald, Esq.
NIPSCO Industries, Inc. William C. Weeden
801 East 86th Avenue Thelen Reid & Priest LLP
Merrillville, Indiana 46410 701 Pennsylvania Ave., N.W.
Washington, D.C. 20004
Michael L. Meyer, Esq.
Schiff Hardin & Waite
7200 Sears Tower
233 S. Wacker Drive
Chicago, Illinois 60606
<PAGE>
The Applicant hereby amends and restates in its entirety the
Application or Declaration filed herein, as previously amended by
Amendments No. 1, No. 2 and No. 3, to read as follows:
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
-----------------------------------
1.1. Introduction and Summary of Transaction.
---------------------------------------
NIPSCO Industries, Inc. ("Industries"), an Indiana corporation
whose principal executive offices are located at 801 East 86th Avenue,
Merrillville, Indiana 46410, herein requests authority pursuant to
Section 10 of the Public Utility Holding Company Act of 1935, as
amended (the "Act"), to acquire all of the issued and outstanding
common stock of Bay State Gas Company ("Bay State"), whose principal
executive offices are located at 300 Friberg Parkway, Westborough,
Massachusetts 01581. Industries, an exempt holding company pursuant
to Section 3(a)(1) of the Act and Rule 2 thereunder, owns all of the
issued and outstanding common stock of three public-utility subsidiary
companies that provide electric and retail natural gas service
exclusively within the State of Indiana. Bay State, a gas-utility
company, distributes natural gas at retail in parts of Massachusetts
and, through a wholly-owned subsidiary, Northern Utilities, Inc.
("Northern"), in contiguous areas of Maine and New Hampshire.
Industries and Bay State have entered into an Agreement and Plan
of Merger, dated as of December 18, 1997, as amended and restated as
of March 4, 1998 and further amended as of November 16, 1998 (the
"Merger Agreement"), pursuant to which Industries has agreed to
acquire all of the issued and outstanding common stock of Bay State.
The Merger Agreement sets forth the terms of a "preferred merger"
structure pursuant to which Bay State would be merged with and into a
wholly-owned Industries' subsidiary which, upon completion of the
merger, would change its name to and operate under the name of "Bay
State Gas Company." Under the "preferred merger," "new" Bay State and
Northern will become additional direct wholly-owned subsidiaries of
Industries. The Merger Agreement also provides that, in the event it
is not possible to consummate the "preferred merger" structure, the
parties would, subject to certain conditions, carry out an
"alternative merger" transaction in which Bay State and then Northern
would be merged directly into Northern Indiana Public Service Company
("Northern Indiana"), Industries' principal public-utility subsidiary.
The request for approval made herein concerns only the "preferred
merger" transaction (hereinafter referred to as the "Transaction");
the "alternative merger" is not subject to the jurisdiction of this
Commission. The Merger Agreement is filed herewith as Exhibit B-1.
The Transaction is expected to produce benefits to the public,
investors and consumers and will satisfy all of the applicable
standards under Section 10 of the Act. Industries and Bay State have
both stated that they believe that the Transaction will provide
important strategic and financial benefits to their respective
shareholders, as well as to their employees and customers and the
communities in which they provide public utility service. Among other
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things, the parties believe that the Transaction will provide benefits
in the form of greater flexibility and capacity in financing their
operations and an enhanced ability to take advantage of future
strategic opportunities in the competitive marketplace for energy and
energy services that is rapidly evolving in New England. Further, as
explained more fully in ITEM 3 - APPLICABLE STATUTORY PROVISIONS,
Industries believes that, following the merger, the combined companies
will be better positioned to take advantage of operating economies and
efficiencies through, among other measures, joint management and
optimization of their respective portfolios of gas supply,
transportation and storage assets.
1.2 Description of Parties to the Transaction.
-----------------------------------------
(a) NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES.
Industries, an Indiana corporation, was incorporated in 1987 to
serve as the holding company for Northern Indiana and various non-
utility subsidiaries and has since acquired two additional public-
utility subsidiaries, Kokomo Gas and Fuel Company ("Kokomo Gas")<1>
and Northern Indiana Fuel and Light Company, Inc. ("NIFL").<2>
Industries is an exempt holding company pursuant to Section 3(a)(1) of
the Act and Rule 2 thereunder.<3>
Northern Indiana, Industries' largest and dominant subsidiary, is
a combination gas and electric utility company which operates in 30
counties in the northern part of Indiana, serving an area of about
12,000 square miles with a population of approximately 2,200,000.
Northern Indiana distributes gas to approximately 662,500 residential,
commercial and industrial customers and generates, purchases,
transmits and sells electricity to approximately 416,300 retail and
wholesale electric customers. Northern Indiana also provides gas
transportation service to approximately 200 customers. The electric
service territory of Northern Indiana is subsumed within the combined
gas service areas of Northern Indiana and NIFL.<4>
Kokomo Gas supplies natural gas to approximately 33,500 retail
customers in a 440 square-mile area in six counties of north central
__________________
<1> The Commission authorized Industries to acquire all of the issued
and outstanding common stock of Kokomo Gas in 1992. SEE NIPSCO
INDUSTRIES, INC., 50 SEC Docket 1231 (February 5, 1992).
<2> The Commission authorized Industries to acquire all of the issued
and outstanding common stock of NIFL in 1993. SEE NIPSCO INDUSTRIES,
INC., 53 SEC Docket 1997 (March 25, 1993).
<3> SEE File No. 69-340.
<4> Northern Indiana provides electric service in all or parts of 20
of the 30 counties in northern Indiana in which it operates. Gas
service is also provided in each of these 20 counties by either
Northern Indiana or NIFL.
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Indiana having a population of approximately 100,000. The Kokomo Gas
service territory touches Northern Indiana's gas service territory.
NIFL supplies natural gas to approximately 33,400 retail customers in
a 1,425 square- mile area in five counties in the northeast corner of
Indiana having a population of approximately 66,700. The NIFL service
territory also touches Northern Indiana's gas service territory, and,
as indicated above, overlaps a portion of Northern Indiana's electric
service territory in the northeast corner of the state. The three
operating utility subsidiaries of Industries are subject to regulation
by the Indiana Utility Regulatory Commission ("IURC") as to rates,
service, accounts, issuance of securities, and other matters.
Industries also owns all of the outstanding common stock of
Crossroads Pipeline Company ("Crossroads"), a non-utility natural gas
transportation company that was certificated by the Federal Energy
Regulatory Commission ("FERC") in May 1995 to operate as an interstate
pipeline.<5> Crossroads owns and operates a 201-mile, 20-inch,
pipeline that extends from Schererville, Indiana, in the northwestern
corner of the state, where it takes delivery from the interstate
pipeline facilities of Natural Gas Pipeline Company of America
("NGPL"), to Cygnet, Ohio, which is located in northwestern Ohio,
where it interconnects with facilities owned by Columbia Gas
Transmission Corporation ("Columbia"). Recently, Crossroads announced
plans to construct a 20-mile extension of its pipeline facility in
Ohio to a point of interconnection with a unit of Consolidated Natural
Gas Company.<6> The Crossroads extension will form a link in a
chain of interstate pipeline projects that are designed to transport
natural gas from the Chicago area market to eastern markets served by
CNG Transmission Corp. ("CNG") and Transcontinental Gas Pipe Line
Corp. ("Transco") by early 2000.
Industries' other principal non-utility subsidiaries include IWC
Resources Corporation, which owns and operates eight subsidiaries,
including three regulated water utility companies, Indianapolis Water
Company, Harbour Water Corporation, and Liberty Water Corporation,
which provide water service in Indianapolis, Indiana and surrounding
areas;<7> NIPSCO Industries Management Services Company ("NIPSCO
Services"), a subsidiary service company which provides financial,
__________________
<5> SEE CROSSROADS PIPELINE COMPANY, 71 FERC Para. 61,076 (April 21,
1995).
<6> Crossroads recently concluded its FERC-mandated "open season."
SEE "RACE INTENSIFIES AS RIVALS LINE UP TO BUILD PIPELINES TO EASTERN
U.S.," INSIDE F.E.R.C.'S GAS MARKET REPORT, January 23, 1998 (McGraw-
Hill Companies, Inc.), p. 17.
<7> The other five subsidiaries of IWC Resources Corporation, and
each such company's principal business, are: Utility Data Corporation
(customer billing and data processing services); IWC Services, Inc.
(waste water treatment); Waterway Holdings, Inc. (real estate
development); SM&P Utility Resources, Inc. (utility location and
marking services); and Miller Pipeline Corporation (pipeline
constructions).
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accounting, tax, purchasing, natural gas portfolio management, and
other administrative services to associate companies within the
Industries system; NIPSCO Development Company, Inc., which holds
various investments, including investments in real estate and venture
capital enterprises; NI Energy Services, Inc., which is engaged in
various energy-related activities, such as retail gas marketing,
energy efficient lighting sales and installations, and gas and
electricity wholesale marketing; Primary Energy, Inc., which arranges
energy-related projects with large industrial customers; and NIPSCO
Capital Markets, Inc., which handles financing for ventures of
Industries and certain of its subsidiaries, other than Northern
Indiana.
For the year ended December 31, 1997, Industries' three utility
subsidiaries reported combined net income of $205.3 million on
combined operating utility income of $286.2 million. Gas revenues
(including revenues from transportation-only customers) of
approximately $803 million and electric revenues of approximately $1
billion accounted for approximately 44% and 56%, respectively, of the
combined gross utility revenues of Industries' three utility
subsidiaries in 1997. Consolidated assets of Industries and its
subsidiaries as of December 31, 1997, were approximately $4.9 billion,
consisting of $3.1 billion in net utility plant and associated
facilities and $1.8 billion in net non-utility plant and other non-
utility assets. For the twelve months then ended, consolidated
operating revenues, operating income and net income for Industries and
its subsidiaries were approximately $2.6 billion, $410 million and
$191 million, respectively.
(b) BAY STATE GAS COMPANY AND SUBSIDIARIES.
Bay State provides gas service to approximately 261,000
residential, commercial and industrial customers in three separate
areas of Massachusetts covering approximately 1,344 square miles and
having a combined population of approximately 1,340,000. These
include the greater Springfield area in western Massachusetts, an area
southwest of Boston that includes the cities of Attleboro, Brockton
and Taunton, and an area north of Boston extending to the New
Hampshire border that includes the city of Lawrence. Bay State is
subject to regulation by the Massachusetts Department of
Telecommunications and Energy ("MDTE") as to rates, service, accounts,
issuance of securities, and other matters.
Bay State's wholly-owned subsidiary, Northern, provides gas
service to approximately 46,000 residential, commercial and industrial
customers in an area of approximately 808 square miles in New
Hampshire and Maine having a population of approximately 450,000.
Northern's service area extends north from the Massachusetts-New
Hampshire border to the Portland/Lewiston area in Maine.<8>
Northern is subject to regulation by the New Hampshire Public
Utilities Commission ("NHPUC") and Maine Public Utilities Commission
__________________
<8> Bay State is an exempt holding company under Section 3(a)(2) and
Rule 2 thereunder. SEE File No. 69-249.
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("MPUC") as to rates, service, accounts, issuance of securities, and
other matters.
Bay State has only one direct non-utility subsidiary, Granite
State Gas Transmission, Inc. ("Granite State"), which owns and
operates a 105-mile, 6 to 12-inch diameter, interstate pipeline that
extends from Haverhill, Massachusetts, where it interconnects with the
facilities of Tennessee Gas Pipeline Company ("Tennessee Gas"), in a
northeasterly direction to a point near Westbrook, Maine. Granite
State also leases a 166-mile, 18-inch, converted oil pipeline, which
is used to transport western Canadian gas to Portland, Maine. Through
a wholly-owned subsidiary (Natural Gas Development, Inc.), Granite
State is a partner in the Portland Natural Gas Transmission System
("PNGTS"), which was formed to construct a 292-mile, 24-inch, natural
gas transmission line in northern New England that will form the
northern link in a new gas transmission system designed to bring
western Canadian gas supplies to the New England market.<9> When
complete, these facilities will interconnect with the Tennessee Gas
pipeline facilities near Dracut, Massachusetts, and with Granite State
at locations in Maine and New Hampshire.
Granite State owns all of the stock of four other direct non-
utility subsidiaries: EnergyUSA, Inc., a company organized to provide
unregulated energy products and services, including water heater
rentals, insurance programs for heating systems, and strategic energy
supply management; EnergyEXPRESS, Inc., an unregulated natural gas,
propane and fuel oil marketer; LNG Development Corp., which was
established to invest in a proposed liquefied natural gas storage
facility in Wells, Maine; and Bay State Energy Enterprises, Inc.,
which is inactive.
For the year ended December 31, 1997, the combined gas revenues
(including revenues from transportation-only customers and forfeited
discounts), utility operating income, and net utility income of Bay
State and Northern were approximately $450.2 million, $35.9 million
and $18.3 million, respectively.<10> Consolidated assets of Bay
State and subsidiaries as of December 31, 1997, were approximately
$788.2 million, consisting of $496.4 million in net utility plant
($397.0 million for Bay State and $99.4 million for Northern), $16.0
million in net non-utility plant (of which $12.8 million represented
net non-utility plant of Granite State and its subsidiaries and $3.2
__________________
<9> SEE PORTLAND NATURAL GAS TRANSMISSION SYSTEM, 76 FERC Para.
61,123 (July 31, 1996). NI Energy Services Development Corp., an
indirect subsidiary of Industries, has acquired a 9.53% equity
interest in PNGTS.
<10> All numbers are stated after intercompany eliminations. Combined
utility operating income and net utility income have been adjusted to
eliminate the effect on earnings of a one-time write-off of
restructuring costs. The restructuring charges, which related
primarily to retirement benefits and consulting fees, totaled $11.4
million, and had the effect of reducing combined net utility income of
Bay State and Northern to approximately $14.7 million in 1997.
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million in net non-utility plant of Northern), and $275.8 million in
current assets (cash, accounts receivable, unbilled revenues, etc.),
prepaid items and other miscellaneous assets ($292.2 million for Bay
State, $36.1 million for Northern, and $56.9 million for Granite State
and its subsidiaries, all before intercompany eliminations of $109.4
million).
1.3 Description of Gas and Electric Utility Operations and
Associated Facilities.
------------------------------------------------------
(a) INDUSTRIES' GAS AND ELECTRIC UTILITY OPERATIONS.
At December 31, 1997, the gas distribution system of Industries'
three operating subsidiaries was comprised of approximately 13,400
miles of distribution mains and 729,400 customer meters. In addition,
Northern Indiana owns and operates underground gas storage facilities
located at Royal Center, Indiana, with a storage capacity of 6.75
billion cubic feet (Bcf), and a liquefied natural gas (LNG) plant in
LaPorte County, Indiana, having a storage capacity of 4.0 Bcf, which
is used for system pressure maintenance and peak season (November-
March) deliveries. Northern Indiana also holds under long-term
contract storage capacity totaling approximately 9.11 Bcf in the
Markham, Moss Bluff and Egan salt-dome storage caverns in Texas and
Louisiana. These facilities, which provide the Industries system with
a significant amount of "high deliverability" storage
capacity,<11> are located at or near major supply "hubs" which
have formed at locations where interstate pipelines serving the upper
Midwest, Northeast and Southwest markets intersect.
Currently, Industries' operating subsidiaries purchase
approximately 89% of their total system gas requirements from
production in the on-shore and off-shore Texas and Louisiana producing
areas (specifically, the Gulf Coast Basin, South Texas Basin, and
North Louisiana/East Texas Basin), and approximately 8% from
production in the Mid-Continent (Oklahoma and Kansas), Rocky Mountain,
Permian (west Texas) and San Juan (New Mexico) Basins. It is
anticipated, however, that, beginning as early as 1999, with the
completion of construction of new pipeline capacity from western
Canada to the upper Midwest markets, Industries' operating
subsidiaries will begin to purchase significant amounts of lower-cost
__________________
<11> "High deliverability," which is an operational characteristic of
salt-dome storage caverns, means the ability to inject and withdraw
gas on a frequent (I.E., daily) basis, year-round and at a high rate
of flow. Utilization of the capacity of such facilities is measured
in terms of both their storage volume and frequency of the
injection/withdrawal cycle (I.E., cycling). In contrast, Industries
storage facilities in Indiana only allow for gas injection and
withdrawal on a seasonal basis. The "high deliverability" facilities
in Texas and Louisiana provide Northern Indiana with added flexibility
in managing deliveries to and from interstate pipelines, which, in
turn, allows Northern Indiana to take advantage of price volatility
and to balance its system load requirements on a daily basis.
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gas produced in the Western Canada Sedimentary Basin (Alberta and
British Columbia).<12> Industries estimates that, by 2002, gas
produced in the Western Canada Sedimentary Basin could potentially
account for as much as 40% of its total system supply.<13>
Currently, Industries' subsidiaries have contracted for "firm"
capacity and storage service on five different long-haul interstate
pipelines: Tennessee Gas, NGPL, ANR Pipeline Company ("ANR"),
Panhandle Eastern PipeLine Company ("Panhandle Eastern"), and
Trunkline Gas Company ("Trunkline"); as well as several other regional
pipelines.
Northern Indiana also owns and operates four coal-fired electric
generating stations with net capabilities of 3,179,000 kilowatts (kw),
two hydroelectric generating plants with net capabilities of 10,000
kw, and four gas-fired combustion turbine generating units with net
capabilities of 203,000 kw, for a total system capability of 3,392,000
kw. During the year ended December 31, 1997, Northern Indiana
generated about 92% of its own electrical requirements and purchased
the remainder from third parties. Northern Indiana owns more than
3,000 circuit miles of transmission lines having voltages of 34.5
kilovolts (kv) and higher, and a distribution system in 20 of the 30
counties in which Northern Indiana operates consisting of
approximately 7,700 circuit miles of overhead and 1,400 cable miles of
underground primary distribution lines.
__________________
<12> FERC has already granted certificate authority under Section 7(c)
of the Natural Gas Act of 1938, as amended, for a major expansion of
the Northern Border Pipeline, which runs from the Montana-Saskatchewan
border to its present terminus at Harper, Iowa, and a 243-mile
extension thereof to a new terminus south of Chicago. SEE NORTHERN
BORDER PIPELINE COMPANY, 76 FERC Para. 61,141 (August 1, 1996) and 80
FERC Para. 61,152 (August 1, 1997). The Northern Border extension
will have the capacity to deliver up to .7 Bcf per day of natural gas
into the Chicago market by 1999. Northern Border has announced its
intention to file a certificate application in October 1998 to extend
its system to connect with Northern Indiana's facilities near North
Hayden, Indiana. FERC has also given final approval for the
construction of the Alliance Pipeline project, an 887-mile, 36-inch,
line designed to transport 1.325 Bcf per day of gas from western
Canada to the Chicago market with an expected in-service date of
October 2000. SEE ALLIANCE PIPELINE L.P., 80 FERC Para. 61,149
(August 1, 1997) and 84 FERC Para. 61,239 (September 17, 1998).
<13> In this regard, Northern Indiana has entered into a binding
precedent agreement with Northern Border Pipeline for .165 Bcf per day
of "firm" capacity on the Northern Border extension. With the
Northern Border contract capacity, about 30% of Northern Indiana s
total contracted transportation capacity will have access to
production in the Western Canada Sedimentary Basin.
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(b) BAY STATE'S GAS UTILITY OPERATIONS.
At December 31, 1997, Bay State's and Northern's combined gas
system consisted of 5,158 miles of distribution mains; 29 miles of
transmission lines, together with associated pumping and regulating
stations; LNG liquefaction, vaporization and storage facilities;
propane storage tanks; 270,108 customer service connections; and
306,446 customer meters.
Bay State purchases approximately 40% of its total system gas
requirements from the same on-shore and off-shore Texas and Louisiana
producing areas in which Industries' subsidiaries obtain their gas and
approximately 49% of its total system requirements from the Western
Canada Sedimentary Basin. Bay State has contracted capacity on four
domestic long-haul pipelines: Tennessee Gas, TransContinental Gas Pipe
Line Corp. ("Transco"), Texas Eastern Transmission Corp. ("Texas
Eastern"), and Texas Gas Transmission Corp. ("Texas Gas"); as well as
on TransCanada PipeLine Corp. and several regional pipelines. Like
Industries, Bay State projects that, as transmission constraints are
eliminated, it will purchase an increasing amount of its gas
requirements from production in the Western Canada Sedimentary Basin.
This gas will reach Bay State's service area directly via the PNGTS
pipeline, which is scheduled to be completed in Spring 1999, as well as
indirectly by means of any one of several different pipeline
expansions/extensions (including the Crossroads/CNG expansions) that
have been announced and which will provide Bay State with greater
access to supplies available in the Chicago area market.
1.4 General Description of the Transaction.
--------------------------------------
Under the Merger Agreement, upon the effective date of the
merger, each outstanding share of common stock of Bay State ("Bay
State Shares") will be converted into the right to receive common
shares of Industries ("Industries Shares"), or, at the election of any
Bay State shareholder and subject to certain limitations, cash, in
either case having a value of $40.00 per share. The Transaction has
been structured to qualify as a tax-free reorganization pursuant to
section 368(a) of the Internal Revenue Code of 1986, as amended.
The number of Industries Shares that would be issued in exchange
for each Bay State Share would be determined by dividing (i) $40.00 by
(ii) the Industries Share Price, which is the average of the closing
prices of Industries Shares, as reported in THE WALL STREET JOURNAL'S
NYSE Composite Transactions Report, for the 20 trading days
immediately preceding the second trading day prior to the effective
date of the merger. Bay State shareholders may elect to receive
$40.00 in cash, without interest, for some or all of their Bay State
Shares (a "Cash Election"). However, the aggregate number of Bay State
Shares that will be converted into the right to receive $40.00 in cash
in the Transaction (the "Cash Election Maximum") may not exceed an
amount determined by dividing (A) the dollar number equal to the
difference between (i) one-half of the product of (x) $40.00
multiplied by (y) the aggregate number of Bay State Shares outstanding
on the second day prior to the effective date of the merger less (ii)
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the dollar amount of a special dividend, if any, paid by Bay State
prior to the merger and certain other cash payments to be determined
prior to such time, by (B) $40.00. Further, cash amounts paid to
electing shareholders would be subject to proration if the aggregate
number of Bay State Shares covered by a valid Cash Election ("Cash
Election Shares") exceeds the Cash Election Maximum.
On a PRO FORMA basis, based on the number of Bay State Shares and
Industries Shares outstanding on November 6, 1998, and assuming that
100% of the outstanding Bay State Shares are converted into the right
to receive Industries Shares at a conversion price of $30.48 per share
(the 20-day trading average for the Industries Shares determined as of
November 6, 1998), the current shareholders of Bay State would
effectively acquire, in exchange for their Bay State Shares, about
13.2% of the issued and outstanding Industries Shares.
The Merger Agreement was approved by a vote of Bay State's
shareholders at a special meeting called for that purpose on May 27,
1998.<14> The Transaction is also subject to various regulatory
approvals in addition to the approval of this Commission. SEE ITEM 4
- REGULATORY APPROVALS. Reference is made to the joint Proxy
Statement and Prospectus of Bay State and Industries, which is filed
herewith as Exhibit C-2, for a more complete description of the
Transaction and the terms of the Merger Agreement.
Upon consummation of the Transaction, Industries, which currently
claims an exemption under the Act pursuant to Section 3(a)(1) and Rule
2, would own an integrated gas utility system comprised of its
existing gas distribution properties in northern Indiana and Bay
State's gas distribution properties in Massachusetts, Maine and New
Hampshire, as well as an integrated electric utility system in
northern Indiana. The utility operations of Industries in Indiana are
substantially larger than those of Bay State and Northern. Even after
giving effect to the Transaction, Industries will remain predominantly
an intrastate (I.E., Indiana) holding company that will not derive any
material part of its income from any out-of-state public-utility
subsidiary. Accordingly, Industries, as a part of this Application
or Declaration, requests an order pursuant to Section 3(a)(1) of the
Act confirming that Industries will continue to qualify for an
exemption under Section 3(a)(1).
Following the merger, the board of directors of Bay State will
consist of seven members, of whom three will be current officers of
Industries, two will be individuals who were officers of Bay State at
the time the Merger Agreement was executed, and two will be current
outside directors of Bay State. Substantially all of the current
officers of Bay State will continue to serve as officers of the
surviving company of the merger (I.E., "new" Bay State). The Merger
Agreement also provides that Industries shall nominate and recommend
__________________
<14> The affirmative vote of two-thirds of all outstanding Bay State
Shares was required for approval of the merger. At the May 27, 1998
special meeting, 78% of all outstanding Bay State Shares were voted in
favor of the merger.
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for election to the Industries board of directors one Bay State
director to be mutually determined by Industries and Bay State. Bay
State will continue to maintain its principal executive offices in
Westborough, Massachusetts.
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 Industries
under the Securities Act of 1933, and other related matters, are
estimated as follows:
SEC filing fee for the
Registration Statement on Form S-4 $185,000
Accountant's fees 750,000
Legal fees and expenses 1,375,000
HSR Act filing fee 45,000
Consulting fees related to public relations,
regulatory support, and other matters
pertaining to Transaction 166,000
Other (travel, printing, exchange listing
fees, etc.) 305,000
---------
TOTAL $2,826,000
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
-------------------------------
3.1 GENERAL OVERVIEW OF STATUTORY REQUIREMENTS. Sections
9(a)(2) and 10 of the Act are applicable to the Transaction. Section
9(a)(2) provides that it is unlawful, without approval under Section
10 of the Act, "for any person . . . to acquire, directly or
indirectly, any security of any public-utility company, if such person
is an affiliate, under [Section 2(a)(11)(A)] of such company and of
any other public utility or holding company, or will by virtue of such
acquisition become such an affiliate." As defined 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 . . .." Industries is currently an "affiliate"
of three public-utility companies: Northern Indiana, Kokomo Gas, and
NIFL; and will, upon consummation of the Transaction, become an
"affiliate" of two additional public-utility companies: Bay State and
Northern.
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The statutory standards for approval of the Transaction are set
forth in Sections 10(b), 10(c), and 10(f) of the Act. The Transaction
satisfies all of the requirements of Section 10 and should therefore
be approved. Specifically, as more fully explained below:
* the Transaction will not tend towards interlocking relations
or the concentration of control of public-utility companies
to the detriment of investors and consumers;
* the consideration, including all commissions and fees, to be
paid in connection with the Transaction is reasonable;
* the Transaction will not unduly complicate the capital
structure of the Industries holding company system;
* the Transaction is in the public interest and the interests
of consumers and investors;
* the Transaction will tend towards the economical and
efficient development of an integrated gas utility system;
and
* the Transaction will comply with all applicable State laws.
3.2 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 the Commission finds that:
(1) such acquisition will tend towards interlocking
relations or the concentration of control of public-utility
companies, of a kind or to an extent detrimental to the public
interest or the interest of investors or consumers;
(2) in case of the acquisition of securities or utility
assets, the consideration, including all fees, commissions, and
other remuneration, to whomsoever paid, to be given, directly or
indirectly, in connection with 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.
In this case, there is no basis for the Commission to make any
adverse findings under Section 10(b).
12
<PAGE>
a. SECTION 10(b)(1)
(i) Interlocking Relationships
--------------------------
By its nature, any merger results in new links between
theretofore 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 efficiencies.<15> The Merger Agreement
provides that, following the merger, three of the ten members of Bay
State's board of directors shall be officers of Industries, and that
Industries shall take steps necessary to assure that the Industries
board of directors will include one member of the Bay State board of
directors. Significantly, although these management interlocks are
necessary and desirable in order to integrate Bay State fully into the
Industries holding company system, the majority of Bay State's board
of directors and officers following the merger will be comprised of
Bay State's current directors and management. Such continuity in
management will help to assure the responsiveness of Bay State's
management to local regulation and to other essentially local
interests (E.G., consumers, labor, ETC.). In sum, the relationship
between Industries and Bay State has been carefully structured to
protect the interests of consumers and other local interests and thus
is not prohibited by Section 10(b)(1).
(ii) Concentration of Control
------------------------
Section 10(b)(1) is intended to prevent utility acquisitions
that would result in "huge, complex and irrational holding company
systems at which the Act was primarily aimed." AMERICAN ELECTRIC
POWER CO., 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
CORP., 43 SEC 693, 700 (1968). Industries' acquisition of Bay State
will not create a "huge, complex and irrational system." Industries'
current utility operations are confined exclusively to Indiana, and
its operations will remain predominantly intrastate in character even
after acquiring Bay State, which is a far smaller company. Further,
the Transaction is not undertaken specifically for the purpose of
extending Industries' control over regulated public utilities, as
such. Rather, as explained in the Proxy Statement/Prospectus,
Industries' primary objective in acquiring Bay State is to position
itself to participate, through Bay State, in the growing and
increasingly deregulated New England energy market. The merger will
combine the strengths of the two companies, which will enable them to
<15> See Section 1(b)(4) of the Act (finding that the public interest
and interests of consumers and investors are adversely affected "when
the growth and extension of holding companies bears no relation to
economy of management and operation or the integration and
coordination of related operating properties . . . .").
13
<PAGE>
offer customers a broader array of energy products and services than
either company alone could offer, and at the same time create a larger
and more diverse asset and customer base, which will create
opportunities for operating efficiencies.
SIZE: If approved, the Industries system will provide gas
distribution service (including transportation of customer-owned gas)
to approximately 1,036,400 residential, commercial and industrial
customers in a 15,205 square- mile area in four states, as well as
electric service to approximately 416,300 customers, all in Indiana.
On a PRO FORMA basis, the combined net utility plant (gas and
electric) of Industries and Bay State as of December 31, 1997 totaled
approximately $3.61 billion and combined utility revenues for the
twelve months then ended totaled approximately $2.27 billion ($1.26
billion of gas revenues and $1.01 billion of electric revenues). By
comparison, the Commission has recently approved several acquisitions
involving significantly larger combination gas and electric utilities.
SEE, E.G., SEMPRA ENERGY, 67 SEC Docket 994 (June 26, 1998) (merger of
Pacific Enterprises, a gas utility holding company, and Enova
Corporation, a holding company of an electric and gas system,
resulting in a system having combined utility assets of more than $6
billion); CONECTIV, INC., 66 SEC Docket 1260 (February 25, 1998)
(merger of Delmarva Power & Light Company, a combination electric and
gas company, and Atlantic Energy, Inc., resulting in a system having
combined utility assets of more than $5.5 billion); AMEREN
CORPORATION, 66 SEC Docket 485 (December 30, 1997) (merger of two
combination gas and electric companies, resulting in a system having
combined utility assets of approximately $6.5 billion); TUC HOLDING
COMPANY, ET AL., 65 SEC Docket 301 (August 1, 1997) (acquisition by
Texas Utilities of Enserch Corporation, resulting in a system having
combined utility assets of $19.6 billion); NEW CENTURY ENERGIES,
INC., 65 SEC Docket 277 (August 1, 1997) (merger of combination
electric and gas company with another electric utility, resulting in a
system having combined utility assets of approximately $7 billion);
and CINERGY CORP., 57 SEC Docket 2353 (October 21, 1994) (merger of
combination gas and electric company with another electric utility,
resulting in a system having combined utility assets of approximately
$7.4 billion).
EFFICIENCIES AND ECONOMIES: Under Section 10(b)(1), the
Commission's determination of whether to prohibit enlargement of a
holding company system by acquisition is made on the basis of various
factors, including by reference to the efficiencies and economies that
can be achieved through the integration and coordination of utility
operations. By virtue of the Transaction, Industries and Bay State
will have opportunities to achieve operating economies and
efficiencies through joint management and coordination of their
respective portfolios of natural gas supply, transportation and
storage assets (I.E., assets that they own or lease, as well as
contracted capacity on interstate pipelines and independently-owned
storage). Among other things, Industries and Bay State will have
numerous opportunities to coordinate supply, transportation and
storage at several strategic natural gas trading and market hubs to
which both companies have access. These expected economies and
14
<PAGE>
efficiencies from joint portfolio management are described in greater
detail below.
COMPETITIVE EFFECTS: As the Commission noted in NORTHEAST
UTILITIES, 47 SEC Docket 1270 at 1282 (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 the customers." In this case, there is no basis for the
Commission to conclude that the Transaction is likely to have anti-
competitive consequences. On the contrary, Industries and Bay State
believe that customers in New England will benefit from the combined
companies' greater flexibility and capacity in financing their
operations and enhanced ability to take advantage of future strategic
opportunities in the competitive marketplace, particularly in the
areas of coordinated gas supply and the capability to provide an
expanded list of energy services in New England as the energy market
becomes deregulated.
Significantly, the Transaction has been approved by the MDTE, the
NHPUC and the MPUC. In none of the proceedings before those
commissions did the commission's staff or other parties raise
significant objections based on the assertion that the Transaction
would harm competition. On the contrary, the MDTE specifically found
that the Transaction would likely benefit Massachusetts ratepayers by,
among other things, eliminating inefficiencies associated with the
highly fragmented and "Balkanized" nature of the gas distribution
systems in Massachusetts. (SEE MDTE Order, Exhibit D-2 hereto, p.
67).
In addition, under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 (the "HSR Act") and rules thereunder, the Transaction may
not be consummated until Industries and Bay State each have filed
Notification and Report Forms with the Department of Justice and the
Federal Trade Commission describing the effects of the Transaction on
competition in the relevant market and expiration or termination of
the required waiting period. On July 1, 1998, Industries and Bay
State filed the required Notification and Report Forms, and, by letter
dated July 14, 1998, the parties were notified of early termination of
the required waiting period.
b. SECTION 10(b)(2)
The Commission may not approve the proposed Transaction if it
determines pursuant to Section 10(b)(2) that the consideration
(including fees and expenses of the Transaction) to be paid by
Industries in connection with the Transaction is not reasonable or
does not bear a fair relation to investment in and earning capacity of
the utility assets underlying the securities being acquired. For the
reasons given below, there is no basis in this case for the Commission
to make either of the negative findings concerning the consideration
being offered by Industries in this Transaction.
15
<PAGE>
(i) Reasonableness of Consideration
-------------------------------
This Commission has previously recognized that when the
agreed consideration for an acquisition is the result of arms'-length
negotiations between the managements of the companies involved,
supported by opinions of financial advisors, there is persuasive
evidence that the requirements of Section 10(b)(2) have been
satisfied. SEE ENTERGY CORPORATION, ET AL., 55 SEC Docket 2035 at
2042 (December 17, 1993); THE SOUTHERN COMPANY, ET AL., 40 SEC Docket
350 at 352 (February 12, 1988). In this case, the Transaction has
been structured to give Bay State shareholders $40 in value for each
Bay State Share, to be paid either in cash or in Industries Shares, or
a combination thereof, which represents a 35% premium over the average
trading price of the Bay State Shares over the 30 trading days prior
to the date on which the merger was publicly announced (December 18,
1997). The terms of the Merger Agreement, including the exchange
ratio, were the product of extensive and vigorous arms'-length
negotiations between Industries and Bay State. The announcement of
the Merger Agreement was preceded by months of due diligence and
analysis and evaluation of the assets, liabilities and business
prospects of Bay State. SEE INDUSTRIES REGISTRATION STATEMENT ON FORM
S-4 (EXHIBIT C-1 HERETO). Finally, the terms of the Merger Agreement
were subject to approval by Bay State's shareholders.
Moreover, in connection with its evaluation of Industries' offer,
Bay State engaged SG Barr Devlin ("Barr Devlin"), a nationally-
recognized investment banking concern, to prepare and deliver a
"fairness" opinion to the Bay State board of directors. Barr Devlin
delivered an oral opinion to Bay State's board of directors on
December 17, 1998, which it confirmed by written opinions dated
December 18, 1997 and April 20, 1998 (see Annex B to Proxy
Statement/Prospectus), to the effect that, based on certain
assumptions therein stated, the consideration offered in connection
with the Transaction is fair, from a financial point of view, to the
holders of Bay State Shares.
In rendering its fairness opinion, Barr Devlin considered various
factors, including the historical market prices and trading activity
for Bay State Shares and Industries Shares and results of operations
of the two companies, which were compared to those of other publicly-
traded utility companies. Barr Devlin also compared the proposed
financial terms of the Transaction with the financial terms of other
comparable utility mergers, and determined a range of values for the
Bay State Shares using various valuation methodologies deemed by it to
be relevant. Finally, Barr Devlin considered the PRO FORMA
capitalization, earnings and cash flow of Industries following the
merger, and compared the PRO FORMA earnings, dividends per share,
capitalization ratios and payout ratio of Industries following the
merger with each of the corresponding current and projected values for
Bay State and Industries on a stand alone basis.
In determining a range of values for the Bay State Shares, Barr
Devlin compared selected financial information and ratios for Bay
State to other comparable gas utilities or gas utility holding
16
<PAGE>
companies, prepared a discounted cash flow analysis, using multiples
of valuation based on multiples of other comparable companies,
compared the consideration offered by Industries to the consideration
offered or paid in other proposed or completed mergers involving
comparable utility companies, and prepared a PRO FORMA analysis of the
effects of the Transaction on the shareholders of Bay State and
Industries for the period 1999 to 2002. The price ranges for Bay
State's Shares implied by these various valuation methods support the
price being offered by Industries. For a more complete discussion of
Barr Devlin's fairness opinion and the valuation methods used by Barr
Devlin, see pages 26 to 30 of the Proxy Statement/Prospectus (Exhibit
C-2 hereto).
It is noteworthy that the PRO FORMA analysis prepared by Barr
Devlin indicated that the Transaction would result in accretion to Bay
State's shareholders in terms of earnings per share and that
Industries' shareholders would also realize accretion in earnings per
share (assuming Industries Shares continue to trade at current
levels).
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 proposed exchange ratio falls within the range of
reasonable ratios for transactions involving comparable companies.
(ii) Relationship of Consideration to be Paid to Earnings
Capacity of Utility Assets Underlying Securities to be
Acquired.
---------------------------------------------------------
Likewise, there is no basis for the Commission to conclude
that the consideration to be paid by Industries for the Bay State
Shares does not bear a fair relation to the earnings capacity of Bay
State's and Northern's utility assets. In this regard, it must be
emphasized again that the proposed Transaction resulted from arms'-
length bargaining and that the Merger Agreement was executed after
several months of negotiations and due diligence on Industries part.
Further, the market, which provides the best check on Industries'
assessment of Bay State's future earnings capacity, has not penalized
Industries. On the contrary, on December 17, 1997, the last full
trading day prior to announcement of the merger, the Industries Shares
closed at $23-5/8 (as adjusted for a subsequent two-for-one stock
split basis). On April 17, 1998, the last full trading day prior to
filing of the joint Proxy Statement/Prospectus (Exhibit C-2 hereto),
the Industries Shares closed at $27-1/8. On November 6, 1998 (the day
following the issuance of the MDTE's order approving the transaction),
the Industries Shares closed at $29-1/16.
(iii) Reasonableness of Fees
----------------------
Industries believes that the fees, commissions and expenses
paid or incurred or to be paid or incurred in connection with the
Transaction will be reasonable and fair in light of the size and
complexity of the Transaction relative to other similar transactions
17
<PAGE>
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 - FEES, COMMISSIONS AND EXPENSES,
Industries estimates the total fees, commissions and expenses paid or
incurred in connection with the proposed Transaction at $2,826,000, or
about .48% of the value of the consideration (Industries Shares plus
cash) offered in exchange for the Bay State Shares. The relationship
of the aggregate amount of fees, commissions and expenses paid to the
size of the Transaction is believed to be within the same range as
other recent merger cases.
c. SECTION 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the
Transaction will unduly complicate Industries' capital structure or
will be detrimental to the public interest, the interest of investors
or consumers or the proper functioning of Industries' system.
(i) Capital Structure
-----------------
The capital structure of Industries after the Transaction
will not be unduly complicated and will be substantially unchanged
from the Industries capital structure prior to completion of the
Transaction. Industries will issue additional shares of its single
class of common stock, or cash, or a combination of the two, in
exchange for all of the outstanding voting securities of Bay State.
Bay State and Northern will become direct, wholly-owned, subsidiaries
of Industries. The existing long-term debt of Bay State and Northern
will not be affected by the Transaction and will remain the
obligations solely of those companies. In this regard, the Industries
capital structure will closely resemble that of most registered
holding company systems.
Set forth below are summaries of the historical capital
structures of Industries and Bay State as of December 31, 1997, and
the PRO FORMA consolidated capital structure of Industries, as of
December 31, 1997 (assuming that the consideration paid by Industries
for the Bay State Shares consisted of 50% cash and 50% Industries
Shares):
18
<PAGE>
Industries and Bay State Historical Capital Structures
(000s omitted)
Industries Bay State
--------- ---------
Common stock equity $1,264,788 $ 241,048
Preferred stock equity 144,461 4,917 <16>
Long-term debt 1,667,925 234,028
--------- -------
Total $3,077,174 $ 479,993
Industries PRO FORMA Consolidated Capital Structure
(000s omitted) (unaudited)
Common stock equity $1,546,024 40%
Preferred stock equity 149,378 4%
Long-term debt 2,172,453 56%
--------- ---
Total $ 3,867,855 100%
Significantly, Industries' PRO FORMA consolidated common equity
to total capitalization ratio of 40% as of December 31, 1997, is well
above the "traditionally acceptable 30% level." SEE NORTHEAST
UTILITIES, 47 SEC Docket 1270 at 1279, n. 47 (December 21, 1990).
Further, the impact of the Transaction on Industries' financial
position (including its capitalization) and its results of operations
is not material.
(ii) Protected Interests.
-------------------
As set forth more fully in the discussion of the standards
of Section 10(c)(2), below, and elsewhere in this Application or
Declaration, the Transaction will create opportunities for Industries
and Bay State to achieve savings, chiefly in the area of joint
management of their respective portfolios of gas supply,
transportation and storage assets. The Transaction will therefore 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. Moreover, as noted by the Commission in
ENTERGY CORPORATION, ET AL., 55 SEC Docket 2035 at 2045 (December 17,
1993), "concerns with respect to investors' interests have been
largely addressed by developments in the federal securities laws and
the securities markets themselves." Industries will continue to be a
reporting company subject to the continuous disclosure requirements of
the Securities Exchange Act of 1934 following completion of the
__________________
<16> Bay State redeemed all of its issued and outstanding preferred
stock effective March 1, 1998.
19
<PAGE>
Transaction, which will provide investors with readily available
information concerning the companies and the Transaction. Further,
the Transaction is subject to various other federal and state
regulatory approvals (SEE ITEM 4 - REGULATORY APPROVALS, below). For
these reasons, Industries submits that the Commission would have no
basis for making a negative finding under Section 10(b)(3).
3.3 Section 10(c).
-------------
Section 10(c) of the Act provides that, notwithstanding the
provisions of Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of
any other interest, which is unlawful under the provisions of
Section 8 or is detrimental to the carrying out of the provisions
of Section 11; or
(2) the acquisition of securities or utility assets of a
public-utility or holding company unless the Commission finds
that such acquisition will serve the public interest by tending
towards the economical and the efficient development of an
integrated public-utility system . . . .
a. SECTION 10(c)(1)
Under Section 10(c)(1), the Commission may not approve an
acquisition that "is unlawful under the provisions of Section
8<17> or is detrimental to the carrying out of the provisions of
Section 11." Section 11(b)(1) of the Act, with an exception, confines
a registered holding company to ownership of a single integrated
public-utility system, either electric or gas. In this case, the
combined gas properties of Industries' operating subsidiaries and Bay
State and Northern will constitute an integrated gas utility system
within the meaning of Section 2(a)(29)(B). These properties will be
operated as a coordinated system. Northern Indiana's electric utility
properties, which constitute an integrated electric utility system
within the meaning of Section 2(a)(29)(A), will not be affected by the
Transaction.
Section 11(b)(1) permits a registered holding company to own one
or more additional integrated public-utility systems only if the
requirements of Section 11(b)(1)(A) - (C) (the "ABC clauses") are
satisfied. By its terms, however, Section 11(b)(1) applies only to
registered holding companies and therefore does not preclude the
acquisition and ownership of a combination gas and electric system by
an exempt holding company, such as Industries, whose ownership of both
gas and electric operations in Indiana is permitted and subject to
__________________
<17> Section 8 prohibits an acquisition by a registered holding
company of an interest in an electric utility and a gas utility
serving substantially the same territory unless expressly approved by
a State commission where State law prohibits or requires approval of
any such acquisition.
20
<PAGE>
"affirmative state regulation." SEE WPL HOLDINGS, INC., 40 SEC Docket
491 at 497 (February 26, 1988), AFF'D IN PART AND REV'D IN PART SUB
NOM., WISCONSIN'S ENVIRONMENTAL DECADE V. SEC, 882 F.2d 523 (D.C. Cir.
1989), REAFFIRMED, 49 SEC Docket 1255 (September 18, 1991); DOMINION
RESOURCES, INC., 40 SEC Docket 847 (April 5, 1988).
The Commission has also previously held that a holding company
may acquire utility assets that will not, when combined with its
existing utility assets, make up an integrated system or comply fully
with the ABC clauses, provided that there is DE FACTO integration of
contiguous utility properties and the holding company is exempt from
registration under Section 3(a) of the Act following the
acquisition.<18> In this case, Industries is requesting an order
exempting it from the registration requirements under the Act pursuant
to Section 3(a)(1). Further, there is and will continue to be
following the Transaction DE FACTO integration of Industries' gas and
electric utility properties. As previously indicated, Northern
Indiana's electric service area is subsumed within the combined gas
service areas of Northern Indiana and NIFL. Of the 416,300 electric
customers served by Northern Indiana, an estimated 342,000 (or 82%)
also receive gas service from Northern Indiana or NIFL.<19>
Northern Indiana has provided both gas and electric service in Indiana
since its incorporation in 1912. Many of the administrative and
operational functions of its gas and electric departments, including
meter reading, customer billing, customer hook-ups, maintenance of
customer call centers, human resources, labor relations, and
regulatory relations, among others, are performed on a centralized
basis. The Transaction will have no effect on the properties of
Northern Indiana, Kokomo and NIFL in Indiana, or on the way in which
the rates and service of these companies are currently regulated by
the IURC. Finally, by letter dated November 12, 1998, the Chairman of
the IURC has confirmed to the Commission that the IURC has the
statutory authority to take action, as appropriate, to ensure that
cross-subsidization of costs and revenues between Northern Indiana and
Bay State does not occur following the merger.
b. SECTION 10(c)(2)
Under Section 10(c)(2), the Commission must affirmatively find
that the acquisition of Bay State by Industries "will serve the public
interest by tending towards the economical and the efficient
development of an integrated public-utility system . . . ." An
"integrated public-utility system" is defined in Section 2(a)(29), to
mean:
__________________
<18> SEE E.G., TUC HOLDING CO., ET AL., 65 SEC Docket 301 (August 1,
1997); SEMPRA ENERGY, 67 SEC Docket 994 (June 26, 1998); and PP&L
RESOURCES, INC., ET AL., 67 SEC Docket 1685 (August 12, 1998).
<19> It is believed that most of the electric customers of Northern
Indiana who are not also gas customers of Northern Indiana or NIFL use
propane or heating oil, instead of gas, as a source for home heating.
21
<PAGE>
(B) As applied to gas utility companies, a system consisting of
one or more gas utility companies which are so located and
related that substantial economies may be effectuated by being
operated as a single coordinated system confined in its
operations to a single area or region, in one or more States, not
so large as to impair (considering the state of the art and the
area or region affected) the advantages of localized management,
efficient operation, and the effectiveness of regulation:
PROVIDED, That gas utility companies deriving natural gas from a
common source of supply may be deemed to be included in a single
area or region.<20>
The gas utility operations of Bay State and Northern, when
combined with the gas utility operations of Industries' three Indiana
operating subsidiaries, will constitute an integrated gas-utility
system within the meaning of Section 2(a)(29)(B) of the Act. In terms
of the area covered, number of customers served, and gross revenues,
Industries' integrated gas utility system will be its primary system,
and its electric utility system (which will not be affected by the
Transaction) will be its secondary system.
(i) SINGLE AREA OR REGION
---------------------
Although the retail gas service areas of Bay State and
Industries' subsidiaries are separated by a distance of approximately
650 hundred miles, and are located in non-contiguous States, such
factors alone are not determinative. SEE MCN CORPORATION, 62 SEC
Docket 2379 (September 17, 1996) (approving acquisition of an interest
in a gas-utility company by an exempt gas-utility holding company
whose service area is located more than 500 miles distant in a non-
adjoining State). On the contrary, Section 2(a)(29)(B) specifically
contemplates 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." Moreover, in considering whether an "area or region" is
so large as to impair "the advantages of localized management,
efficient operation, and the effectiveness of regulation . . .," the
Commission must consider the "state of the art" in the industry.
COMMON SOURCE OF SUPPLY: Historically, in determining whether
two gas companies share a "common source of supply," the Commission
has looked at whether the two entities purchase significant
percentages of their total gas supply from production in one or more
common basins, as well as whether they are served by a common pipeline
or pipelines. SEE MCN CORPORATION, 62 SEC Docket 2379 (September 17,
1996). However, the Commission has found an integrated gas system to
__________________
<20> Unlike the definition of an "integrated electric utility system"
in Section 2(a)(29)(A) of the Act, physical interconnection of the
component parts of a gas utility system is not required. Further, the
Commission has previously recognized, that "integrated and
coordinated operations of a gas system under the Act may exist in the
absence of [physical] interconnection." SEE AMERICAN NATURAL GAS CO.,
43 S.E.C. 203, 207 n. 5.
22
<PAGE>
exist where two entities purchase their gas from different pipelines
which originate in the same gas producing area and/or interconnect at
various points along the transportation route. SEE AMERICAN NATURAL
GAS COMPANY, ET AL., 43 S.E.C. 203 (1966); and CENTRAL POWER COMPANY,
ET AL., 8 S.E.C. 425 (1941).
As previously indicated, Bay State and Industries currently
derive, respectively, 40% and 89% of their total gas requirements from
the same on-shore and off-shore Texas and Louisiana supply
basins,<21> and each has contracted for a significant percentage
(36% and 27%, respectively) of its total system "firm" transportation
capacity requirements on the Tennessee Gas pipeline system.<22>
Accordingly, there is substantial evidence that Industries and Bay
State share a common source of supply.<23>
Industries expects that both its subsidiaries and Bay State will
continue to derive significant percentages of their total gas
requirements for the foreseeable future from the same three on-shore
and off-shore Texas and Louisiana basins from which they now purchase
gas. Further, Industries expects that, as early as 2002, it could
purchase as much as 40% of its total system requirements from
production in the Western Canada Sedimentary Basin, which now accounts
for 49% of Bay State's total requirements and is likely to continue as
the singly most important source of gas for Bay State for the
foreseeable future.<24> Likewise, upon completion of
construction of various proposed pipelines and/or pipeline expansions
from the Chicago area to the eastern U.S. markets, Bay State will have
improved access to gas supplies from the Western Canada Sedimentary
__________________
<21> Bay State and Industries derive the following percentages of
their gas supply from each of the three basins:
Bay State Industries
--------- ----------
Gulf Coast Basin 9% 35%
South Texas Basin 17% 33%
N. Louisiana/E. Texas Basin 14% 21%
<22> Industries' current contract with Tennessee Gas expires in 2004,
while Bay State's contract with Tennessee Gas expires in 2012.
<23> In MCN CORPORATION, the Commission found a common source of gas
supply where the two existing subsidiaries of a holding company
received 46% and 55% of their gas supply from two common basins (the
Mid-Continent and Southern basins) and it was expected that the gas
utility company to be acquired would also obtain between 70% and 90%
of its supply from the same two basins.
<24> As indicated above, n. 13, Northern Indiana has entered into
binding precedent agreements with Northern Border Pipeline as a result
of which approximately 30% of Northern Indiana's total contracted
transportation capacity will be able to access western Canadian gas
supplies.
23
<PAGE>
Basin, as well as direct access to ALL gas entering the Chicago market
center, including supplies to which Bay State currently has very
limited access (E.G., supplies from the Mid-Continent, Rocky Mountain,
Permian and San Juan Basins, which, in the aggregate, account for
about 8% of Industries' gas supplies).<25> Thus, it is likely
that, over time, Industries' and Bay State's dependence upon common
supply sources will evolve even further.
Significantly, industry studies indicate that the importation of
low-cost gas produced in the Western Canada Sedimentary Basin is
reshaping the dynamics of gas supply in certain U.S. markets (in
particular the Midwest and Northeast), and that, in the future, there
will be much more of a west-to-east flow of gas to the Northeast.
With the expansion of import capacity into the Chicago area, it is
projected that the Midwest will experience an excess supply situation.
This expectation has lead to various regional pipeline expansion
proposals between the Midwest and Northeast, all of which are designed
to move Midwest supplies to the supply-constrained Northeast
markets.<26>
STATE OF THE ART: Any determination of the appropriate size of
the "area or region" calls for consideration of the "state of the art"
in the gas industry. In this regard, the "state of the art" in the
gas industry continues to evolve and change, primarily as a result of
decontrol of wellhead prices, the continuing development of an
integrated national gas transportation network, the emergence of
marketers and brokers, and the "un-bundling" of the commodity and
transportation functions of the interstate pipelines in response to
various FERC initiatives, in particular Order 636,<27> which has
dramatically altered the way in which local gas distribution companies
purchase and transport their required gas supplies. The Commission has
previously taken notice of the regulatory and technological changes
that have reshaped the natural gas industry over the past two decades
in a report presented by the Division of Investment Management
__________________
<25> As indicated below, Northern Indiana holds capacity on several
interstate pipelines (including its own affiliate, Crossroads) that
access the Chicago Market Center, which is one of the most import
market centers operating today. Bay State's access to the Chicago
Market Center is limited at this time.
<26> SEE GENERALLY "THE OUTLOOK FOR IMPORTED NATURAL GAS," INGAA
Foundation, Inc. Report No. F-9705 (prepared by the Brattle Group,
1997). INGAA notes (at pp. II-21 to II-22) that 5.4 Bcf/day of import
capacity additions into the Midwest have been proposed, and that over
4 Bcf/day of pipeline capacity additions have been proposed to
facilitate the flow of gas from the Midwest to the Northeast. Most of
these projects are proposed to come on line between 1999-2002.
<27> SEE "PIPELINE SERVICE OBLIGATIONS AND REVISIONS TO REGULATIONS
GOVERNING SELF-IMPLEMENTING TRANSPORTATION; REGULATION OF NATURAL GAS
PIPELINES AFTER PARTIAL WELLHEAD DECONTROL," Order No. 636, 57 Fed.
Reg. 13,267 (April 16, 1992), AFF'D IN PART, UNITED DISTRIBUTION COS.
V. FERC, 88 F.3rd 1105 (D.C. Cir. 1996).
24
<PAGE>
("Division") entitled "THE REGULATION OF PUBLIC-UTILITY HOLDING
COMPANIES" (June 1995) ("SEC Report").<28> Significantly, in
the SEC Report, the Division recommended that the Commission
"interpret the single area or region' requirement [of Section
2(a)(29)] flexibly, recognizing technological advances, consistent
with the purposes and provisions of the Act."<29>
Of particular note, the nation's interstate pipeline system,
which experienced dramatic growth in the decades immediately following
World War II, continues to expand at a significant rate, in terms of
both long-haul and interregional capacity. Between 1990 and the end
of 1997, capacity additions on the long-haul pipeline systems (VIZ.
the pipelines running from the production areas to end markets)
totaled 12.4 billion cubic feet (Bcf) per day, an increase of about
17%, while interregional capacity additions totaled 11.4 Bcf per day,
or about 15%, in the same period. More than 40 projects were
completed in 1997 alone.<30> Several new expansion projects have
been announced to alleviate capacity constraints in those few areas of
the country where they still exist. In describing the current state
of the nation's pipeline delivery system, taking into account
completion by the end of the year 2000 of projects that will expand
transportation capacity from the Rocky Mountain, New Mexico, and West
Texas producing areas to Midwest and Northeast markets, the Department
of Energy has observed that "THE INTERSTATE NATURAL GAS PIPELINE
NETWORK WILL COME CLOSER TO BEING A NATIONAL GRID WHERE PRODUCTION
FROM ALMOST ANY PART OF THE COUNTRY CAN FIND A ROUTE TO CUSTOMERS IN
ALMOST ANY AREA." (Emphasis added).<31>
Another important development affecting the "state of the art" in
the natural gas industry has been the creation of a national network
of trading hubs and market centers. The development of trading hubs
and market centers was a direct outgrowth of FERC's Order 636, which,
as indicated, required interstate pipelines to separate, or "un-
bundle," the commodity and transportation and storage functions of the
interstate pipelines. FERC has promoted the development of trading
hubs and market centers as a means and location for providing services
that customers of the interstate pipelines (I.E., shippers) need in
order to manage their portfolios of gas supply, transportation, and
__________________
<28> SEE SEC Report, pp. 29 - 31.
<29> ID. at 73.
<30> SEE Energy Information Agency, "DELIVERABILITY ON THE INTERSTATE
NATURAL GAS PIPELINE SYSTEM," DOE/EIA-0618(98) (Washington, D.C., May
1998), pp. 32 - 34. Appendix B to this report (pp. 123 - 124) lists
the major proposed pipeline expansions with planned in-service in
1998 - 2000, the associated capacity and the status of each project as
of March 31, 1998.
<31> ID. at p. 34.
25
<PAGE>
storage, all of which can now be contracted separately. There are now
more than 39 trading centers and market hubs in operation.<32>
Today, trading activity conducted at hubs plays an increasingly
vital role in the overall management of the assets in a gas portfolio
(supply, transportation and storage). In this regard, it is
significant to note that, although Industries and Bay State have
contracted capacity on only one common long-haul pipeline (Tennessee
Gas), 10 of the 16 individual interstate pipelines (long-haul and
regional) on which the two companies have contracted capacity
intersect at and form industry recognized trading hubs. These
include:
<TABLE>
<CAPTION>
Name of Hub Location Intersecting Pipelines
----------- -------- ----------------------
<S> <S> <S>
Lebanon Ohio ANR, Panhandle Eastern, Texas Gas, Texas Eastern
Portland Tennessee Tennessee Gas, Midwestern Gas Transmission Co.
Maumee Ohio ANR, Panhandle Eastern, CNG via Crossroads (proposed)
Leidy Pennsylvania Transco, Texas Eastern, CNG via
Crossroads (proposed), National Fuel
Ellisburg Pennsylvania Tennessee Gas, CNG via Crossroads (proposed), National Fuel
Chicago Market Illinois ANR, NGPL, Northern Border, Crossroads and CNG to Tennessee Gas
(proposed), Transco, Texas Eastern
Henry Hub Louisiana NGPL, Texas Gas, Trunkline, Transco
Perryville Louisiana Tennessee Gas, Texas Gas
</TABLE>
Trading hubs (including all of those listed above) essentially
function as physical transfer points between intersecting pipelines,
where shippers (I.E., buyers and sellers) and traders can sell,
exchange or trade gas or pipeline capacity or redirect deliveries to a
different pipeline. Further, various types of un-bundled services are
typically available at trading hubs, such as parking, loaning, and
wheeling of gas and, in some instances, title transfer.<33>
__________________
<32> For a comprehensive analysis of the role of market hubs and
trading centers, see Energy Information Administration, NATURAL GAS
1996: ISSUES AND TRENDS, DOE/EIA-0560(96) (Washington, D.C., December
1996), ch. 3.
<33> "Parking" is essentially a short-term interruptible storage
service. "Loaning" is a service by which a party with gas will
provide the gas to another party with a specific date for the return
(continued...)
26
<PAGE>
Because of the role played today by market hubs and market centers,
coordination of the operations of two distant gas companies is no
longer dependent solely upon having contractual capacity on the same
interstate pipelines, so long as the two companies both have access to
one or more common trading hubs.
Importantly, trading hubs now allow gas distribution companies
operating in a much larger area or region of the country to realize
operating economies and efficiencies from coordinated operation that
were once thought to be achievable only by contiguous or nearly
contiguous gas companies supplied by the same interstate pipelines.
In fact, as discussed below, the opportunities to achieve operating
economies may be even greater where the two companies seeking to
combine have significantly different load profiles (E.G., non-
coincident seasonal peaks, a substantially different customer mix,
etc.)<34> or where, as in this case, one of the companies
(Industries) is located in a major gas market center (the Chicago
market center) while the other (Bay State) is located in a region that
is expected to experience significant growth in demand as constraints
on deliverability are eliminated.
Because Industries and Bay State share access through their
respective pipeline transporters to several industry-recognized market
and supply-area hubs, they will have the ability to physically
coordinate and manage their portfolios of supply, transportation and
storage. For example, the Texas Gas and Texas Eastern pipelines,
which transport gas to Bay State, and the Panhandle Eastern and ANR
pipelines, which transport gas to Industries, all intersect at the
Lebanon, Ohio hub. At the Lebanon hub, Industries can arrange and
consummate direct physical purchases and trades of gas and/or
transportation capacity with Bay State or with any other shipper
having access to the Lebanon hub. Similarly, Industries would have
the ability to redirect gas supplies shipped on its pipeline carriers
into the Ellisburg-Leidy hub in northern Pennsylvania, where it could
be stored in any of the 32 underground interconnected storage
reservoirs for later shipment to Bay State on the Tennessee Gas, CNG,
Transco or Texas Eastern pipelines. Industries and Bay State also
have access to the Henry Hub in southern Louisiana via contracted
capacity on the NGPL, Trunkline, Texas Gas and Transco pipelines. The
Henry Hub is the recognized center for natural gas futures trading in
__________________
<33>(...continued)
of such gas at either that location or another location under mutually
agreeable terms and conditions (in effect, the inverse of parking).
"Wheeling" is the provision of transportation by a hub operator from
one system to another system. Finally, title transfer services allow
parties to exchange title to gas that is already within a pipeline
system for gas that is at a different point on the same pipeline
system or for gas that is on another pipeline system. No physical
movement occurs.
<34> For example, due to the normal effects of the west-to-east
"weather lag" Bay State's demand pattern tends to follow Industries
demand pattern by, on average, 24 to 48 hours.
27
<PAGE>
the U.S. Through 9 interstate and 4 intrastate pipeline
interconnections, market participants such as Bay State and Industries
can physically support, if necessary and if permitted by State
regulatory bodies, the utilization of financial derivatives as a means
of managing price volatility.
Moreover, through its contracted capacity on the Texas Gas and
Texas Eastern pipelines, Bay State would have access to and could thus
utilize the "high deliverability" (salt-dome) storage capacity held by
Northern Indiana in Texas and Louisiana. Such access would greatly
enhance Bay State's ability to manage price volatility. These
facilities would also provide Industries and Bay State with an
important gas balancing capability, which will allow them to manage
fluctuating weather-related load profiles of each other's system.
Finally, with the completion of the proposed Crossroads/CNG
expansions, or any one of several other proposed pipeline projects,
Bay State would gain direct access to the Chicago market center hub,
which, as previously indicated, is expected to become an increasingly
important source of gas for all eastern U.S. markets.
As the foregoing clearly demonstrates, the "state of the art" in
the gas industry today is quite different than it was in 1935, when
most local gas distribution companies had no choice but to purchase
their gas supplies at the city gate from the interstate pipeline that
served them. Today, all local distribution companies have the ability
to purchase their gas supplies from a variety of sources and to
directly or indirectly access capacity on any interstate pipeline.
Further, physical limitations on the deliverability of gas in most
areas of the country have disappeared. Under Section 2(a)(29)(B),
these "state of the art" changes in the industry are directly relevant
to the issue of the appropriate size of the "area or region" in which
an "integrated" gas system may operate.
(ii) Coordinated Operations of Combined Gas Properties.
-------------------------------------------------
As previously described, Industries' operating subsidiaries
and Bay State and Northern currently manage similar physical
properties and contractual assets (gas supply, transportation, and
storage contracts of varying types and duration). Each company
maintains a professional staff that performs essential portfolio
management functions. In Industries' case, these functions are
performed by the Corporate Gas Supply Department of NIPSCO Services, a
group that currently consists of 15 individuals reporting to the Vice
President - Energy Services. NIPSCO Services provides gas portfolio
management services to Northern Indiana pursuant to a Management
Services Contract. NIPSCO Services also provides some gas portfolio
management services to its other affiliated gas utilities. The Bay
State gas supply department currently consists of 6 individuals.
After the merger, there will be a formal relationship between the
two gas supply departments which will enable them to integrate the
overall planning and management of the two companies' respective
portfolios of physical and contractual assets. Specifically, the Bay
State gas supply department will be functionally merged with the
28
<PAGE>
NIPSCO Services Corporate Gas Supply Department, and Bay State and
NIPSCO Services will enter into a service agreement which, subject to
certain changes and modifications that are now being discussed, will
be similar to the NIPSCO Services Management Services Contract.
Although Bay State gas supply personnel will remain physically located
in New England and employees of Bay State, there will be a reporting
responsibility to the Vice President - Energy Services of NIPSCO
Services.
The six essential portfolio management functions of both
companies include: portfolio design, portfolio strategy, procurement,
Midwest and New England storage optimization, price risk management,
and contract administration. The PORTFOLIO DESIGN function includes
the development of demand forecasts and modeling the appropriate
combination of portfolio components (E.G., the optimum levels of
"firm" transportation and long-term gas purchases, short-term
transportation and supply, and spot-market transactions) to meet
projected demand and the negotiation of all transportation and storage
contracts. PORTFOLIO STRATEGY involves the development of strategies
for optimizing the daily and seasonal utilization of portfolio assets
through the correlation of supply area and market area pricing
activity with the load requirements and pressures of each individual
company. The PROCUREMENT group is responsible for daily and short-
term (less than three months) gas purchases in supply basins, market
centers, pooling points, etc., based on the plan developed by the
portfolio strategy group. STORAGE OPTIMIZATION involves maximizing
the "value" of storage contracts and storage that is owned through
coordination and management of injection and withdrawal volumes and
rates. PRICE RISK MANAGEMENT implements price risk management
strategies, using both physical and financial contracts, within
guidelines approved by the board of directors. Finally, CONTRACT
ADMINISTRATION is responsible for contract administration and
accounting functions, scheduling/nomination of gas shipments, and
State regulatory reporting and support functions.
After the merger, the two gas departments will be linked through
Industries' Energy Access System (referred to as the EASy system), a
data management software system recently developed in conjunction with
Price Waterhouse Coopers at a cost of approximately $9 million. The
EASy system will permit the two gas supply departments to record and
exchange real-time information in each of the six functional areas
described above. Among its other features, the EASy system integrates
the management of on-system gas requirements (VIZ. customer demand)
with supplies available in the upstream markets and available
transportation and storage. Through the coordination and use of
supply/demand information, Industries will be able to maximize
revenues and minimize costs in such areas as pipeline capacity and
storage utilization. For example, using the data gathered and
analyzed by the EASy system on total system firm pipeline capacity
that the two companies hold, available storage capacity at any moment
in time, and weather conditions and other factors affecting
anticipated demand, Industries will be able to make long-range, as
well as daily and intra-day, decisions on such matters as buying or
selling firm capacity in the capacity release market created by Order
No. 636, making off-system "bundled" sales of gas and pipeline
29
<PAGE>
capacity during periods of excess supply, diverting gas from one
company to the other at any one of the hubs or market centers listed
above, and injecting or withdrawing gas from storage or selling such
capacity to third parties during periods of over capacity. The EASy
system will also be an important tool used in planning and executing
the portfolio risk management (I.E., hedging) programs of the two
companies on an overall, system-wide, basis, which, it is projected,
will also contribute importantly to economies and efficiencies of
operation.
(iii) Economies and efficiencies.
--------------------------
Section 10(c)(2) requires that the Commission find that a
proposed acquisition will produce economies and efficiencies. The
Transaction is likely to produce substantial economies and
efficiencies over time, chiefly in the areas of coordinated gas
supply, optimization in use of interstate pipeline capacity, more
efficient use of existing gas storage facilities, sharing of
Industries' extensive technological, operational, and gas supply
management experience, capital savings, and savings in management and
administrative expenses. Although some of the anticipated economies
and efficiencies will be fully realized in the longer term, they are
properly considered in determining whether the standards of Section
10(c)(2) are met. SEE AMERICAN ELECTRIC POWER CO., 46 SEC 1299, 1320-
21 (1978). Further, although some potential benefits cannot be
precisely estimated, they too are entitled to consideration. As the
Commission has stated, "[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., 35 SEC Docket 769 at 775 (April 29, 1986).
Finally, there is no requirement in Section 10(c)(2) that the specific
dollar estimates of future savings be large in relation to the gross
revenues of the companies involved. SEE AMERICAN NATURAL GAS COMPANY,
43 S.E.C. 203 at 208 (1966).
Industries and Bay State have identified specific components of
their gas portfolios (supply, transportation and storage) which,
through joint management and coordination, will enable the two
companies to exploit opportunities in the marketplace to achieve
savings. At the moment, both companies purchase significant amounts
of gas from the same supply basins in the Texas-Louisiana area, hold
capacity on the Tennessee Gas pipeline, and contract for storage
services in Michigan. These common portfolio resources may present
immediate opportunities to benefit customers. Moreover, as the
dynamics and structure of the natural gas industry continue to change
(E.G., in response to the impact of Canadian gas supplies on the
Midwest and Northeast markets, the elimination of inter-regional
transportation "bottlenecks," the growing importance of hubs and
market centers, etc.), the marketplace will create even more options
for the merger partners to create value through coordination of their
respective gas supply portfolios.
It is not difficult to identify the opportunities that exist and
will exist in the new marketplace, or the means by which market
30
<PAGE>
participants, such as Industries and Bay State, may exploit such
opportunities. The difficulty is in attempting to quantify precise
dollar impacts in an evolving marketplace; that is, a marketplace
which has no historical record in terms of regulatory certainty and
which will be directly affected by changes in physical supply and
capacity and in the contracting practices of market participants
(E.G., the increasing reliance by local distribution companies and
others on short-term and spot market gas purchases and released
pipeline capacity, as opposed to long-term "firm" contracts). It is
likewise very difficult to predict, with accuracy, the timing or
frequency with which opportunities to achieve savings will
occur.<35> Thus, any attempt to quantify future estimated savings
using historical data would necessarily involve interjecting uncertain
assumptions of a static and non-volatile marketplace. It is certain,
however, that demand and pricing differentials now exist and will
continue to occur and that, through coordinated management of their
portfolios of physical and contractual assets, Industries and Bay
State will be better positioned to take advantage of changing market
conditions.
The ability to capitalize on opportunities in the geographically
separated wholesale markets in which Industries and Bay State
participate can be illustrated by an example. A day that is colder
than normal in Indiana and warmer than normal in New England may
present an opportunity for a transaction between the merger partners
that produces additional value beyond what market participants that do
not have a presence in both the Midwest and New England could capture.
On such a day, Bay State may have gas supplies available in the Gulf
Coast that can be delivered via its Tennessee Gas pipeline capacity to
the Midwestern Gas Transmission pipeline at an interconnect at the
Portland hub in Portland, Tennessee. This supply could then be
delivered via Northern Indiana's Midwestern Gas Transmission capacity
to Northern Indiana or other purchasers in the Chicago market. This
transaction could generate a premium for Bay State's excess gas supply
and capacity on such a day as a result of the close coordination of
the two company's transportation capacity and the exchange of market
information that would not, in the absence of the merger, take place.
Market opportunities such as this will exist at any time when the
supply and capacity resources (I.E., contracted transportation or
storage) are in excess of either company's requirements.
Identification and pursuit of such opportunities will be a priority of
the merger partners.
__________________
<35> While price volatility is a given, it would be impossible to
predict, with any level of certainty, the timing of future price
movements. The point can be illustrated by looking at gas prices in
the month of February in the on-shore and off-shore Texas-Louisiana
supply basins, where Industries and Bay State have historically
purchased most of their gas. The price fluctuated from $1.00/MMBtu in
1992 to over $4.00/MMBtu in 1997 to $2.00/MMBtu in 1998. Similarly,
gas prices in the Chicago market center have ranged from as high as
$3.50/MMBtu in 1996 to a 1998 level not exceeding $2.30/MMBtu.
31
<PAGE>
There will also be opportunities for the merged companies to
achieve administrative savings in such areas as accounting, tax, human
resources (including employee benefits plan management), information
services, financial services, and regulatory relations. NIPSCO
Services makes available all of these services to its current
associate companies and, in time, will be in a position to provide
similar kinds of services to Bay State and Northern. An intercompany
taskforce to identify other opportunities for shared services has
already been formed.
QUANTIFIABLE BENEFITS. It is estimated that the quantifiable
dollar benefits of the Transaction over 10 years (projected savings
and opportunities for incremental revenues) will be as much as $57.45
million, as follows: (1) an increase in revenues of between $1.8 and
$3.6 million per year (up to $36 million over the 10-year period) from
bundled off-system sales, interruptible sales and interstate pipeline
capacity release credits; (2) a one-time savings to Bay State of at
least $1 million associated with gaining access to Industries' EASy
system; (3) a savings to Bay State of $100,000 per year ($1 million
over ten years) through the elimination of the need for one new-hire
in its gas supply department; (4) capital cost savings, chiefly in the
form of interest rate savings and lower transaction costs, of up to
$1.5 million per year by the third year after closing ($12 million in
years 3 through 10), which would result primarily from the integration
of the debt management programs of the two companies; (5) $200,000 per
year ($2 million over ten years) through a reduction in the amount of
directors' fees and expenses Bay State would otherwise have had to pay
as a publicly-listed company; (6) $200,000 per year ($2 million over
ten years) through the elimination by Bay State of trustee and stock
transfer fees; and (7) $345,000 per year ($3.45 million over ten
years) through a reduction in investor relations and servicing costs,
also as a result of Bay State's de-listing. Significantly, unlike
other recent merger cases in the electric and gas utility industries
in which the majority of the estimated dollar savings were anticipated
to be achieved through labor reductions in duplicate or redundant
positions,<36> the parties to this Transaction do not anticipate
any significant reductions in current employment levels.
(iv) No impairment
-------------
The resulting integrated gas system to be formed by the
combination of Bay State's gas properties with those of Industries
will 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."
In this case, the separate corporate identity and local corporate
headquarters of Bay State will be maintained and the Merger Agreement
__________________
<36> SEE, E.G., CONECTIV, INC., 66 SEC Docket 1260 at 1263 (February
25, 1998) (59.55% of estimated savings to be achieved through labor
reductions); WISCONSIN ENERGY CORPORATION, 67 SEC Docket 409 at 411
(May 19, 1998) ($13 million of $20 million of quantifiable benefits in
the form of labor reductions).
32
<PAGE>
assures continuity in the management of Bay State after the
Transaction. Further, following the Transaction, Bay State and
Northern will remain subject to regulation as to rates, service, and
other matters by the public service commissions in Massachusetts,
Maine and New Hampshire, each of which must also approve the
Transaction. Finally, by maintaining the separate corporate existence
of Bay State and Northern, there will be no change in the manner in
which Industries' Indiana subsidiaries are currently
regulated.<37>
3.4 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 explained in ITEM 4 - REGULATORY APPROVALS, the Transaction
has been approved by each of the public service commissions in
Massachusetts, Maine and New Hampshire.
3.5 Section 3(a)(1).
---------------
Industries also requests that the Commission issue an order
pursuant to Section 3(a)(1) of the Act confirming that Industries, and
each of its subsidiary companies as such, will continue to be exempt
from all provisions of the Act, except Section 9(a)(2). Section
3(a)(1) provides that the Commission shall exempt a holding company,
and every subsidiary thereof as such, from some or all provisions of
the Act, unless such exemption would be detrimental to the public
interest or interest of investors and consumers, if:
such holding company, and every subsidiary company thereof which
is a public-utility company from which such holding company
derives, directly or indirectly, any material part of its income,
are predominantly intrastate in character and carry on their
business substantially in a single State in which such holding
company and every such subsidiary company thereof are organized.
__________________
<37> In contrast, if the Transaction (I.E., the "preferred" merger
structure) cannot be achieved, Bay State and then Northern will be
merged into Northern Indiana, Industries' largest subsidiary, with the
result that the public service commissions in the four States would
then have to deal with potentially difficult issues of cost
allocations between Northern Indiana's Indiana operations and those
conducted in New England.
33
<PAGE>
Although Bay State and Northern are not incorporated and do not
conduct any public utility operations in Indiana, the State of
Industries' incorporation, following its acquisition of Bay State and
Northern, (i) Industries will not derive any material part of its
income from either Bay State or Northern, and (ii) Industries, and
each of its public-utility subsidiary companies from which it derives
any material part of its income, will remain predominantly intrastate
in character and carry on their business substantially in a single
State, namely, Indiana.
A. Industries Will Not Derive Any Material Part of Its Income
From Bay State or Northern.
----------------------------------------------------------
As is clear from the plain language of Section 3(a)(1), the test
of whether the public-utility subsidiaries of a holding company are
"predominantly intrastate in character" is applied separately to each
public-utility subsidiary from which such holding company "derives,
directly or indirectly, any material part of its income." SEE PUBLIC
SERVICE COMPANY OF OKLAHOMA, 8 S.E.C. 12, 16 (1940); WISCONSIN
ELECTRIC POWER COMPANY, 28 S.E.C. 906, 909 - 911 (1948). Hence, the
fact that a holding company has, as a subsidiary, a public-utility
company incorporated and operating in a State other than its own State
of incorporation is irrelevant for purposes of determining whether
such holding company is entitled to an exemption under Section 3(a)(1)
if that out-of-State subsidiary does not contribute "any material
part" of the holding company's income. SEE WASHINGTON RAILWAY AND
ELECTRIC COMPANY, 4 S.E.C. 191 at 192 - 193 (1938); COMMONWEALTH
EDISON COMPANY, 28 S.E.C. 172 at 173 (1948); WPL HOLDINGS, INC., 40
SEC Docket 491 at 499 (February 26, 1988). If, on the other hand, a
public-utility subsidiary does contribute a "material part" of the
holding company's income, then it must be BOTH incorporated in the
same State as the holding company AND carry on its business
"substantially" in that State.
In the decisions under Section 3(a)(1) in which the materiality
of an out-of-State subsidiary has been considered, the Commission has
consistently focused on the RELATIVE SIZE of the out-of-State
subsidiary, expressed as a percentage of the applicant holding
company's total operations, using a variety of financial measurements.
In its early decisions, including PUBLIC SERVICE COMPANY OF OKLAHOMA,
WASHINGTON RAILWAY and WISCONSIN ELECTRIC, SUPRA, the Commission
placed greatest importance upon the relationship of the dividends
actually paid by and undistributed earnings of the out-of-State
subsidiary, expressed as a percentage of the holding company's
consolidated net income. The Commission has also considered size in
terms of other quantifiable factors. In COMMONWEALTH EDISON COMPANY,
SUPRA, for example, which was decided the same year as WISCONSIN
ELECTRIC, the Commission compared an out-of-State subsidiary's gross
operating revenues from off-system sales to the parent's consolidated
gross operating revenues. Similarly, in WPL HOLDINGS, INC., SUPRA,
the Commission appears to have considered only the operating revenues
of an out-of-State subsidiary. In other recent cases, the Commission
has taken into account various financial comparisons, without
indicating which, if any, was entitled to greatest deference. SEE
34
<PAGE>
E.G., UNICOM CORPORATION, 57 SEC Docket 660 (July 22, 1994)
(percentage of consolidated operating revenues, consolidated net
income, consolidated net utility plant and consolidated total assets
represented by out-of-State subsidiary); PROVIDENCE ENERGY
CORPORATION, 60 SEC Docket 2109 (November 30, 1995) (percentage of
consolidated gas revenues and income represented by out-of-State
subsidiary); and ATLANTA GAS LIGHT COMPANY, ET AL., 61 SEC Docket 1057
(March 5, 1996) (percentage of consolidated operating revenues and
total assets represented by out-of-State subsidiary).
To date, the Commission has not embraced any numerical bright-
line test of materiality under Section 3(a)(1). Moreover, it is
noteworthy that, in the SEC Study, the Division recommended that the
Commission apply a more liberal standard for exemptions under Section
3(a). Rather than redefining phrases such as "predominantly
intrastate" and "material part of income" in terms of any bright-line
numerical limits, however, the Division urged the Commission to adopt
a more flexible standard for exemption under Section 3(a) that would
take into account the ability of the affected States to "adequately
protect utility consumers against any detriment that might be
associated with certain activities of exempt holding companies." SEC
Study, pp. 119 - 120.
In fact, a review of the recent decisions indicates that the
Commission is already moving toward a more flexible standard of
interpretation of the materiality test (as well as of the
"predominantly intrastate in character" test, which is discussed
below). In ATLANTA GAS LIGHT COMPANY, SUPRA, for example, the
Commission granted an exemption under Section 3(a)(1) to a newly-
organized Georgia holding company (AGL Resources, Inc.) with a
subsidiary operating in Tennessee which represented 6.2% and 6.9%,
respectively, of the holding company's consolidated operating revenues
and total assets. The Commission also recently accepted, without
challenge, a claim for exemption under Section 3(a)(1) pursuant to
Rule 2, 17 C.F.R. Section 250.2, by FirstEnergy Corp. ("FirstEnergy"),
a holding company incorporated in Ohio that owns all of the stock of
two Ohio utilities and, in addition, indirectly holds all of the stock
of Pennsylvania Power Company ("Penn Power"), a utility that is
incorporated and operates in Pennsylvania.<38> It appears from
FirstEnergy's initial filing on Form U-3A-2 that, for the twelve
months ended June 30, 1997, Penn Power represented about 6%, 6.4%, and
6.9%, respectively, of FirstEnergy's consolidated net income,
consolidated operating revenues, and net utility plant, and, for the
previous calendar year, accounted for about 7.5% of total electric
__________________
<38> The Commission approved the acquisition by FirstEnergy of all of
the voting securities of Centerior Corporation and Ohio Edison
Company, the parent of Penn Power. SEE FIRSTENERGY CORP., 65 SEC
Docket 1825 (November 5, 1997). Since FirstEnergy had not requested
an order under Section 3(a)(1) exempting it as a holding company, the
Commission did not specifically address whether FirstEnergy would
derive "any material part of its income" from Penn Power.
35
<PAGE>
energy sales (in kWh) by FirstEnergy and subsidiaries on a PRO FORMA
basis.<39>
In contrast, there have been only a few occasions on which the
Commission has denied an exemption to a holding company based upon a
finding that a subsidiary with substantial interstate operations
contributed a "material part" of the holding company's income. The
leading case is WISCONSIN ELECTRIC, SUPRA, in which the Commission
found that an out-of-State subsidiary of the applicant contributed a
"material part" of its income where the dividends paid by such
subsidiary, as a percentage of the applicant's consolidated net
income, ranged between 9.45% and 11.92% over a four-year period (1944-
1947). 28 S.E.C. at 912. These are apparently the lowest percentages
in any case decided under Section 3(a)(1) in which the Commission has
expressly held that an out-of-State subsidiary contributed a "material
part" of the applicant's income and, accordingly, denied an exemption.
In the present case, gross operating revenues, net operating
revenues (operating margin), utility operating income, net utility
income and net utility plant of Bay State and Northern (before
intercompany eliminations), and the percentage of each on a PRO FORMA
basis for each of the past three years, to the total combined gross
operating revenues, net operating revenues, utility operating income,
net utility income and net utility plant (after intercompany
eliminations) of Industries and subsidiaries are as follows:<40>
<TABLE>
<CAPTION>
BAY STATE AND
PRO FORMA BAY STATE NORTHERN NORTHERN <Fd>
COMBINED -----------------------------------------------------------------
UTILITIES AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
($MM) <Fd> ($MM) ($MM) ($MM)
---------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross operating
revenues <Fa> 1997 $2,274.5 $367.4 16.2% $82.8 3.6% $450.2 19.8%
1996 2,228.5 334.3 15.0 72.6 3.7 406.9 18.3
1995 2,130.7 341.5 16.0 66.8 3.1 408.4 19.2
Operating
margin <Fb> 1997
$1,264.3 $142.1 11.2% $31.4 2.5% $173.5 13.7%
1996
1,284.9 138.4 10.8 29.2 2.3 168.4 13.1
1995
1,241.5 134.0 10.8 26.8 2.2 160.8 13.0
Utility operating
income <Fc> 1997 $ 322.1 $28.3 8.7% $7.6 2.4% $35.9 11.1%
1996 318.2 26.2 8.2 6.6 2.1 32.8 10.3
1995 311.2 22.0 7.1 5.0 1.6 27.0 8.7
</TABLE>
__________________
<39> SEE Statement on Form U-3A-2 of FirstEnergy Corp., dated November
8, 1997 (as amended November 21, 1997) (File No. 69-423).
<40> The data presented in the table excludes Industries' operating
revenues from water operations and other non-utility products and
services which, in 1997, totaled about $762 million, or about 29% of
Industries' consolidated operating revenues.
36
<PAGE>
<TABLE>
<CAPTION>
BAY STATE AND
PRO FORMA BAY STATE NORTHERN NORTHERN <Fd>
COMBINED ---------------------- -------------------- --------------------
UTILITIES AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
($MM) <Fd> ($MM) ($MM) ($MM)
---------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net utility
income <Fc> 1997 $223.6 $14.2 6.3% $4.1 1.8% $18.3 8.1%
1996 218.1 13.3 6.1 3.0 1.4 16.3 7.5
1995 221.7 7.8 3.5 2.1 .9 9.9 4.4
Net utility
plant 1997 $3,613.8 $397.0 11.0% $99.4 2.6% $496.4 13.7%
1996 3,659.2 402.2 11.0 94.6 2.5 496.8 13.5
1995 3,663.5 389.6 10.6 89.2 2.4 478.8 13.1
</TABLE>
<Fa> Includes revenues from transportation-only customers and
forfeited discounts.
<Fb> Gross operating revenues less cost of gas and cost of fuel
for electric generation.
<Fc> Adjusted to eliminate the effect of one-time write-off of
restructuring costs by Bay State. SEE FN. 10, SUPRA.
<Fd> After intercompany eliminations.
As the foregoing demonstrates, Industries will not derive "any
material part" of its income from Northern, no matter what financial
yardstick for comparison is used. Likewise, although Bay State's net
utility income in 1997, as a percentage of the PRO FORMA combined net
utility income of Industries (6.3%), is higher than the percentage
found acceptable in any case in which the Commission has granted, by
order, an exemption under Section 3(a)(1), it is lower than the
percentage found unacceptable in WISCONSIN ELECTRIC, SUPRA, and
approximately the same as the percentage of net income that
FirstEnergy derives from Penn Power, based on data disclosed in
FirstEnergy's initial claim for exemption on Form U-3A-2.
Furthermore, although Bay State's contribution to Industries' PRO
FORMA combined gross utility revenues (15.0 - 16.2% for the three
years 1995 - 1997) is also greater than in any case in which the
Commission has granted an exemption, by order, under Section 3(a)(1)
to a holding company with an out-of-State subsidiary, in this case a
percentage based on gross operating revenues would tend to distort and
overstate Bay State's comparative size, for a number of reasons.
First, it is relevant to consider that Bay State's delivered cost of
gas has historically been significantly higher than
Industries'.<41> The cost of gas is essentially a pass-through to
customers that has an obvious impact on gross revenues, but little if
any effect on operating margin or income. Second, Industries'
subsidiaries serve a much larger industrial customer base than Bay
__________________
<41> For comparison, during the period 1994 through 1997, Bay State s
average delivered cost of gas ranged between $3.92 and $4.79/Dth,
while Northern Indiana's average delivered gas cost ranged between
$2.65 and $3.16/Dth. It is predictable that this difference in gas
cost will narrow as new pipeline capacity into New England comes on
line.
37
<PAGE>
State. A high percentage of these customers purchase their gas
directly from producers and marketers and contract only for
"unbundled" transportation service from the local utility.<42>
Because revenues from transportation-only customers do not reflect, or
include, a gas sales component, a revenues-based size comparison of
Bay State and Industries would once again present a distorted picture.
Thus, while the combined gas operating revenues of Bay State and
Northern in 1997 would represent, on a PRO FORMA basis, approximately
35% of the gas operating revenues of the merged companies, the total
gas send-out of Bay State and Northern Utilities would represent only
18% of the send-out of the merged companies on a volumetric basis.
A size comparison based on operating margin (gross revenues less
cost of gas and cost of fuel for electric generation) would eliminate
these distortions. On such basis, Bay State's operating margin would
represent, on a PRO FORMA basis, between 10.8% and 11.2% of the
combined operating margins (gas and electric) of Industries and Bay
State over the three-year period 1995 - 1997. These percentages
correspond more closely to the percentage size comparisons based on
net income, net utility plant, and other financial criteria. (Also,
see the preliminary projections of gross operating margins of
Industries and Bay State for the years 1998 - 2000) (filed
confidentially pursuant to Rule 104 as Exhibit K-1 hereto).
It is also relevant to consider that Bay State is engaged
exclusively in the natural gas business, whereas Industries'
predominant subsidiary, Northern Indiana, derives more than half of
its revenues from electric utility operations. In this regard, in
HOUSTON INDUSTRIES INCORPORATED, ET AL., 65 SEC Docket 83 (July 24,
1997), the Commission noted the difficulty of making size comparisons
between a gas company and an electric company based on operating
revenues. In that case, the Commission granted an exemption under
Section 3(a)(2) of the Act to an electric utility that was proposing
to acquire a gas utility, even though, in applying the "gross-to-
gross" subsidiary-to-parent operating revenues test historically used
in cases under Section 3(a)(2), the resulting percentage (52.5%) was
significantly higher than the highest percentage (about 26%) in any
previous case in which an exemption had been granted.
Although the Commission appears to have accepted a more liberal
test for predominance under Section 3(a)(2) in HOUSTON INDUSTRIES,
based on the traditional "gross-to-gross" revenues analysis, it is
significant that the Commission also looked at other relevant proxies
for size, such as ratios of utility operating income and utility
assets, which it found to be more in line with ratios established in
earlier cases. The Commission also noted that, because Houston
Industries' operations are entirely electric while its subsidiary's
are entirely gas, other size comparisons (E.G., units of energy sold,
number of customers) sometimes used in cases under Section 3(a)(2)
would not be relevant. 65 SEC Docket at 86, and n. 21.
__________________
<42> In 1997, "unbundled" gas transportation (primarily to large
industrial customers) represented 55% of Northern Indiana's total gas
send-out, but only 32% of Bay State's total gas send-out.
38
<PAGE>
B. Industries Will Remain Predominantly Intrastate in Character
and Carry On its Business Substantially in a Single State.
------------------------------------------------------------
As indicated, Industries and its three existing public utility
subsidiaries, Northern Indiana, Kokomo and NIFL, are all incorporated
in Indiana, and the three subsidiaries carry on their public utility
operations exclusively within Indiana. Although Northern Indiana
sells electricity at wholesale to non-Indiana customers, almost all of
those sales take place in Indiana or at the Indiana border, and
therefore do not constitute utility operations outside of Indiana.
SEE WPL HOLDINGS, INC., 40 SEC Docket 491 at 499 (February 26, 1988)
(citing SIERRA PACIFIC RESOURCES, 40 SEC Docket 103 at 114 (January
28, 1988)).
Taking into consideration the combined out-of-State operations of
Bay State and Northern, Industries' utility operations would still be
"predominantly intrastate in character." For the year ended December
31, 1997, the combined gross operating revenues, net operating
revenues (operating margin), utility operating income and net utility
income of Bay State and Northern (after intercompany eliminations)
represented 19.8%, 13.7%, 11.1% and 8.1%, respectively of Industries'
PRO FORMA combined gross operating revenues, net operating revenues,
utility operating income and net utility income. Although the gross
operating revenues percentage is higher than in any case in which the
Commission has granted, by order, an exemption under Section
3(a)(1),<43> holding companies have claimed exemption under Rule 2
with disclosed out-of-State utility revenue percentages as high as
22.4%, which claims for exemption have not been challenged.<44>
__________________
<43> In SIERRA PACIFIC RESOURCES, 40 SEC Docket 103 at 114, n. 29
(January 28, 1988), the Commission indicated that the operations of
Sierra Pacific Resources' principal subsidiary were substantially
intrastate even though the subsidiary derived 9.9% of its utility
revenues from outside of its state of incorporation. The case did not
involve the grant of an exemption under Section 3(a)(1).
<44> SEE E.G., 1983 Form U-3A-2 filed by Diversified Energies (File
No. 69-271) (disclosing 22.4% of utility revenues from out-of-State
operations). SEE TOO, 1998 Form U-3A-2 filed by Southwestern Energy
Co. (File No. 69-248) (disclosing 27% of retail gas sales (in MCF)
out-of-State; no revenues breakdown provided); 1998 Form U-3A-2 filed
by TNP Enterprises, Inc. (File No. 69-291) (disclosing 16% of
operating revenues from and 22.7% of retail electricity sales (in MWH)
to out-of-State customers, who comprise 19.5% of all electric
customers); and 1998 Form U-3A-2 filed by MidAmerican Energy Holdings
Company (File No. 69-399) (disclosing 21% of retail gas operating
revenues and 12.4% of electric operating revenues from out-of-State
operations and 20.2% of net gas plant and 11.7% of net electric plant
located out-of-State). In another instance, the Commission's Division
of Corporate Regulation gave its informal assurances that it would not
question a claim for exemption under Rule 2 by a holding company whose
subsidiary would derive about 30% of its utility revenues from out-of-
(continued...)
39
<PAGE>
Moreover, for the reasons that have already been discussed above,
using gross operating revenues in this case would tend to distort and
overstate the relative size of the combined Bay State/Northern
operations. Thus, if net operating revenues (operating margin) are
considered, the out-of-State operations of Bay State and Northern
together (after intercompany eliminations) would represent on a PRO
FORMA basis between 11.2% and 13.7% of Industries and Bay State and
subsidiaries combined for the three-year period 1995 -1997. (Also,
see preliminary projections of gross operating margins of Industries
and Bay State for the years 1998 - 2000). (Filed confidentially
pursuant to Rule 104 as Exhibit K-1 hereto).
C. The Exemption of Industries Will Not Be Detrimental to the
Public Interest or Interest of Investors or Consumers.
----------------------------------------------------------
For the reasons noted above, a finding by the Commission that
Industries will not derive "any material part of its income" from
either Bay State or Northern would not be inconsistent with settled
interpretations of Section 3(a)(1). Moreover, while Bay State will
contribute a higher percentage of Industries' consolidated operating
revenues, net utility income and net utility plant than in any
previous case in which the Commission has granted, by order, an
exemption under Section 3(a)(1), it is clear that Industries is a
substantially larger company than Bay State and Northern together by
any possible measure and that, in qualitative terms, granting
Industries an exemption in this case will not, in the words of Section
3(a), be "detrimental to the public interest or the interest of
investors or consumers." Industries submits that granting Industries
an exemption under Section 3(a)(1) in this case would thus be
consistent with the recommendations of the Division in the Division
Report.
In this case, Industries' acquisition of Bay State has been
approved by the MDTE and its acquisition of Northern has been approved
by both the NHPUC and the MPUC.<45> In the petitions that were
__________________
<44>(...continued)
State operations. SEE CHESAPEAKE UTILITIES CORPORATION, SEC No-Action
Letter dated August 31, 1978. In that letter, the Division Director
acknowledged that there would be no detriment to effective regulation
by permitting the holding company to claim an exemption.
<45> The principal issue in all three proceedings concerned the impact
of the acquisition premium to be paid for Bay State's shares on future
rates of Bay State and Northern. In the Massachusetts proceeding, the
MDTE concluded that "the proposed merger promises significant (albeit
of indeterminate size) savings for ratepayers because Bay State and
Northern Indiana would engage in joint management and purchasing of
gas supplies, resulting in greater economies and efficiencies." MDTE
Order Approving Joint Petition, p. 27. Likewise, in the Maine
proceeding, the Office of the Public Advocate supported the merger
based on expectations that the transaction should "lend increased
(continued...)
40
<PAGE>
filed with these three commissions (Exhibits D-1, D-3 and D-5 hereto),
Bay State and Northern requested approval for both the "preferred
merger" structure, under which Industries would acquire the voting
securities of Bay State and Northern and hold them as additional
public-utility subsidiaries, as well as the "alternative merger"
structure, under which Bay State and Northern would be merged into
Industries' predominant subsidiary, Northern Indiana, which would
thereafter conduct public utility operations in Massachusetts, New
Hampshire and Maine through separate divisions. In the petitions, the
applicants expressly stated that the "preferred merger" structure is
subject to SEC approval under the Act and that Industries would not
consummate the transaction under the "preferred merger" structure if
the SEC does not approve the transaction (or approval is delayed) or
if the status of Industries as an exempt holding company would be
jeopardized. Thus, all three state commissions have approved the
transaction with the clear understanding that the "preferred merger"
structure is dependent upon Industries' ability to maintain its
current exemption under the Act. Further, each of the three
commissions indicated in its order that it favored the "preferred
merger" structure.
Following the merger, the MDTE will have the same jurisdiction
and authority over Bay State's rates, services and operations
following the acquisition as it currently has, and its ability to
protect ratepayers will not be impaired by virtue of Bay State's
ownership by an out-of-state holding company. Pursuant to M.G.L.
c. 164, Section 76A, the MDTE will have general supervisory authority
over Industries, as an affiliate of Bay State, with respect to any
relations, transactions and dealings that may affect Bay State's
operations. For example, the MDTE may investigate the price of gas
supplied by an affiliate (Section 76A), examine the books and records
of affiliates (Section 85), approve contracts for services between Bay
State and an affiliated company (Sections 85A, 94B); and require
periodic reports by Bay State regarding its affiliate transactions
(Section 76A).
The jurisdiction of the NHPUC over Northern's rates, services and
operations will also be unchanged following its acquisition by
Industries, under either merger structure. Pursuant to RSA 366:5, the
NHPUC will have full power and authority to investigate contracts for
services between Northern and its affiliates, and may require Northern
to submit full information with respect to any purchase from or sale
to an affiliate. The NHPUC has the power to disapprove any affiliate
contracts for services, or any purchase or sale that it finds to be
unjust or unreasonable. The NHPUC may also require information from
Northern, or Industries, as to the direct or indirect control of
Northern in order to enforce its regulatory authority.
__________________
<45>(...continued)
financial strength to Northern and its operations in Maine and that
there should be significant opportunities for supply resource savings
. . ." MPUC Order Approving Stipulation and Merger, p. 3.
41
<PAGE>
In Maine, under either merger structure, the MPUC will retain its
present regulatory control over Northern's rates, services and
operations. Affiliate transactions and dealings are expressly
regulated by the MPUC under 35-A M.R.S.A. Section 707. The MPUC has
broad jurisdiction over dealings between a public utility and its
affiliates, including credit arrangements, loans and contracts or
arrangements for any services. Section 707(3). The MPUC may also
inspect the books, records, accounts and papers of any affiliated
interest of Northern which relate to a transaction with Northern.
Section 707(2).
As the foregoing demonstrates, each of the affected State
commissions will have the ability to protect utility customers of Bay
State and Northern against any possible detriment that might be
associated with the relationship of such companies to Industries.
Granting Industries' request for an exemption, therefore, will not be
"detrimental to the public interest or interest of investors or
consumers."
ITEM 4. REGULATORY APPROVALS.
--------------------
The Transaction, insofar as it relates to Bay State and Northern,
is subject to the jurisdiction of and has been approved by the MDTE,
the NHPUC, and the MPUC. The Transaction is also subject to the
notification and reporting requirements of the HSR Act, which have
been satisfied. No other State or Federal commission has jurisdiction
over the proposed Transaction.
ITEM 5. PROCEDURE.
---------
The Commission published a notice under Rule 23 with respect to
the filing of this Application or Declaration and no request for
hearing was made. Industries requests that the Commission's Order be
issued as soon as practicable, and that there should not be a 30-day
waiting period between issuance of the Commission's order and the date
on which the order is to become effective. Industries hereby waives a
recommended decision by a hearing officer or any other responsible
officer of the Commission and consents that the Division of Investment
Management may assist in the preparation of the Commission's decision
and/or order, unless the Division opposes the Transaction.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
---------------------------------
A - Exhibits.
A-1 Articles of Incorporation of Bay State as amended
through January 26, 1995 (filed as exhibit 3.1 to
Form 10-Q of Bay State for the quarter ended
December 31, 1994, File No. 1-7479 and
incorporated herein by reference).
42
<PAGE>
A-2 Articles of Incorporation of Industries, as
amended as of April 9, 1997 (filed as Exhibit 3(a)
to Industries' Form 10-Q for the period ended
March 31, 1997, in File No. 1-9779, and
incorporated herein by reference).
B-1 Agreement and Plan of Merger, dated as of December
18, 1997, as amended and restated as of March 4,
1998, between NIPSCO Industries, Inc. and Bay
State Gas Company (see Annex A to Exhibit C-2).
C-1 Registration Statement of Industries on Form S-4.
(Incorporated herein by reference to File No. 333-
50537).
C-2 Bay State Proxy Statement/Industries Prospectus
(included in Exhibit C-1).
D-1 Joint Petition of Bay State Gas Company, et al.,
to Massachusetts Department of Telecommunications
and Energy, dated March 20, 1998. (Previously
filed).
D-2 Order of the Massachusetts Department of
Telecommunications and Energy. (Filed herewith).
D-3 Joint Petition of Northern Utilities, Inc., et
al., to New Hampshire Public Utilities Commission,
dated March 20, 1998. (Previously filed).
D-4 Order of the New Hampshire Public Utilities
Commission. (Filed herewith).
D-5 Petition of Northern Utilities, Inc. to Maine
Public Utilities Commission, dated March 20, 1998.
(Previously filed).
D-6 Order of the Maine Public Utilities Commission.
(Filed herewith).
D-7 Application of Industries and Bay State to Federal
Energy Regulatory Commission pursuant to Section
203 of the Federal Power Act. (This exhibit is
deleted as unnecessary).
D-8 Order of Federal Energy Regulatory Commission.
(This exhibit is deleted as unnecessary).
E-1 Map of natural gas service areas of Northern
Indiana, Kokomo Gas, NIFL, Bay State and Northern,
major interstate pipelines and market hubs.
(Previously filed - paper format filing).
43
<PAGE>
F-1 Preliminary opinion of Reid & Priest LLP, special
counsel to Industries. (Deleted as unnecessary).
F-2 Past-tense opinion of Reid & Priest LLP, special
counsel to Industries. (Deleted as unnecessary).
F-3 Preliminary opinion of Schiff Hardin & Waite,
Indiana counsel to Industries. (Filed herewith).
F-4 Past-tense opinion of Schiff Hardin & Waite,
Indiana counsel to Industries. (To be filed with
Rule 24 Certificate).
F-5 Preliminary opinion of Day, Berry & Howard,
Massachusetts counsel to Industries. (Filed
herewith).
F-6 Past-tense opinion of Day, Berry & Howard,
Massachusetts counsel to Industries. (To be filed
with Rule 24 Certificate).
G-1 Fairness opinion of Barr Devlin (see Annex B to
Exhibit C-2).
H-1 Form U-3A-2 of NIPSCO Industries, Inc. for 1997,
filed February 27, 1998 (File No. 69-340)
(Incorporated herein by reference).
H-2 Form U-3A-2 of Bay State Gas Company for 1997,
filed February 28, 1998 (see File No. 69-249).
(Incorporated herein by reference).
I-1 Fee statement of Arthur Andersen LLP, accountants
for Industries. (Filed herewith).
I-2 Fee statement of Schiff Hardin & Waite, counsel to
Industries. (Filed herewith).
I-3 Fee statement of Thelen Reid & Priest LLP, special
counsel to Industries. (Filed herewith).
J-1 Proposed form of Federal Register notice.
(Previously filed).
K-1 Projections of Gross Operating Margin in Years
1998-2000. (Filed herewith confidentially
pursuant to Rule 104) (Paper format only).
44
<PAGE>
B. Financial Statements.
--------------------
FS-1: Industries Unaudited PRO FORMA Combined Condensed
Balance Sheet as of December 31, 1997. (Filed
herewith).
FS-2: Industries Unaudited PRO FORMA Combined Condensed
Statement of Income for twelve months ended
December 31, 1997. (Filed herewith).
FS-3: Industries Consolidated Balance Sheet as of
December 31, 1997 (incorporated by reference to
the Annual Report on Form 10-K of Industries for
the fiscal year ended December 31, 1997, in File
No. 1-9779).
FS-4: Industries Consolidated Statement of Income for
the year ended December 31, 1997 (incorporated by
reference to the Annual Report on Form 10-K of
Industries for the fiscal year ended December 31,
1997, in File No. 1-9779).
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
---------------------------------------
The Transaction does not involve a "major federal action" nor
will it "significantly affect the quality of the human environment" as
those terms are used in section 102(2)(C) of the National
Environmental Policy Act. The Transaction that is the subject of this
Application or Declaration will not result in changes in the operation
of the Applicant or its subsidiaries that will have an impact on the
environment. Industries is not aware of any federal agency that has
prepared or is preparing an environmental impact statement with
respect to the Transaction.
SIGNATURE
---------
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, as amended, the undersigned company has duly
caused this statement to be signed on its behalf by the undersigned
thereunto duly authorized.
NIPSCO INDUSTRIES, INC.
By: /s/ Gary L. Neale
-------------------------------
Name: Gary L. Neale
Title: Chairman and President
Date: November 19, 1998
45
<PAGE>
EXHIBIT D-2
-----------
THE COMMONWEALTH OF MASSACHUSETTS
____________
DEPARTMENT OF
TELECOMMUNICATIONS AND ENERGY
November 5, 1998
D.T.E. 98-31
Joint Petition of Bay State Gas Company. Northern Indiana Public
Service Company and NIPSCO Acquisition Company for approval by the
Department of Telecommunications and Energy pursuant to G.L. c. 164.
Section 96, of the merger of Bay State Gas Company and NIPSCO
Industries, Inc.
----------------------------------------------------------------------
APPEARANCES: Paul Connolly, Jr., Esq.
Paul B. Dexter, Esq.
Meabh Purcell, Esq.
LeBoeuf, Lamb, Greene & MacRae, LLP
260 Franklin Street
Boston, MA 02110
FOR: BAY STATE GAS COMPANY
PETITIONERS
David T. Doot, Esq.
Robert P. Knickerbocker, Jr., Esq.
Day, Berry & Howard
CityPlace I
Hartford, Connecticut 06103
FOR: NIPSCO INDUSTRIES, INC.
PETITIONERS
L. Scott Harshbarger, Attorney General
By: James W. Stetson, Esq.
George C. Brooks, Esq.
Assistant Attorneys General
200 Portland Street
Boston, MA 02114
INTERVENOR
Robert Sydney, Esq.
Steven I. Venezia, Esq.
Division of Energy Resources
100 Cambridge Street, Room 1500
Boston, MA 02202
INTERVENOR
<PAGE>
L. William Law, Jr., Esq.
Sara Johnson Meyers, Esq.
Eastern Enterprises
9 Riverside Road
Weston, MA 02193
LIMITED PARTICIPANT
David S. Rosenweig, Esq.
Stephen H. August, Esq.
Keegan, Werlin & Pabian, LLP
21 Custom House Street
Boston, MA 02110
FOR: ESSEX COUNTY GAS COMPANY
LIMITED PARTICIPANT
Becky Merola, Esq.
Enron Corp.
400 Metro Place North
Dublin, Ohio 43017
-and-
Randall S. Rich, Esq.
Tracey L. Bradley, Esq.
Bracewell & Patterson, L.L.P.
2000 K Street, NW
Washington, DC 20006
FOR: ENRON ENERGY SERVICES, INC.
LIMITED PARTICIPANT
Kenneth L. Kimmell, Esq.
Bernstein, Cushner & Kimmell, P.C.
One Court Street, Suite 700
Boston, MA 02108
FOR: UTILITY WORKERS' UNION OF AMERICA,
AFL-CIO, LOCAL 273
INTERVENOR
<PAGE>
TABLE OF CONTENTS
I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . 1
II. DESCRIPTION OF PROPOSAL . . . . . . . . . . . . . . . . . . 2
A. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . 2
B. PREFERRED MERGER . . . . . . . . . . . . . . . . . . . 3
C. ALTERNATIVE MERGER . . . . . . . . . . . . . . . . . . 4
D. ACCOUNTING TREATMENT . . . . . . . . . . . . . . . . . 4
E. RATE PLAN . . . . . . . . . . . . . . . . . . . . . . . 5
1. BASE RATE FREEZE . . . . . . . . . . . . . . . . . 5
2. EARNINGS SHARING MECHANISM . . . . . . . . . . . . 5
F. COSTS ASSOCIATED WITH THE MERGER . . . . . . . . . . . 6
III. STANDARD OF REVIEW . . . . . . . . . . . . . . . . . . . . . 6
IV. SPECIFIC CONSIDERATIONS OF THE MERGER . . . . . . . . . . . . 8
A. EFFECT ON RATES AND RESULTING NET SAVINGS . . . . . . . . 8
1. BASE RATE FREEZE . . . . . . . . . . . . . . . . . . 8
a. INTRODUCTION . . . . . . . . . . . . . . . . . 8
b. POSITIONS OF THE PARTIES . . . . . . . . . . 10
i. ATTORNEY GENERAL . . . . . . . . . . . . 10
ii. PETITIONERS . . . . . . . . . . . . . . 10
c. ANALYSIS AND FINDINGS . . . . . . . . . . . . 11
2. EARNINGS SHARING MECHANISM . . . . . . . . . . . . 13
a. INTRODUCTION . . . . . . . . . . . . . . . . 13
b. POSITIONS OF THE PARTIES . . . . . . . . . . 15
i. ATTORNEY GENERAL . . . . . . . . . . . . 15
ii. PETITIONERS . . . . . . . . . . . . . . 15
c. ANALYSIS AND FINDINGS . . . . . . . . . . . . 16
3. GAS COSTS . . . . . . . . . . . . . . . . . . . . 17
a. INTRODUCTION . . . . . . . . . . . . . . . . 17
b. POSITIONS OF THE PARTIES . . . . . . . . . . 17
i. ATTORNEY GENERAL . . . . . . . . . . . . 17
ii. PETITIONERS . . . . . . . . . . . . . . 18
c. ANALYSIS AND FINDINGS . . . . . . . . . . . . 18
4 WEATHER NORMALIZATION . . . . . . . . . . . . . . 19
a. INTRODUCTION . . . . . . . . . . . . . . . . 19
b. POSITIONS OF THE PARTIES . . . . . . . . . . 20
i. ATTORNEY . . . . . . . . . . . . . . . . 20
ii. PETITIONERS . . . . . . . . . . . . . . 20
c. ANALYSIS AND FINDINGS . . . . . . . . . . . . 21
B. EFFECT ON QUALITY OF SERVICE . . . . . . . . . . . . . 21
1. INTRODUCTION . . . . . . . . . . . . . . . . . . . 21
2. POSITIONS OF THE PARTIES . . . . . . . . . . . . . 22
a. ATTORNEY GENERAL . . . . . . . . . . . . . . 22
b. PETITIONERS . . . . . . . . . . . . . . . . . 22
3. ANALYSIS AND FINDINGS . . . . . . . . . . . . . . 22
C. ACQUISITION PREMIUM . . . . . . . . . . . . . . . . . . 23
1. INTRODUCTION . . . . . . . . . . . . . . . . . . . 23
2. POSITIONS OF THE PARTIES . . . . . . . . . . . . . 24
a. ATTORNEY GENERAL . . . . . . . . . . . . . . 24
b. PETITIONERS . . . . . . . . . . . . . . . . . 26
3. ANALYSIS AND FINDINGS . . . . . . . . . . . . . . 27
D. FINANCIAL INTEGRITY OF POST-MERGER GAS COMPANY . . . . 33
1. INTRODUCTION . . . . . . . . . . . . . . . . . . . 33
2. ANALYSIS AND FINDINGS . . . . . . . . . . . . . . 33<PAGE>
E. SOCIETAL COSTS . . . . . . . . . . . . . . . . . . . . 34
1. INTRODUCTION . . . . . . . . . . . . . . . . . . . 34
2. ANALYSIS AND FINDINGS . . . . . . . . . . . . . . 35
F. STOCK ISSUANCE . . . . . . . . . . . . . . . . . . . . 35
1. INTRODUCTION . . . . . . . . . . . . . . . . . . . 35
2. STANDARD OF REVIEW . . . . . . . . . . . . . . . . 35
3. ANALYSIS AND FINDINGS . . . . . . . . . . . . . . 37
G. SECTION 17A APPROVAL OF FUNDS POOLING AMENDMENT . . . . 37
1. INTRODUCTION . . . . . . . . . . . . . . . . . . . 37
2. STANDARD OF REVIEW . . . . . . . . . . . . . . . . 38
3. ANALYSIS AND FINDINGS . . . . . . . . . . . . . . 38
H. NORTHERN INDIANA OPERATING AS A MASSACHUSETTS GAS
COMPANY . . . . . . . . . . . . . . . . . . . . . . . . 39
1. INTRODUCTION . . . . . . . . . . . . . . . . . . . 39
2. STANDARD OF REVIEW . . . . . . . . . . . . . . . . . 40
3. ANALYSIS AND FINDINGS . . . . . . . . . . . . . . 41
I. PREFERRED MERGER VERSUS ALTERNATIVE MERGER . . . . . . 43
V. SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . 45
VII. ORDER . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
<PAGE>
I. INTRODUCTION
On March 20, 1998, Bay State Gas Company ("Bay State"), Northern
Indiana Public Service Company ("Northern Indiana"), and NIPSCO
Acquisition Company<1> ("Acquisition Company") (collectively, the
"Petitioners") jointly filed with the Department of Telecommunications
and Energy ("Department") a petition for approval: (1) pursuant to
G.L. c. 164, Section 96, of the Merger of Acquisition Company and Bay
State; (2) pursuant to G.L. c. 164, Section 94, of Bay State's rate
plan ("Rate Plan"); (3) pursuant to G.L. c. 164, Section 14, of the
issuance and sale of 100 shares of common stock, $1.00 par value, by
Acquisition Company to NIPSCO Industries, Inc. ("NIPSCO Industries");
(4) pursuant to G.L. c. 164, Section 17A, of an amendment to Bay
State's debt pooling agreement to include NIPSCO Capital Markets<2>
("NIPSCO Capital") as a party to the agreement; (5) pursuant to G.L.
c. 164, Section 8A(a), to operate Northern Indiana as a gas company in
Massachusetts if the Alternative Merger, proposed by the Petitioners
and described below, should occur. The Department docketed this
matter as D.T.E. 98-3 l.
Pursuant to notice duly issued, the Department conducted public
hearings in Lawrence, Springfield, and Brockton on May 14, 18, and 20,
1998, respectively, to afford interested persons an opportunity to
comment on the Petitioners' proposal. The Department granted the
petitions to intervene of the Commonwealth's Division of Energy
Resources and the Utility Workers Union of America, Locals 273 and
273C ("Union").<3> The Attorney General of the Commonwealth
("Attorney General") intervened as of right pursuant to G.L. c. 12,
Section 11E. The Department granted limited participant status to
Eastern Enterprises, Enron Energy Services, Inc., and Essex County Gas
Company.
The Department conducted evidentiary hearings at its offices in
Boston on July 13, 14, and 15, 1998. The Petitioners sponsored the
testimony of two witnesses: (1) James D. Simpson, senior vice
president and head of regulated utility business of Bay State; and (2)
Mark T. Maassel, vice president of regulatory and government policy
for NIPSCO Industries' Management Services Company and a corporate
officer of NIPSCO Industries. The Attorney General sponsored the
testimony of David J. Effron, a consultant in utility regulation. The
Petitioners and the Attorney General submitted both briefs and reply
briefs.
__________________
<1> The draft articles of organization for NIPSCO Acquisition Company
identify the company as Acquisition Gas Company (Exh. DTE 1-7).
The Petitioners stated that the latter name will be used when the
subsidiary actually is incorporated (Tr. 2, at 84).
<2> NIPSCO Capital acts as a financing agent for all of NIPSCO
Industries' regulated and unregulated subsidiaries, with the
exception of Northern Indiana, under the terms of an existing
support agreement (Exhs. Cos.-B, Sch. MTM-2, at 26, 35; DTE 1-23;
Tr. 2, at 75).
<3> On June 25, 1998, the Union filed a letter in support of the
Merger.
<PAGE>
Bay State is a local distribution company ("LDC") serving
approximately 261,000 residential, commercial and industrial customers
in Massachusetts (Exh. Cos.-A at 6). Bay State's direct subsidiaries
are Northern Utilities, Inc., an LDC that serves approximately 45,000
customers in New Hampshire and Maine, and Granite State Gas
Transmission Company, Inc. ("Granite State"), an interstate pipeline
company (Exh. Cos.-A at 6). Granite State's subsidiaries include Bay
State's unregulated Energy Ventures and Energy Products & Services
divisions, including EnergyUSA, Inc., Savage-Alert, Inc., and
EnergyEXPRESS (Exhs. AG 1-1, Att. A; AG 1-2).
NIPSCO Industries is an exempt holding company<4> whose
subsidiaries provide electricity, natural gas, and water service.
These wholly-owned subsidiaries are Northern Indiana, Kokomo Gas and
Fuel, Northern Indiana Fuel and Light Company, Crossroads Pipeline
Company, NIPSCO Development, NI Energy Services, Inc., Primary Energy
Inc., NIPSCO Capital, and IWC Resources Corporation ("IWC")<5>
(Exh. Cos.-B at 3-4). Northern Indiana is a public service company,
incorporated in the State of Indiana. Northern Indiana supplies gas
and electric service over approximately 12,000 square miles in the
northern portion of Indiana. Currently, Northern Indiana serves
approximately 662,000 gas customers and 416,000 electric customers
(Exh. Cos.-B at 3).
II. DESCRIPTION OF PROPOSAL
A. INTRODUCTION.
The Petitioners have presented two merger options to the
Department: (1) a Preferred Merger Structure that would reorganize
Bay State as a wholly-owned subsidiary of NIPSCO Industries
("Preferred Merger"); and (2) an Alternative Merger Structure that
would reorganize Bay State as the Massachusetts operating division of
Northern Indiana ("Alternative Merger"). Both of these options are
further described below. While the Petitioners are seeking approval
of both options, they have expressed their intent to pursue the
Preferred Merger if the Securities and Exchange Commission ("SEC")
permits; and, accordingly, the Petitioners request that the Department
inform the SEC that the Department favors the Preferred Merger (Exh.
Cos.-B at 17).<6>
__________________
<4> See note 6 below.
<5> Through IWC, NIPSCO Industries indirectly owns Indianapolis Water
Company and Harbor Water Corporation, plus three unregulated
subsidiaries (Exh. Cos.-B at 4).
<6> The Petitioners explain that while they have requested that the
SEC approve the Preferred Merger, they note that the SEC may. as
a condition of the Preferred Merger, require NIPSCO Industries to
relinquish its status as an exempt holding company by virtue of
Section 3(a)(1) of the Public Utility Holding Company Act of 1935
("PUHCA") (Exh. Cos.-B at 16). Loss of the exempt status would,
(continued...)
2
<PAGE>
B. PREFERRED MERGER.
Under the Preferred Merger, Northern Indiana would form
Acquisition Company as a wholly-owned Massachusetts subsidiary
corporation (Petition at 4; Exh. Cos.-A at 5). Upon Acquisition
Company's formation, Acquisition Company would issue and sell 100
shares of common stock with a $1.00 per share par value to NIPSCO
Industries, in exchange for $100 (Petition at 1). Shortly after
Acquisition Company's formation, Bay State would merge with
Acquisition Company. Acquisition Company would survive and would
assume the name "Bay State Gas Company" (Exhs. Cos.-A at 5; Cos.-B,
Sch. MTM-4, at A-1). Under the proposed merger, Bay State's
shareholders would exchange each of their common shares issued and
outstanding at the time of the merger for the right to receive: (1)
$40 in cash; or (2) NIPSCO Industries' common shares in an amount
equivalent to $40 per share;<7> or (3) a combination of cash and
NIPSCO Industries' common shares, subject to an overall cash
limitation of 50 percent of the total consideration paid by NIPSCO
Industries (Exh. Cos.-B. Sch. MTM-4, at A-3). Acquisition Company
would be the surviving company, in order to avoid income tax
consequences for Bay State's shareholders (Exhs. DTE 1-13; AG 2-22).
Shortly after the merger, Acquisition Company would change its name to
Bay State Gas Company and transfer its interests in Northern Utilities
and Granite State to NIPSCO Industries (Exh. Cos.-A at 6-7; Tr. 2, at
85). Thereafter, Bay State would operate as a stand-alone subsidiary
of NIPSCO Industries, as would both Northern Utilities and Granite
State (Exhs. Cos.-A at 5-7, 28; Cos.-B, Sch. MTM-3). The Petitioners
__________________
<6>(...continued)
according to the Petitioners, impose significant reporting
requirements on NIPSCO Industries, as well as possible
restrictions on NIPSCO Industries' operations (Tr. 2, at 59-62).
Because the Alternative Merger does not require SEC approval, the
Petitioners request that the Department approve the merger under
both the Preferred Merger and the Alternative Merger, so that the
merger may be consummated under the Alternative Merger if the SEC
requires NIPSCO Industries to relinquish its exempt status as a
condition of approval of the Preferred Merger (Exhs. Cos.-A at
29; Cos.-B at 16). The Petitioners made the request that the
Department inform the SEC of a preference for the Preferred or
the Alternative Merger plan in advance of our final order in
D.T.E. 98-31 (Exh. Cos.-A, Tab A at 4). Of course. such a
prejudgment in advance of a final Order is not a request that the
Department could readily grant. But we do state here that the
Preferred merger is favored by the Department and will so inform
the SEC. SEE Section VII below.
<7> The actual number of NIPSCO Industries' shares to be issued in
exchange for Bay State's common stock would be determined by
dividing the cash price of $40 per share by the average NIPSCO
closing price for the twenty trading days before the second
trading day before the consummation of the merger (the "Effective
Time" as described in article 1.4 of the merger agreement (Exh.
Cos.-B, Sch. MTM-4, at A-3).
3
<PAGE>
state that the merger has been designed to qualify as a tax-free
reorganization for federal income tax purposes, so that no tax gain or
loss would be recognized (Exhs. Cos.-B at 19; AG 3-3, at 15). Under
the Preferred Merger, Bay State, Northern Utilities and Granite State
would continue to operate as separate corporations. each with its own
books and records, capital structure, management structure, and board
of directors (Exh. Cos.-A at 29-30).
C. ALTERNATIVE MERGER.
Under the Alternative Merger. NIPSCO would directly merge Bay
State (and its subsidiaries) into NIPSCO Industries' primary LDC
subsidiary, Northern Indiana (Exh. Cos.-A at 28-29). Thereafter,
Northern Indiana would operate Bay State as its Massachusetts division
and Northern Utilities as its New Hampshire and Maine divisions. Bay
State would transfer its interest in Granite State to NIPSCO
Industries. Granite State (along with its unregulated subsidiaries)
would operate as a stand-alone subsidiary of NIPSCO Industries (Exhs.
Cos.-A at 28-29; Cos.-B, Sch. MTM-3). The purchase price under the
Alternative Merger would be identical to that under the Preferred
Merger (Exh. Cos.-B, Sch. MTM-4, at A-3). Under the Alternative
Merger, Northern Indiana's Massachusetts operations would have its own
management structure and personnel distinct from the management
structure and personnel of Northern Indiana's operations in Indiana,
but would not have a separate board of directors (Exh. Cos.-A at 29-
30).
D. ACCOUNTING TREATMENT.
The Petitioners intend to account for the transaction through
"purchase accounting" whereby the acquiring company, NIPSCO
Industries, would record the difference between the cost of the
acquired enterprise and the sum of the values of tangible and
identifiable assets, less liabilities, as a plant acquisition
adjustment (Exhs. Cos.-A at 21; AG 2-13). According to the
Petitioners, because purchase accounting is being used to record the
acquisition, both the acquisition premium paid by NIPSCO Industries
and the related transaction costs must be reflected on the books of
the acquired company, Bay State (Exhs. Cos.-A at 21; AG 2-14; Tr. 2,
at 125). The Petitioners stated that under generally accepted
accounting principles ("GAAP"), Bay State would have no more than 40
years to write off the acquisition premium and transaction costs (Tr.
2, at 127).
E. RATE PLAN.
The Rate Plan consists of two components: (1) a base rate freeze;
and (2) an earnings sharing mechanism ("ESM")<8> (Exh. Cos.-A at 17-18).
__________________
<8> Earnings sharing refers to a sharing of above- or below-average
profits between the utility and ratepayers. Under earnings
sharing, the regulator sets a benchmark return using traditional
Rate of Return techniques. The regulator then establishes the
(continued...)
4
<PAGE>
1. BASE RATE FREEZE
The Petitioners propose to implement a five-year base rate freeze
to commence upon the termination of Bay State's current rate plan,
which is scheduled to end on October 31, 1999<9> (Exh. Cos.-A at
17; Tr. 1. at 14-15). The rate freeze would be subject to changes for
exogenous factors that the Petitioners define as changes in tax laws,
accounting principles, and regulatory, judicial, or legislative
mandates (Exh. Cos.-A at 19). The Petitioners' proposal also reserves
an opportunity for Bay State to seek a rate increase if, as a result
of compliance with any new service quality measure(s), Bay State's
annual revenue requirement increases by $500,000 or more (Exh. Cos.-A
at 19; Tr. 2, at 160-161). The proposal allows Bay State to terminate
the Rate Plan should the rate of inflation be six percent or more in
any twelve-month period (Exh. Cos.-A at 19-20).
2. EARNINGS SHARING MECHANISM
The Petitioners initially proposed to implement an ESM for Bay
State with a 800 basis-point bandwidth ranging from 7.4 percent to
15.4 percent, centered on Bay State's currently authorized return on
equity ("ROE") of 11.4 percent (Exh. Cos.-A at 17; Tr. 3, at 6-8).
Under certain circumstances, earnings above or below the bandwidth
would be shared between ratepayers and shareholders (Exh. Cos.-A at
17; Tr. 3, at 5). The Petitioners initially included the acquisition
premium in Bay State's common equity balance for purposes of
determining any ESM adjustment (Tr. 2, at 105-106; RR-DTE-1). During
the hearings, however, the Petitioners decided to modify the ESM
calculation so that neither the annual amortization of the acquisition
premium nor the increased common equity balance would be included in
the ESM if Bay State's ROE reached 7.4 percent (Petitioners Brief at
17; Tr. 2, at 135 136; Tr. 3, at 7-8). As part of the proposed ESM,
Bay State would eliminate the weather normalization feature included
in its current ESM (Cos.-A at 18).
__________________
<8>(...continued)
level(s) of return above and below the benchmark at which sharing
would be triggered, and the distribution of those above- or
below-average earnings between the utility and ratepayers. NYNEX,
D.P.U. 94-50 at 186 (1994).
<9> In BAY STATE GAS COMPANY, D.P.U. 97-97 (1997), the Department
approved a settlement agreement between Bay State and the
Attorney General which provided for two annual base rate
increases of up to $1.8 million per year, recovery of an
additional $1.6 million for expenses related to customer choice
pilot programs through the Distribution Adjustment Cost Clause,
and the introduction of both an ESM and service quality index.
5
<PAGE>
F. COSTS ASSOCIATED WITH THE MERGER.
The Petitioners project that the costs associated with the merger
would be $315 million (Exhs. AG 2-9; AG 2-9 (Supp.); Tr. 1, at 24).
This projection includes $310 million as an acquisition premium
associated with the difference between the purchase price and the book
value of Bay State's combined operations,<10> plus an estimated $5
million in transaction costs for NIPSCO Industries, including legal,
accounting, and financial expenses (Exhs. AG 2-9; AG 2-9 (Supp.); Tr.
1, at 23-26).<11> The Petitioners are not seeking recovery of the
acquisition premium through rates at this time (Exh. Cos.-A at 21).
However, they request that the Department include in its order a
finding that Bay State may seek recovery of the annual amortization of
the acquisition premium in future rate proceedings to the extent
offset by merger-related savings (Exh. Cos.-A at 21).
III. STANDARD OF REVIEW
The Department's authority to review and approve mergers and
acquisitions is found at G.L. c. 164, Section 96, which, as a
condition for approval, requires the Department to find that mergers
and acquisitions are "consistent with the public interest". In BOSTON
EDISON COMPANY, D.P.U. 850, at 6-8 (1983), the Department construed
Section 96's standard of consistency with the public interest as
requiring a balancing of the costs and benefits attendant on any
proposed merger or acquisition. The Department stated that the core
of the consistency standard was "avoidance of harm to the public."
D.P.U. 850, at 5. Therefore, under the terms of D.P.U. 850, a
proposed merger or acquisition is allowed to go forward upon a finding
by the Department that the public interest would be at least as well
served by approval of a proposal as by its denial. D.P.U. 850, at 5-
8; EASTERN-ESSEX ACQUISITION at 8 (1998).<12> The Department has
reaffirmed that it would consider the potential gains and losses of a
proposed merger to determine whether the proposed transaction
satisfies the Section 96 standard. EASTERN-ESSEX ACQUISITION at 8;
BOSTON EDISON COMPANY, D.P.U./D.T.E. 97-63, at 7 (1998); MERGERS AND
ACQUISITIONS at 6, 7, 9 (1994). The public interest standard, as
elucidated in D.P.U. 850, must be understood as a "no net harm,"
__________________
<10> According to the Petitioners, the actual premium level
attributable to Bay State's stand-alone operations is dependent
upon a number of factors, including a review of Bay State's
accounts, the final costs of the transaction, and the elections
made by Bay State's shareholders under the cash option feature
(Tr. 1, at 23-26; Tr. 2, at 123). The Petitioners agreed that for
purposes of the proceedings, they would accept the Attorney
General's estimate that Bay State's stand-alone share of the
total acquisition premium would be 69.7 percent. or $216,096,000
(Exh. DTE-1 Sch. 1; Tr. 1, at 24-26).
<11> Those transaction costs being incurred by Bay State are expensed
in accordance with GAAP (Exh. AG 2-14).
<12> The Department issued its Order in EASTERN-ESSEX ACQUISITION,
D.T.E. 98-27 (1998) on September 17, 1998, which was after
hearings were completed and briefs had been filed in this case.
6
<PAGE>
rather than a "net benefit" test.<13> EASTERN-ESSEX ACQUISITION
at 8. The Department considers the special factors of an individual
proposal to determine whether it is consistent with the public
interest. EASTERN-ESSEX ACQUISITION at 8; D.P.U./D.T.E. 97-63, at 7;
MERGERS AND ACQUISITIONS at 7-9. To meet this standard, costs or
disadvantages of a proposed merger must be accompanied by offsetting
benefits that warrant their allowance. EASTERN-ESSEX ACQUISITION at
8; D.P.U./D.T.E. 97-63, at 7; MERGERS AND ACQUISITIONS at 18-19.
Various factors may be considered in determining whether a
proposed merger or acquisition is consistent with the public interest
pursuant to G.L. c. 164. Section 96. These factors were set forth in
MERGERS AND ACQUISITIONS: (1) effect on rates; (2) effect on the
quality of service; (3) resulting net savings; (4) effect on
competition; (5) financial integrity of the post-merger entity; (6)
fairness of the distribution of resulting benefits between
shareholders and ratepayers; (7) societal costs, such as job loss; (8)
effect on economic development; and (9) alternatives to the merger or
acquisition. EASTERN-ESSEX ACQUISITION at 8-9; D.P.U./D.T.E. 97-63,
at 7-8; MERGERS AND ACQUISITIONS at 7-9. This list is illustrative
and not exhaustive, and the Department may consider other factors when
evaluating a Section 96 proposal. EASTERN-ESSEX ACQUISITION at 9;
MERGERS AND ACQUISITIONS at 9.
With respect to the recovery of acquisition premiums, the
Department has found that if a petitioner can demonstrate that denial
of recovery of an acquisition premium would prevent the consummation
of a particular merger that otherwise would satisfy G.L. c. 164,
Section 96, then the Department may be willing to consider recovery of
an acquisition premium.<14> EASTERN-ESSEX ACQUISITION at 9;
MERGERS AND ACQUISITIONS at 18-19. The Department will determine
whether an acquisition premium should be allowed in a specific case by
applying the general balancing of costs and benefits under the Section
96 consistency standard. EASTERN-ESSEX ACQUISITION at 9; MERGERS AND
ACQUISITIONS at 18-19. Thus, allowance or disallowance of an
acquisition premium would be but one part of the cost/benefit analysis
under the Section 96 consistency inquiry. EASTERN-ESSEX ACQUISITION
at 9; MERGERS AND ACQUISITIONS at 7.
The Department's determination whether the merger or acquisition
meets the requirements of Section 96 must rest on a record that
quantifies costs and benefits to the extent that such quantification
can be made. EASTERN-ESSEX ACQUISITION at 10; MERGERS AND
__________________
<13> The Department notes that a finding that a proposed merger or
acquisition would probably yield a net benefit does not mean
that such a transaction must yield a net benefit to satisfy G.L.
c. 164, Section 96 and BOSTON EDISON, D.P.U. 850.
<14> Thus, MERGERS AND ACQUISITIONS removed the PER SE bar to recovery
of acquisition premiums and treated them as just another kind of
costs to be reckoned in the balancing of costs and benefits
required by G.L. c. 164. Section 96 and BOSTON EDISON COMPANY,
D.P.U. 850.
7
<PAGE>
ACQUISITIONS at 7. A Section 96 petitioner who expects to avoid an
adverse result cannot rest its case on generalities, but must instead
demonstrate benefits that justify the costs, including the cost of any
premium sought. EASTERN-ESSEX at 10; MERGERS AND ACQUISITIONS at 7.
This admonition is particularly apt where allowance of an acquisition
premium is sought. EASTERN-ESSEX at 10; MERGERS AND ACQUISITIONS at
7.
IV. SPECIFIC CONSIDERATIONS OF THE MERGER
In considering the Petitioners' proposal, the Department's
analysis focuses on the following: (1) effect on rates and resulting
net savings; (2) effect on the quality of service; (3) societal costs;
(4) acquisition premium; and (5) financial integrity of the post-
merger gas company.
A. EFFECT ON RATES AND RESULTING NET SAVINGS
1. BASE RATE FREEZE
a. INTRODUCTION
The Petitioners propose to implement a five-year base rate
freeze, commencing on November 1, 1999<15> (Exh. Cos.-A at 17;
Tr. 1, at 14-15). The proposed rate freeze would not apply to the
Cost of Gas Adjustment Clause ("CGAC") or to the Distribution
Adjustment Cost Clause ("DACC")<16> (Exh. Cos.-A at 17). Bay
State would retain flexibility to propose revenue-neutral rate design
changes (Exh. Cos.-A at 17).
As proposed by the Petitioners, the Bay State Rate Plan would be
subject both to upward rate adjustment during its term and to
cancellation if certain conditions arise. The Petitioners propose
that the rate freeze be subject to changes resulting from two
conditions: (1) if changes in all exogenous factors taken together
__________________
<15> In their Brief, the Petitioners indicated, for the first time, a
willingness to implement a ten year rate freeze (Petitioners
Brief at 35). Due to the lack of record evidence needed to
approve or deny such a request, the Department will not consider
this proposal.
<16> The Petitioners use the term DACC in place of Local Distribution
Adjustment Clause ("LDAC"). The LDAC is a mechanism that allows
an LDC to recover, or credit on a fully reconciling basis, costs
that have been determined to be distribution-related costs but
not included in base rates. Such costs include demand side
management costs, environmental response costs associated with
manufactured gas plants, and Federal Energy Regulatory Commission
Order 636 transition costs. The LDAC is applicable to all firm
customers (both sales and transportation). To maintain uniformity
of terminology among the LDCs, the Department directs the
Petitioners to use the term LDAC in the future.
8
<PAGE>
increase Bay State's annual revenue requirement by $500,000 or
more;<17> and/or (2) if Bay State projects that compliance with
new service quality parameters implemented during the term of the rate
plan would increase its annual revenue requirement by $500,000 or more
(Exh. Cos.-A at 19-20; Tr. 2, at 160-161)."<18> Additionally,
Bay State proposes to terminate the rate freeze if the rate of
inflation as measured by the Gross Domestic product-Price Index ("GDP-
PI") equals or exceeds six percent for any twelve-month period (Exh.
Cos.-A at 19-20).
b. POSITIONS OF THE PARTIES
i. ATTORNEY GENERAL
The Attorney General states that the Department has not always
found that a rate freeze would benefit ratepayers (Attorney General
Brief at 8). The Attorney General maintains that no evidence has been
introduced to demonstrate that the proposed rates, as of November 1,
1999, would be just and reasonable as compared to either the present
rates or rates set pursuant to traditional ratemaking (Attorney
General Brief at 14).
In particular, the Attorney General asserts that the benefits of
Bay State's corporate restructuring and the cumulative base rate
increases of $3.6 million approved by the Department in BAY STATE GAS
COMPANY, D.T.E. 97-97 (1997), could contribute to a revenue excess
when the present rate plan expires (Attorney General Brief at 14). If
the revenue excess occurs, the Attorney General argues that the
combination of the Petitioners' proposed ESM and the amortization of
the acquisition premium would likely preclude Bay State's-ratepayers
from sharing any excess revenues (Attorney General Brief at 14, CITING
Exh. AG-1, at 8). Thus, the Attorney General concludes, that when
analyzed in the context of a potential overearnings situation, the
proposed ESM and the amortization of the acquisition premium would
make the five-year rate freeze disadvantageous to ratepayers (Attorney
General Brief at 14).
__________________
<17> As noted above. the Petitioners define exogenous factors as
changes in tax laws, accounting principles, and regulatory.
judicial. or legislative mandates (Exh. Cos.-A, at 19). The
Petitioners do not indicate how such exogenous effects might be
influenced by the structure envisioned by the Alternative Merger,
if adopted. If flay State were to become an operating division of
a foreign corporation, Indiana-driven effects could not be
visited upon Massachusetts ratepayers. See discussion at end of
Section IV(I).
<18> The Petitioners state that sometime before the end of Bay State's
current rate plan on October 31, 1999, Bay State will submit
proposed refinements to the quality of service standards and
targets contained in that rate plan (Exh. Cos.-A at 18; Tr. 2, at
161).
9
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The Attorney General proposes an alternative rate plan (Exh. AG-
1, at 24). The Attorney General recommends that, upon the expiration
of the existing rate plan, the Department order the Petitioners to
implement a three-year base rate freeze (Exh. AG-1 at 24). The
Attorney General states that his proposed rate freeze would be subject
to exogenous factors similar to those outlined by Bay State (Exh. AG-1
at 26). However, the Attorney General suggests that any one
individual exogenous cost increase or decrease should meet a threshold
of $1,500,000 per year instead of the $500,000 per year threshold
recommended by the Petitioners (Exh. AG-1, at 26).
ii. PETITIONERS
The Petitioners contend that customers benefit from a five-year
base rate freeze since they would be protected from any base rate
increase during that time (Exh. Cos.-A at 25; Tr. 3, at 23).
Moreover, the Petitioners claim that, absent the merger, Bay State
would not freeze rates after its current rate plan expires (Exh. Cos.-
A at 25). The Petitioners note that during the proposed five-year
rate freeze, they would bear the risk of an increase in the rate of
inflation (up to six percent over a 12-month period) and any reduction
in sales (Petitioners Brief at 29).
With respect to the Attorney General's position that extending
the current rate plan for an additional three years would produce
greater benefits for Bay State's ratepayers than the proposed Rate
Plan, the Petitioners state that the current plan is the product of a
settlement agreement and cannot be extended unilaterally (Petitioners
Brief at 30-31). Additionally, the Petitioners contend that
continuing the current rate plan would not be advantageous to
customers because, pursuant to the settlement, incremental revenues,
which Bay State would be allowed to recover over an additional five
years, total as much as $31 million (Petitioners Brief at 31).<19>
Furthermore, the Petitioners maintain that the Attorney General's
assertion that Bay State may have a revenue excess after October 31,
1999 is speculative (Petitioners Brief at 30). The Petitioners reject
the Attorney General's argument that termination of the current
amortization of corporate restructuring costs and the realization of
benefits from this restructuring may produce excess revenues at the
end of the two-year settlement. In response to the Attorney General's
argument concerning excess revenues, the Petitioners note that
corporate restructuring costs would be offset by ongoing price
increases from inflation and the implementation of other constraints
imposed on productivity by G.L. c. 164, Section 1E (Petitioners Brief
__________________
<19> The Petitioners calculate the $31 million savings in incremental
revenues during the five-year rate freeze by assuming $1.8
million in cumulative base rate increases ($27 million) plus
$800,000 per year in unbundling costs ($4 million) (Petitioners
Brief at 31).
10
<PAGE>
at 30).<20> Finally, the Petitioners argue that, unlike
traditional incentive regulation plans, Bay State's proposed Rate Plan
would not increase rates to account for inflation and therefore it is
"a true rate freeze for Bay State's customers" (Petitioners Reply
Brief at 7). The Petitioners did not address the Attorney General's
alternative rate freeze proposal on brief.
c. ANALYSIS AND FINDINGS
Subject to points noted in this analysis, the Department finds
that ratepayers would not be harmed by the proposed five-year rate
freeze. The record indicates an historic pattern, since 1982, of Bay
State receiving rate increases every two to five years.<21>
Therefore, the rate freeze most likely would allow ratepayers to avoid
some level of rate increases over the five-year period. Also, because
the rate freeze does not include an adjustment for inflation, it
actually represents a "real" rate decrease for customers over the
five-year period.<22>
Because the Petitioners' proposed rate freeze meets the Section
96 standard, we do not need to turn to the Attorney General's
alternative proposal for a three-year rate freeze. However, we note
that the benefits of a non-inflation adjusted rate freeze are
compounded the longer the term of the rate freeze. In terms of the
Attorney General's claim that there may be excess earnings at the
expiration of the current rate plan resulting from the elimination of
the amortization of corporate restructuring costs, we note that just
as strong a case can be made for cost increases (such as inflationary
pressures and costs related to distribution system growth) that would
__________________
<20> G.L. c. 164. Section 1E(b) sets forth certain requirements that
pertain to performance-based regulation plans.
<21> Bay State's recent rate case history is as follows: (1) BAY STATE
GAS COMPANY, D.P.U.1122 (1982) ($2.1 million increase); (2) BAY
STATE GAS COMPANY, D.P.U. 1535 (1985) ($5.5 million increase);
(3) BAY STATE GAS COMPANY, D.P.U. 89-81(1989) ($12.4 million
increase); (4) BAY STATE GAS COMPANY, D.P.U. 92-111 (1992) ($11.5
million increase); (5) BAY STATE GAS COMPANY, D.T.E. 97-97 (1997)
($3.6 million increase over two years).
<22> The Petitioners' contention that the actual benefit of the rate
freeze would be a savings of $31 million for ratepayers is based
on the assumption that Bay State would be entitled to -- and that
the Department would approve -- $1.8 million per year in
cumulative base rate increases, as well as the annual recovery of
$800,000 in third-party unbundling costs. The current rate plan
expires on October 31, 1999; and rate increases, allowed under
the current plan, apply to the cost of service for that two-year
settlement period and may not extend beyond that date. The
Petitioners have not provided adequate support in the record for
the validity of assuming that the conditions of the settlement
would hold into the future. Therefore, the Department does not
accept the Petitioners' savings estimate of $31 million.
11
<PAGE>
balance out or even exceed the potential savings. The only way to
determine whether potential cost savings outweigh cost increases would
be to actually measure those cost savings in a rate case at the
expiration of the current rate plan. On balance, given Bay State's
historic experience of rate increases every two to five years, we
believe that ratepayers are better served by a commitment now to a
five-year rate freeze than by a rate-case examination of actual cost
savings and cost increases at the expiration of the current rate plan.
With respect to exogenous factors, the Department has defined
these factors as positive or negative cost changes beyond a company's
control that would significantly affect that company's operations.
EASTERN-ESSEX ACQUISITION at 19, CITING D.P.U. 96-50 (Phase I) at 292.
The exogenous factors proposed by the Petitioners are identical to
those set forth and accepted by the Department in EASTERN-ESSEX
ACQUISITION and BOSTON GAS COMPANY, D.P.U. 96-50 (Phase I) at 292.
There is no compelling evidence or policy reason to expand the list of
factors. Therefore, the Department accepts the Petitioners' exogenous
factors.
The Petitioners' request to establish exogenous cost adjustments
that would go into effect without regulatory review is not acceptable.
Whether or not a cost change is actually an exogenous event is often
subject to interpretation and disagreement. BELL ATLANTIC
MASSACHUSETTS' FOURTH ANNUAL PRICE CAP COMPLIANCE FILING, D.T.E. 98-
67. Leaving that determination to a regulated utility would be an
inappropriate delegation of regulatory authority; and, more important,
it would be inconsistent with the requirements of G.L. c. 164, Section
94, which requires that a general rate increase be noticed and subject
to a Department hearing. During the Rate Plan, if the Petitioners
seek to recover any exogenous costs, they must propose exogenous cost
adjustments, with supporting documentation and rationale, to the
Department for determination as to the appropriateness of recovery of
the proposed exogenous costs.
Concerning the $500,000 cumulative threshold for exogenous cost
changes, the Department has stated that there should be a threshold
for qualification as an exogenous cost in order to avoid regulatory
battles over minimal dollars. BOSTON GAS COMPANY, D.P.U. 96-50 at
288. The Department's intent in establishing this requirement was to
ensure that any individual exogenous cost must exceed a threshold in
order to qualify for recovery. ID. Thus, the Department finds that
the impact for any individual exogenous cost must exceed $500,000 in a
particular year in order for the Petitioners to request recovery.
Moreover, the Department will not pre-determine whether an increase in
the inflation rate of six percent or more in any twelve month period
warrants terminating the rate freeze. Extraordinary economic
circumstances have always been a recognized basis for any gas or
electric company to petition the Department for changes to tariffed
rates. Similarly. the Department may make such changes if
extraordinary economic circumstances, such as significant cost
deflation, provide the company with a windfall.<23> Therefore,
__________________
<23> Performance Based Rate plans excepted.
12
<PAGE>
the Department sees no need to approve the Petitioners' proposal
allowing it to terminate the rate freeze in the event of a 6 percent
inflation rate increase over a 12-month period. For a rate freeze to
be a meaningful benefit to ratepayers and thereby to offset identified
costs of a merger or acquisition, the rate freeze cannot be so heavily
encumbered with qualifications and potential "outs." Again, if
serious adverse circumstances were presented during a valid rate
freeze, the Department would not be indifferent to reasonable
adjustments, properly supported.
2. EARNINGS SHARING MECHANISM
a. INTRODUCTION
The Petitioners propose to implement an ESM for Bay State that is
similar to the one approved by the Department in D.P.U. 96-50 (Phase
I) at 325-326. Under the proposed ESM, an 800 basis-point-bandwidth
would be centered on Bay State's most recently authorized ROE of 11.4
percent,<24> thus creating a bandwidth ranging from 7.4 percent
to 15.4 percent (Exh. Cos.-A at 17; Tr. 3, at 6-8). If Bay State's
fiscal year (October 1 through September 30) earnings result in an
earned ROE above 15.4 percent, then 25 percent of the difference
between the earned ROE and the maximum 15.4 percent established under
the bandwidth would be passed back to ratepayers (Exh. Cos.-A at 17;
Tr. 3, at 5). Conversely, if Bay State's earned ROE for the fiscal
year falls below the minimum 7.4 percent level, ratepayers would be
charged 25 percent of the difference between the earned ROE and the
minimum 7.4 percent (Exh. Cos.-A at 17). Bay State would submit
annual filings with the Department to report on the updated earnings
sharing calculation (Exh. Cos.-A at 20).
In their initial filing, the Petitioners proposed to include the
amortization of the acquisition premium in both the numerator and the
denominator of the ROE for the earnings sharing calculation (Exh.
Cos.-A at 17). However, during hearings, the Petitioners stated that
"if all other elements of the merger rate plan proposal and the Joint
Application were approved by the Department, it would be reasonable to
exclude the pushed down equity<25> from the proposed calculation
__________________
<24> BAY STATE GAS COMPANY, D.P.U. 92-111, at 281-282 (1992).
<25> The pushed down equity is the balance sheet effect associated
with an acquisition premium under the purchase accounting method.
Under purchase accounting, the acquisition premium would
represent an intangible asset on the asset side of the balance
sheet. The acquisition premium must also appear on the equity
side of the balance sheet -- increasing the equity balance by the
same amount of the acquisition premium as recorded on the asset
side of the balance sheet. Including the acquisition premium in
the common shareholders' equity balance substantially increases
the denominator in the calculation of ROE. The net effect of
including this amount in the common equity balance would
significantly reduce the ROE (Exh. AG 3-1 (BAY STATE GAS COMPANY,
(continued...)
13
<PAGE>
of the ESM so that ONLY the annual amortization of the acquisition
premium expense would be reflected in the calculation" (Petitioners
Brief at 18; Tr. 3, at 12). Further, the Petitioners state that they
would exclude both the annual amortization and the increased equity
balance from the acquisition premium in the earnings sharing
calculation if their inclusion would cause the calculation of Bay
State's ROE to fall below 7.4 percent (Petitioners Brief at 17).
b. POSITIONS OF THE PARTIES
i. ATTORNEY GENERAL
The Attorney General maintains that the proposed ESM, when
considered in conjunction with the proposed recovery of the
acquisition premium, is not consistent with the public interest and is
less beneficial to customers than the ESM in Bay State's current rate
plan (Exh. AG-1, at 8, 11). The Attorney General argues that charging
the amortized value of the acquisition premium against earnings when
calculating the ESM would make the possibility of earning an ROE
greater than 15.4 percent unlikely (Exh. AG-I, at 24). In addition,
the Attorney General asserts that the Petitioners provided no record
evidence supporting their proposal to adopt the ESM parameters
approved by the Department in D.P.U. 96-50 (Phase I) (Attorney General
Brief at 15).
The Attorney General recommends that the Department approve an
ESM with a benchmark ROE of 11.0 percent instead of the currently
authorized 11.4 percent (Exh. AG-1, at 27). The Attorney General
asserts that 11.0 percent is warranted since the Petitioners propose
to eliminate weather normalization as a component of the ESM
calculation (Exh. AG-1, at 28). The Attorney General maintains that
if, as the Petitioners state, eliminating the weather normalization
component in the ESM calculation reduces investors' exposure to
weather risk and improves Bay State's ability to manage their
business, then eliminating this component would be advantageous to Bay
State (Exhs. AG-1, at 18; Cos.-A at 18). Therefore, the Attorney
General asserts that eliminating the weather normalization component
should be taken into account in the design of the ESM (Exh. AG-1, at
18). Moreover, the Attorney General states that the 11.0 percent ROE
is acceptable since customers are not offered a reduction in base
rates from any cost savings attributable to the merger (Exh. AG-1, at
28).
Further, the Attorney General requests that the Department order
a 75/25 split between ratepayers and shareholders for any earnings
between an 11.0 and 15.0 percent ROE (Exh. AG-1, at 27). The Attorney
__________________
<25>(...continued)
D.P.U. 93-167 Supp. Comments, Question 3, at 1)). The effect is
expressed formulaically thus:
ROE = Net income - preferred shareholder dividends
--------------------------------------------
Average common shareholders' equity
14
<PAGE>
General also proposes that 100 percent of earnings over the 15.0
percent ROE be returned to ratepayers (Exh. AG-1 at 27).
ii. PETITIONERS
The Petitioners maintain that their proposed ESM, modeled on the
mechanism established by the Department in BOSTON GAS, D.P.U. 96-50,
mitigates the significant risk and uncertainty for shareholders of a
five-year rate freeze (Petitioners Brief at 15). Moreover, the
Petitioners argue that including the amortization of the acquisition
premium in the earnings calculation during the rate freeze reasonably
allocates the benefits of a rate freeze to ratepayers. Further, the
opportunity for earnings sharing is balanced against the risks assumed
by the Petitioners during the rate freeze (Petitioner Brief at 16).
Regarding the Attorney General's request to continue the current
ESM with modifications, the Petitioners assert that it is
inappropriate to modify one component of the settlement and not
consider other components of the settlement (Exh. Cos.-C at 2).
Specifically, the Petitioners contend that the weather normalization
in the current ESM was acceptable to the settling parties because of
other offsetting considerations, such as the amortization of $3.7
million in corporate restructuring costs in the current ESM, the
recovery of third party unbundling costs and the recovery of
statutorily-mandated costs (Petitioners Brief at 32). The Petitioners
assert that the settlement approved in D.P.U. 97-97 has no
precedential value, and therefore, cannot be relied upon in subsequent
proceedings (Exh. Cos.-C at 2).
With respect to the Attorney General's proposed 11.0 percent
benchmark ROE, the Petitioners argue that the Attorney General failed
to provide a cost of capital analysis or testimony on rate of return
to support his recommendation (Petitioners Brief at 32). Furthermore,
the Petitioners contend that allocating 75 percent of all earnings to
ratepayers that exceed this reduced ROE of 11.0 percent would deny the
Petitioners any recognition of the costs reflected in the acquisition
premium (Petitioners Brief at 32). The Petitioners claim that "if
[NIPSCO] Industries is not given the opportunity to recover its
investments, the merger will not be completed" (Petitioners Reply
Brief at 4).
c. ANALYSIS AND FINDINGS
The Department has reviewed the Petitioners' proposed ESM and
declines to approve its implementation for the reasons set forth
below.
Allowing the Petitioners to increase rates automatically, should
the ROE fall below 7.4 percent, presents a risk of a rate increase
before the end of the proposed rate freeze. This risk to ratepayers
would diminish the value of the rate freeze. Moreover, because the
Petitioners propose to subtract the annual amortization of the
acquisition premium from earnings in calculating the earned ROE, it is
unlikely that the ROE would exceed 15.4 percent. That ratepayers
would share any excess earnings under the Rate Plan's ESM seems quite
15
<PAGE>
improbable. Yet, the Petitioners' proposal does present the risk of a
rate increase before 2004. In addition, the Petitioners are already
protected from significant changes in exogenous costs during the term
of the Rate Plan. Adding the ESM "belt" to the exogenous factors
"suspenders" would serve to protect the Petitioners from the
consequences of their own endogenous actions. Therefore, the
Department finds that the Petitioners' proposed ESM is not consistent
with the public interest. For the same reasons, the Department also
rejects the Attorney General's proposed ESM.
Comparison of the Petitioners' proposed Rate Plan to Boston Gas's
PBR plan is misplaced. A PBR plan is a substitute for traditional
cost-of-service regulation that takes into account inflation factors
and analyzes an industry's productivity compared with the economy-wide
productivity. Consideration of a PBR may, but need not, include an
examination of the appropriateness of an earnings sharing mechanism.
EASTERN-ESSEX ACQUISITION CITING D.P.U. 96-50 (Phase I) at 259-339 and
NYNEX, D.P.U. 94-50, at 91-273. The Petitioners' proposed Rate Plan
is not a PBR. It does not include either an inflation factor or an
analysis of industry productivity. It represents no change in
traditional cost of service regulation. Even if the Rate Plan were a
PBR, inclusion of an ESM is not a necessary feature of a PBR; rather,
it is a component that may be evaluated in the specific circumstances
of each company's filing.
3. GAS COSTS
a. INTRODUCTION
The Petitioners state that the merger will allow the combined
companies, over time, to take advantage of economies and efficiencies
relating to coordinated gas supply, optimized use of gas
transportation capacity, geographic differences between Northern
Indiana's and Bay State's core markets, more efficient use of NIPSCO
Industries' gas storage facilities, and enhanced ability to benefit
from new gas projects (Exh. Cos.-B at 14). The Petitioners further
state that as a result, Bay State's customers would save approximately
$1.8 million per year in gas costs (Exh. AG 2-16 (Supp.) at
l).<26>
b. POSITIONS OF THE PARTIES
i. ATTORNEY GENERAL
The Attorney General argues that the Petitioners have failed to
support their projected $1.8 million in gas cost savings (Attorney
General Reply Brief at 8-9). The Attorney General contends that the
__________________
<26> The Petitioners project that the annual benefits associated with
bundled off-system sales, interruptible sales, and capacity
release credits could result in an incremental increase of $1.8-
3.6 million per year as a result of joint management efforts
depending on the regulatory environments under which the
Petitioners operate (Exh. AG-2-16 (Supp.) at 1).
16
<PAGE>
estimate of gas cost savings should be accorded little weight given
the level of uncertainty and speculative nature of the Petitioners'
analysis (Exhs. AG 2-16; AG 2-16 (Supp.) at 1; Tr. 3, at 70-71;
Attorney General Reply Brief at 8). The Attorney General contends
that the Petitioners admitted that the gas cost savings forecast is
based on joint purchasing and highly speculative "price risk
management" through the use of futures contracts (Attorney General
Reply Brief at 9, CITING Tr. 2, at 148). The Attorney General further
asserts that the Petitioners admitted that the estimated gas cost
savings provide few benefits for approximately 25,000 Bay State
transportation customers under Bay State's Customer-Choice Program
(Tr. 1, at 72).<27> Finally, the Attorney General notes that, as
acknowledged by the Petitioners, no gas cost savings would be realized
by Bay State customers "if the Department adopts the portfolio out-
sourcing proposal" being considered in NOI-GAS UNBUNDLING, D.T.E. 98-
32 (Attorney General Reply Brief at 9).
ii. PETITIONERS
The Petitioners contend that, as a result of the merger, they
will be able to take advantage of market opportunities and market
conditions through joint management of their combined portfolios (Exh.
AG 2-16 (Supp,) at 1; Petitioners Brief at 20). The Petitioners
assert that joint management of the portfolios,<28> the associated
sharing of market information, and the diversity of physical and
contracted assets<29> would create opportunities for additional
benefits through the use of price risk management tools, real-time
trading, and asset optimization (Exh. AG 2-16 (Supp.) at 1;
Petitioners Brief at 20). The Petitioners recognize that a portion of
the $1.8 million projected gas cost savings would result from certain
hedging transactions that are currently not recognized or approved by
the Department (Petitioners Brief at 20).
__________________
<27> The Customer-Choice Program is a pilot program by Bay State to
identify and evaluate the mechanisms that affect a competitive
gas supply market (Exh. Cos-1, at 10-11).
<28> Northern Indiana purchases approximately 85 percent and Bay State
purchases approximately 40 percent of their respective system
supplies from the on-shore and off-shore Texas and Louisiana
producing regions (Exh. AG 2-16 (Supp). at 1). Moreover, both
companies expect to purchase more Canadian supplies (ID.).
According to the Petitioners, joint purchasing of these supplies
would lead to greater economies and efficiencies (ID.).
<29> Bay State and Northern Indiana have contracted capacity on
Tennessee Gas Pipeline (Exh. AG 2-16 (Supp.). Further, the two
companies hold capacity on 16 interstate pipelines of which nine
intersect and form industry-recognized trading hubs (ID. at 1).
17
<PAGE>
c. ANALYSIS AND FINDINGS
The Department has reaffirmed the importance of cost savings by
utility companies and its expectation that all utilities explore any
and all measures that provide the opportunity for these savings.
EASTERN-ESSEX ACQUISITION at 26, CITING MERGERS AND ACQUISITIONS at
18. In addition, the Department has stated that mergers and
acquisitions are a useful and potentially beneficial mechanism for
utility companies to consider in meeting their service obligations.
EASTERN-ESSEX ACQUISITION at 26. The Department here evaluates (1)
whether the opportunity exists for the Petitioners to achieve the
savings described in the proposal while maintaining the level of
service and reliability Bay State Gas customers have experienced; and
(2) whether the projections of the Petitioners are reasonable based on
the evidence.
The Department recognizes that the $1.8 million per year in gas
cost savings are estimated and that the magnitude of this value would
vary from year to year. That the savings are estimated is not itself
grounds for rejection of the Rate Plan. All calculations of the
impact of future events are based on an estimation of likelihood. The
point is to judge whether, based on logic, fact, and law, such
estimations may reasonably be relied upon in assessing costs and
savings. EASTERN-ESSEX ACQUISITION at 26.
The evidence indicates that the Petitioners' estimate relies too
heavily on insufficiently supported assumptions about joint management
of the two companies' portfolios, shared intelligence about the market
on a daily basis, and the' diversity of physical and contracted assets
to permit quantification of the gas costs savings (Petitioners Brief
at 20). CF. EASTERN-ESSEX ACQUISITION at 26. Nevertheless, the
Department agrees with the Petitioners that the proposed merger
promises significant (albeit of indeterminate size) savings for
ratepayers because Bay State and Northern Indiana would engage in
joint management and purchasing of gas supplies, resulting in greater
economies and efficiencies. Thus, with respect to gas costs,
ratepayers are likely to be better off, and certainly no worse off,
than they would be absent the merger.
Although the Department has not permitted the use of risk
management tools to reduce costs to ratepayers, we acknowledge that
with the evolution of the gas marketplace, the use of various price
risk management tools also has the potential to yield gas costs
savings with less risk to ratepayers than in the past. Moreover, Bay
State's affiliation would be with a much larger company; and the
prudent use of these risk management tools by large entities would
tend to reduce the risk to ratepayers of companies like Bay State.
18
<PAGE>
4 WEATHER NORMALIZATION
a. INTRODUCTION
The Petitioners propose to eliminate the weather
normalization<30> component of the existing ESM (Exh. Cos-A at
18).
b. POSITIONS OF THE PARTIES
i. ATTORNEY
The Attorney General argues that it would be inappropriate to
modify unilaterally the weather normalization component of the current
ESM since that resulted from the unanimous consent of all parties to a
settlement (Exh. AG-1, at 17). The Attorney General agrees with the
Petitioners' assertion that if the Department eliminates weather
normalization in the proposed ESM, then the risk to shareholders would
be reduced (ID. at 18). However, the Attorney General asserts that if
an ESM is implemented after November 1, 1999, without weather
normalization, the elimination of that component should be taken into
account in designing the proposed ESM (ID).
ii. PETITIONERS
The Petitioners assert that the elimination of the weather
normalization component of the existing ESM is consistent with D.P.U.
96-50 and, thus, is reasonable (Petitioners Brief at 15). The
Petitioners state that inclusion of a weather normalization component
in an ESM unreasonably magnifies the risk of earnings stability to
shareholders and of foregone revenue credits to ratepayers, and
interferes with Bay State's ability to manage its business (Exhs.
Cos.-A at 18; Cos.-C at 4; Tr. 2, at 109). The Petitioners disagree
with the Attorney General's position that only Bay State's
shareholders would benefit by eliminating weather normalization and
assert that ratepayers would benefit during a year with colder than
normal temperatures, because adjusting earnings for weather in the
earnings sharing calculation would decrease net income (Exh. Cos.-C at
4; Tr. 2, at 108-109).<31>
Finally, in response to the Attorney General's proposal for an 11
percent ROE, the Petitioners argue that if weather normalization is
eliminated from the ESM, then Bay State's sales and earnings would be
__________________
<30> Weather normalization is an adjustment for weather based on a
comparison of test year degree days to twenty-year average
degree-day data obtained from an official weather data source.
FALL RIVER GAS COMPANY, D.P.U. 750, at 8 (1981).
<31> Decreasing net income would result in a smaller ROE. The
opposite occurs during a year with warmer than normal
temperatures.
19
<PAGE>
affected by weather and, therefore, the Department should not reduce
Bay State's ROE (Exh. Cos.-C at 4).
c. ANALYSIS AND FINDINGS
The weather normalization component in the existing ESM is the
result of a settlement and it would be inappropriate to modify the
settlement unilaterally. Therefore, the Department rejects the
Petitioners' proposal to eliminate the weather normalization component
of the existing ESM. Given that the Department has rejected the
Petitioners' proposal for an ESM to apply after the end of the
existing settlement, we need not address the issue of weather
normalization here and decline to do so.
B. EFFECT ON QUALITY OF SERVICE
1. INTRODUCTION
Bay State has implemented a service quality index ("SQI")
pursuant to the settlement agreement that was approved by the
Department in D.P.U. 97-97.<32> These service quality measures
will remain in effect until expiration of Bay State's current rate
plan on October 31, 1999 (Exh. Cos.-A at 18). The Petitioners propose
to modify the current measures before the effective date of the
proposed five-year rate plan (ID.). The Petitioners request the
opportunity to seek a rate increase if they project that compliance
with the new service quality measures would cause Bay State to incur
an annual revenue requirement increase of $500,000 or more (ID. at
19).
__________________
<32> The Settlement contains the following service quality measures
and benchmarks: (1) customer survey responses indicating that
Bay State met or exceeded customer expectations -- 94 percent in
fiscal year ("FY") 1998, and 94.5 percent in FY 1999; (2) service
appointments met on the day scheduled -- 94 percent in FY 1998,
and 95 percent in FY 1999; (3) no more than 1.4 customer
complaint cases per 1,000 customers, using the Department's
Consumer Division statistics for both FY 1998 and FY 1999 (with a
ten percent no-penalty bandwidth); (4) lost time incidents per
100 employees - current three-year average not exceeding the
previous year's three-year average; (5) response time to odor
calls in one hour or less -- 95 percent for both FY 1998 and FY
1999; (6) current year of main and service damage incidents due
to third parties -- not exceeding the previous year's three-year
average; (7) emergency, and service and billing calls answered
within 30 seconds -- 95 percent for both FY 1998 and FY 1999, and
80 percent for FY 1998 and FY 1999, respectively; and (8) actual
on-cycle meter readings -- 88 percent in FY 1998 and 89 percent
in FY 1999. Failure to comply with any one of these goals would
carry a maximum penalty of $250,000 per measure or a maximum
penalty of $2.0 million annually. For each measure, one-fourth
of the maximum penalty would be assessed for each percentage
point, or any portion thereof, that Bay State's performance falls
short of the target. D.P.U. 97-97, at 4-5.
20
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2. POSITIONS OF THE PARTIES
a. ATTORNEY GENERAL
The Attorney General argues that before allowing a rate increase
for compliance with any new service quality measures, the Department
should require Bay State to establish that it experienced a revenue
deficiency as a result of increased costs that it incurred to comply
with the modified service quality measures (Attorney General Brief at
16). Similarly, the Attorney General contends that if costs decrease
as a result of the implementation of new service quality measures and
Bay State earns in excess of its rate of return, then Bay State should
be required to reduce its rates (Attorney General Brief at 16).
b. PETITIONERS
The Petitioners agree with the Attorney General that if
modifications to Bay State's service quality indices result in a
reduction of costs of more than $500,000, this reduction should be
passed back to customers. This reduction would flow through the DACC
(Petitioners Brief at 17; Petitioners Reply Brief at 5-6).
3. ANALYSIS AND FINDINGS
The Department retains oversight of a company's service quality
pursuant to G.L. c. 164, Section 76, and has stated that an SQI is an
important bulwark against deterioration in a company's service to its
customers. EASTERN-ESSEX ACQUISITION at 32-33; D.P.U./D.T.E. 97-63,
at 15 (1998); MERGERS AND ACQUISITIONS at 8-10. The Petitioners have
not presented a proposal for a service quality plan extending beyond
the date that the current settlement agreement ends, November 1,
1999.<33>
To ensure that there will be no reduction in the quality of
service following consummation of the merger, the Department directs
Bay State to continue to use the current quality of service measures
and penalties as approved by the Department in D.T.E. 97-97, until
November 1, 2004, the date the Rate Plan ends. When Bay State
proposes to change the current SQI, the Department would review any
proposed amendments. The Department will consider whether any
additional cost adjustments related to the SQI are, on their own
merits, warranted. The Department does not approve the Petitioners
proposed $500,000 threshold.
__________________
<33> The Department directs companies filing requests for approval of
mergers or acquisitions to include a service quality plan that is
designed to prevent degradation of service following the merger.
This directive reaffirms the importance of maintaining and
improving service quality to customers. EASTERN-ESSEX
ACQUISITION at 33; MERGERS AND ACQUISITION at 8-10.
21
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C. ACQUISITION PREMIUM
1. INTRODUCTION
As noted in Section II.F, above, the Petitioners estimate that
the merger would result in an acquisition premium of approximately
$310,000,000, based on the purchase price of $40 per-share book-value
of Bay State's assets and on the number of Bay State shares
anticipated to be outstanding as of the consummation of the
merger<34> (Exhs. Cos.-B at 19; AG 2-9; Tr. 3, at 27-28). The
Petitioners propose to allocate the acquisition premium, consistent
with GAAP requirements, proportionately among Bay State and its
subsidiaries<35> at the time of the consummation of the merger
(Exh. DTE 1-20). The actual calculation would be based on a review of
Bay State's accounts, the final costs of the transaction, and the
extent to which Bay Stare's shareholders exercise the cash option
feature of the merger (Tr. 1, at 23-26; Tr. 2, at 123, 133-134). The
Petitioners estimate that Bay State's stand alone share of the total
acquisition premium will be $216 million (Tr. 2, at 133). The
Petitioners propose to amortize the acquisition premium over a period
not exceeding forty years, consistent with GAAP requirements (Exh.
Cos.-A at 21). The actual period would be determined in a post-merger
review of the allocation of the total acquisition premium among Bay
State and its subsidiaries (Exh. Cos.-A at 21; Tr. 2, at 127).
The Petitioners request that the Department expressly recognize
that Bay State may seek the opportunity in future rate proceedings to
recover the annual amortization of the acquisition premium expense,
after the five-year rate freeze ends, but only to the extent that the
premium may be offset by demonstrable merger-related savings (Exhs.
Cos.-A at 21; Cos.-B at 21). During the term of the rate freeze
itself, the Petitioners propose to apply any savings realized through
the merger as an offset to the amortization of the acquisition premium
(Tr. 2, at 38-39).
The Petitioners state that although the proposal lacks currently
quantifiable benefits, there would be certain savings of undetermined
magnitude for Bay State (Tr. 1, at 35-37). The Petitioners estimate
savings of $1.5 million per year as a result of Bay State's improved
access to capital (Exhs. Cos.-A at 16; Cos.-B at 9, 15; AG 2-16
__________________
<34> The acquisition premium is a function of the purchase price of
$40 per share and the book value of the approximately 13,750,000
shares that the Petitioners estimate will be outstanding as of
the consummation of the merger (Exh. AG 2-9). Subtracting the
book value of approximately $240 million from the total purchase
price of $550 million results in the $310 million acquisition
premium (ID.).
<35> The Petitioners state that the acquisition premium must be
recorded on Bay State's consolidated books, in accordance with
the guidelines set forth by the SEC in Staff Accounting Bulletin
54 (Exh. AG 2-14; Tr. 2, at 91-93).
22
<PAGE>
(Supp.) at 3; Tr. 2, at 145-146). Further, the Petitioners estimate
that certain corporate costs, such as directors' fees and expenses,
will likely be reduced by about $200,000 per year (Exh. AG 2-16
(Supp.) at 2; Tr. 2, at 145-146). In addition, the Petitioners
project savings from stock transfer and trustee fees of $200,000 per
year (Exh. AG 2-16 (Supp.) at 2). Finally, according to the
Petitioners, the current level of costs of investor services are
expected to decrease for Bay State by $345,000 annually (Exh. AG 2-16
(Supp.) at 2; Tr. 2, at 145-146).
2. POSITIONS OF THE PARTIES
a. ATTORNEY GENERAL
The Attorney General contends that, as Bay State argued in
MERGERS AND ACQUISITIONS, a company should not be allowed to use an
accounting method that would result in lower net savings for customers
and would produce higher costs (Attorney General Brief at 16-17). The
Attorney General notes that although the Petitioners intend to use
purchase accounting, pooling of interests accounting would result in a
higher net savings to ratepayers (ID.).
The Attorney General argues that the regulatory recoverability of
an acquisition premium should not be dependent on the method of
accounting used to record the merger (ID. at 19). While the Attorney
General acknowledges that the Petitioners are required to use purchase
accounting to record the merger transaction on their books pursuant to
GAAP, he argues that the Department should require the Petitioners to
use pooling of interests accounting to determine any allowable
acquisition premium (ID). The Attorney General reasons that the
dilution to book value, as determined under pooling of interests
accounting, is the appropriate measure of any acquisition premium
resulting from this merger (ID. at 19-20). Noting that the
transaction would be effected primarily through an exchange of NIPSCO
Industries' common stock for Bay State's common stock, the Attorney
General maintains that the premium to book value of NIPSCO Industries'
stock more than offsets the premium to book value being offered for
Bay State's stock (ID. at 21). According to the Attorney Genera!,
this differential results in a higher book value per share for NIPSCO
Industries after the consummation of the merger than before the merger
(ID.). The Attorney General concludes that the Petitioners would not
experience any earnings dilution under pooling of interests accounting
(ID.).
The Attorney General argues that the Petitioners plan to "charge
off' to their customers a $210 million acquisition premium and to
incorporate those effects that the acquisition premium would have on
Bay State's capital structure (Attorney General Reply Brief at 4).
The Attorney General contends that the cost of service will increase
by approximately $44 million, consisting of $5 million in the annual
amortization of the acquisition premium, plus another $39 million for
the change in the cost of capital (ID. at 4-5). Accordingly, the
Attorney General asserts that based on these numbers, the Petitioners
will have to achieve $44 million in gross annual savings, or a 30
percent reduction in the cost to serve, before ratepayers will see any
23
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of the benefits of the merger (ID. at 5). The Attorney General
concedes that the Petitioners' modification to their proposed ESM made
during these proceedings eliminates the harm to ratepayers resulting
from the inclusion of the acquisition premium in Bay State's capital
structure during the term of the rate freeze. Even so, the Attorney
General argues that this increase will directly harm ratepayers after
the freeze, because of the effect on the cost of service (through the
amortization of the acquisition premium and the change in Bay State's
capital structure) (ID.)
The Attorney General contends that the Petitioners designed the
merger so that Bay State's ratepayers would pay the costs of the
merger to NIPSCO Industries while Bay State's shareholders retain
benefits (ID.) Analogizing the acquisition premium as a gain on the
sale of utility assets, the Attorney General contends that if the
Department is going to recognize the acquisition premium as a cost
that can be recovered from ratepayers, then it is only fair that the
premium being paid to Bay State stockholders be flowed back to
customers (ID). The Attorney General asserts that such an approach
would be consistent with Department policy where "the Department has
recognized that the gain on the sale of assets that have been
supported by the ratepayers are to be flowed through to the
ratepayers" (ID. at 5-6).
The Attorney General argues that the Petitioners did not
establish that there would be benefits to customers since there is no
quantification of benefits and no comparison of potential benefits to
the costs of the merger (Attorney General Brief at 9). Specifically,
the Attorney General contends that any quantification of benefits made
by the Company is speculative (Attorney General Reply Brief at 8).
Furthermore, the Attorney General asserts that, because the
Petitioners' plans are to provide new services and products that will
benefit the unregulated businesses and not traditional utility
operations, the acquisition premium should be assigned solely to the
unregulated entities (Attorney General Brief at 18; Attorney General
Reply Brief at 10). The Attorney General asserts that the growth and
expansion opportunities referred to by the Petitioners actually relate
to areas that should be provided by unregulated businesses in the
restructured gas industry, such as marketing of gas supplies, security
services, energy services, and any bundled services (Attorney General
Reply Brief at 10).
According to the Attorney General, the Petitioners have
characterized the purpose of the merger as effecting a "strategic
combination" and not designed to reduce Bay State's costs or its
revenue requirement (Attorney General Brief at 18). Therefore, the
Attorney General contends that the Department should deny the
inclusion of the acquisition premium either directly in the cost to
serve, or indirectly in the capital structure or for the purposes of
the ESM (ID).
24
<PAGE>
b. PETITIONERS
The Petitioners maintain that pooling of interests accounting is
not an option for recording the merger transaction because NIPSCO
Industries fails to meet the treasury stock condition of Accounting
Principles Board Opinion No. 16 "Business Combinations"<36>
<37> ("APB 16") as a result of its long-standing stock repurchase
program (Petitioners Brief at 11). Furthermore, the Petitioners
assert that pooling of interests accounting is not an option for
recording the merger and, that therefore, the Attorney General's
analysis of pooling of interests and dilution of book value is
irrelevant (ID. at 25). The Petitioners state that NIPSCO Industries'
independent public accountant, Arthur Anderson, confirmed that the
Petitioners must use purchase accounting to record the transaction
(ID. at 11-12).
The Petitioners contend that the Attorney General's earnings
dilution analysis is illogical and lacks economic or accounting
support (ID. at 24-25). The Petitioners state that NIPSCO Industries'
offer of $40 for each outstanding share of Bay State stock is 2.35
times Bay State's book value (ID. at 23). According to the
Petitioners, this results in a total acquisition premium of $310
million, of which approximately $210 million would be apportioned to
Bay State's Massachusetts operations (ID). Moreover, the Petitioners
contend that the required annual amortization of this premium on Bay
State's books under GAAP would be approximately $5.4 million pre-tax
and represents an additional revenue requirement of approximately $9
million (Petitioners Brief at 12-13). The Petitioners argue that this
required amortization would result in a significant dilution of Bay
State's earnings, I.E., approximately 30 percent (ID.).
The Petitioners contend that the acquisition premium, even at
2.35 times Bay State's book value, is below the average premium paid
in similar transactions (ID. at 23). The Petitioners assert that
NIPSCO Industries' stockholders would make this investment only if
__________________
<36> As interpreted by the SEC, the Treasury Stock Condition requires
that each of the combining enterprises reacquires shares of
voting common stock only for purposes other than business
combinations, and no enterprise reacquires more than a "normal"
number of shares between the dates the plan of combination
initiated and consummated (Exh. AG 2-13; Tr. 2, at 52-53, 55).
Since 1989, NIPSCO Industries has had a stock repurchase program
in effect, which has resulted in the repurchase of approximately
44 million shares of NIPSCO Industries common stock (Exh. Co.-B,
Sch. MTM-2, at 46). A significant number of these repurchased
shares resulted from NIPSCO Industries' acquisition of IWC in
1997 (Exh. Co.-B, Sch. MTM-2, at 46).
<37> APB 16 is a subsection of GAAP that specifies the rules to follow
when entering into a business combination (Exh. AG 2-13). APB 16
states that a business combination may be recorded under pooling
of interests accounting when it meets certain specified criteria,
otherwise it must be recorded as a purchase (Exh. AG 2-13).
25
<PAGE>
they have reasonable assurance to be repaid and an opportunity to earn
a reasonable return on their investment (ID.). The Petitioners argue
that they are not asking Bay State customers to pay for any part of
the acquisition premium as an immediate result of this proceeding.
The Petitioners acknowledge that Bay State will need to prove
offsetting benefits before any part of the acquisition premium can be
recovered in rates (Petitioners Reply Brief at 5). The Petitioners
maintain that Bay State's rates will never be higher as a result of
the merger (ID.).
3. ANALYSIS AND FINDINGS
The Department has stated that it will consider individual merger
or acquisition proposals that seek recovery of an acquisition premium,
as well as the recovery level of such premiums. EASTERN-ESSEX
ACQUISITION at 61, CITING MERGERS AND ACQUISITIONS at 18-19. Under
the Department's standard, a company proposing a merger or acquisition
must, as a practical matter, demonstrate that the costs or
disadvantages of the transaction are accompanied by benefits that
warrant their allowance. Thus, allowance or disallowance of an
acquisition premium would be just one part (albeit an important one)
of the cost/benefit analysis under the Section 96 standard. ID.
As noted by the Department in MERGERS AND ACQUISITIONS, under
GAAP, a business combination seeking to use pooling of interests
accounting must meet certain conditions. MERGERS AND ACQUISITIONS at
10. Specifically, APB 16 requires that a business combination must
satisfy 12 conditions to use pooling of interests accounting; and
failure to satisfy even one of these conditions would require the
combination to be recorded through purchase accounting (Exhs. Cos.-D
at 3; AG 2-13; Tr. 2, at 51). The SEC has implemented a stringent
policy of reviewing business combinations using pooling of interests
accounting, requiring companies to restate their combinations under
purchase accounting if the conditions in APB 16 are not fully met (Tr.
2, at 73-74). As part of this policy, the SEC has in place a
presumptive rule that any stock repurchase undertaken by a company up
to two years prior to a business combination was done for the purpose
of the business combination (ID. at 72-73). NIPSCO Industries' stock
repurchase program, including those shares repurchased as a result of
the "IWC acquisition, renders these shares "tainted" for purposes of
applying pooling of interests accounting. The "tainting" occurs
because the number of shares NIPSCO has repurchased exceeds the SEC's
definition of "normal" (ID. at 52-54).<38> Moreover, the SEC's
__________________
<38> The SEC has defined the "normal" number of shares that can be
repurchased under APB 16 as no greater than ten percent of the
total number of shares to be issued under the business
combination under review (Tr. 2, at 52-53, 55). The Petitioners
estimated that, assuming 20 million NIPSCO Industries shares to
be issued in conjunction with the merger, no more than two
million shares could be held as repurchased shares and still meet
the Treasury Stock condition (ID. at 55). During 1997 alone,
NIPSCO Industries repurchased approximately 25.2 million shares,
(continued...)
26
<PAGE>
Staff Accounting Bulletin 54<39> ("SAB 54"), the acquisition
premium must be "pushed down" or recorded on the books of Bay State
(Exh. AG 2-14). Both the Petitioners and Attorney General agree that
the Treasury Stock Condition described in APB 16, as defined above,
and the provisions of SAB 54 require the Petitioners to use purchase
accounting to record the merger on Bay State's books.<40> The
Department concludes that the use of purchase accounting for the
proposed merger would comply with both GAAP and SEC regulations.
Moreover, the Department concludes that the use of purchase accounting
and the "push-down" of the acquisition premium on the books of Bay
State would ensure that Bay State's books would more accurately
indicate that company's post-merger financial condition (ID.)
Accordingly, the Department finds that the Petitioners' proposed use
of purchase accounting to record the merger is appropriate.<41>
While the Attorney General acknowledges the need to record the
merger on Bay State's books using purchase accounting, he proposes the
use of an earnings dilution analysis based on pooling of interests
accounting to determine the recoverable portion of the acquisition
premium for regulatory purposes. The Attorney General argues that,
had pooling of interests accounting been used, no acquisition premium
would have resulted. However, the fact remains that pooling of
interests accounting is not an option available to the Petitioners
because of the Treasury Stock Condition. Therefore, the acquisition
premium represents a real cost that must be recorded on Bay State's
books. As noted in Section II.D, above, NIPSCO Industries is paying
approximately $550 million for assets with a book value of
approximately $240 million, with a resulting premium of $310 million
(Exh. AG 2-9). The amortization of the acquisition premium will occur
over a period of years, with a corresponding effect on Bay State's
__________________
<38>(...continued)
most of which were associated with the IWC acquisition (Exhs. AG
1-3, at 43; Cos.-B, Sch. MTM-2, at 46).
<39> Staff Accounting Bulletins are regularly issued by SEC staff to
address detailed, specific accounting questions not fully covered
under GAAP (Exh. AG 2-14). SAB 54, "Push Down Basis of Accounting
Required in Certain Limited Circumstances," requires that an
acquiring company's acquisition costs should be pushed down to
the purchased entity (ID.).
<40> The Attorney General's own witness agreed that the SAB 54 is
dispositive of the need to reflect the acquisition premium on Bay
State's books (Tr. 3, at 69).
<41> The Attorney General's argument that Petitioners should be
precluded from recording the merger using purchase accounting
simply because Bay State commented favorably on the benefits of
pooling of interests accounting in MERGERS AND ACQUISITIONS is
without merit. The Department construes Bay State's comments in
that proceeding as a general indication of support of the use of
pooling of interests accounting, not as proposing the use of
pooling of interests accounting for all mergers and acquisitions.
27
<PAGE>
balance sheet and earnings, as was demonstrated by the Attorney
General's own witness (Exh. AG-1, Sch. DTE-1 at 2). The Attorney
General's proposed accounting approach, if adopted, would effectively
preclude recovery of an acquisition premium and thus would nullify any
reason for NIPSCO Industries to consummate the merger. In EASTERN-
ESSEX at 70, the Department discussed how a company operating under
cost-of-service regulation must be given an explicit opportunity to
recover merger-related costs, including an acquisition premium, if
beneficial mergers are to take place. In the long run, failure to
complete the merger could be a detriment to Bay State ratepayers
through lost economies that could be realized by Bay State as part of
a larger company. Therefore, the Department concludes that the
acquisition premium presented by the Petitioners is a reasonable
measure of the economic premium that occurs when using purchase
accounting.
With respect to the Attorney General's argument that the
acquisition premium should be passed back to Bay State's ratepayers as
a gain on the sale of utility property, the Department notes that each
of the cases cited by the Attorney General pertain to the sale or
transfer of real property by a regulated utility. SEE Attorney
General Reply Brief at 5-6. While the Attorney General has correctly
noted the Department's policy with respect to gains on the sale of
utility property, our policy presupposes that such properties have
been recorded as above-the-line assets and that ratepayers have
supported those assets through the utility's allowed rate of return.
BARNSTABLE WATER COMPANY, D.P.U. 93-223-B at 12-13 (1994);
COMMONWEALTH ELECTRIC COMPANY. D.P.U. 88-135/151, at 90-92 (1989). A
utility's rate base consists of assets that have been purchased
through the issuance of stock or debt; and under well-established
accounting and regulatory principles, stock and debt instruments do
not constitute utility assets, but represent liabilities in the form
of claims on those utility assets by the holders of those security
instruments. SEE Charles F. Philips, Jr., THE REGULATION OF PUBLIC
UTILITIES 202 (2nd ed. 1985). Moreover, it is indisputable that,
under the concept of original cost rate base, utility assets are
carried on the utility's books at neither more nor less than their
actual cost unless and until such assets are abandoned, replaced,
reconstructed, or convened. 220 C.M.R. Sections 50.00 ET SEQ., Gas
Plant Instruction No.2. Daily variations in a utility's stock value
have no bearing on the value of the assets carried on the books of the
utility. There are no valid reasons to endorse the Attorney General's
departure from well-established regulatory and accounting principles.
With respect to the level of consideration paid by NIPSCO
Industries for Bay State, the record evidence demonstrates that the
purchase price was evaluated in light of both a comparison with
purchase prices associated with other recent mergers and acquisitions
by LDCs, and an assessment of the potential long-term benefits (Exhs.
Cos.-B at 19; AG 2-23; AG 3-3 at B1-3; AG 3-8, App. A (Proprietary)).
A purchase price at a multiple of book value expresses a buyer's
expectations of the acquired company's future contributions to
combined operations. EASTERN-ESSEX ACQUISITION at 64. The particular
exchange rate involved in merger or acquisition stock transactions
expresses a number of matters of value to the buyer, including a
28
<PAGE>
premium for management control and long-term strategic and economic
value perceived by the buyer as accruing from the transaction. ID.
It is clear that NIPSCO Industries, as a knowledgeable and willing
buyer, experienced in other acquisitions, was prepared to pay a
premium over Bay State's book value in exchange for long-term growth
potential and to accept the risk associated with justifying, or not,
the recovery of this premium at a later date (Exhs. Cos.-B, at 11-13;
AG 3-8, App. A (Proprietary); AG 3-10). Between 1994 and 1998,
acquisition prices in natural gas distribution company mergers have
ranged between 1.74 times and 5.56 times the book value of the
acquired company, with an average of 2.68 times book value (Exh. AG 2-
23).<42>
The proposed purchase price for Bay State's stock represents a
premium of 2.35 times book value (Exh. AG 2-23). The price paid by
NIPSCO Industries for Bay State in this case is well within the range
of what has been offered in other transactions involving natural gas
distribution companies (Exhs. Cos.-B at 19; AG 2-23; AG 3-8
(Proprietary)). Bay State's independent advisor, SG Barr Devlin, has
pronounced the terms of the transaction to be reasonable (Exh. AG 3-3,
at B-1 through B-3). The premium lies within an historic range and
has been validated by the market at large and corroborated by
independent financial advisors. The Department finds that the
proposed purchase price for Bay State's common stock and proposed
exchange ratio are in line with experience in other gas acquisitions
and, therefore, are reasonable and valid expressions of today's market
conditions. CF. HAVERHILL ELECTRIC COMPANY, D.P.U. 2138 (1926)
(Department rejected proposed one-to-one stock exchange ratio, and
found that a seven-to-ten exchange ratio was more reflective of the
value of the acquired company).
The Department has stated that a Section 96 petitioner seeking
recovery of an acquisition premium cannot "rest its case on mere
generalities, but must instead demonstrate benefits that justify the
costs, including the cost of any premium sought." EASTERN-ESSEX
ACQUISITION at 10; MERGERS AND ACQUISITIONS at 7. The Petitioners
have chosen not to request recovery of an acquisition premium at this
time, except to the extent that they would be allowed to use
productivity gains over the five-year term of the rate freeze to
offset the annual amortization of the acquisition premium during that
time. The Petitioners have not quantified the expected benefits of
the merger to offset the acquisition premium, primarily because the
benefits of the merger are related to growth (which is too uncertain
to estimate in quantifiable terms) and not cost-cutting (Petitioners
Brief at 19). (Compare this to the EASTERN-ESSEX ACQUISITION, a
merger focused on cost cutting synergies, where the initial filing of
the companies in that case quantified up-front all of the expected
__________________
<42> Additionally, in EASTERN-ESSEX ACQUISITION, the Department found
that Eastern Enterprise's payment of 2.36 times the book value
for Essex County Gas Company was reasonable. EASTERN-ESSEX
ACQUISITION at 65. It is, of course, possible that a future
Section 96 petition might seek recovery of an excessive premium,
unwarranted by market evidence and offsetting benefits.
29
<PAGE>
benefits, as directed by MERGERS AND ACQUISITIONS at 7, and committed
to a path that could be evaluated and approved by the Department in
one event.) Instead, the Petitioners are relying on a requested
Department finding that "Bay State may seek recovery of the annual
amortization of the acquisition premium in future rate proceedings to
the extent offset by merger-related savings." We find here that Bay
State may seek recovery of the annual amortization of the acquisition
premium in future rate proceedings to the extent offset by merger-
related savings. In making this finding, however, we note that the
Petitioners have chosen not to make their showing at this time that
recovery of the premium is warranted but seek leave to make that
showing later. The Petitioners thus voluntarily undertake the risk of
later non-recovery of premium, if they fail to make the requisite
showing of offsetting benefits. MERGERS AND ACQUISITIONS made clear
the terms for recovery, before the Petitioners proposed to postpone
requesting recovery. Nevertheless, the Petitioners are currently
incurring costs. This feature of the proposal is of the Petitioners'
own choosing and not at the Department's insistence. Based on the
evidence presented to date, the benefits claimed by the Petitioners
have yet to be established to our satisfaction (Exh. AG 2-16 (Supp.);
Tr. 2, at 146-147).
Despite the present lack of showing concerning premium recovery,
the merger and Rate Plan have been structured so that Bay State's
ratepayers are not at risk for recovery of any acquisition premium or
merger-related costs during the five-year term of the rate freeze.
Throughout this proceeding, the Petitioners have repeatedly
represented that NIPSCO Industries' shareholders would bear any risk
that the benefits and cost savings resulting from the merger would be
insufficient to offset the acquisition premium (Tr. 2, at 129, 135-
136; Petitioners Brief at 17; Petitioners Reply Brief at 3).
After the rate freeze, the Petitioners may seek recovery of the
acquisition premium and merger-related costs from Bay State's
ratepayers, provided that merger-related benefits are proven to the
Department to be equal to or greater than any portion of the
acquisition premium proposed to be included in base rates (Exh. Cos.-A
at 21; Petitioners Brief at 24). At such time that the Petitioners
seek to recover the acquisition premium through rates, they must show
quantifiable benefits and be able to demonstrate, so as to warrant a
reasonable conclusion, that such benefits are the result of the
merger. This demonstration of merger-related benefits must be
developed and maintained by the Petitioners on an on-going basis
during the term of the rate freeze and thereafter until the
Petitioners file their request for recovery of the acquisition premium
and merger-related costs. The Department places the Petitioners on
notice that we expect to see such documentation of merger-related
savings as part of the demonstration of benefits that justify costs.
EASTERN-ESSEX ACQUISITION at 10; MERGERS AND ACQUISITIONS at 7.
With respect to the amortization period of the acquisition
premium, the Department has historically recognized that any
acquisition premium would be, in general, amortized over the life of
30
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the acquired assets.<43> MERGERS AND ACQUISITIONS at 12, CITING
BAY STATE GAS COMPANY, D.P.U. 17726, at 5-6 (1973), BOSTON GAS
COMPANY, D.P.U. 17574, at 11(1973), BOSTON GAS COMPANY, D.P.U. 17138,
at 7-8 (1971). The Petitioners propose to use rules established by
GAAP in calculating the amortization period of the acquisition premium
(Exh. DTE 1-15; Tr. 2, at 127). As stated by the Petitioners, a study
will be completed after the consummation of the merger in order to
ascertain the length of the amortization period as well as the
allocation of the premium between Bay State and its subsidiaries (Tr.
2, at 127). The Department directs the Petitioners to submit a final
copy of the study documenting the allocation and the amortization of
the acquisition premium to the Department for review once such a study
has been completed. Once such an allocation has been made, and Bay
State has filed its proposed acquisition premium recovery method, the
Department will consider the issue of the appropriate distribution of
the acquisition premium among Bay State's regulated and unregulated
operations.<44>
Based on the arguments and evidence, the Department finds that
the acquisition premium of $310 million as estimated by the
Petitioners fairly represents the total acquisition premium that will
result from the merger. Therefore, the Department finds that Bay
State may seek recovery of the annual amortization of the acquisition
premium in future proceedings to the extent offset by merger-related
savings. As noted above, the Petitioners bear the burden of
demonstrating the presence of merger-related benefits to the
Department before any portion of this acquisition premium may be
included in Bay State's rates. Because the stock exchange, when it
occurs in fact, will be based on the actual number of Bay State shares
outstanding on the consummation date as well as NIPSCO Industries'
stock price used in the merger agreement, the actual amount of the
acquisition premium cannot be precisely calculated until the
consummation date or shortly thereafter -- although its range is
formulaically determined. The Petitioners are hereby directed to
provide the Department with a copy of the journal entries or a
schedule summarizing such entries upon completion of the merger, in
sufficient detail so as to determine the actual acquisition premium.
Additionally, the Petitioners are directed to provide the Department
with a detailed listing of the final transaction costs 90 days from
the date of consummation of the merger.
__________________
<43> The Department expects that the Petitioners will begin to
amortize the acquisition premium during the five-year term of the
rate freeze and will not seek to recover any of the amortization
of the acquisition premium from that five-year period at the end
of the rate freeze. In other words, the Petitioners may not defer
recovery of the entire acquisition premium to the 35 post-rate
freeze years in which such recovery is allowed.
<44> Consequently, the Department finds it premature to consider the
Attorney General's proposal to assign all of the acquisition
premium to Bay State's unregulated operations.
31
<PAGE>
Throughout this proceeding, the Petitioners have repeatedly
represented that Bay State ratepayers would bear no risk for recovery
of the acquisition premium during the five-year rate freeze (Tr. 2, at
129, 135-136; Petitioners' Brief at 17; Petitioners' Reply Brief at
3). This repeated representation is one to which NIPSCO Industries and
Bay State will fairly be held throughout the period of the Rate Plan.
D. FINANCIAL INTEGRITY OF POST-MERGER GAS COMPANY
1. INTRODUCTION
The Petitioners contend that the merger will have no adverse
effects on Bay State's financial integrity and will provide Bay State
with additional financing options under more favorable terms than are
now available to that company (Petitioners Brief at 34). Petitioners
claim that NIPSCO Industries' debt management program provides
financing flexibility in such matters as terms and debt maturity. The
debt management program is intended to allow ready responses to
interest rate changes (Exh. AG 2-16 (supp) at 2).
2. ANALYSIS AND FINDINGS
The Department has stated that the financial integrity of a
company may be one of the factors considered in evaluating a merger
petition. MERGERS AND ACQUISITIONS at 8-9. Under the Preferred
Merger, Bay State would remain a stand-alone company operating as a
wholly-owned subsidiary of NIPSCO Industries. A review of Bay State's
financial and operating data, as represented by its annual returns to
the Department,<45> SEC, and shareholders, as well as information
provided in Bay State's disclosure statements and developed through
NIPSCO Industries' evaluation of the proposed merger, demonstrates
that Bay State is financially viable (Exhs. AG 1-1(A); AG 1-2; AG 1-8;
AG 3-9 (Proprietary)). Moreover, Bay State's post-merger financial
position is likely to improve because of the additional sources of
capital open to Bay State through its affiliation with NIPSCO
Industries. Such an improvement would result in benefits to ratepayers
(Exh. AG 2-16 (Supp.)). Accordingly, the Department finds that the
Preferred Merger will not adversely affect Bay State's financial
integrity, absent the effects of the deferral of recovery of the
acquisition premium. SEE section IV C(3), above.
Under the Alternative Merger, Bay State would become a division
of Northern Indiana. A review of Northern Indiana's financial and
operating data contained in its annual reports to both the Federal
Energy Regulatory Commission and the SEC, and a review of NIPSCO
Industries' annual returns and disclosure statements provided to its
shareholders, demonstrates that Northern Indiana is also financially
viable (Exhs. AG 1-1(B); AG 1-3; AG 1-7; AG 1-9). There is no
evidence that Northern Indiana's or Bay State's facilities require
extraordinary investments, or that the financial viability of either
__________________
<45> The Department took administrative notice of Bay State's Annual
Returns to the Department for the years 1993 through 1997
pursuant to 220 C.M.R. Section 1.10(3) (Tr. 3, at 38-39).
32
<PAGE>
company is in doubt. CF. COMMUNITY UTILITIES/RESORT SUPPLY, D.P.U.
16380, at 2-5 (1970) (Department disallowed proposed merger of two
small water systems because of, in part, concerns over the financial
viability of both systems). Finally, Bay State's ratepayers may
benefit through NIPSCO Industries' additional sources of capital
available to Northern Indiana (Exh. AG 2-16 (Supp.)). Accordingly,
the Department finds that the Alternative Merger will not adversely
affect Bay State's financial integrity.
E. SOCIETAL COSTS
1. INTRODUCTION
The Petitioners stated that in considering the merger. they did
not seek a combination that would require employee reductions at
either Bay State or NIPSCO Industries in order to generate lower costs
and greater short-term earnings (Exh. Cos.-A, at 13; Cos.-B at 11).
Instead, the Petitioners view the acquisition of Bay State by NIPSCO
Industries as a "strategic merger" that would use Bay State's existing
workforce to increase throughput and improve service to customers
(Exhs. Cos.-A at 13; Cos.-B at 13). The Petitioners stated that under
both the Preferred Merger and Alternative Merger, Bay State would
maintain its Westborough headquarters, as well as its existing local
offices in Brockton and Springfield (Tr. 2., at 97). The Petitioners
noted that although any consideration of workforce reductions here
would be premature, future workforce reductions that may occur as a
result of cost containment efforts would be worked out through
negotiation with the employees' respective bargaining units (Tr. 2, at
100). The intervenors did not address this issue on brief.
2. ANALYSIS AND FINDINGS
The Department does not lightly regard the effect of mergers on
employment. EASTERN-ESSEX ACQUISITION at 44. Although job
redundancies in consolidated systems would impose avoidable costs and
thus would be detrimental to ratepayers, the Department has noted that
the elimination of these redundancies should be accomplished in a way
that mitigates the effect on the utility's employees. EASTERN-ESSEX
ACQUISITION at 43.
Bay State has already engaged in significant cost containment
efforts, and savings have resulted from workforce reductions (Exh.
Cos.-B at 11-12; Tr. 2, at 94, 97-99). Moreover, NIPSCO Industries'
assessment of the growth potential in Bay State's service territory
and expressed intent to avoid layoffs at Bay State demonstrate that
the Petitioners consider a strong local presence and management at Bay
State to be a critical component of the combined system's long-term
objectives (Exh. Cos.-B at 13; Tr. 2, at 94-95). The Department
concludes that neither the Preferred Merger nor the Alternative Merger
would significantly affect Bay State's workforce.
33
<PAGE>
F. STOCK ISSUANCE
1. INTRODUCTION
Acquisition Company is intended to have an authorized
capitalization of 1,000 shares of common stock, $1.00 par value, of
which 100 shares have been subscribed for sale to NIPSCO Industries at
a price of $1.00 per share (Exh. DTE 1-7 (Supp.)). The Petitioners
request that the Department authorize and approve the proposed
issuance of 100 shares of this common stock to NIPSCO Industries, at a
price of $1.00 per share (Petition at 1). The Petitioners state that
the proposed issuance is reasonably necessary to effect the merger
(ID. at 6). While the Petitioners restated their request in their
brief, the Attorney General did not address this issue on brief.
2. STANDARD OF REVIEW
In order for the Department to approve the issuance of stock,
bonds, coupon notes, or other types of long-term indebtedness<46>
by an electric or gas company, the Department must determine that the
proposed issuance meets two tests. First, the Department must assess
whether the proposed issuance is reasonably necessary to accomplish
some legitimate purpose in meeting a company's service obligations,
pursuant to G.L. c. 164, Section 14. FITCHBURG GAS & ELECTRIC LIGHT
COMPANY V. DEPARTMENT OF PUBLIC UTILITIES, 395 Mass. 836, 842 (1985)
("FITCHBURG II"), CITING FITCHBURG GAS & ELECTRIC LIGHT COMPANY V.
DEPARTMENT OF PUBLIC UTILITIES, 394 Mass. 671, 678 (1985) ("FITCHBURG
I"). Second, the Department must determine whether the Company has
met the net plant test.<47> COLONIAL GAS COMPANY, D.P.U. 84-96
(1984).
The Court has found that, for the purposes of G.L. c. 164,
Section 14, "reasonably necessary" means "reasonably necessary for the
accomplishment of some purpose having to do with the obligations of
the company to the public and its ability to carry out those
obligations with the greatest possible efficiency." FITCHBURG II at
836, CITING LOWELL GAS LIGHT COMPANY V. DEPARTMENT OF PUBLIC
UTILITIES, 319 Mass. 46, 52 (1946). In cases where no issue exists
about the reasonableness of management decisions regarding the
requested financing, the Department limits its Section 14 review to
the facial reasonableness of the purpose to which the proceeds of the
proposed issuance will be put. CANAL ELECTRIC COMPANY, et al, D.P.U.
84-152, at 20 (1984); SEE, E.G., COLONIAL GAS COMPANY, D.P.U. 90-50,
at 6 (1990).
The FITCHBURG LAND II and LOWELL GAS cases also established that
the burden of proving that an issuance is reasonably necessary rests
with the company proposing the issuance, and that the Department's
authority to review a proposed issuance "is not limited to a
`perfunctory review.'" FITCHBURG I at 678; FITCHBURG II at 842,
CITING LOWELL GAS at 52.
__________________
<46> Long-term refers to periods of more than one year after the date
of issuance. G.L. c. 164, Section 16.
<47> The net plant test is derived from G.L. c. 164, Section 16.
34
<PAGE>
Where issues concerning the prudence of a company's capital
financing have not been raised or adjudicated in a proceeding, the
Department's decision in such a case does not represent a
determination that any specific project is economically beneficial to
a company or to its customers. In such circumstances, the
Department's Order may not in any way be construed as ruling on the
appropriate ratemaking treatment to be accorded any costs associated
with the proposed financing. SEE E.G., BOSTON GAS COMPANY, D.P.U. 95-
66, at 7 (1995).
Regarding the net plant test, a company is ordinarily required to
present evidence that its net utility plant (original cost of
capitalizable plant less accumulated depreciation) is equal to or
exceeds its total capitalization (the sum of its long-term debt,
preferred stock, and common stock outstanding) and will continue to do
so after the proposed issuance. D.P.U. 84-96, at 5. If the
Department determines at that time that the fair structural value of
the net plant and land and the fair market value of the nuclear or
fossil fuel inventories owned by the company are less than its
outstanding debt and stock, it may prescribe such conditions and
requirements as it deems best to make good within a reasonable time
the impairment of the capital stock. G.L. c. 164, Section 16.
3. ANALYSIS AND FINDINGS
The Petitioners have requested that the Department authorize the
issuance of stock to a corporation that is not yet in existence.
While one could argue that G.L. c. 164, Section 14, addresses stock
transfers to corporate entities only, we recognize that some
flexibility must be afforded to those petitioners that require stock
transfers in order to form a corporation by way of a merger or
acquisition. Here, the Petitioners request authority to issue stock
in order to establish the framework within which the merger could be
consummated. Without the authority to issue the stock, this merger
would not take place. Therefore, the Department finds that the
issuance of 100 shares of common stock by Acquisition Company, at a
par value of $1.00, is a necessary mechanism for the purpose of
forming Acquisition Company and effecting the proposed merger.
Accordingly, the Department finds that the proposed stock issuance is
reasonably necessary and is in accordance with G.L. c. 164, Section
14.
With regard to the net plant test requirement of G.L. c. 164,
Section 16, the record demonstrates that Acquisition Company has no
assets and thus could not meet the net plant test as contemplated by
G.L. c. 164, Section 16. However, the Department notes that the
Merger Agreement would extinguish the corporate existence of Bay
State. Through the acquisition of Bay State's assets, Acquisition
Company would remedy any net plant deficiency of Acquisition Company.
See EASTERN-ESSEX ACQUISITION at 74; D.P.U./D.T.E 97-63, at 73. The
purpose of the net plant test is to protect investors from hidden
watering of stock. Application of the test was not contemplated for a
transaction as patent and transparent as the instant one. No public
protective purpose would be served by applying the test here. It is
sufficient to note that the transaction is structured to prevent any
35
<PAGE>
adverse risk to the investing public and immediately to correct any
theoretical problem with the Acquisition Company shares. EASTERN-
ESSEX ACQUISITION at 74. Therefore, the Department finds it
unnecessary to impose further conditions upon Acquisition Company
under G.L. c. 164, Section 16.
G. SECTION 17A APPROVAL OF FUNDS POOLING AMENDMENT
1. INTRODUCTION
In BAY STATE GAS COMPANY, D.P.U. 96-69 (1996), the Department
approved a funds pooling arrangement between Bay State, Northern, and
Granite State, in which the participants pool their short-term cash
surpluses and manage these funds to meet the borrowing needs of the
participants (Exh. DTE 1-22). The Petitioners request approval of a
modification to Bay State's funds pooling agreement to permit NIPSCO
Capital, NIPSCO Industries' financing subsidiary, to participate
(Petition at 6; Tr. 2, at 75).<48>
2. STANDARD OF REVIEW
Pursuant to G.L. c. 164, Section 17A, a gas or electric company
must obtain written Department approval in order to "loan its funds
to, guarantee or endorse the indebtedness of, or invest its funds in
the stock, bonds, certificates of participation or other securities
of, any corporation, association or trust." The Department has
required that such proposals must be "consistent with the public
interest," that is, a Section 17A proposal will be approved if the
public interest is at least as well served by approval of the proposal
as by its denial. BAY STATE GAS COMPANY, D.P.U. 91-165, at 7 (1992);
SEE D.P.U. 850, at 7-8.
The Department has stated that it will interpret the facts of
each Section 17A case on their own merits to make a determination that
the proposal is consistent with the public interest. D.P.U. 91-165,
at 7. The Department will base our determination on the totality of
what can be achieved by, rather than on a determination of any single
gain that could be derived from, the proposed transaction. ID.; SEE
D.P.U. 850, at 7. Thus, the Department's analysis must consider the
overall anticipated effect on ratepayers of the potential costs and
benefits of the proposal. D.P.U. 91-165, at 8. The effect on
ratepayers may include consideration of a number of factors,
including. but not limited to: the nature and complexity of the
proposal; the relationship of the parties involved in the underlying
transactions; the use of funds associated with the proposal; the risks
and uncertainties associated with the proposal; the extent of
regulatory oversight on the parties involved in the underlying
transaction; and the existence of safeguards to ensure the financial
integrity of the utility. ID.
__________________
<48> The Petitioners did not seek to include Northern Indiana as a
participant in Bay State's funds pooling agreement (Petition at
6-7).
36
<PAGE>
3. ANALYSIS AND FINDINGS
As part of the Department's approval of Bay State's funds pooling
agreement in D.P.U. 96-69, the Department required that any amendment
in the funds pooling agreement be approved by the Department prior to
its implementation. D.P.U. 96-69, at 4-5. The Department has
approved amendments to other funds pooling agreements, including the
addition of additional participants to these fund pools. NANTUCKET
ELECTRIC COMPANY, D.P.U. 95-67, at 15-16 (1995); MASSACHUSETTS
ELECTRIC COMPANY, D.P.U. 91-133, at 4 (1992); NEW ENGLAND POWER
COMPANY, D.P.U. 88-166, at 2 (1989).
As noted in Section I (SEE note 2, above), NIPSCO Capital
provides financing for most of NIPSCO Industries' regulated and
unregulated subsidiaries under the terms of a support agreement
("Indiana Agreement") (Exh. Co.-B, Sch. MTM-2, at 26; Tr. 2, at 75).
The Petitioners requested the inclusion of NIPSCO Capital in Bay
State's funds pooling agreement, rather than the addition of Bay State
and its subsidiaries as participants to NIPSCO Capital's current
Indiana Agreement (Tr. 2, at 78). The Petitioners consider the Bay
State funds pooling agreement to be more adaptable to Bay State's
post-merger operations (Tr. 2, at 78). NIPSCO Capital currently has a
$150 million revolving-credit agreement, that provides short-term
financing flexibility to NIPSCO Industries' subsidiaries, plus $130
million in money market lines of credit (Exh. Co.-B, Sch. MTM-2, at
26). The addition of NIPSCO Capital as a participant to Bay State's
funds pooling agreement would provide Bay State with the opportunity
to gain access to these additional financing sources to meet its
short-term borrowing needs. Conversely, given the status of NIPSCO
Capital as a financing vehicle, NIPSCO Capital's own borrowings from
the Bay State pool would be negligible. Therefore, the Department
concludes that the proposed amendment to Bay State's funds pooling
agreement, which will permit NIPSCO Capital to participate in the
funds pooling agreement, is consistent with the public interest.
If the Alternative Merger is consummated, Northern Indiana would
be the surviving company, with Bay State operating as a division of
Northern Indiana (Exhs. Co.-A at 28-29; Co.-B, Sch. MTM-4, at A-1).
Although Northern Indiana is not currently a participant in the
Support Agreement (Tr. 2, at 75-76), by virtue of the Alternative
Merger, Northern Indiana would be the successor in interest to all
rights, privileges, immunities, and powers currently held by Bay State
(Exh. Cos.-B, Sch. MTM-4, at A-1). Accordingly, the Department finds
that if the Alternative Merger is ultimately implemented, Northern
Indiana would become a participant in the funds pooling agreement.
The Petitioners stated that NIPSCO Industries' management is
still evaluating the possibility of including Northern Indiana as a
participant to the Indiana Agreement (Tr. 2, at 78-80). If the
Alternative Merger is ultimately implemented, and NIPSCO Industries'
management determines that it would be appropriate to include Northern
Indiana as a participant to the Indiana Agreement, Department approval
of Northern Indiana's inclusion may also be required under G.L. c.
164, Section 17A. Therefore, the Petitioners are directed to notify
the Department if NIPSCO Industries implements the Alternative Merger
37
<PAGE>
and later seeks to include Northern Indiana as a participant to the
Indiana Agreement.
H. NORTHERN INDIANA OPERATING AS A MASSACHUSETTS GAS COMPANY
1. INTRODUCTION
Northern Indiana is an Indiana corporation organized as a
combination gas and electric company doing business exclusively in
Indiana (Exhs. Co.-B at 3; AG 1-1, Sec. 4.3, at 3). According to the
Petitioners, G.L. c. 164, Section 8A(a)<49> suggests that Northern
Indiana may need Department approval to operate as a gas company in
Massachusetts because of its status as an electric company in Indiana
(Petition at 4). Therefore, Northern Indiana has requested
authorization to engage in the business of a gas company in
Massachusetts if the Alternative Merger is ultimately consummated
(Petition at 7; Tr. 2, at 80-81).<50> The Petitioners stated that
Northern Indiana does not intend to operate as a Massachusetts gas
company if the Preferred Merger is ultimately implemented (Tr. 2, at
80-81). The Petitioners stated that, although Northern Indiana has
not yet taken the required shareholder vote to amend its articles of
organization. obtaining shareholder approval would not be difficult in
view of Northern Indiana's status as a wholly-owned subsidiary of
NIPSCO Industries (Tr. 2, at 81-83).
2. STANDARD OF REVIEW
In pertinent part, G.L. c. 164, Section 8A, requires the
Department, after notice and public hearing, to certify to the
secretary of state that the public convenience will be promoted,
permitting Northern Indiana to operate as a gas company in
Massachusetts. Because the statute does not define "public
convenience," the Department relies on our precedents relating to
"public convenience and necessity."
The Department has been accorded wide discretion in determining
whether the "public convenience and necessity" would be promoted by
some proposed action. ZACKS V. DEPARTMENT OF PUBLIC UTILITIES, 460
Mass. 217 (1985) ALMEIDA BUS LINES, INC. V. DEPARTMENT OF PUB. UTILS.,
348 Mass 331 (1965); HOLYOKE ST. RY. V. DEPARTMENT OF PUB. UTILS., 347
Mass. 440 (1964); NEWTON V. DEPARTMENT OF PUB. UTILS., 339 Mass. 535
(1959). "Public convenience and necessity" is a term of art that the
__________________
<49> G.L. c. 164, Section 8A(a) provides, in pertinent part, that a
gas company shall not be authorized to engage in the business of
an electric company and an electric company shall not be
authorized to engage in the business of a gas company unless the
Department, after notice and public hearing, certifies to the
state secretary that the Department deems the public convenience
will be promoted thereby.
<50> Under the Alternative Merger, Northern Indiana would be the
surviving company (Exhs. Co.-A at 28-29; Co.-B, Sch. MTM-4, at A-
1).
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<PAGE>
courts have equated with "public interest". ZACKS V. DEPARTMENT OF
PUBLIC UTILITIES, 460 Mass. 217, 223 (1985). Therefore, to determine
whether to authorize a gas company to engage in the business of an
electric company, or an electric company to engage in the business of
a gas company, the Department will consider whether the requested
action is in the public interest.
3. ANALYSIS AND FINDINGS
Petitions under this statute and its predecessors<51> have
historically been brought by gas companies seeking to operate electric
systems. SEE, FOR EXAMPLE, CAMBRIDGE GAS LIGHT COMPANY, D.P.U. 3729
(1930). While the earlier G.L. c. 164, Section 23, was replaced by
certain provisions of G.L. c. 164, Section 8A, no petitions under
either the pre-1973 version of Section 23 or the later Section 8A have
been filed with the Department since 1930. Moreover, Department
records indicate that this is the first time that a non-Massachusetts
gas or electric company (as distinct from common carriers) has sought
to acquire or merge with a Massachusetts utility (holding companies,
of course, are distinct). Thus, the matter before us is one of first
impression.
The entrance of foreign corporations in the Massachusetts gas and
electric industries previously raised concerns over the legal status
of foreign corporations operating gas and electric systems within
Massachusetts; and foreign ownership was not favored. Third Annual
Report of the Board of Gas and Electric Light Commissioners at 58
(1888). The enactment of the Restructuring Act<52> ("Act")
revised the definition of a "gas company" or "electric company" set
out in G.L. c. 164, Section 1, to include non-Massachusetts
corporations operating gas or electric utilities within
Massachusetts.<53> The Act gives the Department the same
jurisdiction over foreign utilities operating in Massachusetts as is
__________________
<51> An earlier version of G.L. c. 164, Section 23, governed the
acquisition of electric systems by gas companies. and the
acquisition of gas systems by electric companies. The provisions
of G.L. c. 164, Section 23, were stricken and the subject matter
replaced, in part, by G.L. c. 164, Section 8A, pursuant to St.
1973, c. 860. Sections 8 and 13.
<52> An Act Relative to Restructuring the Electric Utility Industry in
the Commonwealth, Regulating the Provisions of Electricity and
Other Services, and Promoting Enhanced Consumer Protection
Therein. St. 1997, c. 164.
<53> Section 189 of St. 1997, c. 164 changed the definition of "gas
company" and "electric company" found in G.L. c. 164, Section 1,
so that a gas or electric company need not be a domestic
Massachusetts corporation, provided such corporation is organized
for the purpose of making and selling, or distributing and
selling, gas and electricity within Massachusetts. Currently,
Northern Indiana does not have any authority to operate within
Massachusetts (Exh. AG 1-1, Sec. 4.3, at 3).
39
<PAGE>
currently applied to Massachusetts-chartered corporations. Therefore,
there is no longer a bar on "foreign" corporations operating gas or
electric systems within Massachusetts. The Department considers that
approval of Northern Indiana's request to operate as a Massachusetts
gas utility would facilitate a contingency merger proposal that has
been found to be consistent with the public interest. Because the
Department has equated "public interest" with "public convenience,"
for the reasons described above, the Department finds that the public
convenience would be promoted by an amendment to Northern Indiana's
articles of incorporation that would permit it to operate as a gas
utility in Massachusetts.
Northern Indiana's articles of incorporation currently restrict
that company to operating only within Indiana (Exh. AG 1-1, Sec. 4.3,
at 3). Although Northern Indiana has not yet made the shareholder
vote necessary under Section 8A to permit operations in Massachusetts,
the Petitioners represent that the required vote will be readily
obtained because Northern Indiana is a wholly-owned subsidiary of
NIPSCO Industries (Tr. 2, at 81-83). Because Section 8A does not
require that the shareholder vote take place prior to Department
certification, the Department finds that approval may be granted,
contingent upon the required vote of Northern Indiana's sole
shareholder, NIPSCO Industries and accordingly, gives this approval.
The Petitioners are directed to submit a copy of the shareholder vote
to amend Northern Indiana's articles of organization and revised
articles of organization, if and when such a vote is taken.<54>
Northern Indiana's request to operate as a Massachusetts gas
company also raises the issue of the corporate name under which
Northern Indiana would operate. G.L. c. 164, Section 5A, requires that
the name of a utility corporation operating in Massachusetts contain
the words "gas company" or "electric company," as the case may be.
The Petitioners indicated that, if the Alternative Merger is
ultimately implemented, Northern Indiana would operate in
Massachusetts under a d/b/a arrangement as "Bay State Gas Company" in
order to capitalize on customer familiarity with Bay State and thereby
avoid customer confusion (Tr. 2, at 86). Based on a review of G.L. c.
156B and c.164, the Department concludes that there is no statutory
bar against the use of an assumed name by Northern Indiana<55>.
Additionally, the Department finds that the continued use of the Bay
State corporate name by Northern Indiana for its potential
Massachusetts operations would reduce the possibility of customer
__________________
<54> The Department notes that such a vote may not be necessary if the
Preferred Merger is ultimately implemented (Tr. 2, at 83-84).
<55> General Laws c. 156B, Section 11, in relevant part, permits
corporations to assume any name that has not been used by a
corporation in current operation or had been in operation during
the prior three years, unless written consent of the preexisting
corporation is filed with the state secretary. The Department
presumes that Bay State's assent for Northern Indiana to operate
in Massachusetts under the Bay State name would readily be
obtained.
40
<PAGE>
confusion resulting from the merger. Accordingly, the Department
finds it appropriate for Northern Indiana to operate under Bay State's
name, if the Alternative Merger is ultimately consummated.
Northern Indiana would only operate as a Massachusetts gas
company if the Alternative Merger is implemented (Tr. 2, at 80-81). If
the Preferred Merger is ultimately implemented, Northern Indiana's
need to operate as a Massachusetts gas company would be rendered moot
(Tr. 2, at 68). The Petitioners themselves have made the request for
Northern Indiana to operate as a Massachusetts gas utility only to
facilitate an Alternative Merger proposal (Exh. Cos.-A. Sch. MTM-4, at
A-1; Tr. 2, at 80-81). Therefore, the Department's approval of
Northern Indiana's request to operate as a Massachusetts gas utility
is contingent upon the consummation of the merger under the
Alternative Merger proposal.
In view of the possibility that the Preferred Merger may be
ultimately implemented, the Department finds it appropriate to place a
time limit on the authority being granted by this order to Northern
Indiana. SEE BERKSHIRE GAS COMPANY, D.P.U. 16090, at 3 (1969). The
Department places the Petitioners on notice that Northern Indiana's
authorization to operate as a gas company in Massachusetts shall
expire as of the date of the consummation of the Preferred Merger, if
the Preferred Merger is implemented.
I. PREFERRED MERGER VERSUS ALTERNATIVE MERGER
While the Petitioners are seeking approval of both the Preferred
Merger and Alternative Merger, they have expressed their preference
for the Preferred Merger and request that the Department inform the
SEC that the Department also favors the Preferred Merger (Exh. Cos.-B
at 17; Petition at 3).
The Department favors the Preferred Merger. Under the Preferred
Merger, the post-merger structure of Bay State would be consistent
with the holding company structures that have been adopted by all of
the investor-owned Massachusetts-based electric utilities, a number of
investor-owned gas utilities, and are currently under consideration by
other utilities. EASTERN-ESSEX ACQUISITION at 76-77; D.P.U. 97-63, at
10; BERKSHIRE GAS COMPANY, D.T.E. 98-61 (pending before the
Department). The Alternative Merger would make Bay State an operating
division of Northern Indiana, a wholly-owned gas and electric
subsidiary of NIPSCO Industries, a holding company. Under the
Preferred Merger, Bay State would have its own books and records,
capital and management structures, and board of directors (Exh. Cos.-A
at 29-30). Therefore, the Department's statutorily-mandated review of
specific company proposals would be more efficient under the Preferred
Merger than the Alternative Merger, where Bay State would be operating
as the Massachusetts division of Northern Indiana.
By way of example, G.L. c. 164, Section 14 requires gas and
electric companies to seek Department approval prior to the issuance
of stock, bonds, coupon notes, or other evidences of indebtedness.
Under the Preferred Merger, the Department's review of financing
proposals filed by Bay State pursuant to G.L. c. 164, Section 14,
41
<PAGE>
would be based on examining Bay State as a stand-alone entity or as a
participant in a larger financing package prepared by NIPSCO
Industries (Tr. 2, at 65-66). Under the Alternative Merger, the
Department would have to examine each financing proposal of Northern
Indiana, whether or not the financing had any effect on that company's
Massachusetts division, in order to determine whether the particular
proposal had an impact on Massachusetts operations (Tr. 2, at 66-67).
As the Petitioners have noted, implementation of the Alternative
Merger would require additional coordination between the Department
and the Indiana Utility Regulatory Commission, thereby adding to the
complexity of financial oversight (Tr. 2, at 67-68). Moreover,
complexities would be created in the area of cost allocations between
Northern Indiana's Indiana and Massachusetts operations (Exhs. AG 3-
11; AG 3-12). Therefore, because of the efficiencies that would
result from the Preferred Merger, the Department states its pronounced
preference for the Preferred Merger over the Alternative Merger.
The Petitioners have also proposed an Alternative Merger (Tr. 2,
at 68, 81-82; Exh. Cos.-A, Sch. MTM-4, at A-l).<56> The
Department has already spoken in favor of the Preferred Merger model
and has noted that, with the exception of differing corporate
structures, the remaining elements of the Preferred and Alternative
Merger proposals are identical. If the Alternative Merger model is
followed, Bay State (a gas company within the meaning of G.L. c. 164,
sec. 1, and a Massachusetts corporation) would merge not into
Acquisition Company, a planned Massachusetts corporation, but,
instead, into Northern Indiana, an existing gas and electric company
incorporated in Indiana. The Alternative Merger would thus extinguish
Bay State's corporate existence under Massachusetts law. The company
would be converted into the Massachusetts operating division of the
foreign corporation, Northern Indiana.
The Electric Restructuring Act, St. 1997, c. 164, Section 189
("Restructuring Act"), amended the definition of "gas company" in G.L.
c. 164, Section 1, to remove the requirement that a gas company be
organized under the laws of the Commonwealth. It seems evident that
the Legislature's removal of that restriction was intended to permit
foreign corporations to act as gas companies in Massachusetts. The
result was to allow operation by entities previously excluded from
Massachusetts regulatory law and practice. The Restructuring Act
contains, however, no further expression of legislative intent as to
how regulation of such foreign corporations -- and certainly not
foreign corporations with operating divisions in both Massachusetts
and other states -- is to be accomplished under or integrated into
G.L. c. 164. Moreover, apart from requesting approval of the
Alternative Merger proposal, the Petitioners developed no adequate
__________________
<56> The Department recognizes the logic in this case for the
Petitioners to offer "preferred" and "alternative" merger
structures in order to meet the requirements imposed by other
government agencies. However, presenting alternative proposals
is not an efficient way of litigating a case and should be
introduced only when absolutely necessary. the Department will
require companies to demonstrate this necessity in the future.
42
<PAGE>
record on how certain regulatory questions raised by that proposal
ought to be addressed or how Bay State would conduct itself as an
operating division of Northern Indiana.
There are important issues about regulating Bay State as an
operating division of a foreign corporation. These issues include the
nature and scope of Department regulation of Northern Indiana's
capital structure, cost allocation between operating
divisions,<57> and the coordination between this Department and
the Indiana Utility Regulatory Commission. These and probably other
issues may need to be defined, explored, and resolved in the interest
of protecting Bay State ratepayers.
Having made those points, the Department provisionally approves
the contingent Alternative Merger. If the Petitioners elect to follow
that path, instead of the Preferred Merger, then the Petitioners must
so inform the Department and must file with the Department proposals -
- with supporting legal argument -- for appropriate integration of the
Alternative Merger's corporate and operating structure into the G.L.
c. 164 framework. The Petitioners, either through the initial filing
or through a Department investigation, must satisfy the Department
that Massachusetts ratepayers' interest will not be impaired.
V. SUMMARY
The Department has evaluated the benefits and costs associated
with the merger based on the following five factors: (1) effect on
rates and the resulting net savings the merger; (2) effect on the
quality of service; (3) societal costs; (4) acquisition premium; and
(5) financial integrity of the post-merger entity.
The Department has found that approval of a five-year base rate
freeze will benefit Bay State's ratepayers and will result in just and
reasonable rates. Further, the Department recognized that the
proposed merger could provide Bay State's ratepayers with savings in
gas costs that would be unavailable absent the merger.
Concerning the proposed merger's effect on quality of service,
the Department has ordered the continuation of the quality of service
plan currently in effect to ensure that Bay State's ratepayers
experience no degradation of service following the merger.
With respect to the societal costs of the proposed merger, the
Department has found that the merger would not significantly affect
Bay State's workforce.
__________________
<57> Bay State's last fully adjudicated (I.E., not resolved by
settlement) rate case was in 1992. BAY STATE GAS COMPANY, D.P.U.
92-111 (1992). There currently is no obvious answer to the
question of whether the cost of service findings in that case
would suffice to establish Bay State's operating costs as an
operating division of Northern Indiana.
43
<PAGE>
Regarding the recovery of an acquisition premium, the Department
has found that earnings dilution to Bay State's shareholders that
results from the merger represents a cost that may and should be taken
into consideration as part of the evaluation of the costs and benefits
of the merger. The Department found that the proposed purchase price
for Bay State's common stock and proposed exchange ratio are
reasonable. Therefore, the Department accepted the Petitioners'
estimate of $310,000,000 for the acquisition premium and has found it
to be reasonable. However, the Department reminds the Petitioners
that they are at risk for non-recovery of the premium if they fail to
make the requisite showing of offsetting benefits.
Regarding the financial integrity of the post-merger entity, the
Department has found that both Bay State and Northern Indiana are
viable companies and that the merger would not adversely affect Bay
State's financial integrity.
Based on our evaluation of the costs and benefits associated with
the aforementioned factors, the Department finds that the public
interest would be at least as well served by approval of the proposed
merger as by its denial, I.E., that there is no net harm to
ratepayers. Therefore, the proposed merger is consistent with the
public interest. Accordingly, the Department hereby approves the
Preferred and Alternative Merger Agreements and Rate Plan, subject to
the directives contained herein, under the terms of G.L. c. 164,
Sections 94 and 96.
VI. CONCLUSION
For decades, little or no acquisition or merger activity took
place in the Commonwealth. Service territory maps of investor-owned
electric and gas companies in Massachusetts, as a result, remain
highly Balkanized.<58> Such geographic fragmentation suggests
inefficiencies both from avoidable overhead and from limitations on
utilities' ability to take market actions beneficial to customers --
especially in the area of gas purchasing, corporate finance, and
staffing. MERGERS AND ACQUISITIONS, D.P.U. 93-167A, sought to break
with this disadvantageous STATUS QUO. EASTERN-ESSEX ACQUISITION,
D.T.E. 98-27, enunciated a clear Department policy in favor of
suitably-framed consolidations. The Petitioners, however, filed
shortly after the Eastern-Essex transaction came before the Department
and thus could not have benefitted from perusal of the final order in
EASTERN-ESSEX ACQUISITION before making their filing.
While the proposal made in the instant docket has succeeded in
securing Department approval under Section 96, the Petitioners
initial filing lacked the detail we expect to see in future Section 96
__________________
<58> For example, and by way of contrast to Massachusetts' situation,
Northern Indiana's service territory of 12,000 square miles
(Exh. Cos.-A, at Tab B, at 3) is nearly half again the size of
the entire Commonwealth (8257 square miles, including all
embayments and sounds, Merriam-Webster's New Geographical
Dictionary at 738 (1984).
44
<PAGE>
proposals. The logic of the initial filing had its strengths; but the
filing's level of generality left important detail to be developed by
the Department itself through discovery and evidentiary hearings. The
Department would not want to repeat that onerous process.
MERGERS AND ACQUISITIONS, D.P.U. 93-167A, at 7, had warned that a
petitioner who expects to avoid an adverse outcome should not rest its
case on mere generalities. The Department would not want future
petitioners to see its approval of the instant proposal as a sign that
this initial filing is a favored model for future Section 96 filings.
Future filings, based on generalities, will not suffice to justify
Section 96 approval, including any requests for acquisition premium
recovery. This reminder applies also to any future filing by the
instant Petitioners to justify premium recovery. Rather, the
Petitioners must demonstrate benefits that justify costs, including
the cost of any acquisition premium sought.
VII. ORDER
Accordingly, after due notice, hearing and consideration, the
Department
VOTES: That pursuant to G.L. c. 164, Section 14, the issuance
and sale by Acquisition Gas Company of 100 shares of common stock,
$1.00 par value, to NIPSCO Industries in exchange for $100.00 is
reasonably necessary for the purposes stated; and it is
ORDERED: That pursuant to G.L. c. 164, Section 14, the issuance
and sale by Acquisition Gas Company of 100 shares of common stock,
$1.00 par value, to NIPSCO Industries in exchange for consideration of
$100.00 is hereby approved and authorized; and it is
FURTHER ORDERED: That pursuant to G.L. c. 164, Section 96, the
Agreement and Plan of Merger by and among Bay State and NIPSCO
Industries, dated as of December 18, 1997, and as amended and restated
as of March 4, 1998, by and between Bay State and NIPSCO Industries is
hereby approved; and it is
FURTHER ORDERED: That pursuant to G.L. c. 164, Section 96, the
merger of Acquisition Gas Company into Bay State Gas Company is hereby
approved; and it is
FURTHER ORDERED: That pursuant to G.L. c. 164, Section 94, the
Rate Plan for Bay State Gas Company is allowed in part and denied in
part, and that Bay State Gas Company, Northern Indiana Public Service
Company and NIPSCO Industries design and file a Rate Plan in
compliance with this Order; and it is
FURTHERED ORDERED: That, upon consummation of the Preferred
Merger of Acquisition Gas Company with and into Bay State Company,
Acquisition Gas Company as surviving company shall have all rights,
powers, and privileges, franchises, properties, real personal or
mixed, and immunities held by Bay State Gas Company necessary to
engage in all the activities of a gas utility company in all the
cities and towns in which Bay State Gas Company was engaged
45
<PAGE>
immediately prior to the merger, and that further action pursuant to
G.L. c. 164, Section 21 is not required to consummate the merger; and
it is
FURTHER ORDERED: That pursuant to G.L. c. 164, Section 17A,
under the Preferred Merger, an amendment to Bay State's debt pooling
agreement to join NIPSCO Capital Markets, Inc. as a party to the
Agreement is hereby approved; and it is
FURTHER ORDERED: That if, subject to the conditions contained
herein, the Alternative Merger occurs, operation of Northern Indiana
as a gas company is approved pursuant to G.L. c. 164, Sections 1 and
8A(a); and it is
FURTHER ORDERED: That Bay State Gas Company, NIPSCO Industries,
Northern Indiana Public Service Company and Acquisition Gas Company
shall comply with all directives contained herein; and it is
FURTHER ORDERED: That a copy of the journal entries, or a
schedule summarizing such entries, recording the effect of the merger
shall be filed with the Department upon consummation of the merger;
and it is
FURTHER ORDERED: That the Secretary of the Department notify the
Secretary of State of the issuance of stock and deliver a certified
copy of this Order to the Secretary of State within five business days
hereof; and it is
FURTHER ORDERED: That the Secretary of the Department notify the
Securities and Exchange Commission of the issuance of this Order under
cover letter informing that agency of the Department's preference for
the Preferred merger, and deliver to that agency a certified copy of
this Order.
_____________________________________
By Order of the Department,
_____________________________________
Janet Gail Besser, Chair
_____________________________________
James Connelly, Commissioner
_____________________________________
W. Robert Keating, Commissioner
_____________________________________
Paul B. Vasington, Commissioner
_____________________________________
Eugene J. Sullivan, Jr., Commissioner
46
<PAGE>
EXHIBIT D-4
-----------
DF 98-040
NORTHERN UTILITIES, INC.
Merger of Northern Utilities, Inc., NIPSCO Industries, Inc.,
and Northern Indiana Public Service Company
Approval of Merger and Related Transactions
O R D E R N O. 22,983
July 20, 1998
APPEARANCES: LeBoeuf, Lamb, Greene & MacRae by Meabh Purcell, Esq.
and Paul B. Dexter, Esq. for Northern Utilities, Inc.; Day, Berry &
Howard by Robert Knickerbocker, Esq. for NIPSCO Industries, Inc. and
Northern Indiana Public Service Company; and Eugene F. Sullivan, III,
Esq. for the Staff of the New Hampshire Public Utilities Commission.
I. PROCEDURAL HISTORY
On March 20, 1998, Northern Utilities, Inc. (Northern),
NIPSCO Industries, Inc. (NIPSCO) and Northern Indiana Public Service
Company (Northern Indiana) jointly filed with the New Hampshire Public
Utilities Commission (Commission) a petition for Approval of a Merger
and Related Transactions. The petition requested permission for
NIPSCO or its affiliate, Northern Indiana, to acquire Northern, or its
parent, Bay State Gas Company, Inc. (Bay State) under two alternative
acquisition plans. The petition specified a preferred and an
alternative plan of merger.
Under the preferred plan of merger, Bay State would merge
into a newly created wholly-owned subsidiary of NIPSCO, formed for
purposes of the merger. Sometime after the merger, Northern's stock
would be transferred from Bay State to NIPSCO and Northern would
operate as a direct subsidiary of NIPSCO. The preferred merger,
however, requires an exemption from the provisions of the Public
Utility Holding Company Act of 1935 by the Securities and Exchange
Commission (SEC).
The alternate merger would have Bay State and Northern
merged into NIPSCO's public utility subsidiary, Northern Indiana.
Subsequently, Northern and Bay State would operate as divisions of
Northern Indiana with no independent corporate identity. Both the
preferred and alternate mergers require the approval of the Maine and
New Hampshire Public Utilities Commissions because Northern provides
service in both States.
On April 9, 1998, the Commission issued an Order of Notice
setting a prehearing conference for April 28, 1998. No Motions to
Intervene were filed; the Office of the Consumer Advocate (OCA) is a
statutorily recognized intervenor. On April 22, 1998, Staff submitted
a letter to the Commission stating that Northern, NIPSCO and Northern
<PAGE>
Indiana, the Maine Public Utilities Commission (MPUC), the Maine
Public Advocate Office (Public Advocate) the OCA and Staff had agreed,
for purposes of administrative efficiency, to hold two joint technical
sessions in Portsmouth, New Hampshire to review the essentially
identical petitions filed in Maine and New Hampshire and to allow
Northern to provide any amendments or updates to the filings.
Following the prehearing conference, the Commission issued
Order No. 22,930 (May 13, 1998) approving a procedural schedule to
govern its investigation into the petition. In accordance with the
procedural schedule, the parties and Staff engaged in formal discovery
and the joint technical sessions with the State of Maine in
Portsmouth.
On June 12, 1998, the MPUC issued an order approving the
proposed merger under either the preferred or alternative structures.
In addition, on June 16, 1998, the MPUC submitted a letter to the SEC
supporting the merger and recommending the SEC grant the necessary
exemptions to permit the preferred structure.
On June 8, 1998, Northern, NIPSCO, OCA and Staff entered
into a Stipulation and Agreement (Stipulation) resolving or leaving to
subsequent proceedings all of the issues in this proceeding. The
Stipulation was substantially the same as a Stipulation and Agreement
executed among Northern, NIPSCO, the Maine Public Advocate and the
Staff of the MPUC. A hearing on the merits was held on July 1, 1998
at which the parties presented the Stipulation and supporting
testimony.
II. STIPULATION AND AGREEMENT
Pursuant to the Stipulation, Northern, NIPSCO, OCA and Staff
agreed that the merger is consistent with the public interest standard
of RSA 374:33 under either the Preferred or the Alternate structures
proposed in the March 20, 1998 petition, and should be approved
subject to the following provisions:
1. COMMISSION JURISDICTION. The jurisdiction of the Commission
over Northern's operations will not be changed under either the
Preferred or the Alternate Merger structure or form of merger.
2. SUPPORT PREFERRED STRUCTURE. Northern, NIPSCO, OCA and Staff
agree that the Commission should express its support for the
Preferred Merger structure because it simplifies accounting for
the subsidiary's operations and regulation of those operations.
3. ALTERNATE MERGER. Northern, NIPSCO, OCA and Staff agree that if
the Preferred Merger structure is not possible, the Alternate
Merger structure is in the public good.
4. RECOVERY OF ACQUISITION PREMIUM. Northern, NIPSCO, OCA and Staff
agree that Northern may request recovery of the amortization of
the acquisition premium in future ratemaking proceedings to the
extent that Northern can demonstrate that the benefits of the
-2-
<PAGE>
merger to customers equal or exceed the amount of the premium
being sought to be amortized.
5. CAPITAL STRUCTURE. Northern, NIPSCO, OCA and Staff agree that no
Party will be bound in any future ratemaking proceedings to
utilize the capital structure of Northern that results from
entries to account for the merger.
III. COMMISSION ANALYSIS
After careful review of the Stipulation and Agreement, and
the testimony and exhibits offered at the July 1, 1998 hearing, we
find that the Stipulation is reasonable and that the proposed
acquisitions are lawful, proper and in the public interest. RSA
374:33
Under the public interest standard to be applied by the
Commission where a utility or public utility holding company seeks to
acquire, directly or indirectly, a jurisdictional utility, the
Commission must determine that the proposed transaction will not harm
ratepayers. GRAFTON COUNTY ELECTRIC LIGHT AND POWER CO. V. STATE, 77
N.H. 539 (1915); ID., EASTERN UTILITIES ASSOCIATES, 76 N.H.P.U.C. 236,
252 (1991); RE HAMPTON WATER WORKS COMPANY, INC., 80 N.H.P.U.C. 468,
473 (1995) AND CF., PARKER-YOUNG CO. V. STATE, 83 N.H. 551 (1929)
(application of "net benefits" test where there are competing offers
to acquire).
As was noted above, there are two different acquisition
scenarios proposed in this petition, the preferred and alternate
plans. The primary difference between the preferred and alternate
plans is that Northern remains a corporate entity with its own Board
of Directors under the preferred merger. In testimony,
NIPSCO/Northern Indiana represented that if the alternate merger was
required by the SEC, an Advisory Board could be established for
Northern to provide local input into decisions affecting Northern's
customers.
At this time, we express our support and preference for the
"preferred acquisition scenario" because it provides for the continued
corporate existence of Northern and the attendant corporate
formalities that we believe will provide greater protection or
representation of Northern's interests in the new corporate structure,
such as a corporate Board of Directors. The preferred merger would
also impose a legal requirement that Northern maintain separate books
and records which will facilitate our continued review and oversight
of Northern and its operations in New Hampshire.
In order to ensure that there is no harm to Northern
ratepayers, we direct that should the alternate merger be implemented,
such an Advisory Board be established. The Advisory Board should be
comprised of members involved in the New Hampshire community and it
should have real authority to ensure that New Hampshire customers
receive the full benefits of this merger and that the Northern
Division and its customers' interests are not neglected in the merged
-3-
<PAGE>
company. We expect more than token representation of Northern's
interests on either the Board of Directors or the Advisory Board.
Under either of the acquisition plans, there is no evidence
that ratepayers will be harmed. Under both the preferred and
alternative acquisition scenarios Northern's operations are to remain
unchanged or will improve as the new Company seeks to expand its area
of service. Moreover, separate books and records will be maintained
under both the preferred and alternate acquisition scenarios,
facilitating the Commission's continued review and oversight of
Northern and its operations in New Hampshire.
We note, however, that the inclusion of the acquisition
premium in ratebase and the effect of the acquisition premium on the
capital structure of Northern would in all likelihood lead us to the
conclusion that Northern ratepayers would be harmed by the acquisition
without the conditions contained in the Stipulation. Those conditions
require Northern to substantiate any savings to ratepayers that have
resulted from the merger before Northern may include any part of the
acquisition premium in ratebase for ratemaking purposes. The same
condition applies to the effect of the acquisition premium on the
capital structure of the resultant entity.
For the purpose of SEC approvals, we note that we have the
necessary authority and responsibility to protect Northern's New
Hampshire ratepayers and the preferred merger will facilitate our
continued exercise of that authority. Accordingly, we will notify the
SEC of our support for the preferred merger for consideration in its
review of NIPSCO, Inc.'s merger application.
As noted above, the provisions in the Stipulation which
defer consideration of the capital structure and ratemaking issues for
a subsequent proceeding are appropriate. Northern will have the right
to request recovery of an acquisition premium in a future proceeding
to the extent it can substantiate the reasonableness of that action,
just as all parties are free to argue in support of or opposition to
such recovery as they see fit. Likewise, in a future rate recovery
proceeding, any party may argue that a hypothetical capital structure
may be more appropriate in determining a rate of return. We will
consider such requests and related arguments when
filed.<***********>
Before such a proceeding, however, Northern shall file its annual
reports in a form that allows for an analysis of its earnings with and
without the effects of the acquisition premium, both from the
perspective of ratebase and the weighted cost of capital.
<***********>At the July 1, 1998 hearing, Northern indicated that
the SEC had required a demonstration that the proposed acquisition
would result in net benefits to customers. We do not believe it would
be appropriate for NIPSCO/Northern Indiana to represent to the SEC
purported benefits of the merger if it intends subsequently to seek
from this Commission recovery of the costs of such benefits through
the acquisition premium.
-4-
<PAGE>
Based upon the foregoing, it is hereby
ORDERED, that the Stipulation and Agreement is APPROVED
subject to the foregoing analysis; and it is
FURTHER ORDERED, that this Order, which indicates our
support for the preferred merger, shall be submitted to the Securities
and Exchange Commission for consideration in its review of NIPSCO,
Inc.'s merger application; and it is
FURTHER ORDERED, that if the alternate merger is
implemented, a Northern Advisory Board shall be established.
By order of the Public Utilities Commission of New Hampshire
this twentieth day of July, 1998.
/S/ Douglas L. Patch /S/ Bruce B. Ellsworth /S/ Susan S. Geiger
-------------------- ---------------------- --------------------
Douglas L. Patch Bruce B. Ellsworth Susan S. Geiger
Chairman Commissioner Commissioner
Attested by:
/S/ Thomas B. Getz
--------------------------------
Thomas B. Getz
Executive Director and Secretary
-5-
<PAGE>
STATE OF NEW HAMPSHIRE
before the
PUBLIC UTILITIES COMMISSION
---------------------------------------------)
JOINT PETITION OF NORTHERN UTILITIES, )
INC., NIPSCO INDUSTRIES, INC. AND ) DOCKET NO. DF 98-040
NORTHERN INDIANA PUBLIC SERVICE )
COMPANY FOR APPROVAL OF A MERGER AND )
RELATED TRANSACTIONS )
---------------------------------------------)
STIPULATION AND AGREEMENT
---------------------------
This Stipulation and Agreement ("Stipulation") is entered
into this 5th day of June, 1998, by and between Northern Utilities,
Inc. ("Northern"), NIPSCO Industries, Inc. ("Industries"), an Indiana
corporation, the Office of the Consumer Advocate ("OCA") and the Staff
of the New Hampshire Public Utilities Commission ("Staff") with the
intent of resolving all issues that were raised or could have been
raised in connection with this docket. Northern, Industries, the OCA
and the Staff are referred to collectively below as the "Parties."
I. RECITALS
WHEREAS, by Joint Petition dated March 20, 1998, Northern
and Industries requested the approval of the New Hampshire Public
Utilities Commission ("NHPUC") to approve a reorganization in which
either Northern, or its parent Bay State Gas Company, will be merged
with an acquisition subsidiary of Industries or with Northern Indiana
Public Service Company ("Northern Indiana"), Industries' largest
public utility subsidiary.
WHEREAS, Northern is a gas utility under R.S.A. 362:2 and
provides gas service to approximately 20,000 customers in the seacoast
area of New Hampshire, including greater Portsmouth.
WHEREAS, Bay State is a Massachusetts corporation and a
public utility that provides gas services to approximately 261,000
customers in Massachusetts. Bay State is the parent company of
Northern and, as such, is an affiliate of Northern under R.S.A. 366:1.
WHEREAS, Industries is an Indiana corporation that owns all
of the common stock of Northern Indiana, among other regulated and
unregulated subsidiaries, and is presently a holding company exempt
from most provisions of the Public Utility Holding Company Act of
1935, as amended (the "1935 Act"). Northern Indiana is a public
utility operating company supplying natural gas and electric energy to
the public.
WHEREAS, for this transaction, Northern has proposed special
legislation in the New Hampshire General Court to remove the domestic
incorporation requirement under R.S.A. 374:26 to allow Northern to
merge with a foreign corporation. The bill has been passed by the
Senate and the House and is presently before the Governor for
execution.
<PAGE>
WHEREAS, the Agreement and Plan of Merger, dated as of
December 18, 1997, as amended and restated as of March 4, 1998, by and
between Bay State and Industries (the "Merger Agreement"), provides
for two possible corporate structures for the proposed transaction.
Under the Preferred Merger structure or form of merger, Bay State
would merge into the newly created wholly-owned subsidiary of
Industries, formed for purposes of the merger. Sometime after the
Merger all of the common stock of Northern would be transferred from
Bay State to Industries, and Northern would then operate as a direct
subsidiary of Industries, and Industries would maintain its status as
an exempt public utility holding company. The Preferred Merger
structure is subject to the review and approval of the Securities and
Exchange Commission (the "SEC") under the 1935 Act.
WHEREAS, if Industries does not receive approval of the SEC
under Section 9(a)(2) of the 1935 Act, the Alternate Merger or form of
merger, which does not require SEC approval, would be employed to
accomplish the merger. Under the Alternate Merger structure, Bay
State and Northern would each be merged into Industries' public
utility subsidiary, Northern Indiana, and would operate as divisions
of Northern Indiana.
WHEREAS, the Board of Directors of Bay State has unanimously
determined that the merger is in the best interests of Bay State and
its shareholders. At a special meeting of common shareholders, the
Merger Agreement was approved by a vote of 78.1%.
II. TERMS AND CONDITIONS
1. The Parties agree that under either the Preferred or
the Alternate Merger structure or form of merger, the jurisdiction of
the Commission over Northern's operations will not be changed.
2. The Parties agree that the merger is consistent with
the public interest under either the Preferred or the Alternate
structure or form of merger.
3. The Parties agree that both the Preferred and Alternate
structures of the merger satisfy the Commission's standard of review
under R.S.A. 374:33 for assessing whether an acquisition is consistent
with the public interest.
4. The Parties agree that the Commission should express
its support for the Preferred Merger structure in its final order
because the Preferred Merger structure simplifies assurances that the
risks and benefits of operations within the individual subsidiaries
are retained by those operations and their customers and simplifies
regulation of those operations by the Commission.
5. The Parties agree that if the Preferred Merger
structure is not possible, under the Alternate Merger structure, the
transfer of Northern's franchise work and systems to Northern Indiana,
and authorization for Northern Indiana to engage in business as a
public utility in New Hampshire are in the public good, pursuant to
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<PAGE>
R.S.A. 374:22, 26 and 30 and subject to passage of the pending
legislation previously referred to.
6. Without precluding any Party from taking any position
with regard to such request, the Parties agree that Northern will be
allowed to request in future proceedings the amortization of the
acquisition premium in rates, and that the Commission may consider
allowing such recovery to the extent that Northern can meet the
evidentiary burden of demonstrating that the benefits of the merger to
customers equal or exceed the amount of the premium being sought to be
amortized.
7. The Parties agree that no Party shall be bound in any
future proceedings to utilize for ratemaking purposes the capital
structure of Northern that results from entries to account for the
merger.
III. MISCELLANEOUS
1. The Parties agree that the making of this Stipulation
shall not be deemed in any respect to constitute an admission by any
party that any allegation or contention in these proceedings is true
or valid.
2. The Parties agree that this Stipulation is expressly
conditioned upon the Commission's acceptance on or before July 15,
1998 of all of its provisions, without change or condition, and if the
Commission does not accept it in its entirety, without change or
condition, the Stipulation shall be deemed null and void and without
effect, and shall not constitute any part of the record in this
proceeding nor be used for any other purpose.
3. The Parties agree that the Commission's acceptance of
the Stipulation does not constitute continuing approval of or
precedent regarding any particular issue in this proceeding, except as
provided in Section II.6, supra, but such acceptance does constitute a
determination that the provisions set forth herein are just and
reasonable.
4. The Parties agree that the discussions which have
produced this Stipulation have been conducted with the understanding
that all offers of settlement and discussion relating thereto are and
shall be privileged, and shall be without prejudice to the position of
any party or participant representing any such offer or participating
in any such discussion, and are not to be used in any manner in
connection with this proceeding, any further proceeding or otherwise.
-8-
<PAGE>
IN WITNESS WHEREOF, Northern, Industries, the OCA and the
Staff have caused this Stipulation to be duly executed in their
respective names by their agents, each being fully authorized to do so
on behalf of their principal.
NORTHERN UTILITIES, INC.
Dated: 6/8/98 By: /S/ Meabh Purcell
------- ----------------------------------------
NIPSCO INDUSTRIES, INC.
Dated: 6/8/98 By: /S/ Robert P. Knickerbocker, Jr.
------- ---------------------------------------
OFFICE OF THE CONSUMER
ADVOCATE
Dated: 6/5/98 By: /S/ Kenneth E. Traum
------- ----------------------------------------
STAFF OF THE PUBLIC
UTILITIES COMMISSION
Dated: 6/5/98 By: /S/ Eugene F. Sullivan, III
------- ---------------------------------------
-9-
<PAGE>
EXHIBIT D-6
------------
STATE OF MAINE
PUBLIC UTILITIES COMMISSION Docket No. 98-216
June 12, 1998
NORTHERN UTILITIES, INC., ORDER APPROVING
Request for Approval of Reorganization - STIPULATION AND
Merger with NIPSCO Industries MERGER
WELCH, Chairman; Nugent, Commissioner
----------------------------------------------------------------------
I. SUMMARY OF ORDER
We approve the Stipulation among the parties and find that
the merger of Northern Utilities, Inc. with NIPSCO Industries, Inc. is
not adverse to the public interest under the terms presented in the
Stipulation.
II. PROCEDURAL HISTORY
On March 20, 1998, Northern Utilities, Inc. (Northern),
filed a request for approval of a reorganization pursuant to 35-A
M.R.S.A. 708 to allow for its merger with a subsidiary of NIPSCO
Industries, Inc. (NIPSCO), an Indiana corporation. Northern's parent
corporation, Bay State Gas Company (Bay State) is also proposing to
merge with NIPSCO in the same manner as is proposed for Northern. Bay
State's proposal is currently before the Massachusetts Department of
Telecommunications and Energy for approval. Northern must also obtain
the approval of the proposed merger from the New Hampshire Public
Service Commission.
The merger is proposed to take either of two possible forms:
1) the Preferred Structure: Northern's merger as a separate subsidiary
of NIPSCO; or 2) the Alternate Structure: Northern's merger into, to
exist as a division of, Northern Indiana Public Service Company
(Northern Indiana), NIPSCO's largest public utility subsidiary. The
form of the merger will ultimately depend on the decision of the
Securities and Exchange Commission (SEC), which may approve the
Preferred Structure as exempt from the provisions of the Public
Utility Holding Company Act of 1935. If the SEC does not so hold, the
merger will take place under the proposed Alternate Structure.
The Bay State Board of Directors unanimously determined that
the merger is in the best interests of the company and its
shareholders and common shareholders approved the Merger Agreement by
a vote of 78.1%.
The Commission issued a Notice of Proceeding on April 10,
1998 by procedural order and by publication in newspapers of general
circulation. These notices established an intervention deadline of
April 27, 1998 and set a prehearing conference for April 29, 1998.
<PAGE>
On April 28, 1998, Central Maine Power Company (CMP) asked
to be included on the service list for this proceeding as an
interested person. The Office of the Public Advocate (OPA) and NIPSCO
participated in the prehearing conference and were granted
intervention. The parties and Advisory Staff participated in
discovery and in joint technical conferences with the New Hampshire
Public Service Commission on May 6 and 26, 1998.
On May 19, 1998, CMP submitted a Petition for Late
Intervention pursuant to Chapter 110, Section 720. In filings dated
May 22, 1998, Northern and NIPSCO objected to CMP's late-filed
petition for intervention. CMP did not file responsive comments to
these objections on May 28th as allowed by Chapter 110, section
420(c). The Commission denied CMP's late-filed petition to intervene
by Order dated June 3, 1998.
A Stipulation executed by OPA, Northern and NIPSCO was filed
on May 29, 1998 and the Commission held a hearing on the stipulation
followed by deliberations on June 3, 1998. At the hearing, James D.
Simpson, Senior Vice-President and Leader of the Utility Segment for
Bay State Gas Company, and Mark Maassel, Vice President of NIPSCO
Industries Management Services Company presented oral testimony in
support of the stipulation and merger. The prefiled testimonies of
these witnesses dated March 20, 1998 were entered into the record as
Northern Exhibit #1. The OPA also spoke in support of the stipulation
and merger and the witnesses responded to questions from the bench.
III. STIPULATION PROVISIONS
The Stipulation provides that, under either of the proposed
corporate structures, the merger is consistent with the interests of
Northern's customers and investors and satisfies the Commission's
standard of review under 35-A M.R.S.A. Section 708(2). The
Stipulation also provides that, under either corporate structure, the
merger will not change the jurisdiction of the Commission over
Northern's operations and that the Commission should express to the
SEC its support of the Preferred Structure. Additionally, the
Stipulation provides that should the merger occur under the Alternate
Structure, the merger of Northern's property, franchise or permits
with Northern Indiana should be granted pursuant to 35-A M.R.S.A.
Section 1101 and that transfer of stock should be allowed pursuant to
Section 1103.
Finally, the Stipulation provides that in a future
proceeding the parties will not be precluded from making a request
for, or argument in opposition to, the recovery of an acquisition
adjustment in rates. Nor will any party be bound to accept, for
ratemaking purposes in future proceedings, the capital structure
resulting to Northern from the merger accounting entries.
OPA summarized its support of the merger stating that it
should lend increased financial strength to Northern and its
operations in Maine and that there should be significant opportunities
for supply resource savings as a result of the merger. OPA noted that
the parties had "agreed to disagree" on the need for recovery of the
-2-
<PAGE>
acquisition adjustment by reserving that issue for litigation in a
later proceeding.
IV. DISCUSSION
Our general criteria for approving stipulations include:
whether the parties joining the Stipulation represent a sufficiently
broad spectrum of interests; whether the process that led to the
Stipulation was fair; and whether the stipulated resulted is
reasonable, not contrary to legislative mandate, and is in the public
interest. See PUBLIC UTILITIES COMMISSION, INVESTIGATION INTO
REGULATORY ALTERNATIVES FOR THE NEW ENGLAND TELEPHONE AND TELEGRAPH
COMPANY D/B/A NYNEX, Docket No. 94-123 at 4-5 (Mar. 17, 1998). Taking
these general criteria into account and upon review of the specific
terms of the Stipulation, we find the agreement to be reasonable and
not contrary to the public interest.
Consequently, we approve the Stipulation and the merger. We
find support for our decision in the lack of opposition among the
participants and find that the reservations in the Stipulation holding
aside the capital structure and ratemaking issues for a subsequent
proceeding are appropriate.
We also note that there appear to be some benefits to Maine
ratepayers in the Preferred Structure because there will be a separate
Board of Directors overseeing Northern's operations and books and
records will be separate. These factors should facilitate our
continued review and oversight of Northern and its operations in
Maine.
Should the merger go forward under the Alternate Structure,
we will also require that the companies maintain separate books and
records for the Northern operating division of Northern
Industries.<************>
Accordingly, we
O R D E R
1. That the Stipulation and Agreement filed May 28, 1998
is approved;
2. That the merger of Northern Utilities, Inc. with NIPSCO
Industries, Inc. of Indiana, is approved under either of the proposed
corporate structures; and
3. That we will submit this Order indicating our support
for the Preferred Merger Structure to the Securities and Exchange
<************>At the hearing, Mr. Maassel indicated that this
would require the merged companies company to keep two sets of books
because, as divisions of Northern Indiana, the operating results of
the Northern and Bay State divisions would need to be merged on a
monthly basis with those of Northern Indiana. Also, NIPSCO files a
consolidated tax return each year.
-3-
<PAGE>
Commission for consideration in its review of NIPSCO Industries,
Inc.'s merger application.
Dated at Augusta, Maine this 12th day of June, 1998.
BY ORDER OF THE COMMISSION
/S/ Dennis L. Keschl
------------------------------
Dennis L. Keschl
Administrative Director
-4-
<PAGE>
COMMISSIONERS VOTING FOR: NUGENT
WELCH
-5-
<PAGE>
NOTICE OF RIGHTS TO REVIEW OR APPEAL
5 M.R.S.A. Section 9061 requires the Public Utilities Commission to
give each party to an adjudicatory proceeding written notice of the
party's rights to review or appeal of its decision made at the
conclusion of the adjudicatory proceeding. The methods of
adjudicatory proceedings are as follows:
1. RECONSIDERATION of the Commission's Order may be requested
under Section 6(N) of the Commission's Rules of Practice and
Procedure (65-407 C.M.R.1l) within 20 days of the date of
the Order by filing a petition with the Commission stating
the grounds upon which consideration is sought.
2. APPEAL OF A FINAL DECISION of the Commission may be taken to
the Law Court by filing, within 30 days of the date of the
Order, a Notice of Appeal with the Administrative Director
of the Commission, pursuant to 35-A M.R.S.A. Section 1320
(1)-(4) and the Maine Rules of Civil Procedure, Rule 73 et
seq.
3. ADDITIONAL COURT REVIEW of constitutional issues or issues
involving the justness or reasonableness of rates may be had
by the filing of an appeal with the Law Court, pursuant to
35-A M.R.S.A. Section 1320 (5).
NOTE: The attachment of this Notice to a document does not
indicate the Commission's view that the particular document
may be subject to review or appeal. Similarly, the failure
of the Commission to attach a copy of this Notice to a
document does not indicate the Commission's view that the
document is not subject to review or appeal.
-6-
<PAGE>
STATE OF MAINE
PUBLIC UTILITIES COMMISSION
----------------------------------------
)
NORTHERN UTILITIES, INC. )
Request for Approval of Reorganization- ) DOCKET NO. 98-216
Merger with NIPSCO Industries, Inc. )
----------------------------------------)
STIPULATION AND AGREEMENT
---------------------------
This Stipulation and Agreement (the "Stipulation") is
entered into as of the 28th day of May 1998 between Northern
Utilities, Inc. ("Northern"), NIPSCO Industries, Inc. ("Industries"),
an Indiana corporation, and the Maine Office of the Public Advocate
("OPA") with the intent of resolving all issues that were raised or
could have been raised in connection with this docket. Northern,
Industries, and the OPA are referred to collectively below as the
"Parties."
I. RECITALS
WHEREAS, by Petition dated March 20, 1998, Northern
requested the approval of the Maine Public Utilities Commission
("MPUC") to approve a reorganization in which either Northern, or its
parent, Bay State Gas Company ("Bay State"), will be merged with an
acquisition subsidiary of Industries, or with Northern Indiana Public
Service Company ("Northern Indiana"), Industries' largest public
utility subsidiary;
WHEREAS, Northern is a Maine gas utility under 35-A M.R.S.A.
Section 102 and provides gas service to over 20,000 customers in the
greater Portland and greater Lewiston areas;
WHEREAS, Bay State is a Massachusetts corporation and a
public utility that provides gas services to approximately 261,000
customers in Massachusetts. Bay State is the parent company of
Northern and, as such, is an affiliate of Northern under 35-A M.R.S.A.
Section 707;
WHEREAS, Industries is an Indiana corporation that owns all
of the common stock of Northern Indiana, among other regulated and
unregulated subsidiaries, and is presently a holding company exempt
from most provisions of the Public Utility Holding Company Act of
1935, as amended (the "1935 Act"). Northern Indiana is a public
utility operating company supplying natural gas and electric energy to
the public;
WHEREAS, the Agreement and Plan of Merger, dated as of
December 18, 1997, as amended and restated as of March 4, 1998, by and
between Bay State and Industries (the "Merger Agreement"), provides
for two possible corporate structures for the proposed transaction.
Under the Preferred Merger structure or form of merger, Bay State
would merge into the newly created wholly-owned subsidiary of
Industries, formed for purposes of the merger. Sometime after the
<PAGE>
Merger all of the common stock of Northern would be transferred from
Bay State to Industries, and Northern would then operate as a direct
subsidiary of Industries, and Industries would maintain its status as
an exempt public utility holding company. The Preferred Merger
structure is subject to the review and approval of the Securities and
Exchange Commission (the "SEC") under the 1935 Act.
WHEREAS, if Industries does not receive approval of the SEC
under Section 9(a)(2) of the 1935 Act, the Alternate Merger or form of
merger, which does not require SEC approval, would be employed to
accomplish the merger. Under the Alternate Merger structure, Bay
State and Northern would each be merged into Industries' largest
public utility subsidiary, Northern Indiana, and would operate as
divisions of Northern Indiana;
WHEREAS, the Board of Directors of Bay State has unanimously
determined that the merger is in the best interests of Bay State and
its shareholders. At a special meeting of common shareholders, the
Merger Agreement was approved by a vote of 78.1%.
II. TERMS AND CONDITIONS
1. The Parties agree that under either the Preferred or
the Alternate Merger structure or form of merger, the jurisdiction of
the Commission over Northern's operations will not be changed.
2. The Parties agree that the merger is consistent with
the interests of Northern's customers and investors pursuant to 35-A
M.R.S.A. Section 708(2) under either the Preferred or the Alternate
structure or form of merger.
3. The Parties agree that under either structure, the
merger satisfies the Commission's standard of review under Section
708(2) for assessing whether an acquisition is consistent with the
public interest.
4. The Parties agree that the Commission should express
its support for the Preferred Merger structure in its final order
because the Preferred Merger structure simplifies assurances that the
risks and benefits of operations within the individual subsidiaries
are retained by those operations and their customers, simplifies
regulation of those operations by the Commission, and facilitates the
tracking of revenues and costs associated with unregulated affiliates.
5. The Parties agree that under the Alternate Merger
structure, approval of the merger of Northern's property, franchise or
permits with Northern Indiana pursuant to 35-A M.R.S.A. Section 1101,
and approval for the transfer of its stock pursuant to Section 1103
should be granted.
6. Without precluding any Party from taking any position
with regard to such a request, the Parties agree that Northern will be
allowed to request in future proceedings the amortization of the
acquisition premium in rates, and be allowed to request that the
Commission permit such recovery to the extent that Northern can meet
-8-
<PAGE>
the evidentiary burden of demonstrating that the benefits of the
merger to customers equal or exceed the amount of the premium being
sought to be amortized.
7. The Parties agree that no Party shall be bound in any
future proceedings to utilize for ratemaking purposes the capital
structure of Northern that results from entries to account for the
merger.
III. MISCELLANEOUS
1. The Parties agree to use best efforts to support this
Stipulation and to obtain its approval by the Commission and to
support it in any appeal from the Commission.
2. The Parties agree that in the event that this entire
Stipulation does not receive Commission approval by June 17, 1998, it
shall be null and void and of no force and effect. The Parties also
agree that if this Stipulation fails to receive Commission approval,
the fact that any Party executed this Stipulation shall not be used
for any purpose to prejudice such Party's position in any pending or
future proceeding. This paragraph shall not be operative so long as
there is continuing litigation seeking approval of this Stipulation.
3. The approval of this Stipulation shall not be construed
as modifying or in any way affecting the current law in Maine with
respect to any matter agreed to in this Stipulation.
4. The Parties agree that captions used herein are for
convenience only and shall have no substantive effect.
5. The Parties agree that the Commission shall have
continuing jurisdiction to enforce any and all terms of this
Stipulation.
-9-
<PAGE>
IN WITNESS WHEREOF, the Parties hereto, through their
respective representatives who represent that they are fully
authorized to do so on behalf of their principals, have hereunto set
their hands.
NORTHERN UTILITIES, INC.
Dated: 5/28/98 By: /S/Meabh Purcell
----------------- --------------------------------
NIPSCO INDUSTRIES, INC.
Dated: 5/28/98 By: /S/Robert P. Knickerbocker, Jr.
----------------- ---------------------------------
OFFICE OF THE PUBLIC ADVOCATE
Dated: 5/27/98 By: /S/Stephen G. Ward
----------------- ---------------------------------
-10-
<PAGE>
EXHIBIT F-3
-----------
[SCHIFF HARDIN & WAITE LETTERHEAD]
Peter V. Fazio
(312) 258-5634
E-mail: [email protected]
November 18, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We have acted as special counsel for NIPSCO Industries, Inc., an
Indiana corporation ("NI"), in connection with the proposed merger
(the "Transaction") of Bay State Gas Company, a Massachusetts
corporation ("Bay State"), with and into Acquisition Gas Company,
Inc., a wholly owned subsidiary of NI and a Massachusetts corporation
("Acquisition"), pursuant to the Agreement and Plan of Merger dated as
of December 18, 1997, and amended and restated as of March 4, 1998,
and further amended as of November 16, 1998, among NI, Acquisition and
Bay State (the "Merger Agreement"). This opinion is being delivered
at NI's request in connection with NI's Form U-1 Application under the
Public Utility Holding Company Act of 1935 (the "Application") in
connection with the Transaction.
As such counsel, we have examined the Merger Agreement, NI's
Registration Statement on Form S-4, as amended (Registration No. 33-
50537), filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, the Articles of Incorporation and
By-Laws of NI, resolutions adopted by the Board of Directors of NI and
certificates of public officials. In addition, we have examined such
other documents and matters of law and made such inquiries as we have
deemed necessary or appropriate to enable us to render the opinions
expressed below. In such examination, we have assumed the genuineness
of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents
submitted to us as copies and the authenticity of the originals of
such latter documents. As to any facts material to our opinion, we
have, when relevant facts were not independently established by us,
relied upon the aforesaid instruments and documents.
Based upon and subject to the foregoing and further
qualifications set forth below, we are of the opinion that in the
event the Transaction is consummated as set forth in the initial
paragraph above and in accordance with the Merger Agreement:
1. All laws of the State of Indiana applicable to the
Transaction will have been complied with.
2. NI is a corporation duly incorporated and validly existing
under the laws of the State of Indiana, and the NI common
shares, without par value, and related preferred share
<PAGE>
Securities and Exchange Commission
November 18, 1998
Page 2
purchase rights (the "Shares"), issuable pursuant to the
Transaction, when issued as contemplated by the Merger
Agreement, will be validly issued, fully paid and
nonassessable, and the holders thereof will be entitled to
the rights and privileges appertaining thereto as set forth
in the Articles of Incorporation of NI.
3. NI will legally acquire all of the outstanding shares of
common stock of Bay State.
4. The consummation of the Transaction will not violate the
legal rights of the holders of any securities issued by NI
or any associate company thereof.
The foregoing opinions are subject to the following
qualifications:
(i) Except as set forth below, the law covered by the opinions
expressed herein is limited to the laws of the State of
Indiana and the federal securities laws of the United States
of America.
(ii) With respect to matters governed by the laws of the
Commonwealth of Massachusetts, in rendering our opinion at
paragraph 3 above, we have relied on the opinion of Day
Berry & Howard dated November 18, 1998 to the Securities and
Exchange Commission.
We hereby consent to the filing of this opinion as Exhibit F-3 to
the Application.
Very truly yours,
SCHIFF HARDIN & WAITE
By: /s/ Peter V. Fazio, Jr.
------------------------------
Peter V. Fazio, Jr.
LGR/js
<PAGE>
EXHIBIT F-5
-----------
[DAY, BERRY & HOWARD LLP LETTERHEAD]
November 18, 1998
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 12549
Re: File Number: 70-9197
Application/Declaration by NIPSCO Industries, Inc.
on Form U-1
Ladies and Gentlemen:
We have acted as special counsel to NIPSCO Industries, Inc., an
Indiana corporation ("Industries"), in connection with the proposed
merger (the "Transaction") of Bay State Gas Company, a Massachusetts
corporation ("Bay State"), with and into Acquisition Gas Company,
Inc., a Massachusetts corporation and a wholly owned subsidiary of
Industries ("Acquisition"), pursuant to an Agreement and Plan of
Merger between Industries, Acquisition and Bay State dated as of
December 18, 1997, as amended and restated as of March 4, 1998 and as
further amended by a First Amendment to Amended and Restated Agreement
and Plan of Merger dated as of November 16, 1998 (the "Merger
Agreement"). We are furnishing this opinion to you in connection with
the Application/Declaration, as amended, on Form U-1 (the
"Application") of Industries to the Securities and Exchange Commission
with respect to the Transaction. Capitalized terms used herein and not
otherwise defined are used as defined in the Application.
In connection with this opinion, we have examined the Application
and the exhibits thereto and the Merger Agreement, and we have
examined or caused to be examined such other papers, documents and
records, and have made such examination of law and have satisfied
ourselves as to such other matters, as we have deemed relevant or
necessary for the purpose of this opinion.
Based upon the foregoing, and in the event the proposed
Transaction contemplated by the Application is carried out in
accordance therewith and with the Merger Agreement, we are of the
opinion that:
(1) Upon (i) the approval of articles of merger of Acquisition
and Bay State by the Massachusetts Secretary of State, and (ii) the
filing by Acquisition of the articles of merger, certified by the
Massachusetts Secretary of State, with registry of deeds in each
district within Massachusetts in which real property of Bay State is
<PAGE>
Securities and Exchange Commission
November 18, 1998
Page 2
located, all state laws applicable to Industries in connection with
the proposed Transaction will have been complied with; and
(2) Industries will legally acquire all of the outstanding
shares of common stock of Bay State.
The opinions expressed herein are qualified in their
entirety as follows: (i) no opinions are expressed with respect to
laws other than those of (A) the Commonwealth of Massachusetts, (B)
the State of New Hampshire, and (C) the State of Maine, (ii) the
opinions with respect to the laws of the States of New Hampshire and
Maine are limited to the regulatory approvals of the Transaction
required to be obtained from the New Hampshire Public Utilities
Commission and the Maine Public Utilities Commission, respectively,
under the laws regulating public service companies in such states, and
(iii) the opinions with respect to the laws of the Commonwealth of
Massachusetts are limited to the approvals of the Transaction and the
articles of merger required to be obtained from the Massachusetts
Department of Telecommunications and Energy and the Massachusetts
Secretary of State under the laws regulating gas companies in such
state.
We hereby consent to (i) the filing of this opinion as an exhibit
to the Application, and (ii) the reliance by Schiff Hardin & Waite on
our opinion in paragraph (2) above with respect to matters governed by
the laws of the Commonwealth of Massachusetts in rendering its opinion
to be filed as an exhibit to the Application.
Very truly yours,
/s/ Day, Berry & Howard LLP
-------------------------------
DAY, BERRY & HOWARD LLP
DBH:JAC/mrd
<PAGE>
EXHIBIT I-1
-----------
[ARTHUR ANDERSEN LETTERHEAD]
November 18, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
Arthur Andersen LLP has been engaged to provide professional services
in connection with the proposed acquisition by NIPSCO Industries,
Inc., of all the issued and outstanding common stock of Bay State Gas
Company, herein referred to as the "Transaction". The professional
services which we have furnished or will furnish in connection with
the Transaction include our involvement with the Proxy Statement and
Registration Statement, accounting and tax consultation, and
preparation of a comfort letter. Our estimate of the fees and
expenses covering the professional services related to the Transaction
referred to above total approximately $750,000. For purposes of this
statement, we have assumed that the proposed Transaction will close on
or before year-end 1998.
Very truly yours,
/s/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
<PAGE>
EXHIBIT I-2
-----------
Before the
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
------------------------------------
:
In the Matter of :
:
NIPSCO Industries, Inc. : STATEMENT WITH
: RESPECT TO SERVICES
File No. 70-9197 : RENDERED BY
: SCHIFF HARDIN & WAITE
(Public Utility Holding Company :
Act of 1935) :
:
------------------------------------
The undersigned, John F. Adams, is a member of the law firm of
Schiff Hardin & Waite and as such has been engaged in the activities
of Schiff Hardin & Waite in connection with the proposed acquisition
by NIPSCO Industries, Inc. ("Industries") of all of the issued and
outstanding common stock of Bay State Gas Company ("Bay State"), as
more fully described in the Application-Declaration on Form U-1, as
amended ("Application"), in the above-referenced file. This statement
summarizes the legal services which we have furnished or will furnish
in connection with said transaction. We have assumed, for purposes of
this statement, that the proposed transaction will close at or before
year-end 1998.
The scope of work undertaken by Schiff Hardin & Waite includes
the following:
1. MERGER AGREEMENT. Negotiated, drafted and coordinated
execution of the Agreement and Plan of Merger by and between
Industries and Bay State ("Merger Agreement") and all amendments
thereto. Drafted and circulated multiple drafts of the Merger
Agreement. Conferred with and consulted other counsel on various
issues related to the proposed acquisition. Advised Industries
officers with respect to corporate legal issues concerning various
structures of merger.
2. PROXY STATEMENT/PROSPECTUS AND REGISTRATION STATEMENT.
Drafted the Proxy Statement/Prospectus and the Registration Statement
on Form S-4 to register common stock of Industries to be issued in
connection with the acquisition. Drafted written responses to comment
letters from the Securities and Exchange Commission (the "Commission")
regarding the Form S-4 and the Proxy Statement/Prospectus. Will draft
and file with the Commission a prospectus supplement to the Proxy
Statement/Prospectus.
<PAGE>
3. OTHER FEDERAL SECURITIES LAW MATTERS. Will draft and file
Form S-8 to register Industries common stock which will be issued
under Bay State's 401(k) plans. Will draft and make other securities
filings with the Commission as necessary in connection with the
acquisition of Bay State including Form 8-K upon the closing of the
acquisition and Form 5 regarding directors who are reporting persons
pursuant to Section 16 of the Securities Exchange Act of 1934.
4. 1935 ACT PROCEEDING. Reviewed Form U-1 and amendments
thereto. Drafted exhibits to Form U-1 including opinion of counsel.
Coordinated filing of Form U-1 and amendments thereto.
5. STATE UTILITY REGULATORY MATTERS. Consulted and coordinated
with Industries officers' and other counsel with regard to regulatory
filings made with the public service commissions of Massachusetts, New
Hampshire and Maine.
6. ANTI-TRUST MATTERS. Prepared and filed with the Federal
Trade Commission and the Department of Justice notifications required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
7. VARIOUS CLOSING MATTERS. Drafted other related closing
documents including employment/non-competition agreements for certain
officers and amendments to certain Industries stock option plans to
convert certain Bay State stock options to Industries stock options.
Will issue a tax opinion.
Our estimated fees and disbursements covering the services
summarized above, which have been discussed with and are satisfactory
to Industries, total approximately $1,100,000. In view of the nature
and extent of the services furnished and to be furnished, the nature
and complexity of the issues arising under the Act, the
responsibilities undertaken and other relevant factors, it is
respectfully submitted that such fees and disbursements are fair and
reasonable.
We hereby consent to the use of this statement as an exhibit to
the application, without prejudice to our rights, including our right
to amend this statement if we deem it necessary.
SCHIFF HARDIN & WAITE
Dated: November 18, 1998 By: /s/ John F. Adams
------------------- ----------------------------
2
<PAGE>
EXHIBIT I-3
-----------
Before the
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
___________________________________
:
In the Matter of :
:
NIPSCO Industries, Inc. : STATEMENT WITH
: RESPECT TO SERVICES
: RENDERED BY THELEN
File No. 70-9197 : REID & PRIEST LLP
:
(Public Utility Holding Company :
Act of 1935) :
___________________________________:
The undersigned, William T. Baker, Jr., is a member of the law
firm of Thelen Reid & Priest LLP and as such has been engaged in the
activities of that firm in connection with the proposed acquisition by
NIPSCO Industries, Inc. ("Industries") of all of the issued and
outstanding common stock of Bay State Gas Company ("Bay State"), as
more fully described in the Application-Declaration on Form U-1, as
amended ("Application"), in the above-referenced file. This statement
summarizes the legal services which we have furnished or will furnish
in connection with said transaction. We have assumed, for purposes of
this statement, that the proposed transaction will close on or before
year-end 1998.
The scope of work undertaken by Thelen Reid & Priest LLP
encompasses the following:
1. MERGER AGREEMENT. Analysis of issues under the Public
Utility Holding Company Act of 1935 ("1935 Act") and the rules
promulgated by the Securities and Exchange Commission ("SEC")
thereunder in respect of the proposed acquisition, including
alternative transaction structures. Reviewed multiple drafts of the
Agreement and Plan of Merger between Industries and Bay State and
conferred with Industries' corporate counsel on regulatory issues
relating to the transaction and Industries' status as an exempt
holding company under the Act.
2. 1935 ACT PROCEEDING. Preparation and circulation to
interested parties of multiple drafts of the Application and
amendments. Participation in the review and/or drafting of certain
documents, exhibits and financial statements included as part of the
Application. Coordination with various Industries representatives and
other counsel in respect of regulatory filings made with the public
service commissions of Massachusetts, New Hampshire and Maine, as well
as filings made with the SEC under the Securities Act of 1933 ("1933
<PAGE>
Act") and the Securities Exchange Act of 1934 ("1934 Act"). Overall
responsibility for filing with the SEC the initial Application and the
various amendments and exhibits thereto. Overall responsibility for
processing the Application and interfacing with members of the SEC's
staff. Review of certain testimony, pleadings and other filings made
by Industries and Bay State and intervenors in proceedings before the
public service commissions of Massachusetts, New Hampshire and Maine
and all orders and decisions rendered by such regulatory authorities.
3. PROXY STATEMENT AND REGISTRATION STATEMENT. Advice to and
consultation with Industries representatives and other counsel with
respect to regulatory issues addressed in joint proxy
statement/prospectus relating to the special meeting of the common
shareholders of Bay State and the related registration statement for
the registration of shares of common stock of Industries.
During the period from November 1, 1997 through November 15,
1998, our partners, counsel, associates and paraprofessionals have
devoted approximately 760 hours to providing the services summarized
in this statement. It is estimated that up to approximately 50
additional hours will be required in connection with the consummation
of the proposed transaction, unless unexpected circumstances arise
which require additional time.
Our estimated fees and disbursements covering the services
summarized above, which have been discussed with and are satisfactory
to Industries, total approximately $275,000. In view of the nature
and extent of the services furnished and to be furnished, the nature
and complexity of the issues arising under the Act, the
responsibilities undertaken and other relevant factors, it is
respectfully submitted that such fees and disbursements are fair and
reasonable.
We hereby consent to the use of this statement as an exhibit to
the Application, without prejudice to our rights, including our right
to amend this statement if we deem it necessary.
/s/ William T. Baker, Jr.
------------------------------
William T. Baker, Jr., Partner
Dated: November 18, 1998
2
<PAGE>
EXHIBIT FS-1
------------
<TABLE>
<CAPTION>
NIPSCO INDUSTRIES, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
NIPSCO Bay State Pro Forma
Industries, Inc. Gas Company Adjustments Consolidated
---------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Assets
Property, Plant and Equipment:
Utility Plant at original cost (including CWIP):
Electric 4,066,568 0 0 4,066,568
Gas 1,395,140 735,933 312,168 b 2,443,241
Water 603,013 0 0 603,013
Common 351,350 0 0 351,350
--------- --------- -------- ---------
6,416,071 735,933 0 7,464,172
Less - Accumulated provision for depreciation
and amortization 2,759,945 223,453 0 2,983,398
--------- --------- -------- ---------
Total utility plant 3,656,126 512,480 0 4,480,774
Other property, at cost, less accumulated
provision for depreciation 96,028 0 0 96,028
--------- --------- -------- ---------
Total Property, Plant and Equipment 3,752,154 512,480 0 4,576,802
--------- --------- -------- ---------
Investments:
Investments, at equity 82,855 0 0 82,855
Investments, at cost 31,771 0 0 31,771
Other investments 24,499 21,975 0 46,474
--------- --------- -------- ---------
Total Investments 139,125 21,975 0 161,100
--------- --------- -------- ---------
Current Assets:
Cash and cash equivalents 30,780 2,620 0 33,400
Receivable Options 0 0 0 0
Accounts receivable, less reserve 231,580 71,085 0 302,665
Other receivables 107,231 0 0 107,231
Fuel adjustment clause 2,679 0 0 2,679
Gas cost adjustment clause 89,991 0 0 89,991
Materials and supplies, at average cost 60,085 50,422 0 110,507
Electric production fuel, at average cost 18,837 0 0 18,837
Natural gas in storage 61,436 0 0 61,436
Prepayments and other 28,089 61,364 0 89,453
--------- --------- -------- ---------
Total current assets 630,708 185,491 0 816,199
Other Assets
Regulatory assets 211,513 40,683 252,196
Non Compete 0 0 3,400 a 3,400
Deferred tax asset 0 0 5,738 a 5,738
Intangible assets, less accumulated provision for
amortization 68,175 0 0 68,175
Prepayments and other 135,358 32,817 0 168,175
--------- --------- -------- ---------
Total other assets 415,046 73,500 9,138 497,684
--------- --------- -------- ---------
4,937,033 793,446 321,306 6,051,785
========= ========= ======== =========
</TABLE>
2<PAGE>
<TABLE>
<CAPTION>
NIPSCO INDUSTRIES, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
NIPSCO Bay State Pro Forma
Industries, Inc. Gas Company Adjustments Consolidated
---------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock - Without Par* 506,987 45,035 270,500 e 777,487
0 (45,035) c 0
Adjustment to Paid in Capital 0 0 0 0
Additional Paid in Capital (Stock Options) 0 0 0
Additional Paid in Capital 89,768 103,475 (103,475) c 89,768
Adjustment to Paid in Capital 0 0 10,736 d 10,736
Retained Earnings 668,033 92,538 (92,538) c 668,033
--------- -------- --------- --------
Common Shareholders Equity 1,264,788 241,048 40,188 1,546,024
Cumulative Preferred Stock 0 0 0
W/O Mandatory Redemption 85,620 0 0 85,620
W Mandatory Redemption 58,841 4,917 63,758
Long-term Debt, Less Current Portion 1,667,925 234,028 270,500 e 2,172,453
Customer Advances For Construction 0 0 0 0
--------- -------- -------- ---------
Total Capitalization 3,077,174 479,993 310,688 3,867,855
Current Liabilities:
Current portion of long-term debt 54,621 5,000 0 59,621
Short-term borrowings 212,639 90,000 0 302,639
Accounts payable 226,751 56,524 0 283,275
Sinking Funds Due within One Year 0 0 0 0
Dividends declared on common and preferred stocks 30,784 0 0 30,784
Customer deposits 22,091 0 0 22,091
Taxes accrued 77,573 5,720 83,293
Interest accrued 19,124 0 0 19,124
Accrued employment costs 58,799 0 0 58,799
Other accruals 47,930 49,031 0 96,961
--------- -------- -------- --------
Total current liabilities 750,312 206,275 0 956,587
Other:
Deferred income taxes 651,815 85,910 737,725
Deferred investment tax credits, being amortized over
life of related property 105,538 0 0 105,538
Deferred Credits 73,715 0 0 73,715
Accrued Liability for Post Ret Benefits 132,919 0 0 132,919
Other Non Current Liabilities 35,415 21,268 10,618 f 67,301
Customers Advances and Contributions in Aid
to Construction 110,145 0 0 110,145
--------- -------- -------- ---------
Total Other 1,109,547 107,178 10,618 1,227,343
--------- -------- -------- ---------
4,937,033 793,446 321,306 6,051,785
========= ======== ======== =========
</TABLE>
The Pro Forma information was prepared based on the assumption that
the price of NIPSCO Industries common shares used in determining the
exchange is $27.38 and the consideration paid by NIPSCO Industries in
the Bay State Gas Company purchase is composed of 50% shares of NIPSCO
Industries and 50% cash.
3
<PAGE>
The following is a summary of the pro forma adjustments to the
combined condensed financial statements:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Balance Sheet Footnotes:
<S> <C> <C>
a Tax Assets
Change of control - Deferred $1,873
Non-compete $3,400
Options Conversion - Deferred $3,865
------
Total Tax Asset $9,138
b Acquisition Adjustment
Purchase Price $551,736
Estimated Book Value $239,568
--------
$312,168
c Elimination of Bay State Equity
Equity $45,035
Paid in Capital $103,475
Retained Earnings $92,538
d Adjustment to Paid in Capital from Option Conversion
Option Price $40.00
Options 589
-------
Incremental Consideration $23,557
-------
Less Assumed Cash Received @ Conversion $12,821
-------
Net Credit to Paid in Capital $10,736
-------
e Funding of Transaction
Common Shares $270,500
Debt $270,500
Options $10,736
--------
$551,736
--------
f Change of Control Liability $10,618
Tax Liability $0
</TABLE>
4
<PAGE>
EXHIBIT F-2
-----------
<TABLE>
<CAPTION>
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR TWELVE MONTHS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
NIPSCO Bay State Pro Forma
Industries, Inc. Gas Company Adjustments Combined
---------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Operating Revenues
Gas $807,239 $449,873 $0 $1,257,112
Electric 1,017,083 0 0 1,017,083
Water 60,743 0 0 60,743
Products and Services 701,476 40,058 0 741,534
--------- --------- -------- ---------
Total 2,586,541 489,931 0 3,076,472
Cost of Sales
Gas costs $495,287 $268,847 $0 $764,134
Fuel for electric generation $238,548 $0 $0 $238,548
Power purchased $37,274 $0 $0 $37,274
Products and Services $604,505 $15,653 $0 $620,158
--------- --------- ------- ---------
1,375,614 284,500 0 1,660,114
--------- --------- ------- ---------
Operating Margin 1,210,927 205,431 0 1,416,358
--------- --------- ------- ---------
Operating Expenses and Taxes (except income):
Operation $390,253 $112,735 ($11,213)a $491,775
Maintenance $76,552 $9,894 $0 $86,446
Depreciation and Amortization $249,804 $29,151 $8,229 b $287,184
Amortization of acquisition premium $0 $0 $0 $0
Taxes (except income) $83,765 $13,102 0 $96,867
--------- --------- -------- ---------
800,374 164,882 (2,984) 962,272
--------- --------- -------- ---------
Operating Income 410,553 40,549 2,984 454,086
--------- --------- -------- ---------
Other Income (Deductions): 14,619 19,041 (13,344)c 20,316
Income Before Interest and Other Charges 425,172 59,590 (10,360) 474,402
Interest and Other Charges:
Interest on long-term debt 105,498 18,194 21,640 d 145,332
Other interest 10,391 0 0 10,391
Amortization of premium, reacquisition premium,
discount and expense on debt, net 4,718 0 0 4,718
Dividend requirements on preferred stock
of subsidiaries 8,691 0 0 8,691
--------- --------- --------- ---------
Total 129,298 18,194 21,640 169,132
--------- --------- --------- ---------
Income Before Taxes 295,874 41,396 (32,000) 305,270
--------- --------- --------- ---------
Income Taxes 105,025 16,819 (8,711)e 113,133
--------- --------- -------- ---------
Net Income 190,849 24,577 (23,289) 192,137
<PAGE>
NIPSCO Bay State Pro Forma
Industries, Inc. Gas Company Adjustments Combined
---------------- ----------- ----------- ------------
Dividend requirements on preferred shares 0 0 0 0
--------- --------- -------- ---------
Balance available for common shareholders 190,849 24,291 0 191,851
Average Common Shares outstanding - basic 123,849 13,473 0 137,322
Common Shares Retired 0 0 (13,473)f (13,473)
Common Shares Issued 0 0 9,881 g 9,881
Average Number of Common Shares
Diluted Shares 374 132 0 374
Diluted Effect of BSG Converted Options 251 h 251
--------- ---------- -------- ---------
Diluted Shares 124,223 13,605 134,356
Basic earnings per average common share $1.54 $1.80 $1.43
Diluted earnings per average common share $1.53 $1.79 $1.43
Dividends declared per common share $0.915 $1.570 $0.915
Common Shares Outstanding @ End of Period 0
</TABLE>
2
<PAGE>
The Pro Forma information was prepared based on the assumption that
the price of NIPSCO Industries common shares used in determining the
exchange is $27.38 and the consideration paid by NIPSCO Industries in
the Bay State Gas Company purchase is composed of 50% shares of NIPSCO
Industries and 50% cash.
The following is a summary of the pro forma adjustments to the
combined condensed financial statements:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Income Statement Footnotes:
<S> <C> <C>
a Adjustment for restructuring cost (pre-tax) $11,213
b Amortization of acquisition adjustment
Premium $312,168
Amortization Period 40 Years
Annual Amortization $7,804
Non-Compete Asset $3,400
Amortization Period 8 Years
Annual Amortization $425
c Adjustment for sale of subsidiary (pre-tax) $13,344
d Interest on Acquisition Debt
Acquisition Debt $270,500
Estimated Interest Rate 8.00%
--------
Estimated Interest $21,640
e Income tax effect of adjustments
Decrease in operating expense $11,213
Increase in Amortization Expense ($425)
Decrease in other income ($13,344)
Increase in interest expense ($21,640)
--------
Total income adjustments ($24,196)
--------
Tax Effect ($8,711)
f Elimination of Bay State shares 13,473
g New Industries shares issued
New Common Issued 270,500
Price per Share 27
New Shares Issued 9,881
h Dilutive effect of new options issued
Shares Purchasable from Employee Proceeds 468
Shares From Tax Benefit (36% Rate) 141
Total Share Repurchased 610
Incremental Shares Outstanding 251
</TABLE>
3
