(As filed July 17, 1998)
File No. 70-9197
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________
Amendment No. 3
to
FORM U-1
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> 2
The Applicant hereby amends and restates section 3.5 of ITEM 3 -
APPLICABLE STATUTORY PROVISIONS, as follows:
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.
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
<PAGE> 3
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. At other times, the Commission has
considered a variety of other financial comparisons as well. 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., 40 SEC Docket 491 (February 26, 1988), the Commission
appears to have considered only the operating revenues of an out-of-
state subsidiary. In more recent cases, the Commission has taken into
account various financial comparisons, without indicating which, if
any, is entitled to greatest deference. SEE 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). In fact, a review of
the recent decisions indicates that the Commission is moving toward a
more flexible standard of interpretation of the materiality test (as
well as of the "predominantly intrastate in character" test). In
COMMONWEALTH EDISON, SUPRA, the Commission granted an exemption under
Section 3(a)(1) where the applicant's out-of-state subsidiary
contributed gross operating revenues (after intercompany eliminations)
ranging between 2.7% and 3.3% of the applicant's consolidated gross
operating revenues over a two-year period, finding that such
subsidiary was not a material subsidiary. More recently, however, in
ATLANTA GAS LIGHT COMPANY, SUPRA, 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
<PAGE> 4
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.<1> 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 energy sales (in kWh) by
FirstEnergy and subsidiaries on a PRO FORMA basis.<2>
In contrast, there have been only a few occasions on which the
Commission has denied an exemption to a holding company based on 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 utility operating revenues, utility
operating income, net utility income and net utility plant of Bay
State and Northern, and the percentage of each on a PRO FORMA basis at
and for the year ended December 31, 1997, to the total combined gross
utility operating revenues, utility operating income, net utility
income and net utility plant of Industries and subsidiaries are as
follows:<3>
---------------
<1> 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.
<2> SEE Statement on Form U-3A-2 of FirstEnergy Corp. , dated
November 8, 1997 (as amended November 21, 1997) (File No. 69-423).
<3> The data presented excludes Industries' operating revenues from
water operations and other non-utility products and services which, in
1997, totaled about $762 million, or about 29% of Industries
consolidated operating revenues.
<PAGE> 5
BAY STATE NORTHERN
--------------- -----------------
PRO FORMA
COMBINED AMOUNT AMOUNT
UTILITIES ($MM) PERCENT ($MM) PERCENT
($MM) ------ ------- ------ -------
GROSS UTILITY
OPERATING REVENUES $2,249.7 $ 357.5 15.9% $ 80.2 3.5%
UTILITY OPERATING
INCOME*/ 325.3 31.1 9.6 8.0 2.5
NET UTILITY
INCOME*/ 226.9 17.1 7.5 4.5 2.0
NET UTILITY PLANT
3,613.8 397.0 11.0 99.4 2.6
*/ As adjusted to eliminate the effect of a one-time write-off of
restructuring costs by Bay State.
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 for 1997, as a percentage of the PRO FORMA combined net
utility income of Industries (7.5%), 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. This
percentage is also only slightly greater than 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 (15.9%) 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, there are compelling reasons in this case why the
Commission should attach greater importance to the net income
percentage. First, as already noted, in its early decisions applying
the materiality test under Section 3(a)(1), the Commission placed
primary importance on net income (or earnings available for payment of
dividends on a subsidiary's common stock) as a percentage of the
holding company's consolidated net income. Indeed, Section 3(a)(1)
itself speaks of "income," not "revenues" or "net utility plant." In
more recent cases, the Commission has considered other relevant
financial comparisons, in addition to net income, but there is no
<PAGE> 6
indication that the Commission's purpose was to minimize the
importance of net income as the preferred yardstick for comparison.
More important, in this case, the operating revenues and
operating income percentages tend to distort and overstate Bay State's
comparative size, for a number of reasons. First, it is relevant to
consider that the cost of gas in New England is and historically has
been significantly higher than in the Midwest, which is much closer to
the major producing areas in North America. This is reflected in Bay
State's per unit cost of gas, which is significantly higher than
Industries' per unit cost of gas.<4> The cost of gas, which is
essentially a pass-through to customers, has an obvious impact on
gross revenues, but little if any effect on income. Second,
Industries' subsidiaries serve a much larger industrial customer base
than Bay 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.<5>
Because revenues from transportation-only customers do not reflect or
include the gas sales component, a revenues-based size comparison of
Bay State and Industries would once again create 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.
Moreover, because 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, a revenues-based comparison of the two companies also
tends to overstate Bay State's relative size. 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 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 revenues test historically used in cases under Section 3(a)(2),
the resulting percentage was significantly higher than 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,
________________
<4> For comparison, during the period 1994 through 1997, Bay State's
average cost of gas ranged between $3.92 and $4.79/Dth, while Northern
Indiana's average gas cost ranged between $2.65 and $3.16/Dth.
<5> 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 send-out.
<PAGE> 7
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.
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)). Because Industries will not derive "any material part of
its income" from Bay State or Northern, their operations may be
disregarded for purposes of determining whether Industries' operations
are "predominantly intrastate in character." SEE COMMONWEALTH EDISON
COMPANY, 28 S.E.C. 172 at 173 (1948); WPL HOLDINGS, INC., 40 SEC
Docket 491 at 499 (February 26, 1988).
Moreover, even if the out-of-state operations of Bay State and
Northern are factored into the analysis, Industries' business would
still be "predominantly intrastate in character." For the year ended
December 31, 1997, the combined gross utility operating revenues,
utility operating income and net utility income of Bay State and
Northern (after intercompany eliminations) represented 19.10%, 12.04%
and 9.51%, respectively, of Industries' PRO FORMA combined gross
utility operating revenues, utility operating income and net utility
income. Although the gross revenues percentage is higher than in any
case in which the Commission has granted, by order, an exemption under
Section 3(a)(1),<6> holding companies have claimed exemption under
Rule 2 with disclosed out-of-state utility revenue percentages as high
---------------
<6> 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).
<PAGE> 8
as 22.4%, which claims for exemption have not been challenged.<7>
Moreover, for the reasons already noted, using gross revenues tends to
overstate the relative size of Bay State and Northern to Industries'
Indiana utility operations.
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 net utility
income 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 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." In this regard, it is noteworthy that the Division of
Investment Management ("Division"), in its report entitled "THE
--------------
<7> 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-
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.
<PAGE> 9
REGULATION OF PUBLIC-UTILITY HOLDING COMPANIES" (June 1995) ("Division
Report"), 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 takes 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." Division Report, pp. 119 - 120.
In this case, Industries' acquisition of Bay State is subject to
review and approval by the Massachusetts Department of
Telecommunications and Energy ("MDTE") and its acquisition of Northern
is subject to review and approval by both the New Hampshire Public
Utilities Commission ("NHPUC") and the Maine Public Utilities
Commission ("MPUC"). In the petitions that were filed with the three
state commissions (Exhibits D-1, D-3 and D-5 hereto), Bay State and
Northern requested approval for both the "preferred" 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 "alternate" 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 explicitly state that the "preferred"
merger structure is subject to SEC approval under the Act and that
Industries would not consummate the transaction under the "preferred"
structure if the SEC does not approve the transaction or if the status
of Industries as an exempt holding company would be jeopardized. Thus,
should all three state commissions approve the transaction, it would
be so with the clear understanding that the "preferred" structure is
dependent upon Industries' ability to maintain its current exemption
under the Act.
By order dated June 12, 1998, the MPUC approved the merger
proposal under either merger structure, as well as a related
stipulation among the parties. The petitions filed with the NHPUC and
MDTE are expected to be acted upon not later than August 19,
1998.<8>
--------------
<8> The principal issue in all three proceedings relates to the
impact of the acquisition premium to be paid for Bay State's shares on
future rates of Bay State and Northern. In each proceeding, the
petitioners offered a proposed form of settlement on this issue. In
the Maine proceeding, the Office of the Public Advocate supported the
merger based on expectations that the transaction should lend
increased 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.
<PAGE> 10
Under either the "preferred" or "alternate" merger structure, the
MDTE will have the same jurisdiction and authority over Bay State's
rates, services and operations 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.
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, whether the transaction is
consummated under the "preferred" or "alternate" structure, 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."
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, as amended, the undersigned company has duly
caused this Amendment No. 3 to the Application or Declaration
<PAGE> 11
previously filed herein 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: July 17, 1998
