Pre-Effective Amendment to Application or Declaration — Form U-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: U-1/A Pre-Effective Amendment to Application or 59± 262K
Declaration
2: EX-99.1 Ex A-1 Memorandum of Association of Emera 4± 19K
11: EX-99.10 Ex D-5 Ferc Order 9 28K
12: EX-99.11 Ex G-1 Emera's Annual Report 46 256K
13: EX-99.12 Ex K-1 Emera Inc. Group of Companies 2± 15K
3: EX-99.2 Ex A-2 Articles of Association of Emera 42± 170K
4: EX-99.3 Ex A-3 Articles of Organization of Bhe 144 382K
5: EX-99.4 Ex A-4 By-Laws of Bhe 42 83K
6: EX-99.5 Ex A-5 Articles of Bangor Var 9 44K
7: EX-99.6 Ex A-6 Bylaws of Bangor Var 8 21K
8: EX-99.7 Ex A-7 Partnership Agreement 23± 96K
9: EX-99.8 Ex D-2 Order of Maine Public Utilities Commission 17 58K
10: EX-99.9 Ex D-3 Mpuc Certification 1 8K
U-1/A — Pre-Effective Amendment to Application or Declaration
Document Table of Contents
File No. 70-9787
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM U-1
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Emera Incorporated Bangor Hydro-Electric Company
P.O. Box 910 33 State Street
Halifax, Nova Scotia Bangor, Maine 04401
Canada
B3J2W5
Bangor Var Co., Inc.
33 State Street
Bangor, Maine 04401
------------------------------------------------
Not applicable
(Name of top registered holding company parent of
each applicant or declarant)
------------------------------------------------
Richard J. Smith Frederick S. Samp
Corporate Secretary and General Counsel Vice President - Finance & Law
Emera Inc. Bangor Hydro-Electric Company
P.O. Box 910 P.O. Box 932
Halifax, Nova Scotia 33 State Street
Canada Bangor, Maine 04401
B3J2W5
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(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 to:
Markian Melnyk David P. Falck
Lynn Robitaille Pillsbury Winthrop LLP
LeBoeuf, Lamb, Greene & MacRae, L.L.P. One Battery Park Plaza
1875 Connecticut Avenue, N.W. New York, N.Y. 10004-1490
Washington, D.C. 20009
TABLE OF CONTENTS
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS...................................1
A. Introduction............................................................1
B. Description of the Companies............................................1
1. Emera..............................................................1
2. BHE................................................................6
C. The Proposed Transaction................................................8
D. Utility Regulation.....................................................10
1. Divestiture of Generation Assets..................................10
2. Divestiture of Rights to Capacity and Energy......................13
3. Standard Offer Service............................................14
4. BHE's Ongoing Electric Utility Function...........................17
5. Intermediate Holding Companies....................................17
6. Financing the Merger..............................................18
7. Management and Operations of BHE Following the Merger.............19
E. Financing the Emera Registered Holding Company System..................19
1. Summary of Authorization Requested................................19
2. Parameters for Financing Authorization............................21
3. Use of Proceeds...................................................22
4. Description of Emera's Existing Capital Structure.................23
5. Description of Proposed Financing Program.........................24
a. Emera's External Financing....................................24
b. Common Stock..................................................24
c. Preferred Stock...............................................26
d. Long-Term Debt................................................26
e. Short-Term Debt...............................................27
f. Hedges and Interest Rate Risk Management......................28
g. Guarantees....................................................30
h. Subsidiary Financing..........................................30
i. Changes in Capital Stock of Wholly-Owned Subsidiaries.........32
j. Payment of Dividends Out of Capital or Unearned Surplus.......33
k. Financing Entities............................................35
l. Tax Allocation Agreement......................................36
m. Direct Stock Purchase and Dividend Reinvestment Plan, Incentive
Compensation Plans and other Employee Benefit Plans...........36
F. Intra-System Service Transactions......................................37
1. Emera Services....................................................37
G. Nonutility Reorganizations.............................................44
H. Rule 58-type Subsidiaries..............................................46
I. EWG and FUCO Investments...............................................47
J. Reporting..............................................................50
ITEM 2. FEES, COMMISSIONS AND EXPENSES........................................51
ITEM 3. APPLICABLE STATUTORY PROVISIONS.......................................51
A. Applicable Provisions..................................................51
B. Legal Analysis.........................................................51
1. Section 10(b)(1)..................................................57
a. Interlocking Relationships....................................57
b. Concentration of Control......................................57
2. Section 10(b)(2)..................................................59
3. Section 10(b)(3)..................................................59
4. Section 10(c)(1)..................................................60
5. Section 10(c)(2)..................................................66
6. Section 10(f).....................................................68
7. Intermediate Holding Companies....................................73
8. Financing the Emera System........................................75
ITEM 4. REGULATORY APPROVALS..................................................76
ITEM 5. PROCEDURE.............................................................77
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.....................................78
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS...............................81
This pre-effective Amendment No. 1 replaces and revises the Form U-1
Application-Declaration in this proceeding, originally filed in File No. 70-9787
on November 6, 2000, in its entirety, except that it does not replace exhibits
previously filed.
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS
A. Introduction.
Emera Incorporated ("Emera") is seeking approval under the Public
Utility Holding Company Act of 1935 (the "1935 Act" or "Act") in connection with
its acquisition of the outstanding voting securities of Bangor Hydro-Electric
Company ("BHE") and its public-utility subsidiary companies (the "Merger").
Emera will register as a holding company under the Act after completion of the
Merger. Consequently, Emera also requests financing, affiliate transaction and
other authorizations necessary to operate a registered holding company system in
accordance with the Act.
B. Description of the Companies
1. Emera
Emera is a corporation that was formed under the laws of the Province
of Nova Scotia, Canada in 1998. Emera is the parent of Nova Scotia Power Inc.
("NSPI"), a Canadian electric utility company that owns and operates a
vertically integrated electric utility system in Nova Scotia. NSPI serves
440,000 customers in Nova Scotia with 2,183 MW of generating capacity,
approximately 5,200 km of transmission lines, 24,000 km of distribution lines,
associated substations and other facilities. NSPI has no retail gas distribution
facilities.
NSPI's electric generation, transmission and distribution facilities
are located exclusively within Nova Scotia. The transmission assets are used
primarily to transmit power within Nova Scotia and, on a limited basis, to
transmit power for sale to customers in New Brunswick and beyond./1
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1 Under permits issued by Canada's National Energy Board ("NEB"), NSPI may
export energy over any international power line originating in New Brunswick or
Quebec. NSPI's permits expire on July 9, 2008. The permits authorize a total of
1200 GWh of energy export in any 12 month period.
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In 1999, NSPI generated 10,668 GWh of electricity and purchased 411
GWh. Of the amount generated or purchased, 10,882 GWh was consumed in the
province of Nova Scotia and 197 GWh was exported using the international lines
of New Brunswick Power Corporation ("NB Power"). NB Power's principal
interconnection with the U.S. is with the transmission facilities of Maine
Electric Power Company, Inc. ("MEPCO"), in which BHE has a minority interest. At
present, NSPI is not authorized to transmit power and energy within the U.S.,
and accordingly, all purchasers of energy from NSPI purchase the energy within
Canada or for export by the purchaser across the international border for
transmission via ISO-New England facilities. In connection with the proposed
Merger, Emera has undertaken that NSPI will qualify for exemption as a foreign
utility company or "FUCO" within the meaning of Section 33 of the Act.
For the twelve months ending December 31, 2000, Emera had revenues of
approximately $604.4 million and NSPI had operating revenues of approximately
$548.2 million./2 As of December 31, 2000, Emera and NSPI had assets of
approximately $1,989.0 million and $1,913.3 million, respectively.
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2 Unless otherwise noted, all amounts are stated in U.S. dollars. An exchange
rate of $1 CDN to $0.674 USD is assumed.
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Emera owns directly or indirectly a number of nonutility subsidiaries
that are described below. The Emera subsidiaries, including subsequently
acquired subsidiaries, but excluding NSPI, are referred to as the "Subsidiaries"
in this application. Emera, the Subsidiaries and NSPI are referred to as the
"Emera System."
1. NS Power Services Ltd., a wholly owned subsidiary of Emera, was in the
business of providing energy services. NS Power Services Ltd. is currently
inactive.
1.1. NSP Trigen Inc., is 50% owned by NS Power Services Ltd., and the
remainder is owned by a nonaffiliate. NSP Trigen Inc. is currently inactive.
2. Enercom Inc., a wholly owned subsidiary of Emera, is a holding company
for Emera's diversified activities within the energy industry.
2.1 Emera Fuels Inc. is a wholly owned subsidiary of Enercom Inc. that
is engaged in the supply of furnace and fuel oil, lubricants, diesel and
gasoline products.
3. Stellarton Basin Coal Gas Inc. is a wholly owned subsidiary of Emera
that was formed to participate in a joint venture to explore and develop methane
gas reserves in Nova Scotia.
4. Strait Energy Inc. is a wholly owned subsidiary of Emera that sells
steam energy to one large industrial customer located in Nova Scotia.
5. 510845 N.B. Inc. is a wholly owned subsidiary of Emera engaged in the
provision of utility services, in particular, the supply and maintenance of
electric transformers.
5.1 Cablecom Ltd., is a wholly owned subsidiary of 510845 N.B. Inc.
Cablecom Ltd. is engaged in the design and engineering, project management,
construction, structured cabling, maintenance and installation of fiber optic
and wireless communications applications.
5.1.1 Fibretek Inc., is a wholly owned subsidiary of Cablecom Ltd
that engages in the same activities as its parent.
6. NSP Pipeline Management Ltd. is a wholly owned subsidiary of Emera that
owns a 12.5% interest in Maritimes and Northeast Pipeline Management Ltd.
6.1 Maritimes and Northeast Pipeline Management Ltd. is 12.5% owned by
NSP Pipeline Management Ltd. and the remainder is owned by nonaffiliates.
Maritimes and Northeast Pipeline Management Ltd. is the general partner of, and
owns a 1.25% interest in, Maritimes and Northeast Pipeline Limited Partnership.
Maritimes and Northeast Pipeline Management Ltd. operates and manages the
Canadian portion of the Maritimes and Northeast Pipeline, a natural gas pipeline
with its origin in Nova Scotia and its terminus near Boston.
7. NSP Pipeline Inc. is a wholly owned subsidiary of Emera that owns a
12.375% interest in the Maritimes and Northeast Pipeline Limited Partnership.
7.1 Maritimes and Northeast Pipeline Limited Partnership is 12.375%
owned by NSP Pipeline Inc. and 1% owned by Maritimes and Northeast Pipeline
Management Ltd. The remainder is owned by nonaffiliates. Maritimes and Northeast
Pipeline Limited Partnership owns the Canadian portion of the Maritimes and
Northeast Pipeline.
8. NSP US Holdings Inc. is a wholly owned subsidiary of Emera that
indirectly owns a 12.5% interest in Maritimes and Northeast Pipeline L.L.C.
through the holding companies identified below.
8.1 Scotia Holdings Inc. is a wholly owned holding company subsidiary
of NSP US Holdings Inc.
8.1.1 Nova Power Holdings Inc. is a wholly owned holding company
subsidiary of Scotia Holdings Inc.
8.1.1.1 Scotia Power U.S. Ltd. is a wholly owned holding
company subsidiary of Nova Power Holdings Inc.
8.1.1.1.1 Maritimes and Northeast Pipeline, L.L.C. is
12.5% owned by Scotia Power U.S. Ltd. and the remainder is owned by
nonaffiliates. Maritimes and Northeast Pipeline L.L.C. owns the U.S. portion of
the Maritimes and Northeast Pipeline.
Applicants request that the Commission permit Emera to retain its
direct or indirect interests in the Subsidiaries under Sections 9(a)(1), 10 and
11 of the Act. Applicants further request that the Commission find under Rule 16
that 1) Maritimes and Northeast Pipeline Management Ltd., 2) Maritimes and
Northeast Pipeline Limited Partnership, and 3) Maritimes and Northeast Pipeline,
L.L.C. (collectively, the "Maritimes Entities") are exempt from all obligations,
duties or liabilities imposed upon them by the Act as a subsidiary or as an
affiliate of a registered holding company thereof, as such terms are
respectively defined in Sections 2(a)(8)(A) and 2(a)(11) of the Act.
As required by Rule 16: a) none of the Maritimes Entities is a public
utility company as defined in Section 2(a)(5) of the Act; (b) each of the
Maritimes Entities is or has been organized to engage primarily in the
exploration, development, production, manufacture, storage, transportation or
supply of natural or synthetic gas; (c) no more than 50% of the voting
securities or other voting interests of each of the Maritimes Entities would be
owned, directly or indirectly, by one or more registered holding companies; and
(d) the acquisition by the registered holding company or subsidiary thereof of
the interests in the Maritimes Entities "has been approved by the Commission
pursuant to Sections 9(a)(1) and 10 of the Act and applicable rules thereunder
upon a timely application to the Commission." The requirement in item (d) above
would be satisfied by the Commission's determination in this Application to
permit Emera to retain its interests in the Maritimes Entities under Section
11(b)(1) of the Act. See AGL Resources, Inc., Holding Co. Act Release No. 27243
(October 5, 2000) (finding the operations of a 25%-owned propane joint venture
to be exempt under Rule 16).
On February 6, 2001, Emera offered to purchase 8.4% of the Sable
Offshore Energy Project ("SOEP") infrastructure assets for approximately CDN
$90.0 million. The offer is subject to certain rights of first refusal, and
other approvals. The SOEP infrastructure assets comprise a gas processing plant
at Goldboro, Nova Scotia; a natural gas liquids fractionation plant at Point
Tupper, Nova Scotia; a natural gas liquids line connecting the Goldboro and
Point Tupper operations; and offshore production platforms and sub-sea gathering
pipelines. Applicants request Commission authorization to acquire the SOEP
assets, if they have not been acquired prior to Emera's registration under the
Act, and to retain the SOEP assets if they have already been acquired when Emera
registers. See American Electric Power Company, Inc., Holding Co. Act Release
No. 26933 (November 2, 1998) (authorizing AEP to acquire energy assets to
include, without limitation, natural gas production, gathering, processing,
storage and transportation facilities and equipment, liquid oil reserves and
storage facilities, and associated facilities).
2. BHE
BHE is a public utility and holding company currently exempt by order
under Section 3(a)(1) of the 1935 Act./3 BHE holds a 14.2% equity interest in
MEPCO, a Maine utility that owns and operates electric transmission facilities
from Wiscasset, Maine to the Maine-New Brunswick border. MEPCO is owned jointly
by Central Maine Power Company ("CMP") (78.3%), BHE (14.2%) and Maine Public
Service Company (7.5%). In addition, BHE owns a 50% general partnership interest
in Chester SVC Partnership ("Chester SVC"), through BHE's wholly-owned
subsidiary Bangor Var. Chester SVC is a single-purpose financing entity formed
to own a static var compensator, which is electrical equipment that supports the
New England Power Pool (NEPOOL)/Hydro Quebec Phase II transmission line.
By order dated July 12, 1990, the Maine Public Utilities Commission
("MPUC") authorized the creation of Chester SVC and the formation of Bangor Var
as a subsidiary of BHE for the single purpose of owning the Chester SVC
partnership interest. Bangor Var has no assets other than its Chester SVC
interest./4
BHE provides the transmission and distribution system for the delivery
of electricity to approximately 123,000 Maine customers. For the twelve months
ending December 31, 2000, BHE had approximately $212 million of utility
operating revenues./5 As of December 31, 2000 BHE had approximately $532 million
in utility assets.
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3 Bangor Hydro-Electric Company, Holding Co. Act Release No. 2704 (Oct. 25,
1999). BHE obtained that order in connection with its acquisition of a 50%
interest in Bangor Gas Company LLC ("Bangor Gas"), a start up natural gas system
in the Bangor area that the company was developing with Sempra Energy
("Sempra"). BHE has since sold its interest in Bangor Gas to Sempra. Prior to
the issuance of the 1999 order, BHE was exempt under Rule 2.
4 Application of Central Maine Power Co., et al, Maine Public Utilities
Commission Docket No. 90-100, Stipulation (July 12, 1990).
5 As explained infra, under Maine's electric restructuring law, BHE exited the
power supply aspect of its traditional utility function as of March 1, 2000.
Nonetheless, BHE's revenues for the twelve months ending December 31, 2000
continue to include revenue associated with power supply because (1) BHE had
responsibility for power supply until March 1, 2000, so until then BHE's
revenues were derived in part from regulated rates that included the costs
associated with power supply, and (2) since March 1, 2000, under the direction
of the Maine Public Utilities Commission, BHE has been acquiring the power
supply to fulfill the MPUC's obligation to provide for "standard offer service",
for which the MPUC sets the rate charged to customers. Revenues in 2000
associated with providing the power supply for the standard offer service were
approximately $66 million.
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BHE owns directly or indirectly a number of nonutility subsidiaries
that are described below.
1. Bangor Energy Resale, Inc., a wholly owned subsidiary of BHE permits BHE
to use a power sales agreement as collateral for a bank loan.
2. CareTaker, Inc., a wholly owned subsidiary of BHE provides security
alarm services.
3. East Branch Improvement Company ("EBIC") formerly provided water storage
services for hydroelectric facilities. Its dams have been sold and EBIC is now
inactive. BHE owns 60% of the common stock of EBIC.
3.1 Godfrey's Falls Dam Company ("Godfrey's Falls") holds rights that
would permit future water storage development in the basin of the East Branch of
the Penobscot River. Godfrey's Falls is wholly owned by EBIC and is also
inactive.
3.2 The Sawtelle Brook Dam & Improvement Company ("Sawtelle") controls
certain water rights in the basin of the East Branch of the Penobscot River.
Sawtelle is wholly owned by EBIC and is also inactive.
4. The Sebois Dam Company improved the navigation of certain of the Sebois
waters entering the Piscataquis River. The Sebois Dam Company is wholly owned by
BHE and is also inactive.
5. The Pleasant River Gulf Improvement Company was engaged in water
improvement. It is wholly owned by BHE and is inactive.
6. Bangor Fiber Company, Inc. owns and leases fiber optic communications
cable. It is wholly owned by BHE.
7. Bangor Line Company constructs and maintains transmission and
distribution lines and provides engineering services. It is wholly owned by BHE.
BHE also holds 7% of the outstanding common stock of Maine Yankee
Atomic Power Company ("Maine Yankee"), a company that owns and, prior to its
permanent closure in 1997, operated an 880 MW nuclear generating plant in
Wiscasset, Maine. Maine Yankee is being decommissioned. Applicants request
authorization to retain BHE's interests in the nonutility businesses described
above
BHE is obligated to negotiate in good faith to acquire a 50% interest
in a joint venture to develop a second 345 kv transmission line to New
Brunswick, Canada, pursuant to a Memorandum of Understanding with Penobscot
Hydro, LLC, dated January 5, 1999. The transmission line would connect with
BHE's existing transmission facilities. BHE's investment in the joint venture
has not been determined at this time but could be approximately $25 million.
Applicants request that the Commission reserve jurisdiction over the acquisition
of an interest in the joint venture until the record is complete with respect to
this matter.
C. The Proposed Transaction
Pursuant to an Agreement and Plan of Merger entered into on June 29,
2000, between Emera and BHE ("Merger Agreement"),/6 Emera will acquire all of
BHE's common shares for $26.50 per share in cash. The total value of
consideration that BHE shareholders will receive in the Merger, based on the
number of shares of BHE common stock outstanding on September 15, 2000
(7,363,424), is approximately $195 million. BHE will retain its name and
continue to serve its customers pursuant to the terms of its existing contracts
and state and federal requirements. Neither BHE nor Emera will modify or
terminate any existing customer contracts as a result of this transaction.
The Merger offers substantial benefits to both parties' shareholders
and customers. The Merger will allow BHE to become part of a larger organization
with greater resources, yet retain its name and identity, continue its historic
record of community involvement and support, and continue to promote economic
development in the regions it serves. The price to be paid by Emera for each
share of BHE's common stock represents a substantial premium above the value of
the stock at the time the Merger was announced./7 Thus, the proposed transaction
will benefit BHE's shareholders, customers, and employees, as well as the
communities in which they work and live.
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6 The Merger Agreement is incorporated by reference as Exhibit B-1 to this
application. In this agreement, Emera is identified by its old name, NS Power
Holdings Incorporated.
7 The closing price of BHE's common stock on June 29, 2000, the day prior to the
Merger announcement, was $15.13 per share.
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With respect to Emera, this transaction will allow it to continue its
strategy of expanding its operations beyond its Nova Scotia base while
capitalizing on its experience and expertise in operating electric utility
companies.
Pursuant to the terms of the Merger Agreement, Merger Sub, a
to-be-formed Emera subsidiary incorporated in the U.S., will merge with and into
BHE, with BHE surviving (the "Surviving Corporation"). The Merger has been
approved by BHE's shareholders and Board of Directors, by the MPUC and by the
Federal Energy Regulatory Commission ("FERC"). The Merger is expected to occur
as soon as all of the remaining conditions to the consummation of the Merger
(principally the authorization sought herein) are met or waived. The Merger
Parties plan to consummate the Merger in the spring of 2001.
Under the terms of the Merger Agreement, (i) each outstanding share of
common stock of Merger Sub will be converted into one share of common stock of
the Surviving Corporation, (ii) each outstanding share of preferred stock of BHE
(the "BHE Preferred Stock") will remain outstanding as one share of preferred
stock of the Surviving Corporation, and (iii) each outstanding share of common
stock of BHE (the "BHE Common Stock") other than Dissenting Shares (as defined
in the Merger Agreement) or shares owned by BHE as treasury shares, or by Emera,
if any, will be converted into the right to receive $26.50 in cash (the "Per
Share Amount"), as such amount may be adjusted in accordance with the Merger
Agreement (the "Merger Consideration"). Holders of BHE's warrants outstanding at
the effective time of the Merger will thereafter be entitled to receive, upon
exercise of each warrant, the Merger Consideration less the exercise price. If
the closing of the Merger does not occur on or prior to June 29, 2001, and all
conditions to closing have been satisfied or are capable of being satisfied
except for the receipt by Emera of (A) the necessary authorizations from the
Commission under the 1935 Act, or (B) any other necessary governmental approvals
to be obtained by Emera, then the Per Share Amount shall be increased by an
amount equal to $0.003 for each day after such date up to and including the day
which is one day prior to the closing of the Merger.
D. Utility Regulation
The State of Maine has been a leader in electric industry
restructuring. As described below, restructuring has required BHE to exit the
former utility function of the provision of power supply for retail consumption.
The restructuring law has required BHE to divest, to the extent practicable, its
generation and power supply assets. Thus, under retail choice, which was
implemented on March 1, 2000, BHE has largely exited the power supply
business./8
1. Divestiture of Generation Assets
In 1997, legislation was enacted to restructure Maine's electric
industry./9 The Maine Restructuring Act states that "[b]eginning on March 1,
2000, all consumers of electricity have the right to purchase generation
services directly from competitive electric providers."/10 The Maine
Restructuring Act required each investor-owned electric utility in Maine to
divest all generation assets and generation-related businesses activities on or
before March 1, 2000, other than any:
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8 As a transitional measure, however, pursuant to MPUC orders, BHE has provided
standard offer supply service since March 1, 2000, and will continue to do so at
least until February 28, 2002.
9 "An Act to Restructure the State's Electric Industry," Pub. Law, ch. 316, 35-A
M.R.S.A.ss.ss. 3201, et seq. (May 29, 1997) ("Maine Restructuring Act").
10 35-A M.R.S.A.ss. 3202(1).
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A. Contract with a qualifying facility, contract with a party other
than a qualifying facility or affiliated interest entered into solely
for the purpose of restructuring a contract with a qualifying facility
or contract with a demand-side management or conservation provider,
broker or host;/11
B. Ownership interest in a nuclear power plant;/12
C. Ownership interest in a facility located outside the United
States;/13 or
D. Ownership interest in a generation asset that the commission
determines is necessary for the utility to perform its obligations as
a transmission and distribution utility in an efficient manner./14
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11 The "qualifying facility" exemption recognizes that Maine's utilities have
ongoing contracts with nonutility generators entered into under the requirements
of the Public Utility Regulatory Policies Act of 1978 and Maine's Small Power
Production Act, 35-A M.R.S.A. ss. 3301 et seq. (1999) (repealed effective March
1, 2000), which are not intended to be affected by the Maine Restructuring Act.
The utilities are instead required to periodically auction the power supply
entitlement under the contracts.
12 This exemption recognizes the difficulties associated with divesting nuclear
power plant interests. BHE's only interest in a nuclear power plant is its 7%
ownership interest in Maine Yankee Atomic Power Company's nuclear plant in
Wiscasset, Maine, which has permanently ceased operations and is being
decommissioned.
13 BHE has no facilities located outside the U.S.
14 As discussed infra, BHE has retained ownership of certain diesel-fired
generators under this exception. 35-A M.R.S.Ass. 3204(1).
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The MPUC required each investor-owned electric utility to submit a
plan to accomplish the required divestiture, which the MPUC reviewed for
consistency with the Maine Restructuring Act and issued an order approving or
modifying the plan./15 Each investor-owned electric utility was then required to
divest its generation assets in accordance with the MPUC's order and was
prohibited from owning or having a financial interest in or otherwise
controlling generation or generation-related assets, except as otherwise
permitted by the Maine Restructuring Act, on or after March 1, 2000./16
Consistent with this requirement, BHE submitted a plan for divesting
its generation assets to the MPUC on February 9, 1998. On June 17, 1998, the
MPUC approved the plan./17 Following its approved divestiture plan, BHE engaged
in an open bidding process to select a purchaser of its generation assets. BHE
selected PP&L Global, Inc. ("PP&L Global"), which purchased the majority of
BHE's generating assets. Specifically, BHE sold to PP&L Global: (1) BHE's
wholly-owned hydro units/18 and the expansion rights to those assets; (2) BHE's
subsidiary's (Penobscot Hydro Company, Inc.'s ("PHC")) ownership interest in the
partnership known as Bangor-Pacific Hydro Associates, which owns the West
Enfield Project; (3) BHE's ownership interest in Wyman Unit No. 4 (8.33% or 51.7
MW); (4) BHE's right, title and interest, subject to a memorandum of
understanding, in the work in progress relating to the potential development of
a new 345-kV tie-line to New Brunswick; (5) BHE's rights in the Hydro-Quebec
Agreements and Transmission Support Agreements; and (6) BHE's Basin Mills
development rights. As part of the sale, BHE also reassigned its 100 MW firm
transmission reservation over MEPCO to PP&L Global./19 By August 27, 1999, the
various asset sales to PP&L Global were complete.
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15 Id.
16 Id.; 35-A M.R.S.A.ss. 3204(5).
17 Re Bangor Hydro-Elec. Co., No. 98-114 (Me. P.U.C. June 17, 1998).
18 Ellsworth Hydro Project, Howland Hydro Project, Medway Hydro Project.,
Milford Hydro Project, Orono Hydro Project, Stillwater Hydro Project, and Veazie
Hydro Project.
19 On March 15, 1999, the Federal Energy Regulatory Commission ("FERC") approved
the transfer to PP&L Global of FERC jurisdictional facilities. Bangor Hydro
Elec. Co., 86 FERC P. 61,281, clarified, 87 FERCP. 61,057 (1999).
--------
After the asset sale, BHE retained 21 MW of diesel-fired internal
combustion units. These facilities consist of 11 units located at BHE's Bar
Harbor, Eastport, and Medway plants. BHE was not required to divest its
ownership in its units at Bar Harbor and Eastport pursuant to 35-A M.R.S.A. ss.
3204(1) of the Maine Restructuring Act. The MPUC found that "BHE's ownership of
its diesel-fired generating units in Bar Harbor and Eastport are necessary for
BHE to perform its obligations as a transmission and distribution utility in an
efficient manner." The Bar Harbor and Eastport units involve 12 MW in total./20
The MPUC extended the deadline for divestiture of BHE's diesel-fired generating
units in Medway until March 1, 2003. The MPUC found that "extending the
divestiture deadline for those units for three years is likely to improve their
sale value."/21
2. Divestiture of Rights to Capacity and Energy
The Maine Restructuring Act directed the MPUC to develop rules
requiring each investor-owned electric utility after February 28, 2000 to sell
rights to capacity and energy from all generation assets and generation-related
businesses, including purchased power contracts that are not divested pursuant
to the general divestiture requirement./22 An investor-owned electric utility
may keep those rights to capacity and energy that the MPUC determines are
necessary for the efficient performance of utility transmission and distribution
obligations./23 The MPUC established rules requiring the sale of remaining
capacity and energy from generation assets and generation-related business./24
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20 Re Bangor Hydro-Elec. Co., No. 98-820 (Me. P.U.C. Feb. 3, 1999).
21 Id.
22 35-A M.R.S.A.ss. 3204(4).
23 Id.
24 Code Me. R. 65-407, Chapter 307.
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On July 16, 1999, the MPUC approved BHE's proposal to sell 38 MW of
its entitlements to generating capacity and associated energy, under existing
power purchase contracts between BHE and six individual qualifying
facilities./25 The six contracts reflect all of BHE's rights to capacity and
energy remaining at the commencement of retail choice, except for: (1) the
output of BHE's 12 MW of diesel-fired units,/26 and (2) 6 MW of capacity and
associated energy from the Penobscot Energy Recovery Company ("PERC") that is
committed to be sold under a pre-existing agreement to UNITIL Power Corporation
("UNITIL")./27
After evaluating the bids received, BHE selected, and the MPUC
approved, Morgan Stanley Capital Group, Inc. ("Morgan Stanley") as the winning
bidder. On December 3, 1999, the MPUC approved BHE's selection of Morgan
Stanley./28 Pursuant to the contract approved by the MPUC, Morgan Stanley has
purchased the 38 MW of entitlements from BHE for a two-year period starting
March 1, 2000. Subsequent auctions will take place to establish purchasers after
this initial period.
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25 Re Bangor Hydro-Elec. Co., No. 99-284 (Me. P.U.C. July 16, 1999). The
entitlements sold include 16 MW from BHE's contract with PERC, the entire output
of the 19.1 MW entitlement in the West Enfield hydro-electric facility, and
BHE's entitlement to the output of four small, less than 1 MW hydro-electric
projects (Green Lake Hydro, Sebec Hydro, Milo Hydro, and Pumpkin Hill Hydro).
26 The MPUC's finding that the Bar Harbor and Eastport diesels were necessary
for transmission and distribution efficiency exempts the output from these units
from the Chapter 307 bid process. Re Bangor Hydro-Elec. Co., No. 99-602 (Me.
P.U.C. Dec. 1, 1999). The MPUC authorized BHE to exclude the output of the
Medway diesels from the Chapter 307 bid process. Id.
27 The MPUC authorized BHE to retain the UNITIL contract concluding that
allowing BHE to retain the contract to continue to meet its contractual
obligation and to receive the associated revenues will likely provide a greater
stranded cost reduction than if BHE divested the contract.
28 Re Bangor Hydro-Elec. Co., No. 99-284 (Me. P.U.C. Dec. 3, 1999).
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3. Standard Offer Service
Under the Maine Restructuring Act, all consumers of electricity
acquired the ability to purchase generation services directly from competitive
electricity providers beginning March 1, 2000./29 Because not all consumers
would want or be able to obtain generation services from the competitive market,
the Maine Restructuring Act required that "when retail access begins, the
Commission shall ensure that standard-offer service is available to all
consumers of electricity."/30 Accordingly, the MPUC has established the terms
and conditions for standard offer service as well as the bid process used by the
MPUC to select standard offer service providers./31
In the event that the MPUC determines that the bids it receives for
standard offer service are inadequate or unacceptable, it may require a
transmission and distribution utility to provide standard offer service. In
doing so, the MPUC must, with full reconciliation, ensure recovery by the
utility of all costs of providing standard offer service, including the costs of
the supply arrangements, any incremental administrative costs of procuring and
managing the purchases and all applicable carrying costs./32
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29 35-A.M.R.S.A.ss.3202(1).
30 35-A.M.R.S.A.ss.3212.
31 35-A.M.R.S.A.ss.3212(2). Code Me. R. 65-407, Chapter 301.
32 35-A.M.R.S.A.ss.3212(2). Code Me. R. 65-407, Chapter 301,ss.8(D)(3).
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On August 2, 1999, the MPUC commenced the bidding for the provision of
standard offer service and received proposals in response to its Request for
Bids ("RFB"). However, the MPUC rejected the bids received for BHE's service
territory because they were not in conformance with the MPUC's rules for
standard offer service and the RFB or they were unreasonably high./33
The MPUC initiated a second round of bids for standard offer service
for BHE's service territory and again rejected all bids submitted in response to
the solicitation./34 The MPUC then directed BHE to provide standard offer
service "through wholesale arrangements with suppliers or from the spot market
until the Commission acts in the future to designate standard offer
providers./35
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33 Re Bangor Hydro-Elec. Co., NO. 99-111 (Me. P.U.C. Oct. 25, 1999).
34 Re Bangor Hydro-Elec. Co., No. 99-111 (Me. P.U.C. Dec. 3, 1999).
35 Id.
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The MPUC set the standard offer service price and required BHE to
procure wholesale power to provide standard offer service until March 1,
2001./36 On February 29, 2000, the MPUC authorized BHE to enter into a one-year
wholesale power supply contract with a supplier BHE chose through an offer of
solicitation./37 This contract with NB Power provided approximately 60 percent
of BHE's standard offer load requirements. The remainder was obtained through
short-term purchases from the NEPOOL market.
On October 2, 2000, the MPUC issued a Request for Bids to provide
standard offer service in BHE's service territory commencing March 1, 2001. Once
again, the MPUC rejected all the bids received and terminated the bid
process./38 While continuing to entertain price proposals from qualified
bidders, the MPUC directed BHE to explore wholesale power supply arrangements as
sources for providing standard offer service beginning March 1, 2001.
By Orders of February 2/39, 15/40, 20/41, 27/42 and March 1, 2001,/43
the MPUC designated BHE as the standard offer service provider in its service
territory beginning March 1, 2001 and directed BHE to enter into three wholesale
power supply contracts in order to serve a portion of that load. To the extent
that wholesale contract amounts vary from the amount needed to serve the actual
standard offer load, differences are expected to be traded in the NEPOOL spot
market. The MPUC also established standard offer prices for the year beginning
March 1, 2001.
The MPUC requires BHE, as the standard service provider, to submit
monthly reports of its standard offer costs and collections. Throughout the
year, the MPUC reviews BHE's purchases for standard offer service and, where
appropriate, it increases or decreases the standard offer service prices for
customers in BHE's service territory to cover projected shortfalls or eliminate
surpluses./44
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36 Id.
37 Re Bangor Hydro-Elec. Co., No. 99-111 (Me. P.U.C. Feb. 29, 2000).
38 Re Public Utils. Comm., No. 2000-808 (Me. P.U.C. Oct. 2, 2000).
39 Id. (Me. P.U.C. Feb. 2, 2001).
40 Id. (Me. P.U.C. Feb. 15, 2001).
41 Id. (Me. P.U.C. Feb. 20, 2001).
42 Id. (Me. P.U.C. Feb. 27, 2001).
43 Id. (Me. P.U.C. Mar. 1, 2001).
44 Re Bangor Hydro-Elec. Co., No. 99-111 (Me. P.U.C. Feb 29, 2000); Re Bangor
Hydro-Elec. Co., No. 99-111 (Me. P.U.C. June 15, 2000); Re Bangor Hydro-Elec.
Co., No. 99-111 (Me. P.U.C. June 23, 2000); Re Bangor Hydro-Elec. Co., No.
99-111 (Me P.U.C. July 20, 2000); Re Bangor Hydro-Elec. Co., No. 99-111 (Me.
P.U.C. Aug. 17, 2000); Re Bangor Hydro-Elec. Co., No. 99-111 (Me. P.U.C. Sept.
21, 2000).
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4. BHE's Ongoing Electric Utility Function
Following the divestiture activities described above, BHE now
continues in its historic function of the provision of all of the attributes of
electric utility service other than power supply as a regulated monopoly in the
area it serves. Its rates are regulated by the FERC and the MPUC. BHE may be
required by the MPUC from time to time to acquire power to fulfill the MPUC's
obligation to provide standard offer power supply service. When it does so, the
MPUC sets the price for standard offer service at a level sufficient to cover
the cost of such power supply, and provides for a reconciliation after the fact
for under or over recoveries.
5. Intermediate Holding Companies
To effect the Merger, Emera will hold its ownership interest in BHE
through one or more intermediate holding companies./45 The intermediate holding
companies allow Emera to structure its BHE ownership interest efficiently from a
tax perspective and will not be used to make Emera's capital structure more
complex. The intermediate holding companies will be wholly-owned, directly, or
indirectly, by Emera and will have no public or private institutional equity or
debt holders. The intermediate holding companies will be capitalized with equity
and/or debt, all of which will be held either by Emera or an intermediate
holding company. The only utility holdings of the intermediate holding companies
will be direct or indirect interests in BHE and its utility subsidiaries.
Because tax laws and regulations and accounting rules could change in
a manner that would require Emera to act quickly to change the intermediate
holding company structure to maintain its efficiency, Applicants request that
the Commission authorize Emera to reorganize the intermediate holding company
structure without seeking prior Commission approval subject to the following
conditions: (a) the companies in the intermediate structure would be wholly
owned directly or indirectly by Emera; (b) the companies in the intermediate
structure would not issue debt or equity to any company outside the Emera group
and would not borrow from BHE or its subsidiaries; (c) the changes will not have
a material impact on the financial condition or operations of BHE or its
subsidiaries or a material adverse effect on Emera, and; (d) the companies in
the intermediate structure would be organized in the U.S., Canada, or a country
in Europe./46
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45 The names of the intermediate holding companies have not been determined at
this time. They will be provided by amendment.
46 See National Grid Group plc, Holding Co. Act Release No. 27154 (March 15,
2000) (authorizing National Grid to reorganize intermediate holding company
structure to respond to tax law and accounting changes as necessary to maintain
an efficient structure).
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6. Financing the Merger
Emera expects to enter into a credit facility with one or more banks
in the amount of $225 million to fund the Merger consideration. The credit
facility would have a non-revolving term of 364 days and an interest of, at the
borrower's option, (1) the greater of (i) the Agent's Base Rate Canada, and (ii)
the Federal Funds Effective Rate for overnight funds (as published by the
Federal Reserve in the U.S.) plus 50 basis points per annum, or (2) the London
Interbank Offered Rate ("LIBOR") plus 75 to 90 basis points. Emera expects that
this credit facility will be replaced or refinanced with longer-term debt,
equity or preferred securities in the future. Applicants' request for financing
authorization included infra at Item 1.E., incorporates the debt that will be
issued to fund and refinance the Merger.
The Merger will be accounted for under the purchase method. The excess
of the purchase price and assumed liabilities over the value of BHE's assets
will be recorded on the books of BHE as goodwill. BHE will amortize the goodwill
on its books over a period of twenty years.
7. Management and Operations of BHE Following the Merger
Following the Merger, BHE will be operated as a subsidiary of Emera.
Although Emera has not yet determined the leadership of BHE and the exact
composition of BHE's board of directors, it is expected that the President and
CEO of BHE will be a resident of Maine and a member of BHE's board. Moreover,
the Merger Agreement requires that when the Merger is consummated the Board of
BHE post-merger have at least nine members, with at least four of those being
carry-overs from the prior BHE Board of Directors. The Merger Agreement provides
that BHE's corporate headquarters will be located in Maine for not less than 10
years following the Merger. BHE will also retain local facilities for customer
service, maintenance and field work operations.
E. Financing the Emera Registered Holding Company System
Applicants seek Commission authorization of the financing activities
of the Emera System for the period beginning with the effective date of an order
issued pursuant to this filing and continuing through June 31, 2004
("Authorization Period").
1. Summary of Authorization Requested
Applicants seek the following Commission authorizations:
a) Emera requests authorization to issue and sell through the Authorization
Period up to $3 billion of securities at any time outstanding and to issue
guarantees and other forms of credit support in an aggregate amount of $500
million at any time outstanding;
b) Emera requests authority to enter into hedging transactions, including
anticipatory hedges, with respect to its indebtedness in order to manage
and minimize interest rate costs and to lock-in current interest rates;
c) Emera requests authorization to finance its nonutility subsidiaries at a
mark up to Emera's cost of funds.
d) The Intermediate Holding Companies request authorization to issue and sell
securities to Emera and one another, and to acquire the securities of BHE
and other Intermediate Holding Companies.
e) Emera, on behalf of the Subsidiaries, requests authorization to change the
terms of any wholly-owned Subsidiary's authorized capital stock
capitalization;
f) BHE requests authorization to pay dividends out of capital or unearned
surplus;
g) Emera and the Subsidiaries request authorization to acquire the equity
securities of one or more special purpose subsidiaries ("Financing
Subsidiaries") organized solely to facilitate a financing transaction and
to guarantee the securities issued by Financing Subsidiaries.
h) Applicants request that the Commission approve the form of agreement for
the allocation of consolidated tax among the associate companies in the
U.S. tax filing group;
i) Emera requests that the Commission approve the issuance of up to 5 million
shares of common stock under dividend reinvestment and stock-based
management incentive and employee benefit plans;
j) BHE requests authorization to issue and sell short-term debt;
k) Emera requests authorization to invest up to 15% of its consolidated
capitalization in companies defined as "energy-related" or "gas-related"
under Rule 58, except that companies that derive revenues from Canada shall
not be excluded from such definition ("Rule 58-type Subsidiaries") and
provided further that Emera's investment in its Subsidiaries at the time of
its registration under the Act shall also be excluded from the investment
limit. As of December 31, 2000, 15% of Emera's consolidated capitalization
was $281.45 million.
l) Emera requests authorization to issue and sell securities in an aggregate
amount of up to $1.5 billion, such amount to be included within the $3
billion overall limit proposed above, for the purpose of financing the
acquisition of exempt wholesale generators ("EWGs") and FUCOs.
2. Parameters for Financing Authorization
To assure the continued sound financial structure of the Emera System
and because the specific terms and conditions of the financing authorizations
requested in this Application are not established at this time, Applicants
propose that the following general terms and conditions would apply, where
appropriate, to the requested financing authorizations:
a) Investment Grade Credit Rating - Emera commits that all long-term debt
issued by Emera to unaffiliated parties under the authority requested in
this Application will, when issued, be rated investment grade by a
nationally recognized statistical rating organization.
b) Minimum Capitalization Ratio - Emera, on a consolidated basis, and BHE,
individually, will maintain common stock equity as a percentage of total
capitalization of at least 30%.
c) Effective Cost of Money on Borrowings - The effective cost of money on debt
financings by Emera under the authorizations requested in this Application
will not exceed the competitive market rates available at the time of
issuance to companies with comparable credit ratings with respect to debt
having similar maturities. The effective cost of money on BHE's short-term
debt will not at the time of issuance exceed 300 basis points over the
comparable term LIBOR.
d) Maturity of Debt - The maturity of debt will not exceed 50 years.
e) Effective Cost of Preferred Stock - The dividend rate on preferred stock or
other types of preferred or equity-linked securities will not exceed at the
time of issuance the rate generally obtainable for preferred securities
having the same or reasonably similar terms and conditions issued by
utility holding companies of reasonably comparable credit quality, as
determined by competitive capital markets.
f) Issuance Expenses - The underwriting fees, commissions and other similar
remuneration paid in connection with the non-competitive issue, sale or
distribution of a security pursuant to this Application would not exceed an
amount or percentage of the principal or total amount of the security being
issued that would be charged to or paid by other companies with a similar
credit rating and credit profile in a comparable arm's-length credit or
financing transaction with an unaffiliated person.
g) EWG and FUCO Investments - Emera's "aggregate investment" in EWGs and
FUCOs, as defined in Rule 53 under the Act, will not exceed $3.0 billion.
3. Use of Proceeds
The proceeds from the financings authorized by the Commission under
this Application will be used for general corporate purposes, including (i)
refinancing the Merger-related debt, (ii) financing, in part, investments by and
capital expenditures of Emera and its Subsidiaries, (iii) funding future
investments in EWGs, FUCOs and Rule 58 Subsidiaries and Rule 58-type
Subsidiaries, (iv) repaying, redeeming, refunding or purchasing any securities
issued by Emera or any Subsidiary, and (v) financing the working capital
requirements of Emera and its Subsidiaries.
Applicants represent that no financing proceeds will be used to
acquire the equity securities of any company unless such acquisition has been
approved by the Commission in this proceeding or in a separate proceeding or in
accordance with an available exemption under the Act or rules thereunder,
including Sections 32 and 33 and Rule 58. The proceeds of financing and
guarantees used to fund investments in Rule 58 Subsidiaries will be subject to
the limitations of that rule.
4. Description of Emera's Existing Capital Structure
As of December 31, 2000, Emera had 87.35 million common shares issued
and outstanding. Emera also has a non-controlling minority interest attributable
to preferred shares in NSPI that are convertible into Emera common stock. NSPI
has issued and outstanding 4.4 million shares of Series C First Preferred Shares
("Series C") that at the option of NSPI may be redeemed on or after April 1,
2009 for a number of shares of Emera common stock determined by dividing $25.00
plus an amount equal to all accrued but undeclared dividends per Series C share
up to but excluding the exchange date by the greater of $2.00 and 95% of the
weighted average trading price of the Emera shares on the Toronto Stock Exchange
for the 20 trading days ending on the last trading day on or before the fourth
trading day immediately prior to the time of the exchange ("Market Price"). On
or after notice prior to July 1, 2009 or prior to each dividend payment date
thereafter the Series C shares will be exchangeable, at the option of the
holder, into the number of shares of Emera common stock determined by dividing
$25.00 by the greater of $2.00 and the Market Price of the Emera shares at such
time, subject to the right of NSPI on not less than 40 days notice prior to the
exchange date to redeem such shares for cash or to find substitute purchasers
for such shares.
NSPI has issued and outstanding 5.4 million shares of Series D First
Preferred Shares ("Series D") that at the option of NSPI may be redeemed on or
after October 15, 2015 for a number of shares of Emera common stock determined
by dividing $25.00 plus an amount equal to all accrued but undeclared dividends
per Series D share up to but excluding the exchange date by the greater of $2.00
and 95% of the weighted average trading price of the Emera shares on the Toronto
Stock Exchange for the 20 trading days ending on the last trading day on or
before the fourth trading day immediately prior to the time of the exchange
("Market Price"). On or after notice prior to January 15, 2016 or prior to each
dividend payment date thereafter the Series D shares will be exchangeable, at
the option of the holder, into the number of shares of Emera common stock
determined by dividing $25.00 by the greater of $2.00 and the Market Price of
the Emera shares at such time, subject to the right of NSPI on not less than 40
days notice prior to the exchange date to redeem such shares for cash or to find
substitute purchasers for such shares.
Emera has long-term debt composed of debentures and notes payable. All
long-term debt instruments are issued under trust indentures at fixed interest
rates, and are unsecured. As of December 31, 2000, Emera had an aggregate amount
outstanding of CDN $1.276 billion with a weighted average coupon rate of 7.59%.
Emera also has short-term debt outstanding consisting of commercial paper,
bankers' acceptances and LIBOR loans issued against lines of credit. As of
December 31, 2000, Emera had an aggregate amount of short-term debt outstanding
of CDN $281.7 million.
5. Description of Proposed Financing Program
a. Emera's External Financing
Emera proposes to issue long-term equity and debt securities
aggregating not more than $3 billion at any one time outstanding during the
Authorization Period./47 Such securities could include, but would not
necessarily be limited to, common stock, preferred stock, options, warrants,
long- and short-term debt (including commercial paper), convertible securities,
subordinated debt, bank borrowings and securities with call or put options.
Emera may also issue guarantees and enter into interest rate swaps and hedges as
described below.
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47 The overall limit of $3 billion includes the Merger-related financing.
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b. Common Stock
Emera requests authorization, during the Authorization Period, to
issue and sell from time to time common stock, either: (1) through underwritten
public offerings, (2) in private placements, (3) under its dividend
reinvestment, stock-based management incentive and employee benefit plans, (4)
in exchange for securities or assets being acquired from other companies, and
(5) in connection with redemptions of the Series C and Series D shares. Emera
also proposes to issue and sell common stock or options, warrants, or other
stock purchase rights. Emera may also buy back shares of common stock during the
Authorization Period in accordance with Rule 42 under the Act.
Emera may perform common stock financings pursuant to underwriting
agreements of a type generally standard in the industry. Public distributions
may be made by private negotiation with underwriters, dealers or agents as
discussed below or through competitive bidding among underwriters. In addition,
sales may be made through private placements or other non-public offerings to
one or more persons. All such common stock sales will be at rates or prices and
under conditions negotiated or based upon, or otherwise determined by,
competitive capital markets.
Emera issues and sells common stock pursuant to its Common Shareholder
Dividend Reinvestment Plan and its Employee Common Share Purchase Plan, which
provide an opportunity for shareholders and company employees to reinvest
dividends and make cash contributions for the purpose of purchasing common
shares. Emera also has a stock option plan that grants options to the executive
officers of Emera for a maximum term of 10 years. The option price for these
shares is the market price of the shares on the day the option is granted. Emera
may also buy back shares of such stock or such options during the Authorization
Period.
Emera may seek to acquire securities of companies engaged in
energy-related businesses as described in Rule 58 and Rule 58-type Subsidiaries,
exempt telecommunications companies ("ETCs"), EWGs and FUCOs. These acquisitions
may involve the exchange of Emera stock for securities of the company being
acquired in order to provide the seller with certain tax advantages. These
transactions would be individually negotiated. The Emera common stock to be
exchanged may be purchased on the open market under Rule 42, or may be original
issue. Original issue stock may be registered or qualified under applicable
securities laws or unregistered and subject to resale restrictions. Emera does
not intend to engage in any transaction where original issue stock is not
registered or qualified while a public offering is being made, other than a
public offering pursuant to a compensation, dividend or stock purchase plan, or
a public offering of debt.
The ability to offer stock as consideration may make a transaction
more economical for Emera as well as for the seller of the business. For
purposes of calculating compliance with the $3 billion external financing limit,
Emera's common stock would be valued at market value based upon the closing
price on the day before closing of the sale or based upon average high and low
prices for a period of 20 days prior to the closing of the sale.
c. Preferred Stock
Emera may issue preferred stock from time to time during the
Authorization Period. Preferred stock or other types of preferred or
equity-linked securities may be issued in one or more series with such rights,
preferences, and priorities as may be designated in the instrument creating each
such series, as determined by Emera's board of directors. All such securities
will be redeemed no later than 50 years after the issuance thereof. The dividend
rate on any series of preferred stock or other preferred securities will not
exceed at the time of issuance the rate generally obtainable for preferred
securities having the same or reasonably similar terms and conditions issued by
utility holding companies of reasonably comparable credit quality, as determined
by competitive capital markets. Dividends or distributions on preferred stock or
other preferred securities will be made periodically and to the extent funds are
legally available for such purpose, but may be made subject to terms that allow
the issuer to defer dividend payments for specified periods. Preferred stock or
other preferred securities may be convertible or exchangeable into shares of
common stock.
d. Long-Term Debt
Emera proposes to issue long-term debt in accordance with the
conditions described in Item 1.E.2 above. Any long-term debt security would have
the maturity, interest rate(s) or methods of determining the same, terms of
payment of interest, redemption provisions, sinking fund terms and other terms
and conditions as Emera may determine at the time of issuance. The request for
authorization for Emera to issue long-term debt securities is consistent with
authorization that the Commission has granted to other registered holding
companies. See Southern Co., Holding Co. Act Release No. 27134 (February 9,
2000) ; Columbia Energy Group, Holding Co. Act Release No. 27035 (June 8, 1999).
Emera believes that a restriction against parent-level debt would be a
unreasonable financial burden that is not necessary or appropriate in the public
interest or for the protection of investors or consumers because it may
interfere with Emera's ability to implement an optimal capital structure for its
business. Prior to issuing debt, preferred securities or equity, Emera will
evaluate the relevant financial implications of the issuance, including without
limit, the cost of capital, and select the security that provides the most
efficient capital structure consistent with sound financial practices and the
capital markets.
e. Short-Term Debt
Emera requests authorization to issue short-term debt including, but
not limited to, institutional borrowings, commercial paper and bid notes.
Issuance of short-term debt will be in accordance with the conditions described
in Item 1.E.2 above. Proceeds of any short-term debt issuance may be used to
refund pre-Merger short-term debt and Merger-related debt, and to provide
financing for general corporate purposes, working capital requirements and
Subsidiary capital expenditures until long-term financing can be obtained.
Emera may sell commercial paper, from time to time, in established
domestic U.S. or European commercial paper markets. Such commercial paper would
be sold to dealers at the discount rate or the coupon rate per annum prevailing
at the date of issuance for commercial paper of comparable quality and
maturities sold to commercial paper dealers generally. It is expected that the
dealers acquiring commercial paper from Emera will reoffer such paper at a
discount to corporate, institutional and, with respect to European commercial
paper, individual investors. Institutional investors are expected to include
commercial banks, insurance companies, pension funds, investment trusts,
foundations, colleges and universities and finance companies.
Emera also proposes to establish bank lines of credit, directly or
indirectly through one or more financing subsidiaries. Loans under these lines
will have maturities of less than one year from the date of each borrowing.
Emera may engage in other types of short-term financing generally available to
borrowers with comparable credit ratings as it may deem appropriate in light of
its needs and market conditions at the time of issuance.
f. Hedges and Interest Rate Risk Management
Emera requests authority to enter into, perform, purchase and sell
financial instruments intended to manage the volatility of interest rates,
including but not limited to interest rate swaps, caps, floors, collars and
forward agreements or any other similar agreements ("Hedging Instruments").
Emera would employ Hedging Instruments as a means of prudently managing the risk
associated with any of its outstanding debt issued under the authority requested
in this application or an applicable exemption by, in effect, synthetically (i)
converting variable rate debt to fixed rate debt, (ii) converting fixed rate
debt to variable rate debt, (iii) limiting the impact of changes in interest
rates resulting from variable rate debt and (iv) providing an option to enter
into interest rate swap transactions in future periods for planned issuances of
debt securities. In no case will the notional principal amount of any Hedging
Instrument exceed that of the underlying debt instrument and related interest
rate exposure. Thus, Emera will not engage in "leveraged" or "speculative"
transactions. The underlying interest rate indices of such Hedging Instrument
will closely correspond to the underlying interest rate indices of Emera's debt
to which such Hedging Instrument relates. Off-exchange Hedging Instruments would
be entered into only with counterparties whose senior debt ratings are
investment grade ("Approved Counterparties").
In addition, Emera requests authorization to enter into Hedging
Instruments with respect to anticipated debt offerings ("Anticipatory Hedges"),
subject to certain limitations and restrictions. Anticipatory Hedges would only
be entered into with Approved Counterparties, and would be used to fix and/or
limit the interest rate risk associated with any new issuance through (i) a
forward sale of exchange-traded U.S. or Canadian Treasury futures contracts,
U.S. or Canadian Treasury obligations and/or a forward swap (each a "Forward
Sale"), (ii) the purchase of put options on U.S. or Canadian Treasury
obligations (a "Put Options Purchase"), (iii) a Put Options Purchase in
combination with the sale of call options on U.S. or Canadian Treasury
obligations (a "Zero Cost Collar"), (iv) transactions involving the purchase or
sale, including short sales, of U.S. or Canadian Treasury obligations, or (v)
some combination of a Forward Sale, Put Options Purchase, Zero Cost Collar
and/or other derivative or cash transactions, including, but not limited to
structured notes, caps and collars, appropriate for the Anticipatory Hedges.
Hedging Instruments may be executed on-exchange ("On-Exchange Trades")
with brokers through the opening of futures and/or options positions traded on
the Chicago Board of Trade, the opening of over-the-counter positions with one
or more counterparties ("Off-Exchange Trades"), or a combination of On-Exchange
Trades and Off-Exchange Trades. Emera will determine the optimal structure of
each Hedging Instrument transaction at the time of execution.
Emera will endeavor to comply with SFAS 80 ("Accounting for Futures
Contracts") and SFAS 133 ("Accounting for Derivatives Instruments and Hedging
Activities") when it is implemented or such other standards relating to
accounting for derivative transactions as are adopted and implemented by the
Financial Accounting Standards Board ("FASB"). In addition, Emera will endeavor
to qualify these financial instruments for hedge accounting treatment under FASB
rules. In the event transactions in financial instruments or products are
qualified for hedge accounting treatment under Canadian GAAP, but not under US
GAAP, Emera's financial statements filed with the Commission will contain a
reconciliation of the difference between the two methods of accounting
treatment. No gain or loss on a hedging transaction entered into by Emera or its
subsidiaries (except BHE and its subsidiaries) will be allocated to BHE or its
subsidiaries, regardless of the accounting treatment accorded to the
transaction.
To the extent such securities are not exempt under Rule 52(a), BHE
requests authorization to enter into the transactions described in this Item
1.E.2.f on the same terms applicable to Emera.
g. Guarantees
Emera requests authorization to enter into guarantees, obtain letters
of credit, enter into expense agreements or otherwise provide credit support
("Guarantees") with respect to the obligations of its Subsidiaries as may be
appropriate or necessary to enable such Subsidiaries to carry on in the ordinary
course of their respective businesses in an aggregate principal amount not to
exceed $500 million outstanding at any one time (not taking into account
obligations exempt under Rule 45). All debt guaranteed will comply with the
conditions in Item 1.E.2. Included in this amount are Guarantees entered into by
Emera that were previously issued in favor of its Subsidiaries. The limit on
Guarantees is separate from the limit on Emera's external financing. Emera
proposes to charge each Subsidiary a fee for each guarantee provided on its
behalf that is not greater than the cost, if any, of obtaining the liquidity
necessary to perform the guarantee. As of December 31, 2000, Emera had no
outstanding Guarantees on behalf of Subsidiaries.
h. Subsidiary Financing
Emera requests authorization to lend funds to its nonutility
subsidiaries at a mark up to Emera's cost of funds at any time during the
Authorization Period without prior Commission authorization. The authorization
requested would not apply to BHE or any of its subsidiaries or to NSPI. Emera
requests such authority so that it can match the cost of funds charged to each
subsidiary with each company's unique investment risk profile. This is desirable
as a risk management measure and because it avoids the cross subsidization of
higher risk subsidiaries from lower risk subsidiaries./48
The nonutility subsidiaries that would be financed in this manner
would not pass any increased costs on to BHE or its subsidiaries because they
would not sell goods or services or lend funds to BHE or its subsidiaries. Emera
intends to finance BHE's capital needs at the lowest practical cost. BHE will
either finance its capital needs through short, medium and long-term borrowings
authorized by the MPUC and exempt under Rule 52(a) or through borrowings from
Emera, directly or indirectly through the intermediate holding companies. BHE
may also borrow funds from NSPI if NSPI has surplus funds and the interest rate
on the loan would result in a lower cost of borrowing for BHE. All borrowings by
BHE from an associate company would be at the lower of Emera's effective cost of
capital, NSPI's effective cost of capital (if NSPI is the lender) or BHE's
effective cost of capital incurred in a direct borrowing at that time from
nonassociates for a comparable term loan./49
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48 See, e.g., Energy East Corp., Holding Co. Act Release No. 27228 (September
12, 2000); Entergy Corp., Holding Co. Act Release No. 27039 (June 22, 1999) (a
requirement that the lender charge only its effective cost of capital for
nonutility loans when market rates are greater would result in a subsidy to the
nonutility borrower).
49 BHE's nonutility subsidiaries will finance their capital needs through the
issuance of securities under Rule 52(b). 50 Emera intends to integrate any BHE
stock-based benefit plans into the plans administered by Emera subsequent to the
Merger.
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The MPUC exercises jurisdiction over the securities issued by BHE with
maturities of one year or longer. BHE requests Commission authorization to issue
and sell securities with maturities of less than one year. Such short-term debt
will not exceed an aggregate amount of $60 million outstanding at any time
during the Authorization Period. BHE also requests authorization to guarantee
the obligations of its subsidiaries in an aggregate amount not to exceed $30
million. BHE may charge each subsidiary a fee for each guarantee provided on its
behalf that is not greater than the cost, if any, of obtaining the liquidity
necessary to perform the guarantee.
Because Emera is structurally subordinated to NSPI with respect to the
majority of assets in the Emera group, NSPI generally may borrow funds at a
lower cost of funds than Emera. Consequently, NSPI generally finances its
capital needs independently of Emera. As a FUCO, NSPI's financing would be
exempt under Section 33 of the Act unless guaranteed or otherwise supported by
the credit of Emera.
Each of the Intermediate Holding Companies also requests authorization
to issue and sell securities to the other Intermediate Holding Companies and
Emera, and to acquire securities from their respective subsidiary companies.
Each of the Intermediate Companies also seeks authority to issue guarantees and
other forms of credit support to direct and indirect subsidiaries. In no case
would the Intermediate Holding Companies borrow, or receive any extension of
credit or indemnity from any of their respective direct or indirect subsidiary
companies. For reasons of economic efficiency, the terms and conditions of any
such financings will be on an arm's length basis, except as noted above for
financings by BHE.
i. Changes in Capital Stock of Wholly-Owned Subsidiaries
The portion of an individual Subsidiary's aggregate financing to be
effected through the sale of stock to Emera or other immediate parent company
during the Authorization Period pursuant to Rule 52 and/or an order issued in
this file is unknown at this time. The proposed sale of capital securities
(i.e., common stock or preferred stock) may in some cases exceed the then
authorized capital stock of such Subsidiary. In addition, the Subsidiary may
choose to use capital stock with no par value. As needed to accommodate such
proposed transactions and to provide for future issues, Applicants request
authority to change the terms of any wholly-owned Subsidiary's authorized
capital stock capitalization by an amount deemed appropriate by Emera or other
intermediate parent company.
The requested authorization is limited to Emera's wholly-owned
Subsidiaries and will not affect the aggregate limits or other conditions
contained herein. A Subsidiary would be able to change the par value, or change
between par value and no-par stock, without additional Commission approval. Any
such action by BHE or any other public utility company would be subject to and
would only be taken upon the receipt of any necessary approvals by the MPUC or
other public utility commission with jurisdiction over the transaction. As noted
previously, BHE will maintain, during the Authorization Period, a common equity
capitalization of at least 30%. See New Century Energies, Inc., Holding Co. Act
Release No. 26750 (Aug. 1, 1997); Conectiv, Inc., Holding Co. Act Release No.
26833 (Feb. 26, 1998); Dominion Resources, Inc., Holding Co. Act Release No.
27112 (Dec. 15, 1999).
j. Payment of Dividends Out of Capital or Unearned Surplus
As a result of the application of the purchase method of accounting to
the Merger, the current retained earnings of BHE will be eliminated. In
addition, the Merger will give rise to a substantial level of goodwill, the
difference between the aggregate values allocated to all identifiable tangible
and intangible (non-goodwill) assets on the one hand, and the total
consideration to be paid for BHE and the fair value of the liabilities assumed,
on the other. In accordance with the Commission's Staff Accounting Bulletin No.
54, Topic 5J, the goodwill will be "pushed down" to BHE and reflected as
additional paid-in-capital in its financial statements. The effect of these
accounting practices would be to leave BHE without retained earnings, the
traditional source of dividend payment, but, nevertheless, a strong balance
sheet showing a significant equity level. To allow BHE to pay dividends after
the Merger, BHE requests authorization to pay dividends out of additional
paid-in-capital up to the amount of its retained earnings immediately prior to
the Merger and out of earnings before the amortization of goodwill thereafter.
BHE also requests authorization to redeem its common stock held by its associate
company parent in lieu of the payment of dividends to the extent permitted by
state law, provided that BHE maintains the required minimum 30% common equity
capitalization.
The application of "push down" accounting represents a change in the
manner of accounting. For FERC and state commission reporting purposes, goodwill
will be recorded in BHE's books, however, the original historical basis of BHE's
books will not be disturbed.
The push down of the net assets at fair market value would also have
an impact on the net income of BHE. The net assets include an acquisition
adjustment that will be amortized over 20 years. BHE's net income will be
reduced by the amount of the amortization. For example if the Merger had
occurred on January 1, 2000, net income of $11.5 million for the year ended
December 31, 2000 would have been reduced by a goodwill amortization of $3.6
million. The resulting net income after amortization would be $7.9 million.
In determining whether to permit a registered holding company or
subsidiary to pay dividends out of capital surplus, the Commission considers
various factors, including: (i) the asset value of the company in relation to
its capitalization, (ii) the company's prior earnings, (iii) the company's
current earnings in relation to the proposed dividend, and (iv) the company's
projected cash position after payment of a dividend. See Eastern Utilities
Associates, Holding Co. Act Release No. 25330 (June 13, 1991) ("EUA"), and The
National Grid Group plc, Holding Co. Act Release No. 27154 (Mar. 15, 2000).
Further, the payment of the dividend must be "appropriate in the public
interest." Id., citing Commonwealth & Southern Corporation, 13 S.E.C. 489, 492
(1943).
In support of its request, BHE asserts that each of the standards of
Section 12(c) of the 1935 Act enunciated in the EUA case are satisfied:
(i) After the Merger, and giving effect to the push down of goodwill,
BHE's common equity as a percentage of total capitalization will be at
or above 30%; consistent with industry norms.
(ii) BHE has a favorable history of prior earnings.
(iii) Applicants anticipate that BHE's cash flow from operations after
the Merger will remain stable. In the years following the Merger, cash
flow is expected to improve and earnings before the amortization of
goodwill ("Gross Earnings") should be adequate to support the
requested dividend authorization. Dividends paid out of future
earnings will not exceed 100% of BHE's Gross Earnings.
(iv) The projected cash position of BHE after the Merger will be
adequate to meet its operating needs. As of December 31, 2000, BHE had
balances of $12.5 million in cash and cash equivalents. The
amortization of goodwill is a non-cash expense that will not affect
the cash flow of BHE. BHE is forecast to have sufficient cash to pay
dividends in the amounts contemplated.
(v) The proposed dividend payments are in the public interest. BHE is
in sound financial condition. In addition, the dividend payments are
consistent with investor interests because they allow the capital
structure of BHE to be adjusted to more appropriate levels of debt and
equity.
Lastly, it is important to note that in no case would dividends be
paid if BHE's common stock equity as a percentage of its total capitalization
was below 30%. This restriction protects the interests of investors, consumers
and the general public in soundly capitalized public utility companies.
k. Financing Entities
Emera and the Subsidiaries seek authorization to organize new
corporations, trusts, partnerships or other entities that will facilitate
financings by issuing income preferred securities or other securities to third
parties. To the extent not exempt under Rule 52, the financing entities also
request authorization to issue such securities to third parties. In connection
with this method of financing, Emera and the Subsidiaries may: (i) issue
debentures or other evidences of indebtedness to a financing entity in return
for the proceeds of the financing; (ii) acquire voting interests or equity
securities issued by the financing entity to establish ownership of the
financing entity (the equity portion of the entity generally being created
through a capital contribution or the purchase of equity securities, ranging
from one to three percent of the capitalization of the financing entity), and;
(iii) guarantee a financing entity's obligations in connection with a financing
transaction. Emera and the Subsidiaries also request authorization to enter into
expense agreements with financing entities to pay the expenses of any such
entity. Any amounts issued by a financing entity to a third party under this
authorization will be included in the overall external financing limitation
authorized herein for the immediate parent of such financing entity. However,
the underlying intra-system mirror debt and parent guarantee shall not be so
included. The authorization sought herein with respect to financing entities is
substantially the same as that granted in New Century Energies, Inc., Holding
Co. Act Release No. 26750 (Aug. 1, 1997); Conectiv, Holding Co. Act Release No.
26833 (Feb. 26, 1998) and Dominion Resources, Inc., Holding Co. Act Release No.
27112 (Dec. 15, 1999).
l. Tax Allocation Agreement
Applicants ask the Commission to approve the agreement among certain
Emera System companies to file a consolidated tax return ("Tax Allocation
Agreement"). Approval is necessary because the Tax Allocation Agreement provides
for the retention by [identify intermediate holding company that will be parent
of the US tax filing group] ("US Group Parent"), of certain payments for tax
losses that it has incurred, rather than the allocation of such losses to the
Subsidiaries in the U.S. tax filing group without payment as would otherwise be
required by Rule 45(c)(5).
In this matter, US Group Parent is seeking to retain the benefit of
tax losses that have been generated by it in connection with Merger-related debt
only. As a result of the Merger, US Group Parent will be creating tax benefits
from the interest expense on Merger-related debt that is non-recourse to BHE and
its subsidiaries and unrelated to the financing of subsidiary operations.
Because the debt incurred is necessary to finance US Group Parent's investment
in BHE, US Group Parent should properly retain the related tax benefits. In
addition, the Tax Allocation Agreement will not give rise to the types of
problems (e.g., upstream loans) that the Act was intended to address. Compare
Section 12(a) of the Act.
The Commission has approved a substantially similar tax allocation
agreement in The National Grid Group plc, Holding Co. Act Release No. 27154
(Mar. 15, 2000). Applicants have attached the form of the proposed Tax
Allocation Agreement among US Group Parent and the Subsidiaries as Exhibit M-1.
m. Direct Stock Purchase and Dividend Reinvestment Plan,
Incentive Compensation Plans and other Employee Benefit
Plans
Emera proposes, from time to time during the Authorization Period to
issue and/or acquire in open market transactions or by some other method that
complies with applicable law and Commission interpretations then in effect up to
5 million shares of Emera common stock under Emera's dividend reinvestment plan,
certain incentive compensation plans and certain other employee benefit plans
currently existing or that may be adopted in the future.50 For example, Emera
currently maintains the following stock-based benefit plans for employees: 1)
Emera Senior Management Stock Option Plan, which currently has 1,706,109
treasury shares reserved; 2) Emera Common Share Purchase Plan, which currently
has 2,000,000 treasury shares reserved; and 3) Emera Dividend Reinvestment Plan.
The plans will remain in effect following consummation of the Merger. The plans
are described in greater detail in Exhibit J-1 to the Application.
F. Intra-System Service Transactions
1. Emera Services
Emera requests authorization to form a service company, Emera
Services, to provide a variety of services to the companies in the Emera System.
As a general rule, the individual system companies will continue to
independently perform certain functions that are most efficiently and
effectively provided internally by each company. In contrast, Emera Services
will offer system-wide coordination and strategy services, oversight services
and other services where economies can be captured by centralization of
personnel, equipment, practice and procedures in one organization. Emera
Services will also ensure adequate oversight and realize economies of scale by
consolidating certain administrative and service functions for the Emera System.
In particular, Applicants anticipate that the following services may
be offered by Emera Services to system companies:
a. Rates and Regulatory.
Emera Services may assist the Emera System companies in the analysis of
their rate structures and in the formulation of rate policies and advise
and assist the Emera System companies in proceedings before regulatory
bodies involving the rates and operations of Emera System companies and of
other competitors where such rates and operations directly or indirectly
affect the Emera System companies.
b. Internal Auditing.
Emera Services may conduct periodic audits of administration and accounting
processes. Audits would include examinations of service agreements,
accounting systems, source documents, allocation methods and billings to
assure proper authorization and accounting for services.
c. Strategic Planning.
Emera Services may advise and assist system companies with the preparation
of strategic business plans and corporate strategies.
d. External Relations.
Emera Services may maintain relationships with government policy makers,
conduct lobbying activities and provide community relations support.
e. Transmission and Distribution System Management.
Emera Services may assist BHE in coordinating the management of its
transmission and distribution system to ensure the most efficient provision
of services and to capture economies of scale as a larger purchaser in the
market. BHE may, however, remain as the contract party under any agreement.
f. Legal Services, Corporate Secretary, and Risk Management.
Emera Services may provide various legal services and general legal
oversight, as well as corporate secretarial functions for the benefit of
Emera System companies. In addition, Emera Services may provide insurance,
claims, security, environmental and safety related services.
g. Marketing.
Emera Services may assist Emera System companies to develop marketing
strategies for product and brand name promotion. Individual Emera System
companies may maintain independent marketing personnel to handle the
day-to-day details of marketing campaigns.
h. Financial Services.
Emera Services may provide various services including corporate tax,
treasury, corporate accounting and reporting, general ledger maintenance
and all accounting recordkeeping, processing certain accounts such as
accounts payable, cash management, and others as may be deemed necessary,
hedging policy and oversight, financial planning and rates (for Utility
Subsidiaries and other Subsidiaries that interact with regulators or
regulated companies). Each Subsidiary may also maintain its own corporate
and accounting group and engage Emera Services to provide advice and
assistance on accounting matters, including the development of accounting
practices, procedures and controls, the preparation and analysis of
financial reports and the filing of financial reports with regulatory
bodies, on a system-wide basis.
i. Information Systems and Technology.
Emera Services may provide the Emera System companies with electronic data
processing and telecommunication network services.
j. Executive.
Using Emera's executive staff working through Emera Services, Emera
Services may assist the Emera System companies in formulating and executing
general plans and policies, including operations, issuances of securities,
appointment of executive personnel, budgets and financing plans, expansion
of services, acquisitions and dispositions of property, public
relationships and other related matters.
k. Investor Relations.
Emera Services may maintain relationships with the financial community and
provide certain shareholder services.
l. Customer Services.
Emera Services may provide billing, mailing, remittance processing, call
center and customer communication services for customers.
m. Employee Services.
Emera Services may offer to assist system companies to develop employee
relations policies and programs and to train personnel in a coordinated
manner across the Emera System. Each Emera System company may maintain a
human resources group to handle the individualized application of policies
and programs. Emera Services may also provide payroll services, management
of the employee benefit plans, employee communications and mail services.
n. Engineering.
Emera Services may provide engineering services for the Emera System
companies. These services could include infrastructure expansion and
improvements, right-of-way maintenance and acquisition, surveys, mapping,
laboratory, and environmental services.
o. Business Support.
i. Power Procurement
Emera Services may coordinate and procure power supplies on behalf of NSPI
and BHE.
ii. Purchasing.
Emera Services may provide procurement services to Emera System companies.
iii. Facilities Management.
Emera Services may provide facilities management services for offices owned
by Emera System companies.
p. Other Services.
Emera Services may provide other services, such as business development, as
identified in the services agreement or requested by the Subsidiaries.
In accordance with the services agreement, services provided by Emera
Services will be directly assigned if possible or allocated as necessary by
activity, project, program, work order or other appropriate basis. To accomplish
this, employees of Emera Services will record transactions using data capture
and accounting systems currently in place at Emera as well as new systems to be
installed for future use. Costs of Emera Services will be accumulated in
accounts and directly assigned if possible or allocated as necessary to the
appropriate system company in accordance with the guidelines set forth in the
services agreement (included as Exhibit I-1 to the Application). It is
anticipated that Emera Services will be staffed primarily by transferring
personnel from Emera and, to a certain extent, with personnel transferred from
NSPI and BHE. Emera Services' accounting and cost allocation methods and
procedures would be structured to comply with the Commission's standards for
service companies in registered holding company systems. Emera Services' billing
system will use the "Uniform System of Accounts for Mutual Service Companies"
established by the Commission for holding-company systems, as may be adjusted to
use the FERC uniform system of accounts. Exhibit I-3 discusses the systems and
procedures to be implemented by Emera Services. As necessary, Emera Services may
organize a U.S. subsidiary to provide services within the U.S. Such subsidiary
will also maintain the systems and procedures necessary to comply with the
Commission's standards for service companies in registered holding company
systems. The operations of Emera Services and any such U.S. subsidiary will be
coordinated and managed with the objective of maximizing the economical and
efficient performance of services for all associate companies in the Emera
System.
As compensation for services, the services agreement will provide for
client companies to "pay to Emera Services the cost of such services, computed
in accordance with the applicable rules and regulations (including, but not
limited to Rules 90 and 91) under the Act and appropriate accounting standards."
Where more than one company is involved in or has received benefits from a
service performed, the services agreement will provide that client companies
will pay their fairly allocated pro rata share in accordance with the methods
set out in a schedule to the services agreement. Thus, charges for all services
provided by Emera Services to affiliated utility companies, non-utility
companies and the holding company will be on an "at cost" basis as determined
under Rules 90 and 91 of the Act.
No change in the organization of Emera Services, the type and
character of the companies to be serviced, the methods of allocating cost to
associate companies, or in the scope or character of the services to be rendered
subject to Section 13 of the Act, or any rule, regulation or order thereunder,
shall be made unless and until Emera Services shall first have given the
Commission written notice of the proposed change not less than 60 days prior to
the proposed effectiveness of any such change. If, upon the receipt of any such
notice, the Commission shall notify Emera Services within the 60-day period that
a question exists as to whether the proposed change is consistent with the
provisions of Section 13 of the Act, or of any rule, regulation or order
thereunder, then the proposed change shall not become effective unless and until
Emera Services shall have filed with the Commission an appropriate declaration
regarding such proposed change and the Commission shall have permitted such
declaration to become effective.
Emera will structure the services agreement so as to comply with
Section 13 of the Act and the Commission's rules and regulations thereunder.
Rule 88 (b) provides that "(a) finding by the commission that a subsidiary
company of a registered holding company . . . is so organized and conducted, or
is to be so conducted, as to meet the requirements of Section 13(b) of the Act
with respect to reasonable assurance of efficient and economical performance of
services or construction or sale of goods for the benefit of associate
companies, at cost fairly and equitably allocated among them (or as permitted by
Rule 90), will be made only pursuant to a declaration filed with the Commission
on Form U-13-1, as specified in the instructions for that form, by such company
or the persons proposing to organize it." Notwithstanding the foregoing
language, the Commission has on at least two recent occasions made findings
under Section 13(b) based on information set forth in an application on Form
U-1, without requiring the formal filing on a Form U-13-1. See Unitil Corp., 51
SEC Docket 562 (Apr. 24, 1992); CINergy Corp., 57 SEC Docket 2353 (Oct. 21,
1994). In this Application, Emera Resources has submitted substantially the same
application information as would have been submitted in a Form U-13-1.
Accordingly, it is appropriate for the Commission to find that Emera
Services will be so organized and shall be so conducted as to meet the
requirements of Section 13(b), and that the filing of a Form U-13-1 is
unnecessary, or, alternatively, that this Application should be deemed to
constitute a filing on Form U-13-1 for purposes of Rule 88.
Emera proposes that, for a limited period of time ending on March 31,
2002 ("Transition Period"), Emera will continue to provide services and sell
goods to Emera System companies. Emera will comply with the provisions of Rule
90 with respect to the performance of services or construction for associate
companies on the basis of cost and with the provisions of Rule 92 with respect
to the sale of goods produced by the seller./51 The Transition Period will allow
the Emera System to practically and efficiently implement the transition to
Emera Services as the principal provider of services to the Emera System. In
particular, because the Emera Services will need to be organized, implement
appropriate accounting and cost tracking systems, test the systems and train
employees prior to commencing operations, the Transition Period will allow Emera
Services adequate time to perform these tasks. The Transition Period will also
allow for the orderly transfer of Emera's personnel to Emera Services for the
purpose of staffing its service operations.
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51 A form of transition services agreement is attached as Exhibit K-3.
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The relief requested here is similar to the relief granted in AGL
Resources, Inc., Holding Co. Act Release No. 27243 (October 5, 2000) (AGL
Resources authorized to provide services to system companies during a transition
period intended to allow for a practical and efficient transition to a
centralized and unified service company organization). The proposed Transition
Period is a reasonable extension of the 30-day transition period provided in
Rule 82(a) and its is justified under Section 13(a) of the Act as a special or
unusual circumstance not in the ordinary course of business. In particular,
Emera had traditionally performed the service company function for the Emera
System but, as a registered holding company, it must now transfer all of these
services to a new entity which must acquire and install appropriate systems and
recruit personnel. This is a one-time-only event, not in the ordinary course of
business. Further, the Transition Period is necessary and appropriate in the
public interest and in the interest of investors and consumers because it allows
time to acquire new software and to fully modify existing software systems for
the most efficient transition to a centralized service company structure without
wasteful expenditures on intermediate, temporary software modifications.
Consumers of the Emera's utility subsidiaries will not be
detrimentally affected by the services provided during the Transition Period
since all transactions will comply with the applicable provisions under the Act,
including the provisions of Rule 90 thereunder requiring the performance of
services on the basis of cost. In no event will Emera provide services to Emera
System companies after the Transition Period, except in accordance with Rule 85
under the Act.
G. Nonutility Reorganizations
Applicants propose to restructure Emera's nonutility holdings from
time to time as may be necessary or appropriate in the furtherance of the Emera
System's authorized nonutility activities. To that end, Emera requests
authorization to acquire, directly or indirectly, the equity securities of one
or more intermediate subsidiaries ("Intermediate Subsidiaries") organized
exclusively for the purpose of acquiring, financing, and holding the securities
of one or more existing or future nonutility subsidiaries. Intermediate
Subsidiaries may also provide management, administrative, project development,
and operating services to such entities.
Restructuring could involve the acquisition of one or more new
special-purpose subsidiaries to acquire and hold direct or indirect interests in
any or all of the Emera System's existing or future authorized nonutility
businesses. Restructuring could also involve the transfer of existing
subsidiaries, or portions of existing businesses, among the Emera associates
and/or the reincorporation of existing subsidiaries in a different jurisdiction.
This would enable the Emera System to consolidate similar businesses and to
participate effectively in authorized nonutility activities, without the need to
apply for or receive additional Commission approval.
These direct or indirect subsidiaries might be corporations,
partnerships, limited liability companies or other entities in which Emera ,
directly or indirectly, might have a 100% interest, a majority equity or debt
position, or a minority debt or equity position. These subsidiaries would engage
only in businesses to the extent the Emera System is authorized, whether by
statute, rule, regulation or order, to engage in those businesses. Emera does
not seek authorization to acquire an interest in any nonassociate company as
part of the authority requested in this application and states that the
reorganization will not result in the entry by the Emera System into a new,
unauthorized line of business.
The Intermediate Subsidiaries would be organized for the purpose of
acquiring, holding and/or financing the acquisition of the securities of or
other interest in one or more EWGs, FUCOs, Rule 58 Subsidiaries, Rule 58-type
Subsidiaries, ETCs or other non-exempt nonutility subsidiaries. Intermediate
Subsidiaries may also engage in development activities ("Development
Activities") and administrative activities ("Administrative Activities")
relating to the permitted businesses of the nonutility subsidiaries.
Development Activities will be limited to due diligence and design
review; market studies; preliminary engineering; site inspection; preparation of
bid proposals, including, in connection therewith, posting of bid bonds;
application for required permits and/or regulatory approvals; acquisition of
site options and options on other necessary rights; negotiation and execution of
contractual commitments with owners of existing facilities, equipment vendors,
construction firms, power purchasers, thermal "hosts," fuel suppliers and other
project contractors; negotiation of financing commitments with lenders and other
third-party investors; and such other preliminary activities as may be required
in connection with the purchase, acquisition, financing or construction of
facilities or the acquisition of securities of or interests in new businesses.
Administrative Activities will include ongoing personnel, accounting,
engineering, legal, financial, and other support activities necessary to manage
Emera's investments in nonutility subsidiaries.
An Intermediate Subsidiary may be organized, among other things, (1)
in order to facilitate the making of bids or proposals to develop or acquire an
interest in any EWG, FUCO, Rule 58 Subsidiary, Rule 58-type Subsidiary, ETC or
other non-exempt nonutility subsidiary; (2) after the award of such a bid
proposal, in order to facilitate closing on the purchase or financing of such
acquired company; (3) at any time subsequent to the consummation of an
acquisition of an interest in any such company in order, among other things, to
effect an adjustment in the respective ownership interests in such business held
by Emera and non-affiliated investors; (4) to facilitate the sale of ownership
interests in one or more acquired nonutility companies; (5) to comply with
applicable laws of foreign jurisdictions limiting or otherwise relating to the
ownership of domestic companies by foreign nationals; (6) as a part of tax
planning in order to limit Emera's exposure to Canadian, U.S. and foreign taxes;
(7) to further insulate Emera and its utility subsidiaries from operational or
other business risks that may be associated with investments in non-utility
companies; or (8) for other lawful business purposes.
Development Activities will be funded in accordance with Rules 45(b)
and 52(b). To the extent that Emera provides funds or guarantees directly or
indirectly to an Intermediate Subsidiary that are used for the purpose of making
an investment in any EWG or FUCO, Rule 58 Subsidiary or Rule 58-type Subsidiary,
the amount of such funds or guarantees will be included in Emera's "aggregate
investment" in such entities, as calculated in accordance with Rule 53 or Rule
58, as applicable.
H. Rule 58-type Subsidiaries
Emera conducts various businesses in Canada that, but for their source
of revenues would qualify as "energy-related" or "gas-related" under Rule 58.
For example, Strait Energy Inc. ("Strait Energy") is a wholly owned subsidiary
of Emera that sells steam power. The sale of thermal energy is the type of
business that is retainable under Rule 58(b)(vi), but because Strait Energy
derives substantially all its revenues from Canadian sources, as a technical
matter the exemption under the rule is unavailable. The Commission has, however,
found that certain energy-related activities that would otherwise constitute
energy-related companies under Rule 58 but for their operations outside the U.S.
could be conducted in Canada or internationally by registered holding company
systems. EUA Cogenex Corp., Holding Co. Act Release No. 26741 (July 15, 1997)
(authorizing EUA Cogenex Corporation and EUA Cogenex-Canada, Inc., both
subsidiaries of the U.S. public utility holding company Eastern Utilities
Associates, to organize a Canadian subsidiary engaged in a range of energy
conservation-related business activities); Energy East Corp., Holding Co. Act
Release No. 27224 (August 31, 2000) (authorizing retention of Xenergy Canada,
Inc., a company providing utility related software services); Cinergy Corp,
Holding Co. Act Release No. 26662 (February 7, 1997) (authorizing Cinergy
Solutions to market energy-related services on a domestic and international
basis).
Accordingly, Emera requests authorization to invest up to 15% of its
consolidated capitalization in companies defined as "energy-related" or
"gas-related" under Rule 58, except that companies that derive revenues from
Canada shall not be excluded from such definition ("Rule 58-type Subsidiaries")
and provided further that Emera's investment it its Subsidiaries at the time of
its registration under the Act shall also be excluded from the investment limit.
As of December 31, 2000, 15% of Emera's consolidated capitalization was $281.45
million.
I. EWG and FUCO Investments
Emera may use the proceeds of the financings proposed in this
Application, in part, for investments in EWGs and FUCOs. Under Rule 53, in
determining whether to approve the issue or sale of a security by Emera to
finance an EWG or FUCO investment, the Commission must consider the
circumstances surrounding the proposed issuance. In particular, in connection
with the financing of the acquisition of an EWG, or the guarantee of a security
of an EWG by Emera, the Commission may not find that the securities issuance is
not reasonably adapted to the earning power of Emera or to the security
structure of Emera or companies in the Emera System, or that the circumstances
are such that a guarantee by Emera of the security of an EWG would create an
improper risk for Emera, if the conditions of Rule 53(a) are met and none of the
provisions of Rule 53(b) are applicable.
Emera does not satisfy the conditions of Rule 53(a) because its FUCO
investment exceeds 50% of its consolidated retained earnings. As of December 31,
2000, Emera had consolidated retained earnings of $200.4 million and an
investment of $1,563.48 million in NSPI. Because the conditions of Rule 53(a)
are not satisfied, Emera must demonstrate that the proposed issuance of
securities is consistent with the standards of Rule 53(c)./52
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52 Emera also does not meet the GAAP books and records requirement in Rule
53(a), but it will comply with the other provisions of Rule 53(a), in
particular, the reporting requirements, and the limitation on the use of public
utility subsidiary employees in the provision of services to EWGs and FUCOs.
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In addition, none of the provisions of Rule 53(b) are applicable to
Emera. Neither Emera nor any subsidiary having assets with a book value
exceeding 10% or more of consolidated retained earnings has been the subject of
a bankruptcy or similar proceeding. The average consolidated retained earnings
of Emera for the four most recent quarterly periods has not decreased by 10%
from the average for the previous four quarterly periods. Lastly, Emera has not
reported operating losses attributable to investments in EWGs or FUCOs.
Emera requests authorization to issue and sell securities in an
aggregate amount of up to $2.0 billion, such amount to be included within the $3
billion overall financing limit proposed in Item 1.E.1 above, for the purpose of
financing the acquisition of EWGs and FUCOs. As of December 31, 2000, Emera's
investment in NSPI was $1,563.48 million. Consequently, the additional
authorization requested and Emera's current investment in EWGs and FUCOs could
result in an aggregate investment of approximately $3.6 billion.
The proposed issuance and sale of securities meets the standards of
Rule 53(c) and should be authorized. The securities issuance will not have a
substantial adverse impact upon the financial integrity of the registered
holding company system and it will not have an adverse impact on any utility
subsidiary of Emera or on the ability of the MPUC to protect the customers of
such subsidiaries. The general financing commitments proposed in this
Application assure that Emera will remain financially sound, in particular the
30% minimum capitalization standard and the investment grade debt rating
standard assure that any securities issued for purposes of financing an EWG or
FUCO investment would be consistent with an appropriate capital structure. In
addition, the MPUC has full authority to monitor BHE and its relationship with
Emera and to take corrective action should it find that the affiliation has an
adverse impact on BHE or its customers. The full extent of the MPUC's authority
is discussed infra. See Item 3.B.6.
Emera practices a disciplined investment review process to assure that
it identifies and minimizes or appropriately mitigates the risks associated with
FUCO activities. Before any project investment would be made, the project would
be analyzed in detail, including country risk, political risk, currency risk,
regulatory risk and project specific risks. The review process would be
conducted both at the subsidiary level where the project would be developed and
at the Emera level. All projects must be consistent with Emera's broader
strategic goals and consistent with Emera's skills and expertise. Individual
project plans would be created to evaluate the project "fit" and the potential
hurdles or obstacles to success as well as the opportunities presented. All
projects must be justified on business, technical and economic grounds.
Once past the initial review stages the project will be subject to
additional review by senior Emera management. If the project passes this review,
briefing materials for the Emera board of directors will be prepared outlining
the key risks and opportunities, as well as the strategic rationale for the
proposed investment. The board's review serves as an additional check on the
internal evaluation process.
Because many projects will also be debt financed, in some cases on a
non-recourse basis, lenders that provide project finance also play a role in
critically appraising the financial soundness of a project and its risk profile.
Emera is financially sound and experienced in the energy industry in
Canada. Customers of BHE will not be adversely affected by Emera's EWG or FUCO
investments because of Emera's commitment to maintain a minimum 30% common
equity percentage and investment grade debt ratings. Moreover, the MPUC has
certified that it has adequate authority to protect BHE's ratepayers from any
adverse effects that may be associated with Emera's ownership of BHE. Lastly,
Emera commits not to seek recovery in retail rates for any failed investment in,
or inadequate returns from, an EWG or FUCO investment.
J. Reporting
Applicants request an exemption from Rule 26(a)(1) under the Act,
regarding the maintenance of financial statements in conformance with Regulation
S-X. The exemption would apply only to Emera and its subsidiaries that are
organized outside the U.S. Any exempted company would maintain its financial
statements in accordance with Canadian GAAP and, if it is a material subsidiary,
reconcile such statements to U.S. GAAP in the same manner as required by Form
20-F when such statements are provided to the Commission in Emera's filings on
Form U5S and in the Rule 24 certificates proposed below.
Emera proposes to file certificates under Rule 24 on a semi-annual
basis within 60 days of the end of Emera's fiscal year and fiscal second
quarter. The Rule 24 certificates will contain the following information:
a. If sales of common stock by Emera are reported, the purchase price per
share and the market price per share at the date of the agreement of sale;
b. The total number of shares of Emera common stock issued or issuable
pursuant to options granted during the reporting period under employee
benefit plans and dividend reinvestment plans including any employee
benefit plans or dividend reinvestment plans hereafter adopted;
c. If Emera common stock has been transferred to a seller of securities of
a company being acquired, the number of shares so issued, the value per
share and whether the shares are restricted in the hands of the acquirer;
d. If a guarantee is issued during the reporting period, the name of the
guarantor, the name of the beneficiary of the guarantee and the amount,
terms and purpose of the guarantee;
e. The amount and terms of any financings consummated by any Subsidiary
utility company that are not exempt under Rule 52;
f. A list of U-6B-2 forms filed with the Commission during the reporting
period, including the name of the filing entity and the date of filing;
g. Consolidated balance sheets as of the end of the reporting period and
separate balance sheets as of the end of the reporting period for each
company, including Emera, that has engaged in jurisdictional financing
transactions during the reporting period;
h. A table showing, as of the end of the reporting period, the dollar and
percentage components of the capital structure of Emera on a consolidated
basis, and each public utility subsidiary.
i. A retained earnings analysis of Emera on a consolidated basis and for
each public utility subsidiary detailing gross earnings, goodwill
amortization, dividends paid out of capital surplus, and the resulting
capital account balances at the end of the reporting period.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
The fees, commissions and expenses to be paid or incurred by Emera,
directly or indirectly, in connection with the Merger are estimated to be
approximately $4.72 million.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
A. Applicable Provisions
The acquisition by Emera of the voting securities of BHE and the BHE
public-utility subsidiary companies is subject to Sections 9 and 10 of the Act.
The retention of the Subsidiaries is subject to Section 11 of the Act. The
proposed financing transactions are subject to Sections 6, 7, and 12 of the Act
and the proposed establishment of a Emera Services is subject to Section 13 of
the Act.
B. Legal Analysis
Section 9(a)(2) makes it unlawful, without approval of the Commission
under Section 10, "for any person to acquire directly or indirectly any security
of any public utility company if such person is an affiliate ... of such company
and of any other public utility or holding company, or will by virtue of such
acquisition become such an affiliate." As a result of the Merger, Emera would
become an affiliate of three public utility companies: BHE, MEPCO and Chester
SVC. NSPI would not be deemed a utility affiliate under the Act.
As part of its obligations under the Merger Agreement, Emera has
committed that NSPI will claim exempt FUCO status. Specifically, Section 7.02(c)
of the Merger Agreement provides:
Parent agrees that . . . each of its non-U.S. public-utility company
subsidiaries (and such non-utility subsidiaries or businesses, if any,
as Parent determines to place under or within any of such non-U.S.
public utility company subsidiaries) shall claim the status of a
"foreign utility company" under Section 33 of the 1935 Act.
Emera has made this commitment understanding that NSPI must continue to comply
with the requirements of Section 33 of the Act. Emera is, therefore, firmly
committed that NSPI's business will be conducted to assure NSPI's eligibility
for FUCO status.
To qualify as a FUCO under Section 33 of the Act:
(1) NSPI must own or operate facilities that are not located in any
state and that are used for the generation, transmission, or
distribution of electric energy for sale or the distribution at retail
of natural or manufactured gas for heat, light, or power;
(2) NSPI may not derive any part of its income, directly or
indirectly, from the generation, transmission, or distribution of
electric energy for sale or the distribution at retail of natural or
manufactured gas for heat, light, or power, within the U.S.;
(3) Neither NSPI nor any of its subsidiaries may be a public utility
company operating in the U.S.; and,
(4) NSPI must provide notice to the Commission on Form U-57 that it is
a FUCO and, to obtain the exemptions provided under the Act, the MPUC
must certify to the Commission that it has the authority and resources
to protect the ratepayers subject to its jurisdiction and that it
intends to exercise its authority. Sections 33(a)(2) and 33(a)(3).
Ownership of Utility Facilities
NSPI is a vertically integrated utility serving approximately 440,000
customers in Nova Scotia with assets of $1,913.3 million. Its utility assets
include 2,183 MW of electric generating capacity, approximately 5,200 km of
transmission lines, 24,000 km of distribution lines, associated substations and
other facilities. NSPI has no retail gas distribution facilities. NSPI neither
owns nor operates utility facilities located in the U.S. and derives none of its
income from the generation, transmission or distribution of electricity for
sale, or retail gas distribution, within the U.S. NSPI has no utility
subsidiaries.
Source of Income
NSPI's income comes from its utility activities in Nova Scotia. NSPI
does not derive any part of its income, directly or indirectly, from the
generation, transmission, or distribution of electric energy for sale or the
distribution at retail of natural or manufactured gas for heat, light, or power,
within the U.S. In 1999, NSPI sold 75 GWh of electric energy within Canada or at
the Canada/U.S. border to purchasers who exported that energy to the U.S. These
sales used the lines of New Brunswick Power which is interconnected with the
transmission facilities of MEPCO, a 14.2% owned BHE subsidiary. At present, NSPI
is not authorized to transmit power and energy within the U.S., and accordingly,
all purchasers would take title to any energy sold within Canada or at the
international border for transmission via ISO-New England facilities.
The sale by NSPI of power at the Canadian border does not cause NSPI
to fail to qualify for FUCO status. Sales by NSPI at the Canadian border should
be treated as Canadian sales consistent with Commission precedent. As Canadian
sales, these transactions should not be deemed to involve income from the
generation, transmission or distribution of electric energy for sale in the U.S.
that would cause NSPI to fail to qualify for exempt FUCO status, so long as the
purchaser is not a direct or indirect subsidiary of NSPI.
That NSPI's sales at the Canadian border are Canadian in character is
consistent with Commission precedent concerning the treatment of sales at a
state border in cases under Section 3(a)(1). See, e.g., Consolidated Edison,
Inc., Holding Co. Act Release No. 27021 (May 13, 1999) ("Con Edison makes only a
small number of wholesale sales, and the majority of those sales are in New York
or at the New York border, and thus are intrastate in character."); NIPSCO
Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10, 1999) ("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.") (emphasis added). To
establish that the applicants were entitled to an exemption under Section
3(a)(1) of the Act, the Commission in these cases found that the holding company
and its material utility subsidiaries were "predominantly intrastate in
character" and that they did "carry on their business substantially in a single
state." By finding that the sales of electricity took place at the border, the
Commission determined that applicants' operations met that standard. Similarly,
given that NSPI is not authorized to transmit power and energy within the U.S.
and that transactions are structured so that all purchasers take title to any
energy sold at the international border, it is appropriate to find that these
sales are fundamentally Canadian.
Because the sales by NSPI have taken place in Canada, they cannot be
deemed to generate income directly from the generation, transmission or
distribution of electric energy for sale in the U.S. To assure the Commission
that NSPI will continue not to derive income directly from the generation,
transmission or distribution of electric energy for sale in the U.S., NSPI
commits that all future sales of electricity will take place at the border or
within Canada. In addition, to fully protect U.S. retail customers from utility
service that is not regulated in the U.S., NSPI will not sell electricity or
transmission or distribution services directly to retail customers within the
U.S.
With regard to whether NSPI's sales at the border provide it with
indirect income from the generation, transmission or distribution of electric
energy for sale in the U.S., we note that all sales in the past were made to
unaffiliated purchasers. Consequently, NSPI did not receive any income
indirectly from these purchasers' subsequent resale of power in the U.S. To
assure the Commission that NSPI will continue not to derive income indirectly
from the generation, transmission or distribution of electric energy for sale in
the U.S., NSPI commits that no direct or indirect subsidiary of NSPI will engage
in the generation, transmission or distribution of electric energy for sale in
the U.S.
In other contexts, the Division has concurred in the view that a FUCO
can own a U.S. exempt wholesale generator ("EWG") without being deemed to derive
a portion of its income from the generation, transmission, or distribution of
electric energy for sale within the United States for purposes of Section 33.
Central and South West Corporation, SEC No-Action Letter (Sept. 13, 1995),
involved the proposed acquisition by Central and South West Corporation ("CSW")
of a UK regional electric company (the "REC"). Although the REC was engaged
primarily in the distribution of electric energy in the United Kingdom, it also
owned two U.S. qualifying cogeneration facilities through a U.S. EWG. CSW
argued, among other things, that the Commission should reject a reading that
would elevate form over status, in contravention of the purposes of the Act. So,
too, in this matter, the Commission should reject a reading of Section 33 that
could have the unintended effect of discouraging sales from Canada into New
England at a time the region is facing skyrocketing energy costs and potential
power outages, in contravention of the Act's policy against uneconomic
operations./53
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53 Accord, The National Grid Group plc, Holding Co. Act Release No. 27154 (Mar.
15, 2000) at 23 (granting FUCO status to a subsidiary of a foreign holding
company to facilitate a U.S. utility acquisition where the FUCO status was
"consistent with the fundamental purpose of the Act to protect consumers and
investors").
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To summarize, sales by NSPI at the Canadian border to an entity that
is not a direct or indirect subsidiary of NSPI should not be deemed to involve
income from the generation, transmission or distribution of electric energy for
sale in the U.S. that would cause NSPI to fail to qualify for exempt FUCO
status. To assure that NSPI will continue to qualify as a FUCO, Emera commits
that: (1) NSPI will not sell directly to retail customers within the U.S.; (2)
sales will only take place at the Canadian border or within Canada, and; (3) no
direct or indirect subsidiary of NSPI will engage in the generation,
transmission or distribution of electric energy for sale in the U.S.
Utility Operations in the U.S.
NSPI does not, directly or through subsidiaries, own or operate
utility assets, as defined under the Act, located in the U.S.
Notice on Form U-57 and MPUC Certification
Prior to the closing of the Merger, Emera will file Form U-57 with the
Commission, claiming FUCO status for NSPI. Because BHE will become NSPI's
affiliate after the Merger, Applicants also must satisfy Section 33(a)(2) of the
Act to obtain the exemption from the Act available to FUCOs. Applicants have
obtained certification from the MPUC under Section 33(a)(2), that it has the
authority and resources to protect the ratepayers subject to its jurisdiction
and that it intends to exercise its authority. The MPUC certification is
included in this Application as Exhibit D-3.
Under Section 33(a)(1) of the Act, a FUCO is generally exempt from all
the provisions of the Act and is not considered a public utility company under
the Act. Accordingly, NSPI will not be a public utility subsidiary of Emera for
purposes of Sections 9 and 10 of the Act.
The statutory standards to be considered by the Commission in
evaluating the Merger are set forth in Section 10 of the Act. As explained more
fully below, the Merger complies with all of the applicable provisions of
Section 10 and should be approved. Upon completion of the Merger, Emera will
register as a holding company under Section 5 of the Act.
1. Section 10(b)(1)
Section 10(b)(1) precludes approval of an acquisition that "will tend
towards interlocking relations or the concentration of control of public utility
companies, of a kind or to an extent detrimental to the public interest or the
interests of investors or consumers."
a. Interlocking Relationships.
By its nature, any acquisition results in new links between
theretofore unrelated companies./54 Interlocking boards are typical of
wholly-owned subsidiaries and necessary to integrate the BHE companies into the
Emera system. The interlocks, therefore, will be in the public interest and the
interests of investors and consumers, and thus not prohibited by Section
10(b)(1).
b. Concentration of Control.
Section 10(b)(1) is intended to avoid "an excess of concentration and
bigness" while preserving the "opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations" afforded by the
coordination of local utilities into an integrated system./55 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."/56
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54 Cf. Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990),
as modified, Holding Co. Act Release No. 25273 (March 15, 1991), aff'd sub nom.
City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992) (stating that interlocking
relationships are necessary to integrate two merging entities).
55 American Electric Power Co., 46 S.E.C. 1299, 1309 (1978).
56 Vermont Yankee Nuclear Corp., 43 S.E.C. 693, 700 (1968).
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As explained more fully in the application of BHE to the FERC under
Section 203 of the Federal Power Act, the proposed Merger will not have any
adverse effect on competition, rates or the effectiveness of federal or state
regulation./57 Specifically, the proposed Merger cannot and will not harm
competition in wholesale power markets because:
o NSPI and BHE do not sell into common markets.
o NSPI does not own or control any generation in the NEPOOL, the
only market in which BHE sells power.
o All of NSPI's generation is located in Nova Scotia and there is
virtually no available transfer capability ("ATC") between Nova
Scotia and BHE.
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57 The order of the FERC approving the Merger is attached hereto as Exhibit D-5.
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BHE also possesses no market power over transmission as in 1997 it
transferred operational control of its higher voltage transmission facilities to
ISO New England, Inc. ("ISO-NE") and offers service over its lower voltage
facilities pursuant to a FERC accepted open access transmission tariff.
Other regulators have considered the competitive effect of the
proposed Merger./58 The FERC considered competitive issues when it approved the
Merger under Section 203 of the Federal Power Act, and notification and report
forms were filed with the Antitrust Division of the Department of Justice and
the Federal Trade Commission pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, 15 U.S.C. ss.1311 et seq. The Federal Trade Commission
granted Emera early termination of the notice period on February 28, 2001,
thereby permitting consummation of the transaction as of that date.
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58 See, e.g., Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21,
1990) (finding that "antitrust ramifications of an acquisition must be
considered in light of the fact that public utilities are regulated monopolies
and that federal and state administrative agencies regulate the rates charged
consumers").
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For these reasons, the Merger will not "tend toward interlocking
relations or the concentration of control" of public utility companies, of a
kind or to the extent detrimental to the public interest or the interests of
investors or customers within the meaning of Section 10(b)(1).
2. Section 10(b)(2)
Section 10(b)(2) requires the Commission to determine whether the
consideration Emera is giving for BHE is reasonable and whether it bears a fair
relation to investment in and earning capacity of the utility assets being
acquired. A competitive bidding process conducted by an investment banking firm
determined who would acquire BHE. The firm contacted numerous parties to
determine interest, and conducted due diligence with companies that had
submitted indications of interest. BHE's board then accepted definitive
proposals from two remaining companies at the conclusion of the due diligence
process. The resulting price and terms and conditions for the acquisition are
the product of arms'-length negotiations between the buyer and seller. In light
of this evidence, Emera believes that the consideration for the acquisition
bears a fair relationship to the sums invested in and the earning capacity of
the BHE utility assets.
Further, Emera believes that the estimated fees and expenses in this
matter bear a fair relation to the value of BHE and the strategic benefits to be
achieved by the Merger and, further, that the fees and expenses are fair and
reasonable./59
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59 See Northeast Utilities, Holding Co. Act Release No. 25548 (June 3, 1992),
modified on other grounds, Holding Co. Act Release No. 25550 (June 4, 1992)
(noting that fees and expenses must bear a fair relation to the value of the
company to be acquired and the benefits to be achieved in connection with the
acquisition). The total estimated fees and expenses of $4.72 million represent
2.4% of the value of the consideration Emera will pay for BHE, and are
consistent with percentages previously approved by the Commission. See, e.g.,
Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993) (fees and
expenses represented approximately 1.7% of the value of the consideration paid
to the shareholders of Gulf States Utilities); Northeast Utilities, Holding Co.
Act Release No. 25548 (June 3, 1992) (approximately 2% of the value of the
assets to be acquired).
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3. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether a
proposed acquisition will unduly complicate the acquirer's capital structure or
will be detrimental to the public interest or the interest of investors or
consumers or the proper functioning of the resulting system.
The proposed Merger will not unduly complicate the capital structure
of Emera or its public-utility subsidiaries. The proposed Merger does not
involve the creation of any minority interests nor will the existing senior debt
and senior equity securities of Emera be affected by the Merger.
Section 10(b)(3) also directs the Commission to consider whether an
acquisition will be detrimental to the public interest or the interest of
investors or consumers, or the proper functioning of the resulting holding
company system. The acquisition of BHE will not be detrimental to the protected
interests or to the proper functioning of the resulting holding company system.
The BHE board of directors determined that BHE's small size, and the possibility
of further shrinkage of its revenue base as additional aspects of its business
become subject to competition, would make it increasingly difficult to maintain
regulated rates at reasonable levels and attract capital on reasonable terms.
BHE's board of directors believes that Emera and its principal subsidiary, NSPI,
represent a good fit for BHE. NSPI serves a geographical area like BHE's, and
its management has experience operating a utility with challenges similar to
those faced by BHE. In turn, BHE's management and employees have experience
doing business with Canadian utility companies. The BHE board of directors also
believes that the Merger will provide future benefits to BHE's customers and
employees as the best practices of both firms are shared and implemented.
Perhaps more importantly, the MPUC, the agency that is most directly responsible
for the protection of Maine utility consumers, has approved the Merger./60
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60 See Exhibit D-2, Order of the MPUC dated January 5, 2001 and infra Item
3.B.7.e.
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4. Section 10(c)(1)
Under this section, the Commission cannot approve "an acquisition of
securities, 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." Section 8, which governs the combination of electric and gas operations,
does not apply to the instant transaction. Section 11 requires that a registered
holding company should be generally limited to a single integrated
public-utility system. In connection with its previous order, the Commission
concluded that BHE's existing utility operations constitute a single, integrated
electric-utility system within the meaning of the Act./61 The proposed Merger
will impose a new holding company structure over the existing BHE system; it
will not affect the integration of that system./62
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61 Bangor Hydro-Electric Company, Holding Co. Act Release No. 2704 (Oct. 25,
1999).
62 Supra at 12.
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Section 11 also requires that a registered holding company system
should be limited to "such other businesses as are reasonably incidental, or
economically necessary or appropriate to the operations of such integrated
public utility system." As set forth below, all of Emera's active non-utility
businesses are retainable.
1. NS Power Services Ltd., a wholly owned subsidiary of Emera, was in the
business of providing energy services. NS Power Services Ltd. is currently
inactive.
1.1. NSP Trigen Inc., is 50% owned by NS Power Services Ltd., and the
remainder is owned by a nonaffiliate. NSP Trigen Inc. is currently inactive.
2. Enercom Inc., a wholly owned subsidiary of Emera, is a holding company
for Emera's diversified activities within the energy industry. Emercom Inc. is
retainable as an intermediate holding company under New Century Energies, Inc.,
Holding Co. Act Release No. 27000 (April 7, 1999) (authorizing organization and
capitalization of one or more "intermediate" nonutility subsidiaries to act as
holding companies over other nonutility subsidiaries).
2.1 Cablecom Ltd., is a wholly owned subsidiary of Enercom Inc. The
company is engaged in the design and engineering, project management,
construction, structured cabling, maintenance and installation of fiber optic
and wireless communications applications. Cablecom Ltd. will qualify as an
exempt telecommunications company under Section 34(a) of the Act and therefore
is retainable.
2.1.1 Fibretek Inc., is a wholly owned subsidiary of Cablecom
Ltd. that engages in the same activities as its parent. Accordingly, Fibretek
Inc. will qualify as an exempt telecommunications company under Section 34(a) of
the Act and therefore is retainable.
2.2 Emera Fuels Inc. is a wholly owned subsidiary of Enercom Inc. that
is engaged in the supply of furnace and fuel oil, lubricants, diesel and
gasoline products. Emera Fuels is retainable as because it is an energy supply
and marketing company. This is a similar business to the business permitted
under Rule 58(b)(1)(v), the "brokering and marketing of energy commodities,
including but not limited to electricity, natural or manufactured gas and other
combustible fuels." The Commission has also approved the retention of the
following businesses that supply energy products other than electricity and
natural gas: Whiting Petroleum Corp., a subsidiary of Alliant, "purchases,
develops, and produces crude oil and natural gas," WPL Holdings, Inc., Holding
Co. Act Release No. 26856 (April 14, 1998); Harbor Coal Company, an indirect
subsidiary of NiSource, Inc., pulverizes coal and delivers it to a manufacturing
facility for use as blast furnace fuel, NiSource, Inc., Holding Co. Act Release
No. 27265 (November 1, 2000); SCANA Energy Marketing Inc., markets electricity,
natural gas and other light hydrocarbons, SCANA Corp., Holding Co. Act Release
No. 27133 (February 9, 2000); Energy East Solutions, LLC, sells natural gas,
fuel oil and other services and markets a full range of energy-related planning,
financial, operational and maintenance services to commercial, industrial and
municipal customers, Energy East Corp., Holding Co. Act Release No. 27224
(August 31, 2000).
3. Stellarton Basin Coal Gas Inc. is a wholly owned subsidiary of Emera
that was formed to participate in a joint venture to explore and develop methane
gas reserves in Nova Scotia. This type of business is retainable under American
Electric Power Company, Inc., Holding Co. Act Release No. 26933 (November 2,
1998) (authorizing AEP to acquire energy assets including, without limitation,
natural gas production, gathering, processing, storage and transportation
facilities and equipment, liquid oil reserves and storage facilities, and
associated facilities) (the "AEP Energy Assets Order").
4. Strait Energy Inc. is a wholly owned subsidiary of Emera that sells
steam energy. The sale of thermal energy is a retainable business under Rule
58(b)(1)(vi).
5. 510845 N.B. Inc. is a wholly owned subsidiary of Emera engaged in the
provision of utility services, in particular, the supply and maintenance of
electric transformers. This type of business is retainable under Rule
58(b)(1)(vii).
6. NSP Pipeline Management Ltd. is a wholly owned subsidiary of Emera that
owns a 12.5% interest in Maritimes and Northeast Pipeline Management Ltd. NSP
Pipeline Management Ltd. is retainable under the AEP Energy Assets Order.
6.1 Maritimes and Northeast Pipeline Management Ltd. is 12.5% owned by
NSP Pipeline Management Ltd. and the remainder is owned by nonaffiliates.
Maritimes and Northeast Pipeline Management Ltd. is the general partner of, and
owns a 1.25% interest in, Maritimes and Northeast Pipeline Limited Partnership.
Maritimes and Northeast Pipeline Management Ltd. operates and manages the
Canadian portion of the Maritimes and Northeast Pipeline, a natural gas pipeline
with its origin in Nova Scotia and its terminus near Boston. Maritimes and
Northeast Pipeline Management Ltd. is retainable under the AEP Energy Assets
Order.
7. NSP Pipeline Inc. is a wholly owned subsidiary of Emera that owns a
12.375% interest in the Maritimes and Northeast Pipeline Limited Partnership.
NSP Pipeline Inc. is retainable under the AEP Energy Assets Order.
7.1 Maritimes and Northeast Pipeline Limited Partnership is 12.375%
owned by NSP Pipeline Inc. and the remainder is owned by nonaffiliates.
Maritimes and Northeast Pipeline Limited Partnership owns the Canadian portion
of the Maritimes and Northeast Pipeline. Maritimes and Northeast Pipeline
Limited Partnership is retainable under the AEP Energy Assets Order.
8. NSP US Holdings Inc. is a wholly owned subsidiary of Emera that
indirectly owns a 12.5% interest in Maritimes and Northeast Pipeline L.L.C.
through the holding companies identified below. NSP US Holdings Inc. is
retainable under the AEP Energy Assets Order.
8.1 Scotia Holdings Inc. is a wholly owned holding company subsidiary
of NSP US Holdings Inc. Scotia Holdings Inc. is retainable under the AEP Energy
Assets Order.
8.1.1 Nova Power Holdings Inc. is a wholly owned holding company
subsidiary of Scotia Holdings Inc. Nova Power Holdings Inc. is retainable under
the AEP Energy Assets Order.
8.1.1.1 Scotia Power U.S. Ltd. is a wholly owned holding
company subsidiary of Nova Power Holdings Inc.. Scotia Power U.S. Ltd. is
retainable under the AEP Energy Assets Order.
8.1.1.1.1 Maritimes and Northeast Pipeline, L.L.C. is
12.5% owned by Scotia Power U.S. Ltd. and the remainder is owned by
nonaffiliates. Maritimes and Northeast Pipeline L.L.C. owns the U.S. portion of
the Maritimes and Northeast Pipeline. Maritimes and Northeast Pipeline, L.L.C.
is retainable under the AEP Energy Assets Order.
As set forth below, all of BHE's active non-utility businesses also
are retainable:
1. Bangor Energy Resale, Inc., a wholly owned subsidiary of BHE, permits
BHE to use a power sales agreement as collateral for a bank loan. Bangor Energy
Resale, Inc. is retainable as a special-purpose financing entity under The
Southern Company, Holding Co. Act Release No. 27134 (Feb. 9, 2000); New Century
Energies, Inc., Holding Co. Act Release No. 27000 (April 7, 1999) (SEC approved
a special-purpose subsidiary of trust that was formed for the purpose of
facilitating a financing transaction); and Exelon Corporation, Holding Co. Act
Release No. 27256 (Oct. 19, 2000) (authorizing retention of several existing
special-purpose financing entities).
2. CareTaker, Inc., a wholly owned subsidiary of BHE provides security
alarm services. CareTaker, Inc., will qualify as an exempt telecommunications
company under Section 34(a) of the Act and therefore is retainable.
3. Bangor Fiber Company, Inc. owns and leases fiber optic communications
cable. It will qualify as an exempt telecommunications company under Section
34(a) of the Act and therefore is retainable.
4. Bangor Line Company constructs and maintains transmission and
distribution lines and provides engineering services. It is retainable under
Rule 58(b)(1)(vii).
The remaining BHE nonutility subsidiaries presented below own or
manage interests in water rights or real-estate that were acquired and used in
connection with BHE's utility business. These subsidiaries are all presently
inactive and are retainable under Energy East Corp., Holding Co. Act Release No.
27224 (August 31, 2000) (a corporation formed to hold property used in
connection with public utility operations is retainable, but corporation commits
to divest holdings of agricultural lands without utility purpose); Conectiv,
Inc., Holding Co. Act Release No. 26832 (February 25, 1998) (corporation that
manages real estate that was acquired for an intended utility purpose that has
ceased to exist is retainable as a vehicle for the development and sale of such
properties); and Central Maine Power Co., Holding Co. Act Release No. 7985
(February 24, 1948) (corporation owning land around dams and flowage rights is
retainable because it allows control of riparian rights needed to assure the
maximum flow of water to certain hydro-electric dams).
The following subsidiaries fall into this category:
3. East Branch Improvement Company ("EBIC") formerly provided water storage
services for hydroelectric facilities. BHE owns 60% of the common stock of EBIC.
3.1 Godfrey's Falls Dam Company holds rights that would permit future
water storage development in the basin of the East Branch of the Penobscot
River. Godfrey's Falls Dam Company is wholly owned by EBIC.
3.2 The Sawtelle Brook Dam & Improvement Company controls certain
water rights in the basin of the East Branch of the Penobscot River. The
Sawtelle Brook Dam & Improvement Company is wholly owned by EBIC.
4. The Sebois Dam Company improved the navigation of certain of the Sebois
waters entering the Piscataquis River. The Sebois Dam Company is wholly owned by
BHE.
5. The Pleasant River Gulf Improvement Company was engaged in water
improvement. It is wholly owned by BHE.
BHE also holds 7% of the outstanding common stock of Maine Yankee, a
company that owns and, prior to its permanent closure in 1997, operated an 880
MW nuclear generating plant in Wiscasset, Maine. Maine Yankee is being
decommissioned and should be retainable until that process is complete and the
facility can be sold.
Applicants also request that the Commission authorize the acquisition
of certain projects that Emera and BHE have in development. Emera has offered to
purchase 8.4% of the Sable Offshore Energy Project ("SOEP") infrastructure
assets for CDN $90.0 million. The SOEP infrastructure assets comprise a gas
processing plant at Goldboro, Nova Scotia; a natural gas liquids fractionation
plant at Point Tupper, Nova Scotia; a natural gas liquids line connecting the
Goldboro and Point Tupper operations; and offshore production platforms and
sub-sea gathering pipelines. The AEP Energy Assets Order supports the
acquisition of SOEP. Applicants request Commission authorization to acquire the
SOEP assets, if they have not been acquired prior to Emera's registration under
the Act, and to retain the SOEP assets if they have already been acquired when
Emera registers.
5. Section 10(c)(2)
The standards of Section 10(c)(2) are satisfied because the Merger
will tend toward the economical and efficient development of an integrated
public utility system, thereby serving the public interest, as required by that
section of the Act.
The Commission has previously found that a transaction such as the
instant one, involving the imposition of a new holding company over an existing
integrated system, results in financial and organizational benefits for the
utility system./63
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63 WPL Holdings, Inc., Holding Co. Act Release No. 25377 (Sept. 18, 1991); see
also Chevron Corp., Holding Co. Act Release No. 27122 (Dec. 27, 1999); Roanoke
Gas Co., Holding Co. Act Release No. 26996 (April 1, 1999); BEC Energy, Holding
Co. Act Release No. 26874 (May 15, 1998); Western Resources, Inc., Holding Co.
Act Release No. 26783 (Nov. 24, 1997).
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The Merger will result in significant financial benefits for
shareholders, rate payers and the community in general. As a result of the
Merger, BHE will be in a position to achieve synergies typically associated with
a merger of two similar businesses. For example, cost of capital and risks will
be reduced as a result of BHE's affiliation with a larger and more diversified
company. In terms of future rates, Emera has committed to freeze BHE's total PUC
jurisdictional revenue requirement until MPUC consideration and approval of an
alternative rate plan.
Emera plays a vital role in the economy of Nova Scotia as does BHE in
Maine. Both companies serve a very similar customer base, including substantial
service to the pulp and paper industry. Emera understands the importance of this
industry to the economy of the region as a whole and is committed to providing
reliable power at fair rates that allow the industry to continue to operate on a
competitive basis with other pulp and paper producers around the world. Emera
and BHE also serve other common customer groups and Emera will continue its
commitment to these customers in its operation of the combined entity after the
Merger.
In addition, the Merger will help ensure continuity of high quality
customer service. The Merger will permit BHE access to management resources
available from Emera, a company with historic success in the delivery of
services. Emera and BHE will share best practices learned from their extensive
experience in operating their respective utility systems.
The Merger will provide substantial benefits to the communities within
and outside of BHE's service area. After the Merger, BHE will maintain its
community involvement and charitable contributions at the pre-Merger level.
Seventy-seven Maine municipalities, approximately 15% of the communities in the
State, will benefit as a result of the 825,000 outstanding warrants held by
those municipalities through the Municipal Review Committee, Inc., in
conjunction with BHE's involvement with PERC. The increased value in market
price of the warrants will result in an incremental value of approximately $9.1
million, a substantial profit for the municipalities.
On October 24, 2000, BHE shareholders approved the Merger, which will
result in a cash payment to shareholders of $26.50 per share. The closing price
of BHE on June 29, 2000, the day before the Merger announcement, was $15.13 per
share. Because BHE shareholders are protected by the purchase of their shares at
a premium and their voting rights, it is clear that the Merger will be
beneficial to shareholders.
Although some of the anticipated benefits are strategic and will be
fully realizable only in the longer term, they are properly considered in
determining whether the standards of Section 10(c)(2) are met./64 The Commission
has recognized that potential benefits are entitled to be considered, regardless
of whether they can be precisely estimated: "[S]pecific dollar forecasts of
future savings are not necessarily required; a demonstrated potential for
economies will suffice even where these are not precisely quantifiable."/65
--------
64 National Grid Group plc, supra; see American Electric Power Co., 46 S.E.C.
1299, 1320-1321 (1978).
65 Centerior Energy Corp., Holding Co. Act Release No. 24073 (April 29, 1986)
(citation omitted). See also Energy East Corporation, Holding Co. Act Release
No. 26976 (Feb. 12, 1999) (authorizing acquisition based on strategic benefits
and potential, but unquantifiable, savings).
--------
6. 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 to such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be
detrimental to carrying out the provisions of section 11.
The MPUC is the sole state regulator with jurisdiction over the Merger. As
explained above, the MPUC has approved the Merger.
By order dated January 5, 2001, the MPUC approved a stipulation
entered into among the Public Advocate, the Municipal Review Committee, the
Industrial Energy Consumers Group, Emera, BHE, MEPCO and Chester SVC (the
"Stipulation") and incorporated the Stipulation by reference into its order./66
The approval of the Stipulation resolved all issues in the proceeding before the
MPUC and permits the Merger to proceed./67
--------
66 The MPUC order and the Stipulation is included in Exhibit D-2 to this
Application.
67 The Stipulation at 3 notes that "[t]he parties agree that the Commission
issue an order which approves and adopts this Stipulation and finds that,
subject to the provisions herein, the proposed reorganizations are consistent
with the interests of the ratepayers and investors of the Maine public utility
Applicants and approves the proposed reorganizations under 35-A MRSA ss.708 and
such other provisions in Title 35-A as might be applicable.
--------
The Stipulation subjects Emera and BHE to several conditions intended
to preserve MPUC authority and to assure BHE's service quality. In particular,
the Stipulation provides that:
o Applicants (i.e., Emera, BHE, MEPCO and Chester SVC) will comply with Maine
statutes and MPUC regulations regarding reorganizations and affiliated
transactions of BHE. To the extent that the activities of Emera and any of
its affiliates relate to or in any way impact the operations, costs or
revenues of BHE in Maine, Emera and its affiliates will be subject to MPUC
jurisdiction for discovery purposes and participate as a party in any
proceeding when deemed necessary by the MPUC.
o All contracts or transactions between BHE and its affiliated interests that
constitute affiliated transactions which require approval of the MPUC under
Maine law must explicitly provide that no charges made or incurred, and
that no costs incurred or revenues earned under the contracts, will be
reflected in BHE's rates except as permitted by the MPUC in accordance with
Maine law, except where compliance with both state and federal requirements
is impossible or where compliance with state law would cause BHE or an
affiliate to violate federal law. Further, to the extent that the SEC must
approve such contracts, Applicants agree to petition the SEC for an
explicit finding that the terms in the contract required by this provision
are not inconsistent with "SEC law or regulation."
o Applicants agree to waive the defense that the MPUC's jurisdiction to
approve a reorganization or affiliate transaction of BHE or to set the
rates of BHE with regard to a transaction between BHE and an affiliate is
preempted by the existence or exercise of SEC jurisdiction over
reorganizations or affiliate transactions of BHE, except where compliance
with both state and federal requirements is impossible or where compliance
with state law would cause BHE or an affiliate to violate federal law.
o Emera will make available to the MPUC upon request, and at a location in
the State of Maine convenient to the MPUC, such books and records of Emera
and its affiliates as the MPUC may require Emera to produce. Emera is
entitled to notice and opportunity to be heard on the production requests
and may be accorded confidential treatment where appropriate.
o The parties agree that BHE's service quality not deteriorate as a
consequence of the Merger. To maintain service quality, performance
consistent with certain service quality benchmarks and related reports were
required. The remedy for failure to maintain service quality could include
a prohibition on the payment of dividends.
o BHE is required to file various capital budget and expenditure information
and, in the event its actual capital expenditures fall materially below its
budgeted capital expenditures, or if the MPUC should otherwise become
concerned about BHE's capital budget or expenditures, the MPUC may open an
investigation to inquire into such capital budget issues and into what
remedy, if any, would be appropriate.
o The MPUC may order the divestiture of BHE by Emera upon a determination by
the Commission after notice and opportunity to be heard that no other
available remedy is adequate to reasonably address the harm./68
The parties to the Stipulation agreed and recommended that the MPUC's acceptance
of the Stipulation constitutes a finding that the MPUC has the authority and
resources to protect ratepayers subject to its jurisdiction and that it intends
to exercise its authority./69 The extensive powers of the MPUC over Emera and
BHE demonstrate that the proposed acquisition would not be detrimental to the
public interest or the interest of investors or consumers. The judgment of the
MPUC is entitled to considerable deference in this matter.
--------
68 Stipulation at 5-10.
69 Stipulation at 10.
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The acquisition of BHE by Emera will not give rise to any of the evils
that the Act was intended to address. Emera is a publicly held company subject
to continuous reporting requirements under the Canadian securities laws. A
transaction that links companies in a narrowly defined geographic area does not
create a problem of "scatteration" for purposes of the Act.
The Commission may also draw comfort from the findings of the order of
the Federal Energy Regulatory Commission ("FERC") approving the Merger. The FERC
found that the Merger was consistent with the public interest, that the Merger
did not pose competitive concerns, that there would be no adverse rate effects
and the Merger would not adversely effect either federal or state regulation./70
There is a further consideration that argues for Commission
authorization on the facts of this matter. The proposed transaction will unite
Canadian and U.S. utilities. As the Commission in Gaz Metropolitain noted, the
U.S. and Canada enjoy a unique relationship. Both countries have a long history
of friendship and cooperation evidenced by, among other things, the North
American Free Trade Agreement ("NAFTA") and the NAFTA Implementation Act (Pub.
L. 103-182, 107 Stat. 2057-2225 (1993)), which were "designed to remove barriers
to trade and enhance investment opportunities between the United States and
Canada."/71
In a letter to the Commission in support of the Merger, the Governor
of Maine, Angus King, Jr., states that Maine and New England have long fostered
a close relationship with Canada, particularly the eastern Canadian provinces.
For example, a conference of New England Governors and Eastern Canadian Premiers
has worked for the past 26 years to promote the common economic, cultural and
political interests of the region which is viewed by many as an interdependent
market. Governor King called the Merger a "good fit" and stated that he viewed
it as "being entirely consistent with the economic development aims of Maine and
with the goal of strengthening the ties between New England and Eastern
Canada."/72
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70 The order of the FERC approving the Merger is included in Exhibit D-5 to this
Application.
71 Gaz Metropolitain at 15. In Gaz Metropolitain, the Commission found that the
combination of the Canadian and Vermont gas operations resulted in a single
integrated gas utility system. While Emera could acquire a firm contract path to
interconnect the Canadian and U.S. electric operations, it is not necessary to
do so because NSPI intends to conduct its affairs so as to qualify for exemption
as a FUCO. Thus, although the transaction will require prior approval under
Sections 9 and 10, the question of integration will be confined to the BHE
utility operations, which the Commission has previously found to be an
integrated electric utility system. Section 10(c)(2) of the Act is satisfied
because BHE is currently an integrated electric utility system and will remain
so after the Merger. Because here, as in Gaz Metropolitain, the transaction will
result in a single, integrated public-utility system, the Emera-BHE Merger falls
comfortably within the Gaz Metropolitain precedent.
72 Letter from Angus S. King, Jr., Governor of Maine to Jonathan G. Katz,
Secretary of the Securities and Exchange Commission, (dated February 22, 2001).
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The Stipulation requires the Applicants to petition this Commission to
make an explicit finding in its order approving the Merger "that its approval of
the merger transaction does not preempt MPUC exercise of its jurisdiction under
Maine law with respect to reorganizations, affiliate transactions of BHE or
ratemaking for BHE regarding the costs associated with its affiliate
transactions, and that it is the SEC's intention that its approval of the merger
transaction does not affect the MPUC's right to review and disallow BHE's costs
for services rendered between BHE and its affiliated interests that might
otherwise be subject to recovery in rates."/73 Applicants request that the
Commission make the above findings explicitly in its order approving this
Application.
7. Intermediate Holding Companies
Following the Merger, Emera will hold a subsidiary interest in three
U.S. utility companies, BHE, MEPCO and Chester SVC. As illustrated by the
post-Merger organization chart in Exhibit E-1, Emera will hold BHE through
several intermediate holding companies. It is common practice for foreign-based
corporations to hold an interest in a corporation that is outside of the home
country through one or more intermediary companies. This ownership structure is
used to minimize taxes on the repatriation of foreign subsidiary profits./74
Each of the intermediate holding companies will be organized in the State of
Delaware and will have no utility affiliates, other than BHE and its utility
subsidiaries, except as authorized by the Commission. The intermediate holding
companies will be wholly-owned, directly or indirectly, by Emera and will have
no third-party public or private institutional equity or debt holders. The
intermediate holding companies will be capitalized with equity and/or debt, all
of which will be held either by Emera or an intermediate holding company.
--------
73 See Stipulation at 5.
74 See The National Grid Group plc, Holding Co. Act Release No. 27154 (March 15,
2000) at 42-43 (employing intermediate holding companies to maximize tax relief
in the U.K. and noting further that U.S. holding companies use similar
structures in connection with their foreign investments).
--------
BHE, in turn, will hold a minority (14.2%) interest in MEPCO directly,
and a 50% interest in Chester SVC through its ownership of Bangor Var. Each of
the intermediate holding companies, BHE and Bangor Var will be a holding company
within the meaning of Section 2(a)(7) of the Act. As such each would be required
to register with the Commission, and comply with the various requirements for
registered holding companies, unless able to qualify for exemption.
Section 3 of the Act provides that the Commission upon application
"shall" by order exempt any person from the provisions of the Act if such person
meets the requirements for any exemption contained in Sections 3(a) and if the
exemption is not detrimental to the public interest or the interest of investors
or consumers. Of interest here, Section 3(a)(1) of the Act provides an exemption
where a
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.
Because they do not qualify for exemption, the intermediate holding companies
will register under the Act. However, for the reasons that follow, BHE and
Bangor Var request and are entitled to an order under Section 3(a)(1) of the Act
exempting them as holding companies from the Act. BHE and Bangor Var will
continue to be direct or indirect subsidiaries of Emera and therefore subject to
the Act's provisions relating to subsidiaries. In addition, BHE and Bangor Var
commit not to engage in any transactions such as upstream loans or certain
service transactions that would otherwise be prohibited for registered holding
companies.
In the first instance, the inquiry regarding exemption concerns
material utility subsidiaries. Chester SVC is an immaterial utility subsidiary
because it provides no income or revenue to Bangor Var. MEPCO is also
immaterial. BHE's 14.2% investment in MEPCO is accounted for on the equity
method. For the twelve months ended December 31, 2000, BHE's proportional
interest in MEPCO's income was approximately $224, 000. This income is accounted
for under the equity method and is applied to offset BHE's expenses and,
consequently, benefits BHE's ratepayers. BHE is the sole material utility
subsidiary in the Emera system.
In the second part of the Section 3(a)(1) evaluation, both the holding
company and every material utility subsidiary must be predominantly intrastate
in character and carry on its business substantially in a single state in which
both the holding company and subsidiary are organized. BHE and Bangor Var are
predominantly Maine companies. All of BHE's utility operating revenues are
derived from utility operations conducted in Maine./75 Bangor Var holds only an
interest in Chester SVC, whose sole utility assets are located in Maine. BHE and
Bangor Var are also organized in Maine.
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75 See Sierra Pacific Resources, Holding Co. Act Release No. 24566 (Jan. 28,
1988), aff'd sub nom. Environmental Action, Inc. v. SEC, 895 F.2d 1255 (9th Cir.
1990) (exemption granted where out-of-state operations represented approximately
9.9% of the holding company's utility revenues.
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Because BHE and Bangor Var will be regulated as subsidiaries of a
registered holding company, a grant of an exemption under Section 3(a)(1) with
respect to their holding company status would not be detrimental to the public
interest or the interest of investors or consumers. For these reasons, the
Commission should grant the requested exemptions.
8. Financing the Emera System
Emera's capital structure as of December 31, 2000, and adjusted to
show the effect of the Merger, is shown in the following table:
[Enlarge/Download Table]
Emera Capital Structure
-------------------------------------------------------------------------------------------------------------
Emera Pre-Merger BHE Pre-Merger
-------------------- ------------------------- ---------------------- --------- ------------- ---------------
$ % of Total $ % of Total Adjust- Pro Forma % of Total
millions Capitaliza- millions Capitaliz- ments Capitaliza- Pro Forma
tion ation tion Capitalization
-------------------- ---------- -------------- ---------- ----------- --------- ------------- ---------------
Common 660.5 35.1 143.2 42.9 13.4 790.3 34.6
stockholders'
equity.
-------------------- ---------- -------------- ---------- ----------- --------- ------------- ---------------
Preferred stock 0 0
-------------------- ---------- -------------- ---------- ----------- --------- ------------- ---------------
Minority interests 168.3 8.9 4.7 1.4 -7.4 180.4 7.9
-------------------- ---------- -------------- ---------- ----------- --------- ------------- ---------------
Long-term debt 861.8 45.8 185.7 55.7 12.20 1,035.3 45.4
(including current
portion)
-------------------- ---------- -------------- ---------- ----------- --------- ------------- ---------------
Short-term debt 190.3 10.1 -85.2 275.5 12.1
-------------------- ---------- -------------- ---------- ----------- --------- ------------- ---------------
Total 1,880.9 100 333.6 100 -67.0 2,281.5 100
capitalization
-------------------- ---------- -------------- ---------- ----------- --------- ------------- ---------------
The financing authorizations requested in the Application are
substantially similar to financing authorizations granted to other newly-formed
registered holding company systems. See National Grid Group plc, Holding Co. Act
Release No. 27154 (March 15, 2000); NiSource, Inc., Holding Co. Act Release No.
27265 (November 1, 2000); Exelon Corp., Holding Co. Act Release No. 27266
(November 2, 2000). Emera proposes to abide by the same basic parameters applied
to the financing authorizations previously authorized by the Commission, in
particular, the minimum 30% common equity standard and the commitment not to
issue debt unless it is rated investment grade. The pro forma capitalization of
the combined system presented above also illustrates that Emera will be
financially sound upon consummation of the merger. For these reasons, the
Commission should find the proposed financing transactions to be in accordance
with the Act and generally in the interest of investors, consumers and the
public interest.
ITEM 4. REGULATORY APPROVALS.
Set forth below is a summary of the regulatory approvals that will be
obtained in connection with the acquisition.
1. Antitrust
The acquisition is subject to the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the rules and
regulations thereunder, which provide that certain acquisition transactions may
not be consummated until certain information has been furnished to the Antitrust
Division of the Department of Justice and the Federal Trade Commission, and
until certain waiting periods have been terminated or have expired. The Federal
Trade Commission granted Emera early termination of the notice period on
February 28, 2001, thereby permitting consummation of the transaction as of that
date.
2. Federal Energy Regulatory Commission
Under Section 203 of the Federal Power Act, the FERC has jurisdiction
when a public utility sells or otherwise disposes of facilities that are subject
to its jurisdiction. A disposition is deemed made when there is a change in
control of the public utility that owns the facilities. By order dated January
24, 2001, the FERC approved the Merger. See Exhibit D-5.
3. Committee on Foreign Investment in the United States
Section 721 of the Defense Production Act of 1950 authorizes the
Committee on Foreign Investment in the United States ("CFIUS") to suspend or
prohibit any merger, acquisition or takeover, by or with a foreign person, of a
person engaged in interstate commerce in the United States when, in the
Committee's view, the foreign interest exercising control over that person might
take action that threatens to impair the national security. Applicants expect to
file an application with the CFIUS shortly.
4. State Regulatory Approval
Under Maine law, the approval of the MPUC is required for the indirect
transfer of control of BHE resulting from the Merger, under a standard that
requires a finding that the Merger is consistent with the interests of BHE's
customers and investors. In addition, in rendering a decision, the MPUC must
find that it can continue to adequately regulate the reorganized utility. Under
Maine law, once an application for approval is filed, the MPUC must act
definitively within 180 days of the date of filing. Emera and BHE filed a joint
petition with the MPUC on August 4, 2000.
By order dated January 5, 2001, the MPUC made all required findings
and approved the Merger. See Exhibit D-2.
ITEM 5. PROCEDURE.
The Commission is respectfully requested to issue and publish not
later than May 18, 2001 the requisite notice under Rule 23 with respect to the
filing of this Application, such notice to specify a date not later than June
12, 2001 by which comments may be entered. The Commission is requested to issue
its order granting and permitting this Application to become effective not later
than June 15, 2001.
Emera believes that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the Merger.
The Division of Investment Management may assist in the preparation of the
Commission's decision. There should be no waiting period between the issuance of
the Commission's order and the date on which it is to become effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
Exhibits
A-1 Memorandum of Association of Emera.
A-2 Articles of Association of Emera.
A-3 Certificate of Organization of BHE.
A-4 By-Laws of BHE.
A-5 Articles of Incorporation of Bangor Var.
A-6 By-laws of Bangor Var.
A-7 Partnership Agreement Creating Chester SVC Partnership.
B-1 Agreement and Plan of Merger (incorporated by reference to SEC File No.
001-10922, filed September 18, 2000).
C-1 Definitive Proxy Statement relating to the special meeting of shareholders
of BHE to approve the Merger with Emera (incorporated by reference to SEC
File No. 001-10922, filed September 18, 2000).
D-1 Petition to the Maine Public Utilities Commission, filed on August 4, 2000,
together with testimony and exhibits (to be filed by amendment).
D-2 Order of the Maine Public Utilities Commission, dated January 5, 2001.
D-3 Certification of the Maine Public Utilities Commission under Section
33(a)(2) of the Act.
D-4 Application to FERC together with testimony and exhibits (to be filed by
amendment).
D-5 FERC Order dated January 24, 2001.
E-1 Organizational Chart of the combined Emera/BHE system post-Merger (to be
filed in paper under cover of Form SE).
E-2 Maps of BHE and NSPI service territories (to be filed in paper under cover
of Form SE).
F-1 Opinion of counsel of Emera (to be filed by amendment).
F-2 Opinion of counsel of BHE (to be filed by amendment).
F-3 Past tense opinion of counsel (to be filed by amendment).
G-1 Emera's 1999 Annual Report.
G-2 BHE's Annual Report on Form 10-K for the fiscal year ended December 31,
1999 (incorporated by reference to SEC File No. 001-10922, filed March 30,
2000, and amended April 28, 2000).
H-1 Proposed form of notice (previously filed).
I-1 Form of Services Agreement (to be filed by amendment).
I-2 Form of Master Transition Services Agreement (to be filed by amendment).
I-3 Services Company Policies and Procedure Manual (to be filed by amendment).
J-1 Stock-based employee benefits plans (to be filed by amendment).
K-1 Emera Inc. Group of Companies
L-1 Appointment of Agent for Service of Process (to be filed by amendment).
M-1 Form of Federal and State Income Tax Allocation Agreement (to be filed by
amendment).
Financial Statements
FS-1 Balance sheet and income statement of Emera consolidated for the year ended
December 31, 1999 (incorporated by reference to Exhibit G-1).
FS-2 Balance sheet and income statement of BHE consolidated for the year ended
December 31, 1999 and for the quarters ended March 31, 2000 and June 30,
2000 (incorporated by reference to SEC File No. 001-10922, on Form 10-K for
the year-end report filed March 30, 2000 and amended April 28, 2000, and on
Forms 10-Q for the quarterly statements filed May 12, 2000 and August 10,
2000, respectively).
FS-3 Balance sheet and income statement of BHE consolidated for the years ended
December 31, 1998 and December 31, 1997 (incorporated by reference to SEC
File No. 001-10922, on Form 10-K for the year end reports filed March 30,
1999 and March 27, 1998, respectively).
FS-4 Pro-forma financial statements (to be filed by amendment).
FS-5 Financial projections (confidential treatment requested under Rule 104).
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
The Merger neither involves a "major federal action" nor
"significantly affects the quality of the human environment" as those terms are
used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C.
Sec. 4321 et seq. No federal agency is preparing an environmental impact
statement with respect to this matter.
SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned company has duly caused this Application to be signed
on its behalf by the undersigned thereunto duly authorized. The signature of the
applicants, through the undersigned, is restricted to the information contained
in this Application which is pertinent to the instant Application.
Date: May ___, 2001 Emera Incorporated
By: /s/ Richard J. Smith
Name: Richard J. Smith
Title: Corporate Secretary and General Counsel
Date: May ___, 2001 Bangor Hydro-Electric Company
By: /s/ Frederick S. Samp
Name: Frederick S. Samp
Title: Vice President - Finance and Law
Date: May ___, 2001 Bangor Var Co., Inc.
By: /s/ Carroll Lee
Name: Carroll Lee
Title: President
Exhibit Index
A-1 Memorandum of Association of Emera.
A-2 Articles of Association of Emera.
A-3 Articles of Incorporation of BHE.
A-4 By-Laws of BHE.
A-5 Articles of Incorporation of Bangor Var.
A-6 Bylaws of Bangor Var.
A-7 Partnership Agreement Creating Chester SVC Partnership.
D-2 Order of the Maine Public Utilities Commission, dated January 5, 2001.
D-3 Certification of the Maine Public Utilities Commission under Section
33(a)(2) of the Act.
D-5 FERC Order dated January 24, 2001.
G-1 Emera's 1999 Annual Report.
K-1 Emera Inc. Group of Companies
Dates Referenced Herein and Documents Incorporated by Reference
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| | 4/24/92 | | 4 |
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