Pre-Effective Amendment to Application or Declaration — Form U-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: U-1/A Form U-1/A (Amendment No. 3) 115 365K
2: EX-99.1 Opinion of Counsel of Emera 3± 12K
11: EX-99.10 Bhe Balance Sheet and Income Stmt as of 3/31/01 3 15K
12: EX-99.11 Pro-Forma Financials 2 18K
13: EX-99.12 Credit Ratings of Emera and Bhe 1 7K
3: EX-99.2 Opinion of Counsel of Bhe 2± 11K
4: EX-99.3 Form of Master Transition Services Agreement 10± 36K
5: EX-99.4 Emera Stock-Based Employee Benefit Plans 4 19K
6: EX-99.5 Appointment of Agent for Service of Process 2 10K
7: EX-99.6 Form of Federal and State Tax Allocation Agreement 5± 19K
8: EX-99.7 Cfius Approval Letter 1 8K
9: EX-99.8 Balance Sheet and Income Stmt of Emera 12/31/00 20± 111K
10: EX-99.9 Emera Balance Sheet and Income Stmt as of 3/31/01 2 12K
File No. 70-9787
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3
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
Nova Scotia Power Inc. Bangor Var Co., Inc.
P.O. Box 910 33 State Street
Halifax, Nova Scotia Bangor, Maine 04401
Canada
B3J2W5
Emera US Holdings Inc.
BHE Holdings Inc.
1209 Orange Street
New Castle, Wilmington, DE 19801
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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:
William S. Lamb David P. Falck
Markian Melnyk Pillsbury Winthrop LLP
LeBoeuf, Lamb, Greene & MacRae, L.L.P. One Battery Park Plaza
125 West 55th Street New York, N.Y. 10004-1490
New York, N.Y. 10019-5389
TABLE OF CONTENTS
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS...................................1
A. Introduction..........................................................1
B. Description of the Companies..........................................1
1. Emera........................................................1
2. BHE..........................................................7
C. The Proposed Transaction.............................................10
D. Utility Regulation...................................................11
1. Divestiture of Generation Assets............................12
2. Divestiture of Rights to Capacity and Energy................15
3. Standard Offer Service......................................16
4. BHE's Ongoing Electric Utility Function.....................18
5. Intermediate Holding Companies..............................19
6. Financing the Merger........................................20
7. Management and Operations of BHE Following the Merger.......21
E. Financing the Emera Registered Holding Company System................21
1. Summary of Financing Authorization Requested................22
2. Parameters for Financing Authorization......................23
3. Use of Proceeds.............................................24
4. Description of Emera's Existing Capital Structure...........24
5. Description of Proposed Financing Program...................26
a. Emera's External Financing..............................26
b. Common Stock............................................26
c. Preferred Stock.........................................28
d. Long-Term Debt..........................................29
e. Short-Term Debt.........................................30
f. Hedges and Interest Rate Risk Management................30
g. Guarantees..............................................32
h. Subsidiary Financing....................................33
i. Changes in Capital Stock of Wholly-Owned Subsidiaries...39
j. Payment of Dividends Out of Capital or Unearned Surplus.40
k. Financing Entities......................................44
l. Tax Allocation Agreement................................44
m. Direct Stock Purchase and Dividend Reinvestment Plan,
Incentive Compensation Plans and other Employee
Benefit Plans...........................................45
F. Intra-System Service Transactions....................................46
1. Emera Services..............................................46
G. Nonutility Reorganizations...........................................52
H. Canadian Energy Related Subsidiaries.................................54
I. EWG and FUCO Investments.............................................59
J. Reporting............................................................69
ITEM 2. FEES, COMMISSIONS AND EXPENSES........................................71
i
ITEM 3. APPLICABLE STATUTORY PROVISIONS.......................................71
A. Applicable Provisions................................................71
B. Legal Analysis.......................................................72
1. Section 10(b)(1)............................................77
a. Interlocking Relationships.........................77
b. Concentration of Control...........................79
2. Section 10(b)(2)............................................80
3. Section 10(b)(3)............................................81
4. Section 10(c)(1)............................................82
5. Section 10(c)(2)............................................92
6. Section 10(f)...............................................96
7. Intermediate Holding Companies.............................100
8. Financing the Emera System.................................102
ITEM 4. REGULATORY APPROVALS.................................................104
ITEM 5. PROCEDURE............................................................105
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS....................................105
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS..............................109
ii
This pre-effective Amendment No. 3 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 common stock 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./1/
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's common stock is listed and traded on the
Toronto Stock Exchange ("TSE"). The securities commissions of each of the
provinces of Canada regulate securities issuances by Emera and Emera is also
subject to the rules and regulations of the TSE. Emera's public disclosure
documents such as annual reports and proxy statements are available on SEDAR, an
electronic document management system
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/1/ In connection with the Merger, Emera has organized two companies, Emera US
Holdings Inc. ("Emera USH") and BHE Holdings Inc. ("BHEH") to hold Emera's
interest in BHE. Emera USH is a wholly-owned direct subsidiary of Emera and BHEH
is a wholly-owned direct subsidiary of Emera USH. Emera USH and BHEH will
register under the Act upon consummation of the Merger and they are applicants
under this Application. A subsidiary of BHEH, Acquisition Co. No. 2 ("Acq. Co.
2"), will be formed to merge with and into BHE. Acq. Co. 2 is not an applicant
because it does not survive the Merger.
1
like EDGAR, that is administered by the Canadian Securities Administrators, an
association of the provincial securities commissions.
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./2/
In 2000, NSPI generated 11,432 GWh of electricity and sold 10,656 GWh./3/
Of the amount sold, 10,475 GWh was consumed in the province of Nova Scotia and
181 GWh was exported using the international lines of New Brunswick Power
Corporation ("NB Power")./4/ 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,
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/2/ 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.
/3/ The difference between the amount generated and sold is accounted for
principally by internal consumption and line losses.
/4/ NB Power, a Crown Corporation of the Province of New Brunswick established
in 1920 with a legislated mandate to serve the electricity needs of the Province
of New Brunswick, is Atlantic Canada's largest electric utility. NB Power is not
affiliated with Emera.
2
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./5/ NSPI's
compliance with the standards of Section 33 of the Act is discussed infra at
Item 3.B.
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./6/ As of December 31, 2000, Emera and NSPI had assets of
approximately $1,989.0 million and $1,913.3 million, respectively.
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." The Subsidiaries, excluding BHE, MEPCO, Chester SVC Partnership and
Bangor Var Co., Inc., are referred to as the "Nonutility Subsidiaries."
1. NS Power Services Ltd., a wholly owned subsidiary of Emera, was in the
business of providing energy services primarily in Atlantic Canada, including
the design, development, installation and investment in cost-effective energy
projects for industrial,
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/5/ Under the Nova Scotia Power Privatization Act, S.N.S. 1992, C.8, as amended
("Privatization Act"), the assets of Nova Scotia Power Corp., a Crown
Corporation of the Province of Nova Scotia, were transferred to NSPI to
facilitate the initial public offering of NSPI's common shares. In 1999, NSPI
entered into an agreement with Emera, then named NS Power Holdings Inc., to
implement an arrangement under the Companies Act (Nova Scotia) whereby Emera
acquired all the issued and outstanding common shares of NSPI in exchange for an
equal number of Emera common shares (the "Arrangement"). The Nova Scotia Power
Reorganization (1998) Act, S.N.S. 1998, C. 19 ("Reorganization Act"), provided
statutory authority for the Arrangement and provided that no person other than
Emera could hold 15% or more of the common stock of NSPI. Consequently, without
further legislation, Emera cannot adopt a corporate structure that places an
intermediate FUCO holding company over NSPI and Emera's Canadian nonutility
subsidiaries.
/6/ Unless otherwise noted, all amounts presented in the Application are stated
in U.S. dollars. An exchange rate of $1 CDN to $0.674 USD is assumed.
3
commercial, and institutional customers to assist in reducing overall energy
consumption. 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, 3003252 Nova Scotia Ltd., which is
wholly-owned by Trigen Energy Corp. NSP Trigen Inc. was formed to develop
district energy and cogeneration in Nova Scotia, New Brunswick, Prince Edward
Island, and Newfoundland. 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.
4
Maritimes and Northeast Pipeline Management Ltd. is the general partner of, and
owns a 0.125% 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 0.125% 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 NSP Investments Inc., a wholly owned subsidiary of NSP US Holdings Inc.
was established to facilitate the financing of the acquisition of Emera's
interest in Maritimes and Northeast Pipeline, L.L.C.
8.2 Scotia Holdings Inc. is a wholly owned holding company subsidiary of
NSP US Holdings Inc.
8.2.1 Nova Power Holdings Inc. is a wholly owned holding company subsidiary
of Scotia Holdings Inc.
8.2.1.1 Scotia Power U.S. Ltd. is a wholly owned holding company subsidiary
of Nova Power Holdings Inc.
8.2.1.1.1 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.
5
9. 1447585 Ontario Ltd. is a wholly owned subsidiary of Emera that was
incorporated in the event it was needed in connection with the acquisition of
BHE. 1447585 Ontario Ltd. is inactive and will not be used to effect the Merger.
10. 3054167 Nova Scotia Ltd. is inactive.
11. Emera Energy Inc. is a wholly owned holding company subsidiary of Emera
with respect to the infrastructure assets associated with the Sable Offshore
Energy Project ("SOEP"), a natural gas production facility near Sable Island,
Nova Scotia and certain gas storage facilities described below./7/
11.1 30566567 Nova Scotia Limited is a wholly owned sub-holding company.
11.1.1 3056568 Nova Scotia Limited is a wholly owned sub-holding company.
11.1.1.1 Emera Offshore Inc. holds a drilling platform and subsea gathering
pipeline associated with the SOEP.
11.2 Emera Energy U.S. Subsidiary No. 1, Inc. is a wholly owned sub-holding
company.
11.2.1 Emera Energy U.S. Subsidiary No. 2, Inc. is a wholly owned
subsidiary that holds a 40% membership interest in Greyhawk Gas Storage Company,
L.L.C. ("Greyhawk")
11.2.1. Greyhawk was formed to design, develop, own and operate
high-deliverability, multi-cycle natural gas storage facilities in the Northeast
U.S.
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 note that under Rule 16: 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"), and; (4) Greyhawk would be 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 or Greyhawk is a
public utility company as defined in Section 2(a)(5) of the Act; (b) each of the
Maritimes Entities and Greyhawk is or has been organized to engage primarily in
the exploration, development, production, manufacture, storage, transportation
or supply of natural or synthetic gas;
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/7/ 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).
6
(c) no more than 50% of the voting securities or other voting interests of each
of the Maritimes Entities and Greyhawk would be owned, directly or indirectly,
by one or more registered holding companies;/8/ and (d) the acquisition by the
registered holding company or subsidiary thereof of the interests in the
Maritimes Entities and Greyhawk "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 and Greyhawk 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).
2. BHE
BHE is a public utility and holding company currently exempt by order under
Section 3(a)(1) of the 1935 Act./9/ 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 Co., Inc. ("Bangor Var"). Chester SVC is a single-purpose
financing entity formed to own a
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/8/ In addition to Emera, the owners of the Maritimes Entities are M&N
Management Co., a wholly-owned subsidiary of Duke Energy Corp., Westcoast Energy
(U.S.) Inc., a wholly owned subsidiary of Westcoast Energy, Inc. and Mobil
Midstream Natural Gas Investments Inc., a wholly-owned subsidiary of Mobil Oil
Canada Properties, none of which is associated with a registered holding
company. The sole additional member of Greyhawk is Falcon Northeast Holdings,
L.L.C., which is not associated with a registered holding company.
/9/ Bangor Hydro-Electric Company, Holding Co. Act Release No. 27094 (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.
7
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./10/
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./11/ As of December 31, 2000 BHE had approximately $532
million in utility assets.
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.
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/10/ Application of Central Maine Power Co., et al, Maine Public Utilities
Commission Docket No. 90-100, Stipulation (July 12, 1990).
/11/ 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.
8
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. See, Exhibit O-1 hereto. 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
9
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"),/12/ 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 March 20, 2001 (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./13/ Thus, the proposed
transaction will benefit BHE's shareholders, customers, and employees, as well
as the communities in which they work and live.
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.
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/12/ 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.
/13/ The closing price of BHE's common stock on June 29, 2000, the day prior to
the Merger announcement, was $15.13 per share.
10
Pursuant to the terms of the Merger Agreement, a to-be-formed Emera
subsidiary incorporated in the U.S. ("Merger Sub"), 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 summer 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
11
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./14/
1. Divestiture of Generation Assets
In 1997, legislation was enacted to restructure Maine's electric
industry./15/ 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."/16/ 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:
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;/17/
B. Ownership interest in a nuclear power plant;/18/
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/14/ 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.
/15/ "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").
/16/ 35-A M.R.S.A.ss. 3202(1).
/17/ 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.
/18/ 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.
12
C. Ownership interest in a facility located outside the United
States;/19/ 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./20/
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./21/ 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./22/
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./23/ 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/24/ and the expansion rights to those assets; (2) BHE's
subsidiary's (Penobscot Hydro Company,
----------
/19/ BHE has no facilities located outside the U.S.
/20/ As discussed infra, BHE has retained ownership of certain diesel-fired
generators under this exception. 35-A M.R.S.Ass. 3204(1).
/21/ Id.
/22/ Id.; 35-A M.R.S.A.ss. 3204(5).
/23/ Re Bangor Hydro-Elec. Co., No. 98-114 (Me. P.U.C. June 17, 1998).
/24/ Ellsworth Hydro Project, Howland Hydro Project, Medway Hydro Project.,
Milford Hydro Project, Orono Hydro Project, Stillwater Hydro Project, and Veazie
Hydro Project.
13
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./25/ By August 27, 1999, the various asset sales to PP&L Global were
complete.
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./26/
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."/27/
----------
/25/ 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 FERCP. 61,281, clarified, 87 FERCP. 61,057 (1999).
/26/ Re Bangor Hydro-Elec. Co., No. 98-820 (Me. P.U.C. Feb. 3, 1999).
/27/ Id.
14
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./28/ 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./29/ The MPUC established rules requiring the sale of remaining
capacity and energy from generation assets and generation-related business./30/
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./31/ 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,/32/ and (2) 6 MW of capacity and associated energy from PERC
that is
----------
/28/ 35-A M.R.S.A.ss. 3204(4).
/29/ Id.
/30/ Code Me. R. 65-407, Chapter 307.
/31/ 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 Penobscot Energy
Recovery Company ("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).
/32/ 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.
15
committed to be sold under a pre-existing agreement to UNITIL Power Corporation
("UNITIL")./33/
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./34/
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.
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./35/ 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."/36/ 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./37/
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
----------
/33/ 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.
/34/ Re Bangor Hydro-Elec. Co., No. 99-284 (Me. P.U.C. Dec. 3, 1999).
/35/ 35-A.M.R.S.A.ss.3202(1).
/36/ 35-A.M.R.S.A.ss.3212.
/37/ 35-A.M.R.S.A.ss.3212(2). Code Me. R. 65-407, Chapter 301.
16
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./38/
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./39/
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./40/ 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./41/
The MPUC set the standard offer service price and required BHE to procure
wholesale power to provide standard offer service until March 1, 2001./42/ 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./43/ 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./44/
While
----------
/38/ 35-A.M.R.S.A.ss.3212(2). Code Me. R. 65-407, Chapter 301,ss.8(D)(3).
/39/ Re Bangor Hydro-Elec. Co., NO. 99-111 (Me. P.U.C. Oct. 25, 1999).
/40/ Re Bangor Hydro-Elec. Co., No. 99-111 (Me. P.U.C. Dec. 3, 1999).
/41/ Id.
/42/ Id.
/43/ Re Bangor Hydro-Elec. Co., No. 99-111 (Me. P.U.C. Feb. 29, 2000).
/44/ Re Public Utils. Comm., No. 2000-808 (Me. P.U.C. Oct. 2, 2000).
17
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 2/45/, 15/46/, 20/47/, 27/48/ and March 1, 2001,/49/
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./50/
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
----------
/45/ Id. (Me. P.U.C. Feb. 2, 2001).
/46/ Id. (Me. P.U.C. Feb. 15, 2001).
/47/ Id. (Me. P.U.C. Feb. 20, 2001).
/48/ Id. (Me. P.U.C. Feb. 27, 2001).
/49/ Id. (Me. P.U.C. Mar. 1, 2001).
/50/ 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).
18
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
two intermediate holding companies ("Intermediate Holding Companies"). 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 directly
or indirectly 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.
In particular, the first Intermediate Holding Company, Emera USH, is a
wholly-owned direct subsidiary of Emera. The second, BHEH, is a wholly-owned
direct subsidiary of Emera USH./51/ BHEH would own all the issued and
outstanding common stock of BHE. BHE will continue to have preferred stock and
debt outstanding after the Merger that is held by third parties. All the issued
and outstanding common stock of BHEH will be owned by Emera USH.
Emera also intends to use a wholly-owned special purpose financing entity
("ULC") to provide debt and non-voting preferred stock financing to BHEH for the
purpose of partially funding the Merger consideration. Because ULC would not own
voting securities of or control the management of BHEH or BHE it would not be a
----------
/51/ Before the Merger, BHEH will form a wholly-owned subsidiary, Acquisition
Co. No. 2 that will merge with and into BHE with BHE surviving. Thus,
Acquisition Co. No. 2 is not part of the post-Merger corporate structure.
19
holding company under the Act. The function of each Intermediate Holding Company
is further discussed in Exhibit N-1 to the Application.
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 Holding Company structure
would be wholly owned directly or indirectly by Emera; (b) the companies in the
Intermediate Holding Company 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 Holding Company structure
would be organized in the U.S., Canada, or a country in Europe./52/
6. Financing the Merger
Emera expects to use a combination of its available cash deposits and a
credit facility entered into with one or more banks in the amount of up to $225
million to fund the Merger consideration. The credit facility would have a
non-revolving term of 364 days and an interest rate 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.
----------
/52/ 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).
20
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. In accordance with new FASB
pronouncements on goodwill, the amortization of goodwill would cease in 2002 and
thereafter the goodwill would be subject to an annual impairment test./53/
7. Management and Operations of BHE Following the Merger
Following the Merger, BHE will be operated as a subsidiary of Emera. The
President and Chief Operating Officer of BHE after the Merger will be Carroll R.
Lee, a resident of Maine and a member of BHE's board. 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. In particular, Robert S. Briggs, BHE's current
President and CEO will continue to serve on BHE's board, as will Carroll Lee,
currently BHE's Senior Vice President and Chief Operating Officer, Jane J. Bush
and Norman Ledwin. The Emera employees on BHE's board will include David McD.
Mann, Emera's President and CEO, Chris Huskilson, Emera's Chief Operating
Officer, Liz MacDonald, Emera's Vice President, Human Resources, and Ron Smith,
Emera's Senior Vice President and Chief Financial Officer./54/ Consequently,
there will be some representation of the new BHE owners on the board and
continuity from the pre-Merger board members who continue to serve on the BHE
board. The Merger Agreement also 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").
----------
/53/ See, FASB Statement 142, "Goodwill and Other Intangible Assets."
/54/ The ninth member of the BHE board post-Merger has not been selected.
21
1. Summary of Financing 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 certain of 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 $300 million in certain
energy-related companies that are doing business in Canada.
22
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 and
preferred stock 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./55/
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.
----------
/55/ Investment grade long-term debt is denoted by the Standard & Poor's ratings
of AAA, AA, A and BBB, with some ratings also including a + or - to further
differentiate creditworthiness. Moody's uses the ratings Aaa, Aa, A and Baa to
denote investment grade long-term debt. Emera's long-term debt is rated BBB+ by
Standard & Poor's.
23
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, (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
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
24
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
25
are unsecured. As of December 31, 2000, Emera had an aggregate amount
outstanding of $860 million 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 $189.9
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./56/ 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.
Emera proposes that the following sublimits would apply, subject to the
limit that the aggregate of all securities issuances at any one time outstanding
during the Authorization Period would not exceed $3 billion.
------------------------------------------- ---------------------------------
Security Type Limit
------------------------------------------- ---------------------------------
Common stock and securities convertible $2 billion
into common stock
------------------------------------------- ---------------------------------
Preferred stock $500 million
------------------------------------------- ---------------------------------
Long-term debt $1.5 billion
------------------------------------------- ---------------------------------
Short-term debt $1.5 billion
------------------------------------------- ---------------------------------
b. Common Stock
----------
/56/ The overall limit of $3 billion includes the Merger-related financing.
26
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, 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
27
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 or
applicable equity sublimit, 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 in accordance with the conditions described in Item 1.E.2 above..
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.
It is common practice for Canadian companies to finance their capital needs
through the issuance of preferred stock. Emera has authorization in its
Memorandum of Association, filed as Exhibit A-1 hereto, to issue preferred
stock. Any issue of preferred stock would provide Emera with the flexibility to
forego a dividend if
28
sufficient cash was not available. Consequently, preferred stock can be
considered a more flexible instrument from a cash management and financial
leverage perspective.
As a general matter, the dividend obligations of any preferred stock issued
by Emera would be satisfied from dividends and other cash flow that Emera
receives from its subsidiaries, including NSPI, BHE and Emera's Nonutility
Subsidiaries. As with the issuance of debt securities, Emera believes that a
restriction against parent-level preferred stock would be an 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 preferred stock, debt 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. Exhibit FS-5 includes cash flow projections for Emera through 2003. The
projections demonstrate that Emera has the financial capacity to issue preferred
securities.
d. Long-Term Debt
Emera proposes to issue long-term unsecured 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
29
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
30
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
31
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 comply with SFAS 133 ("Accounting for Derivatives Instruments
and Hedging Activities") and SFAS 138 ("Accounting for Certain Derivative
Instruments and Certain Hedging Activities") or such other standards relating to
accounting for derivative transactions as are adopted and implemented by the
Financial Accounting Standards Board ("FASB") or Canadian GAAP. 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, except that BHE would comply with applicable
FASB standards and US GAAP.
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
32
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
Market Rate Subsidiaries
Emera requests authorization to lend funds to certain of 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 apply to all Nonutility Subsidiaries except BHE, any of BHE's
direct or indirect subsidiaries, or NSPI (the "Market Rate Subsidiaries"). Emera
requests such authority principally to allow it to operate its businesses
efficiently under Canadian tax regulations.
The Income Tax Act (Canada) and the Regulations made thereunder
(collectively the "ITA") requires borrowed funds be used for the purpose of
earning income before it allows a taxpayer a deduction in calculating taxable
income, for the interest expense associated with a borrowing. This restriction
flows from the fundamental principle in the ITA that each taxable company is a
separate and distinct entity for tax purposes. Consequently, Emera must earn
income from on-lending its external borrowings to its subsidiaries or Emera will
not be permitted a deduction of the related interest expense in calculating its
taxable income under the ITA. Each company must independently demonstrate a
business purpose for incurring debt. If Emera would be required to on-lend funds
to its Market Rate Subsidiaries at cost, Emera would not be eligible, under the
rules for computation of taxable income in the ITA and the rules of
administrative practice adopted by Canada's Customs and Revenue Agency ("Revenue
Canada"), (the administrative body responsible for the administration of the
ITA) for an interest expense deduction on such borrowed funds.
Because the ITA treats each company as a separate and distinct entity for
Canadian income tax purposes, an associated group of Canadian companies also
cannot file a consolidated tax return. Therefore, unlike U.S. corporate groups,
Canadian groups
33
cannot use losses from affiliated companies to offset income from other
companies in the same corporate group. Intercompany loans at market rates may be
used where appropriate to adjust taxable income among the group members. The
proposed market rate loan authority, therefore, would allow Emera to implement
the most economically efficient financial structure given its tax
constraints./57/
Emera would determine the appropriate market rate for loans to each Market
Rate Subsidiary in much the same manner practiced by an independent bank. Emera
would review the nature of each subsidiary's business, evaluate its capital
structure, the particular risks to which it is subject, and generally prevailing
market conditions. Emera would also evaluate and take into account information
from third parties such as banks that would indicate the prevailing market rates
for similar businesses. In particular, Emera will obtain information on the
range of rates used by one or more banks for loans to similar businesses. Such
independent third-party information would serve as an index against which an
appropriate market rate could be determined. Emera would provide its analysis
supporting its market-based rate determination to the Commission upon request.
The Market Rate Subsidiaries 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
----------
/57/ As discussed infra, although the Intermediate Holding Companies also
propose to obtain funding from Emera at market rates they would not transfer any
financing markup to BHE because BHE's financing rates would be the lower of
Emera's cost of funds, NSPI's cost of funds or BHE's cost of financing
independently from third parties. Market rate financing for the Intermediate
Holding Company debt establishes a bona fide purpose for the debt and avoids its
recharacterization under U.S. tax regulations.
34
interest rate on the loan would result in a lower cost of borrowing for BHE. All
borrowings by BHE from an associate company (including the Intermediate Holding
Companies) 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./58/ In addition, borrowings by BHE from an associate
company would be unsecured, i.e., not backed by the pledge of specific BHE
assets as collateral.
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/58/ BHE's nonutility subsidiaries will finance their capital needs through the
issuance of securities under Rule 52(b).
35
The historical borrowing costs of the companies are set forth below.
[Enlarge/Download Table]
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Cost of Debt Funds
-----------------------------------------------------------------------------------------------------
2000 1999
----------------------------------- -------------------------------- --------------------------------
Emera
----------------------------------- -------------------------------- --------------------------------
Short-term debt 6.31% - bankers acceptances 5.55% - bankers acceptances
7.18% - LIBOR loans 6.63% - LIBOR loans
----------------------------------- -------------------------------- --------------------------------
Medium-term debt N/A N/A
----------------------------------- -------------------------------- --------------------------------
Long-term debt N/A N/A
----------------------------------- -------------------------------- --------------------------------
NSPI
----------------------------------- -------------------------------- --------------------------------
Short-term debt 5.82% 5.15%
----------------------------------- -------------------------------- --------------------------------
Medium-term debt/59/ 7.72% 7.56%
----------------------------------- -------------------------------- --------------------------------
Long-term debt/60/ 7.48% 7.60%
----------------------------------- -------------------------------- --------------------------------
BHE
----------------------------------- -------------------------------- --------------------------------
Short-term debt none issued 6.7%/61/
----------------------------------- -------------------------------- --------------------------------
Medium-term debt Variable rate LIBO + 1.125%, Variable rate LIBO +
Fixed rate 7.03% 1.125%-2%, Fixed rate 7.03%
----------------------------------- -------------------------------- --------------------------------
Long-term debt Various series 7.3%-10.25% Various series 7.3%-12.25%
----------------------------------- -------------------------------- --------------------------------
Emera will report to the Commission in its Rule 24 certificates filed
hereunder the lender, principal amount, term and interest rate applicable to any
loans between an associate company and BHE. The report will also explain how the
interest rate was determined, including whether benchmarking or other methods
were used to establish the interest rate charged to BHE in connection with the
loan.
The requested authorization to lend funds to certain Nonutility
Subsidiaries at a mark up to Emera's cost of funds is not a matter of first
impression. In The National Grid Group plc, the Commission did not restrict the
intermediate holding companies (i.e., those companies between the top registered
holding company and the registered holding company closest to the operating
utilities) to issue and sell securities
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/59/ Up to 5 years maturity - weighted average coupon rate.
/60/ Greater than 5 years maturity - weighted average coupon rate.
/61/ Weighted daily average annual interest rate.
36
to their immediate parent companies at rates reflecting the lender's cost of
capital. Only borrowings by NEES, the registered holding company closest to the
public utility subsidiaries, were required to have a borrowing rate tied to the
effective cost of capital of National Grid, the top registered holding
company./62/ The financial ring fencing of the NEES group of utility and
nonutility subsidiaries adequately protected the investors, consumers and the
public. The insulation of the utility subsidiaries made it unnecessary to
condition the terms of the securities issued by the intermediate holding
companies.
The application filed by The National Grid Group stated that the additional
flexibility promoted the efficiency of the intermediate company structure. "For
reasons of economic efficiency, the terms and conditions of any such financings
will be on an arm's length basis, except that the interest rates and maturity
dates of any debt security issued by NEES to its immediate parent company will
be designed to parallel the effective cost of debt capital of National
Grid."/63/ National Grid's intermediate company structure was implemented to
"avoid the loss of U.K. tax relief for foreign taxes paid on profits repatriated
to the U.K., and to minimize taxes on the repatriation of foreign subsidiary
profits."/64/
The Commission also has permitted the issuance of securities by
partially-owned subsidiaries of registered holding companies at interest rates
that would at least cover the effective cost of capital of the lender. Here
again reasonableness, efficiency and a lack of adverse effect on the protected
interests under the Act made such relief appropriate./65/ Emera's proposal fully
protects BHE and its subsidiaries from being the recipients of any potential
increased costs because BHE and its subsidiaries will not borrow or receive
services or goods from such nonutility subsidiary companies.
----------
/62/ The National Grid Group plc, Holding Co. Act Release No. 27154 (March 15,
2000) at E-6.
/63/ The National Grid Group plc, SEC File No. 70-9519, Pre-effective Amendment
No. 8 (filed March 15, 2000).
/64/ The National Grid Group plc, Holding Co. Act Release No. 27154 (March 15,
2000) at 42.
/65/ Entergy Corp., Holding Co. Act Release No. 27039 (June 22, 1999).
37
It is notable that, but for the provisions of the Reorganization Act, Emera
would have organized NSPI and Emera's Canadian nonutility subsidiaries under a
single FUCO holding company./66/ The financing among such FUCO associate
companies could then have proceeded at arm's length without the need for
Commission authorization under the Act. The Reorganization Act, however,
prohibits any person other than Emera from holding 15% or more of the common
stock of NSPI and, consequently, Emera could not put an intermediate holding
company in place between it and NSPI. The financing flexibility requested herein
is merely a request to conduct financing transactions among companies that
otherwise would have been part of a FUCO.
Financing BHE's Capital Needs
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.
NSPI generally may borrow funds at a lower cost of funds than Emera because
Emera is structurally subordinated to NSPI with respect to the majority of
assets in the Emera group. The concept of structural subordination relates to
the priority of claims on any asset (and its implicit cash flow). An Emera
creditor's claim on NSPI's assets is subordinate to an NSPI creditor's claim on
NSPI's assets. Most of the assets in the Emera system reside with NSPI. Because
NSPI can offer creditors a direct claim on its assets rather than the indirect
claim that Emera's creditors are offered, NSPI generally finances its capital
needs independently of Emera. As a FUCO, NSPI's financing would
----------
/66/ See note 5, supra.
38
be exempt under Section 33 of the Act unless guaranteed or otherwise supported
by the credit of Emera.
Intermediate Holding Company Financing
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 Intermediate Holding Company
subsidiaries and BHE. Each of the Intermediate Holding Companies also seeks
authority to issue guarantees and other forms of credit support to direct and
indirect Intermediate Holding Company subsidiaries and BHE. 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.
Each of the Intermediate Holding Companies is intended to function as a
financial conduit to facilitate Emera's U.S. investments. For reasons of
economic efficiency, the terms and conditions of any Intermediate Holding
Company financings will be on an arm's length basis, except as noted above for
financings by BHE. The Intermediate Holding Company financing proposed herein
would be used to finance the capital requirements of BHE and any exempt or
subsequently authorized activity that is hereafter acquired. The Intermediate
Holding Company financing will not be used by the Intermediate Holding Companies
to carry on business or investment activities within the Intermediate Holding
Companies.
i. Changes in Capital Stock of Wholly-Owned Subsidiaries
39
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
40
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 and or to repurchase or redeem its common stock held by its
associate company parent up to the amount of BHE's pre-Merger retained earnings
plus any amortization or write-down of goodwill charged against post-Merger
earnings. In no event, however, would dividends paid or share repurchases and
redemptions cause BHE's common equity capitalization to fall below 30% of total
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. FASB has recently announced new goodwill reporting
standards that cease the amortization of goodwill for fiscal years beginning
after December 15, 2001. Rather, goodwill will be subject to an annual
impairment test requiring write downs of goodwill if the carrying value is less
than the fair value of the reporting unit./67/
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:
----------
/67/ See, note 53, supra.
41
(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 improve. BHE's future earnings projections include
amortization of "legacy" assets associated with its restructuring into
a pure "wires" company and discussed further below. As BHE collects
the revenue associated with these legacy assets, cash flow from
operations will improve, generating operating cash in excess of
earnings. The legacy revenues produce cash that is free and available
for dividend payments because it is derived from BHE's former role as
a provider of generation services. Since BHE is no longer in the
generation business, it need not reinvest these revenues in generation
activities to continue to provide adequate service to customers.
Moreover, without removal of this cash from BHE in the form of a
dividend or share repurchase BHE's common equity component of its
capital structure will grow. The MPUC has prescribed a target common
equity component not exceeding 40% of total capital. Applicants
request therefore allows it to use dividends or common stock
redemptions to maintain BHE's equity level in the 30% to 40% of total
capitalization band.
(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 write-down of
goodwill, if required, would be a non-cash expense that would not
affect the cash flow of BHE. BHE is forecast to have sufficient cash
to pay dividends/redemptions in the amounts contemplated./68/
(v) The proposed dividend payments are in the public interest. BHE is in
sound financial condition and, as noted above, the dividend
payments/redemptions are consistent with the interest of consumers and
investors because they allow the capital structure of BHE to be
adjusted to more appropriate levels of debt and equity.
----------
/68/ Exhibit FS-5 to the Application contains cash flow projections for the
years 2001 through 2003.
42
As explained previously, in 1997, the State of Maine implemented the
Restructuring Act to bring retail competition to the sale of electricity. BHE
was required to divest its generation under the Restructuring Act and it
completed that process in 1999. Retail competition commenced in Maine in March,
2000, and BHE now functions as a transmission and distribution electric utility
in this new regulatory paradigm. Nevertheless, BHE continues to have costs
related to its legacy supply-related businesses that are recovered in rates.
In particular, BHE has a regulatory asset that represents the cost BHE
incurred in connection with the buy out of above-market power supply contracts
and other unamortized generation-related costs, principally from PURPA
qualifying facilities. The MPUC has allowed for a five to six year recovery in
rates for most of these costs. The recovery for these costs appears in BHE's
annual revenues and is labeled "Regulatory Asset Recovery" in the financial
projections in Exhibit FS-5. This regulatory asset will be amortized over time
and BHE will not invest additional funds to replace it. The regulatory asset is
a remnant of BHE's previous structure under the old regulatory scheme and can be
properly thought of as a return of capital. As such, the revenue stream
associated with the asset is fully distributable since it has no relevance to
the current and future business of BHE as a utility.
Exhibit FS-5 to the Application describes the expected cash flows
associated with BHE's operations during the Authorization Period. It also shows
the projected amount of cash paid as dividends during that period and the
resulting common equity level of BHE. As the exhibit demonstrates, BHE's common
equity as a percentage of total capitalization remains above 30% at all times.
Emera and BHE commit that in no case would dividends be paid or common stock
redeemed if BHE's common stock equity as a percentage of its total
capitalization was below 30%. Further, dividends are restricted to pre-Merger
retained earnings and earnings post-Merger, adjusted for non-cash goodwill
amortizations or writedowns. These restrictions protect the interests of
43
investors, consumers and the general public in soundly capitalized public
utility companies and are consistent with prior Commission precedent./69/
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 unsecured 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
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/69/ The National Grid Group plc, Holding Co. Act Release No. 27154 (March 15,
2000).
44
by Emera USH or BHEH ("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.
Applicants request that the Commission reserve jurisdiction over the terms of
the Tax Allocation Agreement, pending completion of the record.
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./70/ For example, Emera
currently maintains the following
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/70/ Emera intends to integrate any BHE stock-based benefit plans into the plans
administered by Emera subsequent to the Merger.
45
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.
46
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
47
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
48
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. 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.
49
The operations of Emera Services 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./71/
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.
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/71/ NSPI is a public utility company as defined in the Public Utilities Act
(Nova Scotia) ("PUA") and is subject to regulation under the PUA by the Nova
Scotia Utility and Review Board ("UARB"). The PUA gives the UARB supervisory
powers over NSPI's operations and expenditures. The UARB also regulates NSPI's
electricity rates and capital structure. The UARB would not regulate the conduct
of business by Emera Services.
50
Emera will structure the services agreement so as to comply with Section 13
of the Act and the Commission's rules and regulations thereunder. Applicants
request that the Commission reserve jurisdiction over the authorization of Emera
Services until such time as Applicants have submitted the services agreement and
policies and procedures manual for Emera Services and such other information
necessary to complete the record with respect to the organization and operation
of a system services company.
Emera proposes that, for a limited period of time ending on February 28,
2002 ("Transition Period"), Emera will continue to provide services and sell
goods to Emera System companies. Emera will comply with the provisions of Rules
90 and 91 with respect to the performance of services or construction for
associate companies at cost./72/ 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 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.
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 it 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
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/72/ A form of transition services agreement is attached as Exhibit I-2.
51
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./73/
Customers of 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.
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
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/73/ Emera will file a post-effective amendment to this Application by November
30, 2001, requesting an order of the Commission by February, 2002 authorizing
Emera Services to commence operations as the system service company. The
post-effective amendment would include a services agreement, service company
policies manual and proposed cost allocation procedures and methodologies.
52
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, 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.
53
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, 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, or Rule 58 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. Canadian Energy Related Subsidiaries
Emera conducts various businesses in Canada that are energy related and
retainable nonutility businesses under Section 11 of the Act. These businesses
are listed and the basis for their retention discussed in Item 3.B.4, infra. For
example, Strait Energy Inc. 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 the Commission's decision in Exelon Corp., Holding Co. Act
Release No. 27265 (October 19, 2000). In that
54
decision the Commission found that an Exelon subsidiary, UT Holdings Inc., a
company engaged in district energy systems such as the provision of chilled
water, steam and or hot water and related construction and operating services
was retainable. The Commission has also authorized registered holding companies
to engage in similar energy related nonutility businesses specifically in
Canada. The Commission has permitted registered holding companies to market and
broker electric energy and other energy commodities in Canada and to provide
incidental services such as fuel management, storage and procurement./74/ By
analogy, the sale of thermal energy is also retainable under Rule 58(b)(vi),
although relief under the rule is not available to Emera on technical grounds
because Strait Energy Inc. derives substantially all its revenues from Canadian
sources.
Emera proposes under Sections 9 and 10 of the Act to invest up to $300
million to organize or acquire companies engaged in the nonutility businesses in
which Emera is currently engaged and in certain other nonutility energy related
businesses specifically described below without obtaining additional Commission
authorization under the Act for each individual acquisition. Such businesses
would derive substantially all their revenues from Canada or the U.S., or derive
revenues from both countries. Emera's investments in its current nonutility
subsidiaries would be excluded from the investment limit.
Emera proposes to provide to the Commission quarterly, in a certificate
under Rule 24, the information required by Form U-9C-3 with regard to companies
acquired under the authorization provided in this Item 1.H to keep the
Commission informed about Emera's investments in such companies.
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/74/ See e.g., Southern Energy Inc., Holding Co. Act Release No. 27020 (May 13,
1999); Cinergy Corp., Holding Co. Act Release No. 27393 (May 4, 2001)
(authorizing energy management services and consulting services anywhere in the
world and commodity brokering and marketing, including electricity, natural gas
and other combustible fuels, in Canada and the U.S.)
55
The specific nonutility businesses in which Emera proposes to invest
include, in addition to its current nonutility businesses:
o energy management services and other energy conservation related
businesses,
o the maintenance and monitoring of utility equipment,
o the provision of utility related or derived software and services,
o engineering, consulting and technical services, operations and maintenance
services,
o brokering and marketing electricity and other energy commodities and
providing services such as fuel management, storage and procurement,
o oil and gas exploration, development, production, gathering,
transportation, storage, processing and marketing activities, and related
or incidental activities.
Such nonutility businesses have been previously authorized by the
Commission for registered holding companies to conduct in Canada or elsewhere
outside the U.S. See, e.g., 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).
The Energy East decision notes that Energy East conducts numerous
nonutility activities both within the U.S. and internationally directly or
indirectly through XENERGY Enterprises, Inc. ("XENERGY"). The internationally
focused subsidiaries of XENERGY include XENERGY International, Inc., a
subsidiary specializing in conservation engineering and demand side management
in the U.K. and Spain, KENETECH International, a subsidiary specializing in
energy management and XENERGY Canada, Inc. a subsidiary that provides software
services related to a utility client management system.
56
In finding these businesses to be retainable (and presumably qualified for
additional investment), the Energy East decision states:
While these companies would otherwise constitute "energy-related
companies" under rule 58, the "activities permitted by [rule 58] are
limited to the United States." See rule 58, Exemption of Acquisition
By Registered Public Utility Holding Companies of Securities of
Nonutility Companies, HCAR No. 26667, n. 146 (Feb. 14, 1997). However,
the Commission has approved registered holding company ownership of
companies that provide energy-related services on an international
basis. See, e.g., Cinergy Corp., HCAR No. 26662 (Feb. 7, 1997)
(approving Cinergy Solutions marketing of energy-related services on
both a domestic and international basis); Conectiv, Inc., HCAR No.
26832 (Feb. 25, 1998) (approving retention by registered holding
company of CDI II, Inc., a Virgin Islands corporation and wholly owned
foreign sales subsidiary involved in equity investments in leveraged
leases); Northeast Utilities, HCAR Nos. 26335 and 26108 (July 1, 1995
and August 19, 1994, respectively); and Eastern Utilities Associates,
HCAR Nos. 26232 and 26135 (Feb. 15, 1995 and Sept. 30, 1994,
respectively) (authorization to engage in demand side management
activities in Canada)./75/
The Commission has authorized other nonutility businesses in Canada or
countries other than the U.S. Such businesses include: (1) Entergy Corp., was
authorized to render operations and maintenance services overseas;/76/ (2)
Columbia Energy Group, Dominion Resources, Inc., KeySpan Corp. and Alliant
Energy Corp. were authorized to engage in Canadian oil and gas exploration,
gathering, processing and marketing activities;/77/ (3) NiSource, Inc. was
authorized to engage in energy marketing,
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/75/ Energy East at Appendix A, n. 11.
/76/ Entergy Corp., Holding Co. Act Release No. 26322 (June 30, 1995).
/77/ The Columbia Gas System, Inc., Holding Co. Act Release No. 17290 (Sept. 27,
1971); The Columbia Gas System, Inc., Holding Co. Act Release No. 18534 (August
16, 1974); The Columbia Energy Group, Holding Co. Act Release No. 26820 (January
23, 1998); Dominion Resources, Inc., Holding Co. Act Release No. 27113 (December
15, 1999); KeySpan Corp., Holding Co. Act Release No. 27271 (November 7, 2000);
Alliant Energy Corp., Holding Co. Act Release No. 27344 (February 12, 2001).
57
energy management services, consulting, and gas and oil development, exploration
and production in Canada and to a limited extent outside the U.S.,
generally./78/
The Commission's authorization of numerous nonutility activities in Canada
indicates that the Commission is satisfied that energy-related nonutility
diversification by registered holding companies in Canada is reasonably
incidental economically necessary and appropriate to the operations of a
registered holding company system. For example, in addition to the cases cited
above, the Commission has authorized the Southern Company to broker and market
electricity and other energy commodities in Canada and to provide incidental
services such as fuel management, storage and procurement./79/ The Commission's
order notes that the energy market in the U.S. and Canada has evolved into an
integrated market in terms of both physical interconnection and the volume of
cross-border electricity and gas sales. It also notes that the FERC has taken
actions designed to facilitate energy transactions between the U.S. and Canada.
The North American Free Trade Agreement ("NAFTA") also suggests that all markets
between the two countries will become more integrated and that companies
headquartered in either country will be competing for business in the other.
In the Southern order the Commission considered the various risks inherent
in energy marketing activities. While the risks could be considerable, given the
scope and volume of derivatives transactions that are an integral part of the
business, the Commission concluded that such risks could be managed through
appropriate hedging mechanisms. The risks of energy marketing in Canada were
characterized as "virtually the same," with the exception of currency risks.
Emera's proposal to engage the specifically identified energy related
nonutility activities in Canada should be granted. Emera will evaluate and
manage the risks of each business prudently. In addition, Emera would not be
subject to currency risk since its costs, revenues, liabilities and profits
would all generally be denominated in
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/78/ NiSource, Inc., Holding Co. Act Release No. 27265 (November 1, 2000).
/79/ Southern Energy Inc.., Holding Co. Act Release No. 27020 (May 13, 1999).
See also, Cinergy Corp., Holding Co. Act Release No. 27393 (May 4, 2001).
58
Canadian dollars. Moreover, Emera commits that it will not attempt to seek
higher rates for customers of BHE or its utility subsidiaries to compensate for
any possible losses or inadequate returns from the activities of its Canadian
nonutility subsidiaries.
I. EWG and FUCO Investments
Emera has adopted a corporate structure that separates its FUCO investment
from BHE and its other U.S. utility operations. NSPI and BHE are two separate
businesses operated under the supervision of separate local regulators, the UARB
and the MPUC, and Emera intends to continue to manage them in a manner that
preserves their separate financial strength.
Although NSPI is generally financially self-supporting, it may be desirable
from time to time for Emera to use the proceeds of the financings proposed in
this Application, in part, for investments in EWGs and FUCOs, including NSPI. As
a practical matter, Emera's future investments in FUCOs are likely to be
confined to Canada. Its EWG investments would also generally be limited to the
U.S. and Canada. Consequently, the business environment and risks associated
with such investments would be familiar to Emera's management and its board. In
addition, Emera's extensive experience in the Eastern Canada region, an area
that shares many similarities to northern New England, is ideally suited to a
combination with BHE. Emera's FUCO investment is, therefore, fundamentally a
strength and not a source of weakness or risk to the combined Emera-BHE group.
Similar to the National Grid/NEES/80/ and the Powergen/LG&E/81/
transactions authorized by the Commission last year, the instant transaction
involves a foreign utility holding company that developed first outside the U.S.
and only recently has become involved in the U.S. energy industry. Unlike the
U.S.-based registered holding companies, Emera has significant "foreign" i.e.,
Canadian, investment and operating experience. For this reason, it would be
inappropriate to limit its ability to continue to invest in Canada based on the
level of its pre-registration foreign investment
----------
/80/ National Grid Order.
/81/ PowerGen plc, Holding Co. Act Release No. 27291 (December 6, 2000).
59
compared to Emera's consolidated retained earnings. A forward-looking view of
the appropriate level of investment is most valuable in determining whether the
financing proposed in this application will have a substantial adverse effect on
the financial integrity of the registered holding company system.
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 $644 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)./82/ In addition, none of the
provisions of Rule 53(b) are applicable to Emera.
Emera requests authorization to issue and sell securities in an aggregate
amount of up to $2.0 billion through the Authorization Period, 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,
----------
/82/ Emera also does not meet the GAAP books and records requirement in Rule
53(a) but, as discussed infra, 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. In accordance with Rule 53(a)(4), Emera provided a copy of this
Application to the MPUC on June 22, 2001.
60
2000, Emera's investment in NSPI was $644 million. Consequently, the additional
authorization requested and Emera's current investment in EWGs and FUCOs could
result in an aggregate investment of approximately $2.64 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, BHE has also committed to maintain a minimum 30% equity capitalization
ratio. Further, 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.
To demonstrate the lack of adverse impact on the financial integrity of the
Emera registered holding company system and its utility subsidiaries, we first
discuss Emera's investment review process. Second, we discuss various financial
indicators that demonstrate Emera's financial strength.
The Investment Review Process
Emera practices a disciplined investment review process to assure that it
identifies and minimizes or appropriately mitigates the risks associated with
EWG and FUCO activities./83/ Before any project investment would be made, the
project would be
----------
/83/ 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.
61
analyzed in detail, including potential exposure to: (1) operational risks,/84/
(2) construction risks,/85/ (3) commercial risks,/86/ (4) financial risks,/87/
(5) foreign currency exchange risks,/88/ (6) legal and regulatory risks/89/ and
(7) country and political risks./90/ 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
----------
/84/ Emera focuses on projects where it is familiar with the technological and
operational issues that may arise. Emera uses its engineers and outside
technical consultants when necessary to evaluate the equipment and the
performance thereof involved in a project.
/85/ Contracts to build facilities may contain fixed-price terms, performance
milestones, and guarantees backed by liquidated damages provisions to assure
timely and proper construction.
/86/ The credit quality of partners, suppliers, purchasers and other parties may
be evaluated to assure that they perform under project-related agreements. The
markets in the relevant region are studied to confirm the ability of the project
to perform profitably in that market.
/87/ Non-recourse financing and appropriate debt levels are selected to match
the project capital structure to the project characteristics. For example, a
merchant generating plant with a long-term off-take contract may have a debt
capitalization in the 70-80% range while a regulated utility acquisition may
have less debt as a proportion of total capitalization. Interest rate
variability may be addressed through long-term borrowings or interest rate
hedges.
/88/ Borrowings may be made in the same currency as the project revenues to
match the debt service obligation with the income stream. Revenues could also be
indexed to a hard currency to minimize currency risks.
/89/ Regulatory, permitting, environmental, contracting and other risks are
identified by counsel with appropriate expertise in the relevant project and
jurisdiction.
/90/ Political risks may be addressed through insurance obtained from the
Overseas Private Investment Corporation, the Multilateral Investment Guaranty
Agency or in the commercial insurance market. The participation of local
partners in a project can also help to mitigate political risks.
62
on business, technical and economic grounds. In addition, projects under
development are subject to budget review to monitor the expenditure of
development funds./91/
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./92/
Once a project is selected for investment, management sets clear
performance expectations to assure that expenditures for development produce
acceptable results. Measures to mitigate risks that to which the project may be
subject are further evaluated and implemented. The risk mitigation exercise
would also include structuring any project financing so that it does not
adversely impact the customers of any public utility companies owned by Emera,
including BHE.
Recently, the Commission proposed new rule 55 relating to the acquisition
an ownership of FUCOs by registered holding companies./93/ The proposed rule
requires all registered holding companies that would acquire interests in FUCOs
to follow substantially the same risk identification and reduction measures
described above. If Rule 55 is adopted, Emera would undertake to conform its
practices to the rule.
Proposed Rule 55 also would require that no more than 2% of the employees
of the system's domestic public-utility companies render services, at any one
time, directly or indirectly, to exempt wholesale generators or foreign utility
companies in which the registered holding company, directly or indirectly, holds
an interest;
----------
/91/ See e.g., American Electric Power Co., Holding Co. Act Release No. 26864
(April 27, 1998) (discussing a similar project review procedure for EWG and FUCO
investments).
/92/ Under proposed Rule 55, the board of directors of a registered holding
company must adopt procedures designed to analyze the risks of investing in
foreign jurisdictions. If Rule 55 is adopted by the Commission Emera's board
will undertake to adopt the required procedures. See Foreign Utility Companies,
Holding Co. Act Release No. 27342 (February 1, 2001) (proposing new Rules 55 and
56 and an amendment to Rule 87) (the "Proposed FUCO Rule Release").
/93/ Proposed FUCO Rule Release, supra.
63
provided, that the Commission has previously approved the rendering of such
services./94/ Emera will abide by that restriction and limit the use of the
employees of BHE and its public utility subsidiaries accordingly.
The books and records requirements of proposed Rule 55 also would be
followed by Emera, except that as provided in Item 1.J. above, Emera would
maintain the books and records of its FUCOs and EWGs that are organized outside
the U.S. in accordance with Canadian GAAP and reconcile their financial
statements to U.S. GAAP in the manner required by Form 20-F when such statements
are provided to the Commission in Emera's filings under Form U5S and Rule 24.
Emera will also comply with the filing requirements of proposed Rule 55 if
and when the rule is adopted.
Indicators of Emera's Financial Strength
In accordance with Rule 53(c) under the Act, to obtain Commission
authorization for EWG and FUCO investments that exceed 50% of the registered
holding company's consolidated retained earnings or otherwise fail to qualify
for safe harbor treatment under Rule 53(a) the registered holding company must
demonstrate that the proposed investments:
(i) Will not have a substantial adverse impact upon the financial integrity
of the registered holding company system; and
(ii) Will not have an adverse impact on any utility subsidiary of the
registered holding company, or its customers, or on the ability of State
commissions to protect the subsidiary or its customers.
In past orders, the Commission has found compliance with Rule 53(c) in
several ways. In American Electric Power Co., Inc., the Commission reviewed
numerous factors that it found indicative of the registered holding company's
financial strength and therefore its ability to support additional EWG and FUCO
investments. Those factors included:
----------
/94/ Proposed Rule 55(a)(3).
64
1. The level of aggregate investment in EWGs and FUCOs as a percentage of the
registered holding company's (a) consolidated capitalization, (b)
consolidated net utility plant, (c) consolidated assets and (d) market
value of outstanding common stock.
2. The history of growth in consolidated retained earnings over the prior
three years.
3. A comparison of the registered holding company's consolidated
capitalization ratios to the industry ranges for utility holding companies
with investment grade debt.
4. A market assessment of the future growth and earnings of Emera, indicated
by comparisons of (a) price earnings ratios and (b) market to book ratios
to industry averages.
5. The trend in Emera's dividend payout ratio over the recent years as
compared to utility industry averages.
6. The non-recourse nature of the financing raised to support EWG and FUCO
investments./95/
As stated earlier, Emera's financial condition is largely attributable to
the performance of its single largest asset, the stock of NSPI. For this reason,
comparisons of EWG and FUCO size to overall system size, in the manner of
American Electric Power Co. ("AEP"), to show that the EWG and FUCO investments
are small in relation to the overall system do not provide meaningful
information. A modified approach to the AEP method was applied by the Commission
in The National Grid Group plc for that very reason./96/ The National Grid
system, like Emera, also developed first in a foreign country and its assets and
business were predominantly derived from a FUCO subsidiary, National Grid
Company. Consequently, the Commission focused on more useful indicators of the
overall financial health of the National Grid system and a demonstration of the
financial soundness of its principal FUCO asset. We follow the National Grid
method of analysis below.
----------
/95/ American Electric Power Co., Holding Co. Act Release No. 26864 (April 27,
1998).
/96/ The National Grid Group plc, Holding Co. Act Release No. 27154 (March 15,
2000).
65
The Commission's analysis in the National Grid order focused on National
Grid's credit rating, the contribution of National Grid Company's operations to
National Grid's overall earnings and that none of the conditions in Rule 53(b)
existed. In addition, the Commission noted that the lack of risk to U.S.
ratepayers is demonstrated by National Grid's commitment to satisfy the various
conditions in its financing application./97/ In particular, those conditions
are:
1) That the U.S. utility subsidiaries would be insulated from the direct
effects of EWG and FUCO investments because none of the utility
subsidiaries would extend its credit or pledge its assets to any EWG or
FUCO in which National Grid held an interest. In addition, National Grid
committed not to seek recovery in retail rates for any failed investment
in, or inadequate returns from, an EWG or FUCO investment;
2) The credit ratings of National Grid's principal U.S. utility
subsidiaries were rated investment grade;
3) The utility subsidiaries had in place financial facilities that
adequately support their operations;
4) That National Grid has complied with and will continue to comply with
Rules 53(a)(3) (regarding the use of utility company employees to provide
services to EWGs or FUCOs) and 53(a)(4) (regarding the submission of
certain forms and reports to State commissions); and
5) That National Grid would provide the information required by Form 20-F
to permit the Commission to monitor the effect of National Grid's FUCO
investments on National Grid's financial condition.
Emera's long-term debt is rated investment grade, BBB+, by Standard &
Poor's. Emera's capital structure as of March 31, 2001 also included 39.1%
equity, 8.7% preferred stock and 52.2% debt. After the Merger, Emera's pro forma
capital structure would be 33.5% equity, 7.8% preferred stock and 58.7% debt. In
comparison, National Grid's equity capital was below 30% at the time of its
merger with NEES.
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/97/ Id. at 62-64.
66
Like National Grid Company, NSPI has contributed significantly to Emera's
overall earnings. The table below compares the net income of Emera and NSPI over
the last 3 years.
[Download Table]
Emera NSPI NSPI as % of Emera
($CDN mm) ($CDN mm)
As of Dec. 2000 1999 1998 2000 1999 1998 2000 1999 1998
31
Net Income 104.4 100.4 85.4 103.7 100.1 85.4 99.3% 99.7% 100%
The table illustrates that NSPI has a history of stable earnings and that it is
Emera's principal subsidiary. Further, none of the conditions in Rule 53(b)
exist. Neither Emera nor any of its subsidiaries with assets having a book value
exceeding an amount equal to 10% or more of Emera's consolidated retained
earnings, has been the subject of a bankruptcy or similar proceeding. The
average consolidated retained earnings for the four most recent quarterly
periods has not decreased by 10% from the average for the previous four
quarterly periods. And lastly, in the previous fiscal year, Emera has not
reported operating losses, exceeding 5% of Emera's consolidated retained
earnings, attributable to its direct or indirect investments in EWGs and FUCOs.
As did National Grid, Emera commits to abide by the limits stated in
connection with the requested financing authority proposed in the Application.
This commitment also reflects Emera's financial strength and its dedication to
maintaining such strength. In particular, as discussed in Item 1. E.2. above,
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.
Emera also commits that it, on a consolidated basis, and BHE, individually, will
maintain common stock equity as a percentage of total capitalization of at least
30%.
Consistent with National Grid, Emera also commits not to seek recovery in
retail rates for any failed investment in, or inadequate returns from, an EWG or
FUCO
67
investment. In addition, neither BHE nor its subsidiaries will extend their
credit or pledge assets to any EWG or FUCO in which Emera owns an interest.
Furthermore, BHE has adequate financial facilities in place and cash
resources available to support its operations. As the discussion regarding BHE's
payment of dividends to Emera in Item 1.E.5.j. above demonstrates, BHE will
accrue substantial amounts of cash in excess of its financing needs for the next
several years. MPUC has also 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.
With regard to compliance with Rules 53(a)(3) and 53(a)(4), Emera commits
to abide by those provisions. Emera will restrict the number of BHE employees
that it uses in connection with its EWG and FUCO activities. Emera provided a
copy of the Form U-1 Application in this matter to the MPUC on June 22, 2001.
Lastly, the Commission will be able to monitor the effect of Emera's EWG
and FUCO investments on its overall financial condition through the
comprehensive financial reporting provided to the Commission. Emera will provide
NSPI's financial statements and those of any subsequently acquired EWG or FUCO
to the Commission semiannually.
The above facts demonstrate that NSPI is a source of financial strength to
the Emera System and are a testament to the Emera management's capable guidance
of NSPI over the years. Any future acquired EWG or FUCO would be operated with
similar regard for prudent financial practices.
The market data provided below demonstrates that the securities markets
share the view that Emera is financially sound.
[Enlarge/Download Table]
-------------------------------- --------------------------------------------------------------------
Emera's Market to Book Value
-------------------------------- --------------------------------------------------------------------
At: March 31, 2001 December 31, 2000 December 31, 1999
-------------------------------- --------------------- ------------------------ ---------------------
$CDN mm $CDN mm $CDN mm
-------------------------------- --------------------- ------------------------ ---------------------
Market value of equity 1,662.6 1,545.2 1,254.2
-------------------------------- --------------------- ------------------------ ---------------------
Book value of equity 1,164.4 977.6 942.3
-------------------------------- --------------------- ------------------------ ---------------------
Ratio of market to book value 1.4 1.6 1.3
(times)
-------------------------------- --------------------- ------------------------ ---------------------
68
[Enlarge/Download Table]
-------------------------------- --------------------------------------------------------------------
Emera's Price/Earnings Ratio
-------------------------------- --------------------------------------------------------------------
At: March 31, 2001/98/ December 31, 2000 December 31, 1999
-------------------------------- --------------------- ------------------------ ---------------------
$CDN $CDN $CDN
-------------------------------- --------------------- ------------------------ ---------------------
Basic earnings per share 1.12 1.20 1.16
-------------------------------- --------------------- ------------------------ ---------------------
Ratio of price to earnings 15.18 14.75 12.41
-------------------------------- --------------------- ------------------------ ---------------------
Based on all these factors, the Commission should conclude that the
standards of Rule 53(c) are satisfied.
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 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. In
addition, annually upon issuance Emera will provide the Commission staff with a
copy of its annual report to shareholders and the annual audited consolidated
financial statements of BHE in U.S. GAAP with notes. 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;
----------
/98/ The price/earnings ratio for March 31, 2001 is a twelve-month rolling
average.
69
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. In addition, Emera
will report to the Commission the lender, principal amount, term and
interest rate applicable to any loans between an associate company and
BHE. The report will also explain how the interest rate was
determined, including the benchmarking method used to establish the
interest rate charged to BHE in connection with the loan;
f. A list of Form U-6B-2 filings 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;
j. A list of securities issued by the Intermediate Holding Companies
during the reporting period, including the principal amount, interest
rate, term, number of shares and aggregate proceeds, as applicable,
with the acquiring company identified;
k. Emera's aggregate investment, as defined under Rule 53, in EWGs and
FUCOs as of the end of the reporting period in dollars and as a
percentage of Emera's consolidated retained earnings, and a
description of EWG and FUCO investments made during the reporting
period;
l. The amount and terms of any short-term debt issued by BHE and its
subsidiaries;
70
m. The amount and terms of any nonexempt financing consummated by a
nonutility subsidiary during the reporting period.
n. The information required by Form U-9C-3 with regard to companies
acquired under the authorization provided in Item 1.H, above.
Emera will also provide the following supplemental information in its
annual Form U5S filing:
1. The amount of any income tax credit and/or income tax liability incurred
during the previous fiscal year by US Group Parent (a) as a result of any
Merger-related debt; and (b) as a result of any other income source or
expense;
2. A description of how the income tax credit and/or income tax liability was
calculated and allocated to all companies included in the consolidated tax
return, showing all of US Group Parent's interest costs and any assumptions
used in the calculations;
3. A description of how any Merger-related debt flows through all Intermediate
Holding Companies;
4. A description of the amount and character of any payments made by each
Intermediate Holding Company to any other Emera system company during the
reporting period; and
5. A statement that the allocation of tax credits and liabilities was
conducted in accordance with the Tax Allocation Agreement in effect and
filed as an exhibit to the Form U5S.
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
71
transactions are subject to Sections 6, 7, and 12 of the Act and the proposed
establishment of a Emera Services and Emera's transition services arrangements
are subject to Section 13 of the Act and Rules 80-93 thereunder.
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.;
72
(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).
As demonstrated below, NSPI satisfies each of the criteria of Section
33(a)(2) and 33(a)(3) and is therefore entitled to FUCO status. Moreover, in
National Grid, the Commission found that "Section 33 does not expressly bar a
FUCO owned by a foreign holding company from claiming FUCO status. Section
33(c)(1) can be read to permit a foreign holding company to qualify its foreign
utility operations as a FUCO and to acquire a U.S. utility without regard to the
integration of the foreign and domestic utility operations . . . The legislative
history is silent as to whether section 33 was intended to be a vehicle for
foreign investment in the United States utility industry. We do not believe that
Congress silence concerning a foreign company's eligibility to claim FUCO status
precludes this result, so long as the company's FUCO status is consistent with
the fundamental purpose of the Act to protect consumers and investors."/99/ As
discussed in Item 1.I, above, Emera's investment in NSPI and any future-acquired
FUCO is consistent with the protection of consumers and investors.
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
----------
/99/ The National Grid Group plc, Holding Co. Act Release No. 27154 (March 15,
2000) at 23.
73
distribution of electricity for sale, or retail gas distribution, within the
U.S. NSPI has no utility or nonutility 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 2000, NSPI sold 181 GWh of electric energy within Canada or at the
Canada/U.S. border to purchasers for consumption in Canada or export 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./100/
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. 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
----------
/100/ Section 402(f) of the Department of Energy Organization Act ("DOE Act")
(Pub. L. 95-91) provides that no function which regulates the export or import
of electricity shall be within the jurisdiction of the FERC unless the Secretary
of Energy assigns such function to the FERC. The DOE supports the FERC's open
access and non-discriminatory transmission service initiatives for the
development of a more competitive wholesale electricity market and the DOE
believes that cross-border trade in energy should be subject to this same
policy. Consequently, the Secretary of Energy delegated to the FERC the
authority to regulate access to, and the rates, terms, and conditions for,
transmission services over permitted international electric transmission
facilities to the extent the FERC finds it necessary and appropriate to the
public interest. Department of Energy, Notice of Proposed Amendment to
Presidential Permits and Export Authorizations and Delegation and Assignment to
the Federal Energy Regulatory Commission, 64 Fed. Reg. 40586 (July 27, 1999).
74
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.
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. NSPI commits that it will continue not to
derive income directly from the generation, transmission or distribution of
electric energy for sale in 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 addition, NSPI will not sell power directly or indirectly to a subsidiary,
associate or affiliate company for sale in the U.S. and also will not sell power
directly or indirectly to a nonaffiliate where the purchaser resells the power
in the U.S. under terms controlled by NSPI or its associate or affiliate
companies. These commitments preclude NSPI from using any existing or to be
acquired Emera subsidiary, associate or affiliate company, or a nonaffiliate, as
an intermediary to indirectly effect a sale of power in the U.S.
We note that the current administration has recently announced energy
policies that support increased ties between the U.S. and Canada, including
power flows across the border. President Bush's "National Energy Policy: Report
of the National Energy Policy Development Group" (dated May 17, 2001) (the
"Report"), discusses the importance of Canadian power in U.S. markets. According
to the Report, Canadian sources of power "provide important trade and clean air
benefits, while allowing both [the U.S. and Canada] to benefit from load sharing
and integration." Report at 8-8. The Report also notes that "Longstanding U.S.
policy supports a liberalized global
75
energy sector that is open to international trade and investment. The United
States benefits from international investments at home that have increased our
energy sector's capacity and its infrastructure." Report at 8-5 and 8-6. The
findings and policy recommendations of the Report strongly suggest that the
Commission's interpretation of Section 33 should foster a flexible environment
between Canadian FUCOs and their U.S. affiliates.
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
Emera has filed Form U-57 with the Commission, claiming FUCO status for
NSPI./101/ 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.
Nonutility Subsidiaries
NSPI has no subsidiaries. Consequently, its exemption under Section 33 does
not raise any issue with respect to whether certain nonutility businesses may or
may not be retainable by a FUCO./102/
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.
----------
/101/ Emera Inc., Form U-57, SEC File No. 073-00205 (filed June 26, 2001).
/102/ See, Foreign Utility Companies, Holding Co. Act Release No. 27342 (January
31, 2001) (proposing for comment rules 55 and 56 regarding investments in FUCOs
and suggesting that the Commission should establish standards for the type of
businesses in which a FUCO could engage).
76
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. In addition, Emera undertakes and
agrees to file, and will cause each of its present and future directors and
officers, who is not a resident of the U.S., to file with the Commission
irrevocable designation of the party's custodian as an agent in the U.S. to
accept service of process in any suit, action or proceeding before the
Commission or any appropriate court to enforce the provisions of the acts
administered by the Commission./103/
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.
After the Merger, BHE will be a subsidiary of Emera. BHE's new board of
directors will contain some officers or directors from Emera and some of BHE's
directors post-Merger will carry over from BHE's current board. The President
and Chief Operating Officer of BHE after the Merger will be Carroll R. Lee, a
resident of Maine and a member of BHE's board.
Post-Merger, BHE's board will have nine members, with at least four of
those being from BHE's pre-Merger board of directors. In particular, Robert S.
Briggs, BHE's current President and CEO will continue to serve on BHE's board,
as will Carroll Lee, currently BHE's Senior Vice President and Chief Operating
Officer, Jane J. Bush and Norman Ledwin. The Emera employees on BHE's board will
include David McD.
----------
/103/ See Exhibit L-1.
77
Mann, Emera's President and CEO, Chris Huskilson, Emera's Chief Operating
Officer, Liz MacDonald, Emera's Vice President, Human Resources, and Ron Smith,
Emera's Senior Vice President and Chief Financial Officer./104/ Consequently,
there will be some representation of the new BHE owners on the board and
continuity from the pre-Merger board members who continue to serve on the BHE
board. The proposed combination should benefit the public interest and the
interest of investors or consumers by making possible the exchange of new ideas
and practices necessary to integrate BHE fully into the Emera system, while
preserving the institutional knowledge and customer perspective that the current
BHE board members offer.
The Commission has recognized that interlocking boards are not in and of
themselves harmful. By its nature, any acquisition results in new links between
theretofore unrelated companies./105/ Interlocking boards are typical of
wholly-owned subsidiaries and necessary to integrate the BHE companies into the
Emera system. In the matter of American Natural Gas Co., the Commission found
that:
"The mere fact that there will be created a new series of affiliated
relationships between the present directors of the American Natural
Gas system on the one hand, and American Louisiana on the other, does
not create any problems under Section 10(b)(1) of the Act. The
Commission has never taken the position that it is inappropriate to
have common directors among companies in a registered holding company
system. In fact, the entire concept of an integrated public utility
holding company system presupposes,
----------
/104/ The ninth member of the BHE board post-Merger has not been selected. None
of the board members identified above have any affiliation with commercial or
investment banks. The ninth board member will be an Emera employee and will not
have any banking affiliations. Consequently, the composition of BHE's board will
be in compliance with Section 17(c) and Rule 70 under the Act.
/105/ 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).
78
in the interest of efficiency and economy, the existence of
interlocking officers and directors."/106/
The interlocking relations targeted by Section 10(b)(1) are those associated
with business combinations that are unrelated to operating efficiencies./107/
Because the interlocks will further the economical and efficient development of
an integrated public utility system they 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./108/ 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."/109/
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./110/ 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.
----------
/106/ American Natural Gas Co., Holding Co. Act Release No. 12991 (September 20,
1955).
/107/ See Section 1(b)(4) of the Act (finding that the public interest and
consumers are adversely affected "[w]hen the growth and extension of holding
companies bears no relation to the economy of management and operation or the
integration and coordination of related operating properties . . .").
/108/ American Electric Power Co., 46 S.E.C. 1299, 1309 (1978).
/109/ Vermont Yankee Nuclear Corp., 43 S.E.C. 693, 700 (1968).
/110/ The order of the FERC approving the Merger is attached hereto as Exhibit
D-5.
79
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.
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./111/ 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.
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
----------
/111/ 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").
80
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./112/
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.
----------
/112/ 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).
81
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./113/
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./114/ The proposed Merger
----------
/113/ See Exhibit D-2, Order of the MPUC dated January 5, 2001 and infra Item
3.B.7.e.
/114/ Bangor Hydro-Electric Company, Holding Co. Act Release No. 27094 (Oct. 25,
1999).
82
will impose a new holding company structure over the existing BHE system; it
will not affect the integration of that system./115/
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 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./116/
1.1. NSP Trigen Inc., is 50% owned by NS Power Services Ltd., and the
remainder is owned by a nonaffiliate, 3003252 Nova Scotia Ltd., which is
wholly-owned by Trigen Energy Corp. 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./117/ Enercom 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).
----------
/115/ Supra at 12.
/116/ As used in this Application, an "inactive" company refers to a company
that does not conduct or solicit business and has no material revenues or
income. For example, some of BHE's inactive subsidiaries have "excused" status
with the Maine Secretary of State because they have certified that they do not
conduct business and consequently are excused from annual filings. Inactive
companies are often held until the resolution of contingent liabilities, to
maintain certain rights or as a shell company to be used in a future
transaction. In the event Emera seeks to reactivate any of its inactive
Subsidiaries it will file a post-effective amendment seeking authorization to
engage in the proposed activities to the extent such authorization is required
under the 1935 Act.
/117/ As with other registered holding company subsidiaries, Enercom's entry
into new lines of business will be restricted to those permitted by Commission
order or applicable exemptions under the Act.
83
2.2 Emera Fuels Inc. ("Emera Fuels") is a wholly-owned subsidiary of
Enercom Inc. that is engaged principally in the retail and wholesale supply of
furnace and heavy fuel oil, but also to a much lesser extent, lubricants, diesel
fuel and gasoline products, in Nova Scotia and southern New Brunswick. Emera
Fuels had revenues of $49.7 million in 2000 (its cost of fuel oil sold was $45.6
million), compared with Emera's total revenues of $604.2 million./118/ Emera
Fuels is retainable 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 permitted registered holding companies to market and broker
electric energy and other energy commodities in Canada and to provide incidental
services such as fuel management, storage and procurement./119/
The Commission has also approved the retention of the following businesses
that supply energy products other than electricity and natural gas on a
wholesale and retail basis: 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);
----------
/118/ Only 4% of Emera Fuels' revenues were derived from wholesale sales of
gasoline. Emera Fuels has no retail gasoline sales operations. The overwhelming
majority of Emera Fuels' revenues are derived from the wholesale sale of heavy
and light fuel oils (50%) and the retail sale of light fuel oil (46%),
principally by delivery to homes, commercial and industrial facilities for use
as a heating fuel. These activities are part of Emera Fuels' strategy of
delivering total energy products and services.
/119/ See e.g., Southern Energy Inc., Holding Co. Act Release No. 27020 (May 13,
1999); Cinergy Corp., Holding Co. Act Release No. 27393 (May 4, 2001)
(authorizing energy management services and consulting services anywhere in the
world and commodity brokering and marketing, including electricity, natural gas
and other combustible fuels, in Canada and the U.S.) ("Energy Commodity
Marketing Orders").
84
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); EnergyNorth
Propane, Inc. sells propane to approximately 15,300 customers in New Hampshire,
Keyspan Corp., Holding Co. Act Release No. 27271 (November 7, 2000). Applicants
submit that the distribution of furnace oil, fuel oil and related products is
essentially no different than the distribution of propane or coal for use as
fuel. All of these activities are related to a registered holding company
system's role of energy and energy service provider and these activities are
well within the existing base of expertise, experience and knowledge of Emera.
Moreover, considering the current scale of Emera Fuels' operations, these
activities present no significant risks to the financial soundness of the Emera
System. Emera requests that the Commission reserve jurisdiction over the
retention of Emera Fuels' gasoline products operations pending completion of the
record. Emera will supplement the record with respect to such operations by
post-effective amendment filed no later than September 30, 2002.
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) and Columbia Energy Group, Holding Co. Act Release No.
26820 (January 23, 1998) (authorizing the acquisition of oil and natural gas
leasehold interests in Canada). See also, Columbia Gas System Inc., Holding Co.
Act Release No. 17290 (September 27, 1971) (authorizing the acquisition,
exploration and development of gas interests in the Canadian Arctic);
Consolidated Natural Gas Co., Holding Co. Act Release No. 26595 (October 25,
1996) (authorizing
85
investment in gas pipeline projects in Bolivia and Argentina) (collectively the
"AEP/Columbia/CNG Energy Assets Orders").
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). See Exelon Corp., Holding Co. Act Release No. 27265 (October 19,
2000) (authorizing the retention on UT Holdings Inc. a company engaged in
district energy systems such as the provision of chilled water, steam and/or hot
water and related construction and operating services); Cinergy Corp., Holding
Co. Act Release No. 26474 (February 20, 1996) (finding district heating and
cooling to be functionally related to the utility business). The sale of thermal
energy is also a retainable business in Canada under the Energy Commodity
Marketing Orders, supra note 119.
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). See also, CP&L Energy, Inc., Holding Co. Act Release No. 27284
(November 27, 2000) (authorizing Carolina Power and Light Co. to provide
transformer repair services primarily to other utilities and municipalities);
Energy East Corp., Holding Co. Act Release No. 27224 (August 31, 2000)
(authorizing the retention of a company that performs maintenance and monitoring
of utility field equipment located outside the U.S.). 510845 N.B. Inc. is also a
holding company with respect to Cablecom Ltd.
5.1 Cablecom Ltd., is a wholly owned subsidiary of 510845 N.B. 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. ("Cablecom") filed an
application with the Federal Communications Commission ("FCC") on June 21, 2001
to qualify itself and its subsidiaries as exempt telecommunications companies
("ETCs") under Section 34(a) of the Act. As an ETC, Cablecom will be retainable.
5.1.1 Fibretek Inc., is a wholly owned subsidiary of Cablecom Ltd. that
engages in the same activities as its parent. Accordingly, Fibretek Inc.
qualifies
86
as an exempt telecommunications company under Section 34(a) of the Act and will
be retainable.
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/Columbia/CNG Energy Assets
Orders.
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
0.125% 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/Columbia/CNG
Energy Assets Orders.
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/Columbia/CNG Energy Assets Orders.
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/Columbia/CNG Energy Assets Orders.
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/Columbia/CNG Energy Assets Orders.
8.1 NSP Investments Inc., a wholly owned subsidiary of NSP US Holdings Inc.
was established to facilitate the financing of the acquisition of Emera's
interest in Maritimes and Northeast Pipeline, L.L.C. It is retainable under the
AEP/Columbia/CNG Energy Assets Orders.
87
8.2 Scotia Holdings Inc. is a wholly owned holding company subsidiary of
NSP US Holdings Inc. Scotia Holdings Inc. is retainable under the
AEP/Columbia/CNG Energy Assets Orders.
8.2.1 Nova Power Holdings Inc. is a wholly owned holding company subsidiary
of Scotia Holdings Inc. Nova Power Holdings Inc. is retainable under the
AEP/Columbia/CNG Energy Assets Orders.
8.2.1.1 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/Columbia/CNG Energy Assets Orders.
8.2.1.1.1 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/Columbia/CNG Energy Assets Orders.
9. 1447585 Ontario Ltd. is a wholly owned subsidiary of Emera that was
incorporated in the event it was needed in connection with the acquisition of
BHE. 1447585 Ontario Ltd. is inactive and will not be used to effect the Merger.
10. 3054167 Nova Scotia Ltd. is a wholly owned subsidiary of Emera that is
inactive.
11. Emera Energy Inc. is a wholly owned holding company subsidiary of Emera
with respect to the infrastructure assets associated with the SOEP and the
Greyhawk gas storage project.
11.1 30566567 Nova Scotia Limited is a wholly owned sub-holding company.
11.1.1 3056568 Nova Scotia Limited is a wholly owned sub-holding company.
11.1.1.1 Emera Offshore Inc. holds a drilling platform and subsea gathering
pipeline associated with the SOEP. It and its parent holding companies are
retainable under the AEP/Columbia/CNG Energy Assets Orders.
11.2 Emera Energy U.S. Subsidiary No. 1, Inc. is a wholly owned subholding
company.
11.2.1 Emera Energy U.S. Subsidiary No. 2, Inc. is a wholly owned
subsidiary that holds a 40% membership interest in Greyhawk Gas Storage Company,
L.L.C. ("Greyhawk").
11.2.1.1 Greyhawk was formed to design, develop, own and operate
high-deliverability, multi-cycle natural gas storage facilities in the Northeast
U.S. It and its parent holding companies are retainable under the
AEP/Columbia/CNG Energy Assets Orders.
As set forth below, all of BHE's active non-utility businesses also are
retainable:
88
1. Bangor Energy Resale, Inc. ("BERI"), a wholly owned subsidiary of BHE,
permits BHE to use a power sales agreement as collateral for a bank loan. BHE
had provided power directly to UNITIL Power Corp. ("UNITIL"), a New Hampshire
based electric utility, at significantly above-market rates, with the contract
term ending in the year 2003. On March 31, 1998, BHE completed a transaction
with lenders and BERI that provided a loan of approximately $23.3 million in net
proceeds secured by the value of the UNITIL contract. As a requirement of the
financing, BHE established BERI, as a special purpose entity to hold the medium
term notes and act as a conduit between BHE and UNITIL for the procurement of
power under the terms of the original power sales contract between the two
parties. The loan was comprised of $24.8 million in medium term notes, with a
term of 53 months. BERI must maintain a capital reserve fund of $1.5 million,
funded with proceeds from the loan, which will be used to pay the final
installment of principal and interest due in 2002. The assets in the capital
reserve fund are held by a third party trustee and invested in money market
funds whose investments are limited to commercial paper, corporate notes and
bonds, certificates of deposit, municipal bonds, U.S. Agency obligations and
repurchase agreements. Interest is payable, at BHE's option, under the agreement
at the LIBO rate plus 1.125% or the base rate, which is the higher of (a) the
lending bank's reported "base rate" and (b) one-half of one percent (1/2%) above
the federal funds effective interest rate. BHE has historically selected the
LIBO rate interest option. To provide interest rate protection through the
maturity date of the term loan, in April 1998, BERI entered into an interest
rate swap agreement with one of the lending banks. The interest rate swap fixed
the LIBO interest rate on the medium term notes at 5.72%. The agreement also
contains certain financial covenants, with which BERI was in compliance during
2000 and 1999.
BERI 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
89
(Oct. 19, 2000) (authorizing retention of several existing special-purpose
financing entities).
2. CareTaker, Inc. ("CareTaker"), a wholly owned subsidiary of BHE provides
security alarm services. CareTaker filed an application with the FCC on June 21,
2001 to qualify itself as an ETC under Section 34(a) of the Act. As an ETC,
CareTaker will be retainable.
3. Bangor Fiber Company, Inc. ("Bangor Fiber") owns and leases fiber optic
communications cable. Bangor Fiber filed an application with the FCC on June 21,
2001 to qualify itself as an ETC under Section 34(a) of the Act. As an ETC,
Bangor Fiber will be 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). See also, CP&L Energy, Inc., Holding Co. Act Release No.
27284 (November 27, 2000) (authorizing Florida Power Corp. to provide
construction services for transmission and distribution lines and relay towers
for mobile telephones to unaffiliated parties); KeySpan Corp., Holding Co. Act
Release No. 27271 (November 7, 2000) (authorizing retention of KeySpan Electric
Services Inc., to provide operation, maintenance and construction management
services for transmission and distribution facilities, and the retention of
KeySpan Engineering Associates, Inc. to provide engineering services for power
supply facilities).
The remaining BHE Nonutility Subsidiaries presented below (the "Water
Companies") 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.
90
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 Water Companies are not representative of the dangerous diversification
that the 1935 Act was designed to address./120/ First, the Water Companies were
formed for the purpose of controlling water flow affecting hydro-electric
projects on the Penobscot River. Thus, they had a clear utility purpose when
they were organized. Second, they are inactive and are insignificant to BHE. The
Water Companies incur no significant liabilities, do not involve any significant
commitment of management resources or funds, and would not lead to adverse
consequences for BHE or Emera if they were retained. Nevertheless, in 1998 and
1999, BHE engaged in a bid process in an effort to sell a number of assets,
including the water rights held by the Water Companies. BHE continues to hold
these interests because it received no bids for them during that process.
Because divestiture does not appear to be a viable option at present,
Applicants request that they be permitted to retain the Water Companies.
Applicants commit that if they reactivate any of such companies they will do so
only pursuant to Commission order or applicable exemption. Applicants also will
endeavor to sell the Water Companies if a purchaser can be located that is
willing to consummate a transaction under mutually acceptable terms.
The Water Companies are listed below:
5. East Branch Improvement Company ("EBIC") formerly provided water storage
services for hydroelectric facilities. BHE owns 60% of the common stock of EBIC.
----------
/120/ "The Holding Company Act sought to protect holding company system
investors and utility consumers from the risks of nonutility ventures by
limiting the extent to which registered holding companies and their subsidiaries
could engage in these businesses." 1995 Report at 77.
91
5.1 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.
5.2 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.
6. 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.
7. 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.
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. Under Section 10(c)(2), the Commission focuses on the associated
benefits, the so-called "economies and efficiencies" as a result of the proposed
transaction.
The Merger will result in significant financial benefits for shareholders,
rate payers and the community in general, as well as benefits related to BHE's
operations and practices. The benefits fall broadly into three classes: (1)
operational and administrative benefits; (2) strategic benefits, and; (3)
related community benefits.
Operational and Administrative Benefits
Emera and BHE have committed to freeze BHE's total PUC jurisdictional
revenue requirement until MPUC consideration and approval of an alternative rate
plan ("ARP"). Both companies are in the process of developing the ARP which is
expected to
92
provide significant benefits to consumers./121/ Apart form the ARP, the Merger
allows BHE to achieve synergies typically associated with a merger of two
similar businesses. The companies are currently in the process of evaluating
integration possibilities and evaluating the related administrative and
operational benefits. For example, BHE's cost of capital is likely to be reduced
as a result of BHE's affiliation with a larger and more diversified company.
Significant benefits are also likely to flow from access to Emera's high quality
management resources and the sharing of best practices between Emera and
BHE./122/ Savings in materials purchasing, inventory, engineering related
activities and knowledge transfer are also likely.
The knowledge shared by both companies of the Northeastern U.S. and Eastern
Canadian markets should benefit both companies as they work to serve customers
with new and innovative services. The increased breadth of the organization
should also provide BHE's employees with opportunities for growth as part of a
larger organization and help BHE to retain employees. Best practices sharing may
result in efficiencies in purchasing, the implementation of common information
systems platforms and the ability to implement new technologies and industry
developments faster and more economically as fixed costs are allocated over a
broader customer base. The relative closeness of the NSPI and BHE service
territories also means that each company can render emergency storm recovery
assistance such as line crews and spare parts to the other company as needed.
Improved communications also means that crews and parts inventories can be made
available faster in response to emergencies.
Strategic Benefits
----------
/121/ An ARP for BHE would be likely to be based on performance based regulation
and would be expected to provide benefits to consumers in terms of lower overall
electricity cost, stability in transmission and distribution rates and increased
service quality compared to what would likely occur under traditional,
cost-of-service type regulation.
/122/ For example, implementing a new work management system will allow BHE to
more efficiently schedule its crews for routine and emergency maintenance.
93
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. The commonality of customers and service conditions between both
companies should cause the integration of BHE's operations with Emera to result
in continued high quality customer service.
Canada is America's largest overall energy trading partner./123/ As the
Canadian and U.S. energy markets become increasingly integrated, the
cross-border nature of the Emera-BHE operations will help the combined company
compete more effectively. In connection with its holdings in the Maritimes
Entities, Emera currently has gas transportation operations in the U.S.
Consequently, New England, an area of the U.S. that had been heavily dependent
on oil now has a more diversified fuel mix to the benefit of consumers and the
public interest. U.S. energy policy supports more international trade and
investment in energy/124/ and, with BHE, Emera will be better positioned to
participate in that trend. As the National Energy Policy notes, "The reliability
of the North American electricity grid can be enhanced yet further through
closer coordination and compatible regulatory and jurisdictional
approaches."/125/ Emera's knowledge of issues on both sides of the border can
help to catalyze needed change.
Related Community Benefits
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
----------
/123/ Report of the National Energy Policy Development Group, May 2001, at 8-8.
/124/ Id.
/125/ Id.
94
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. ("MRC"), 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./126/
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
----------
/126/ The MRC is the designated agent of the 130 municipalities that entered
into long-term waste disposal agreements with PERC. BHE, PERC Management Company
L.P., Energy National, Inc. and the MRC entered into a series of agreements to
modify certain rights under the power purchase agreement between PERC Management
Company and BHE which agreements provided for the issue of 2,000,000 warrants to
the parties. The MRC received 1,000,000 warrants and PERC Management and Energy
National received the other 1,000,000. As of May 22, 2001 there are 1,042,287
warrants outstanding held as follows: MRC - 720,500, PERC Management - 178,215,
and Energy National - 143,572. Each warrant entitles the holder to purchase up
to one million shares of BHE common stock at an exercise price of $7 per share.
Under the warrant, BHE may pay cash equal to the difference between the exercise
price and the market price of BHE common stock at the exercise date, multiplied
by the number of warrant shares exercised. By agreement dated December 12, 2000,
MRC and BHE agreed that upon MRC's exercise of the warrant on the date of the
Merger, BHE will pay MRC $19.50 ($26.50-$7.00) for each warrant share by
delivery of a promissory note bearing interest at 5% per annum and maturing in
June 2008. Although BHE cannot compel the other warrant holders to exercise
their warrants, BHE expects that they will be exercised. Warrants held after the
closing of the Merger are entitled to cash payment only, not equity securities
of BHE.
95
the standards of Section 10(c)(2) are met./127/ 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."/128/
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./129/ The approval
of the Stipulation resolved all issues in the proceeding before the MPUC and
permits the Merger to proceed./130/
----------
/127/ National Grid Group plc, supra; see American Electric Power Co., 46 S.E.C.
1299, 1320-1321 (1978).
/128/ 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).
/129/ The MPUC order and the Stipulation is included in Exhibit D-2 to this
Application.
/130/ 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 708 and
such other provisions in Title 35-A as might be applicable.
96
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 should 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.
97
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./131/
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.132 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.
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
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./133/
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.
----------
/131/ Stipulation at 5-10.
/132/ Stipulation at 10.
/133/ The order of the FERC approving the Merger is included in Exhibit D-5 to
this Application.
98
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."/134/
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."/135/
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
----------
/134/ 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.
/135/ Letter from Angus S. King, Jr., Governor of Maine to Jonathan G. Katz,
Secretary of the Securities and Exchange Commission, (dated February 22, 2001).
99
interests that might otherwise be subject to recovery in rates."/136/ 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 two 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.137 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.
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.
----------
/136/ See Stipulation at 5.
/137/ 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).
100
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
101
Maine companies. All of BHE's utility operating revenues are derived from
utility operations conducted in Maine.138 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.
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 March 31, 2001, 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 Adjust- Prof Forma % of Total
millions Capitaliza millions Total ments Capitaliza- Pro Forma
-tion Capitaliz tion Capitalization
ation
-------------------- ---------- -------------- ---------- ----------- --------- ------------- ---------------
Common 786.8 39.1 137.3 42.4 (147.2) 776.9 33.5
stockholders'
equity.
-------------------- ---------- -------------- ---------- ----------- --------- ------------- ---------------
Preferred stock 175.4 8.7 4.7 1.5 -- 180.1 7.8
-------------------- ---------- -------------- ---------- ----------- --------- ------------- ---------------
Minority interests -- -- -- -- -- -- --
-------------------- ---------- -------------- ---------- ----------- --------- ------------- ---------------
Long-term debt 848.8 42.2 181.8 56.1 -- 1,030.6 44.5
(including current
portion)
-------------------- ---------- -------------- ---------- ----------- --------- ------------- ---------------
Short-term debt 200.9 10.0 -- 0.0 127.0 327..9 14.2
-------------------- ---------- -------------- ---------- ----------- --------- ------------- ---------------
Total 2,011.9 100 323.8 100 2,315.5 100
capitalization
-------------------- ---------- -------------- ---------- ----------- --------- ------------- ---------------
----------
/138/ 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.
102
Adjustment Notes
Common equity
Upon merger, BHE's net assets and liabilities are recorded on Emera's
balance sheet. Consolidated common equity is unchanged.
Short term debt
The purchase will be financed with proceeds from short term
investments currently held by Emera and short term debt.
The capital structure for Emera and BHE in the preceding two years is shown
below.
[Enlarge/Download Table]
-------------------------------------------------------------------------------------------------------------
Emera and BHE Capital Structures as of December 31, 1999 and 1998
-------------------------------------------------------------------------------------------------------------
Emera 1999 Emera 1998 BHE 1999 BHE 1998
-------------------- ---------------------- --------------------- --------------------- ---------------------
$ % of $ % of $ % of $ % of
millions Total millions Total millions Total millions Total
Capitaliz Capitali Capitali Capitali
ation zation zation zation
-------------------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
Common 636.7 34.1 615.7 33.6 132.7 39 118.9 27.5
stockholders'
equity.
-------------------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
Preferred stock 156.3 8.4 135.1 7.4 4.7 1.5 12.3 2.9
-------------------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
Minority interests -- -- -- -- -- -- -- --
-------------------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
Long-term debt 857.2 45.9 842.7 46.0 202.8 59.6 288.5 66.8
(including current
portion)
-------------------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
Short-term debt 216.5 11.6 239.1 13.0 -- -- 12.0 2.8
-------------------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
Total 1,866.6 100 1,832.6 100 340.2 100 431.7 100
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
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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 filed an application
with the CFIUS and received a reply concluding that "there are no issues of
national security sufficient to warrant an
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investigation under Section 721. Therefore . . . action under section 721 is
concluded with respect to this transaction." See Exhibit P-1.
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 (previously filed).
A-2 Articles of Association of Emera (previously filed).
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A-3 Certificate of Organization of BHE (previously filed).
A-4 By-Laws of BHE (previously filed).
A-5 Articles of Incorporation of Bangor Var (previously filed).
A-6 By-laws of Bangor Var (previously filed).
A-7 Partnership Agreement Creating Chester SVC Partnership (previously filed).
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 (filed under cover of Form SE).
D-2 Order of the Maine Public Utilities Commission, dated January 5, 2001
(previously filed).
D-3 Certification of the Maine Public Utilities Commission under Section
33(a)(2) of the Act (previously filed).
D-4 Application to FERC together with testimony and exhibits (filed under cover
of Form SE).
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D-5 FERC Order dated January 24, 2001 (previously filed).
E-1 Organizational Chart of the combined Emera/BHE system post-Merger (filed
under cover of Form SE, revised).
E-2 Maps of BHE and NSPI service territories (filed under cover of Form SE).
F-1 Opinion of counsel of Emera.
F-2 Opinion of counsel of BHE.
F-3 Past tense opinion of counsel (to be filed by amendment).
G-1 Emera's 1999 Annual Report (previously filed).
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.
I-3 Services Company Policies and Procedure Manual (to be filed by amendment).
J-1 Description of Emera Stock-based Employee Benefit Plans.
K-1 Emera Group of Companies (previously filed).
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L-1 Appointment of Agent for Service of Process.
M-1 Form of Federal and State Income Tax Allocation Agreement.
N-1 Description of Intermediate Holding Companies (previously filed).
O-1 Memorandum of Understanding with Penobscot Hydro, LLC, dated January 5,
1999 (previously filed).
P-1 Letter from Gay Hartwell Sills, Director, Office of International
Investment, Department of the Treasury, to Thomas B. Reems, dated June 6,
2001.
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-1.1 Balance sheet and income statement of Emera consolidated for the year
ended December 31, 2000.
FS-1.2 Balance sheet and income statement of Emera consolidated for the twelve
months ended March 31, 2001.
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).
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FS-3.1 Balance sheet and income statement of BHE consolidated for the years
ended December 31, 2000 and the quarter ended March 31, 2001 (incorporated
by reference to SEC File No. 001-10922, on Form 10-K for the year end
report filed March 27, 2001 and Form 10-Q, SEC File No. 001-10922, for the
quarterly statement filed May 15, 2001).
FS-3.2 Balance sheet and income statement of BHE consolidated for the twelve
months ended March 31, 2001.
FS-4 Pro-forma financial statements of the combined Emera/BHE system for the
twelve months ended March 31, 2001.
FS-5 Financial projections (confidential treatment requested under Rule 104).
FS-6 Credit Ratings of Emera and BHE.
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.
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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: August 31, 2001 Emera Incorporated
Nova Scotia Power Incorporated
By: /s/ Richard J. Smith
Name: Richard J. Smith
Title: Corporate Secretary and General Counsel
Date: August 31, 2001 Emera US Holdings Inc.
BHE Holdings Inc.
By: /s/ A. Michael Burnell
Name: A. Michael Burnell
Title: Director, President and Secretary
Date: August 31, 2001 Bangor Hydro-Electric Company
By: /s/ Frederick S. Samp
Name: Frederick S. Samp
Title: Vice President - Finance and Law
Date: August 31, 2001 Bangor Var Co., Inc.
By: /s/ Carroll Lee
Name: Carroll Lee
Title: President
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Exhibit Index
F-1 Opinion of counsel of Emera.
F-2 Opinion of counsel of BHE.
I-2 Form of Master Transition Services Agreement.
J-1 Description of Emera Stock-based Employee Benefit Plans.
L-1 Appointment of Agent for Service of Process.
M-1 Form of Federal and State Income Tax Allocation Agreement.
P-1 Letter from Gay Hartwell Sills, Director, Office of International
Investment, Department of the Treasury, to Thomas B. Reems, dated June
6, 2001.
FS-1.1 Balance sheet and income statement of Emera consolidated for the year
ended December 31, 2000.
FS-1.2 Balance sheet and income statement of Emera consolidated for the twelve
months ended March 31, 2001.
FS-3.2 Balance sheet and income statement of BHE consolidated for the twelve
months ended March 31, 2001.
FS-4 Pro-forma financial statements of the combined Emera/BHE system for the
twelve months ended March 31, 2001.
FS-6 Credit Ratings of Emera and BHE.
Dates Referenced Herein and Documents Incorporated by Reference
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