File No. 70-10243
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
AGL Resources Inc. NUI Corporation
AGL Services Company NUI Utilities, Inc.
Atlanta Gas Light Company Virginia Gas Company
Chattanooga Gas Company Virginia Gas Distribution Company
Virginia Natural Gas, Inc. Virginia Gas Pipeline Company
Ten Peachtree Place Virginia Gas Storage Company
Suite 1000 NUI Capital Corp.
Atlanta, GA 30309 Utility Business Services, Inc.
NUI Service, Inc.
NUI Energy, Inc.
NUI Energy Brokers, Inc.
NUI Energy Solutions, Inc.
OAS Group, Inc.
NUI Sales Management, Inc.
TIC Enterprises, LLC
NUI Saltville Storage, Inc.
NUI Storage, Inc.
NUI Richton Storage, Inc.
Richton Gas Storage Company, LLC
NUI/Caritrade International LLC
NUI Hungary, Inc.
NUI International, Inc.
550 Route 202-206
Box 760
Bedminster, NJ 07921-0760
(Name of company or companies filing this statement and addresses of principal
executive offices)
AGL Resources Inc.
Ten Peachtree Place
Suite 1000
Atlanta, GA 30309
(Name of top registered holding company of each applicant or declarant)
Bryan E. Seas Steven D. Overly
Vice President and Controller Vice President, Chief Financial Officer,
AGL Resources Inc. General Counsel and Secretary
Ten Peachtree Place NUI Corporation
Suite 1000 550 Route 202-206
Atlanta, GA 30309 Box 760
Bedminster, NJ 07921-0760
(Name and address of agent for service)
The Commission is also requested to send copies
of any communication in connection with this matter to:
William S. Lamb Roshini Thayaparan
LeBoeuf, Lamb, Greene & MacRae, L.L.P. LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street 1875 Connecticut Avenue, NW Suite 1200
New York, NY 10019-5389 Washington, DC 20009
Tel. (212) 424-8170 Tel. (202) 986-8065
Fax (212) 424-8500 Fax (202) 956-3305
2
TABLE OF CONTENTS
Item 1. Description of Proposed Transaction....................................5
A. Introduction and General Request.........................................5
B. Description of the Parties...............................................6
1. AGL Resources Inc. and its Subsidiaries............................6
a. AGL Resources Inc...............................................6
b. Utility Subsidiaries............................................6
(i) Atlanta Gas Light Company................................6
(ii) Chattanooga Gas Company.................................6
(iii) Virginia Natural Gas, Inc..............................7
c. Nonutility Subsidiaries.........................................7
2. NUI Corporation....................................................7
a. Utility Subsidiaries............................................7
(i) NUI Utilities, Inc.......................................7
(ii) Virginia Gas Distribution Company.......................8
b. Nonutility Subsidiaries.........................................8
(i) NUI Capital Corp.........................................8
(ii) Virginia Gas Company....................................9
(iii) NUI Saltville Storage, Inc.............................9
(iv) NUI Storage, Inc.......................................10
c. Recent Developments............................................10
C. Description of the Transaction..........................................13
1. The Merger........................................................13
2. Financing the Merger..............................................13
3. Conditions........................................................14
4. Management and Operations Following the Merger....................15
5. Benefits of the Merger............................................16
a. Benefits from AGL Resources' Financial Strength................16
b. Benefits From AGL Resources' Utility Experience................19
D. Financing Authority.....................................................20
E. Affiliate Transactions..................................................20
1. Gas Procurement and Asset Management Arrangement..................20
2. Billing Services..................................................21
3. Construction and Management Services..............................21
F. Tax Allocation Agreement................................................22
G. Rule 16 Exemption.......................................................22
H. Section 3(a)(1) Exemption Request for VGC...............................22
Item 2. Fees, Commissions and Expenses........................................22
Item 3. Applicable Statutory Provisions.......................................22
A. Applicable Provisions...................................................22
B. Legal Analysis..........................................................23
1. Sections 9(a), 10 and 11..........................................23
a. Section 10(b)(1)...............................................23
3
b. Section 10(b)(2)...............................................25
c. Section 10(b)(3)...............................................27
d. Section 10(c)(1)...............................................28
(i) Section 8...............................................28
(ii) Section 11.............................................29
e. Section 10(c)(2)...............................................31
f. Section 10(f)..................................................35
2. Section 3(a)(1) Exemption Request for VGC.........................35
3. Financing Authority...............................................36
a. Subsidiary Debt................................................38
b. Authorization and Operation of the Money Pools.................39
c. Guarantees.....................................................40
d. Hedges.........................................................41
e. Changes in Capital Stock of Wholly-Owned Subsidiaries..........42
f. Payment of Dividends Out of Capital or Unearned Surplus........42
g. Financing Entities.............................................44
h. Intermediate Subsidiaries......................................44
i. Rule 54 Analysis...............................................46
4. Affiliate Transactions............................................46
a. AGL Services...................................................46
5. Rule 16 Exemption.................................................47
6. Retention of Nonutility Subsidiaries..............................47
Item 4. Regulatory Approval...................................................48
A. State Approvals.........................................................49
1. New Jersey........................................................49
2. Florida...........................................................49
3. Maryland..........................................................49
4. Virginia..........................................................49
B. Federal Approvals.......................................................50
1. Hart-Scott-Rodino Antitrust Improvements Act of 1976..............50
2. Communications Act of 1934........................................50
Item 5. Procedure.............................................................50
Item 6. Exhibits and Financial Statements.....................................51
Item 7. Information as to Environmental Effects...............................54
4
PRE-EFFECTIVE AMENDMENT NO. 1 TO APPLICATION/DECLARATION
ON FORM U-1 UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
This Pre-effective Amendment No. 1 ("Amendment") amends and restates the
Application/Declaration on Form U-1 submitted by AGL Resources Inc. ("AGL
Resources") and NUI Corporation ("NUI") on August 20, 2004 in SEC File No.
070-10243 ("Application").
Item 1. Description of Proposed Transaction.
A. Introduction and General Request
In this Application, AGL Resources, a registered public utility holding
company under the Public Utility Holding Company Act of 1935, as amended (the
"Act"), requests authority under Sections 9, 10 and 11 of the Act to acquire all
of the issued and outstanding common stock of NUI, an exempt holding company
under Section 3(a)(1) of the Act, and indirectly acquire all of NUI's subsidiary
companies./1 The proposed transaction, more fully described below, is referred
hereto as the "Merger."
AGL Resources, AGL Services Company ("AGL Services"), Atlanta Gas Light
Company ("AGLC"), Chattanooga Gas Company ("CGC"), Virginia Natural Gas, Inc.
("VNG"), NUI, and its subsidiaries named herein/2 (collectively, "Applicants")
also seek approval under Sections 6(a), 7, 9(a), 10, 11, 12(b), 12(c), 13(b) of
the Act and Rules 43, 45, 46, and 54 for NUI and its subsidiaries to engage,
after the consummation of the Merger, in the same financing and other
transactions authorized by the Commission in the AGL Resources Financing Order/3
and described herein. Applicants further request authorization (a) to retain
NUI's Nonutility Subsidiaries (defined below), (b) to reorganize NUI's direct
and indirect Nonutility Subsidiaries without the need to seek further Commission
authorization, (c) for AGL Resources to acquire NUI's interest in the Saltville
Gas Storage Company, LLC pursuant to an exemption under Rule 16, and (d) for NUI
Utilities, Inc. ("NUI Utilities") to pay dividends out of capital and unearned
surplus in an amount up to their pre-merger retained earnings and post-merger
earnings before any deduction for the impairment of goodwill. Finally,
Applicants request that the Commission find that Virginia Gas Company ("VGC"), a
utility holding company subsidiary of NUI, is entitled to an exemption pursuant
to Section 3(a)(1) of the Act.
____________________
1 A letter from the Commission to NUI dated July 15, 2004 questions NUI's claim
of exemption under Section 3(a)(1) and Rule 2. NUI responded to the Commission
by letter dated August 4, 2004. NUI's qualification for an exemption under the
Act would become moot if NUI became part of the AGL Resources registered holding
company system as proposed in this application because NUI would register under
the Act upon the consummation of the Merger.
2 NUI Utilities, Inc., Virginia Gas Company, Virginia Gas Distribution Company,
Virginia Gas Pipeline Company, Virginia Gas Storage Company, NUI Capital Corp.,
Utility Business Services, Inc., NUI Service, Inc., NUI Energy Inc., NUI Energy
Brokers Inc., NUI Energy Solutions, Inc., OAS Group, Inc., NUI Sales Management,
Inc., TIC Enterprises, LLC, NUI, Saltville Storage, Inc., NUI Storage, Inc., NUI
Richton Storage, Inc., Richton Gas Storage Company, LLC, NUI/Caritrade
International LLC, NUI Hungary, Inc., and NUI International, Inc. (collectively,
"NUI Group").
3 AGL Resources Inc., et al., Holding Co. Act Release No. 27828 (Apr. 1, 2004)
("Financing Order").
5
B. Description of the Parties
1. AGL Resources Inc. and its Subsidiaries
a. AGL Resources Inc.
AGL Resources is a corporation organized under the laws of Georgia, and is
an Atlanta-based energy services holding company. AGL Resources owns three gas
public utility subsidiary companies: AGLC, CGC, and VNG; and several directly or
indirectly-owned subsidiary companies. AGLC, CGC and VNG serve more than 1.8
million customers in three states.
AGL Resources' common stock has a five dollar ($5.00) par value and is
listed and traded on the New York Stock Exchange under the symbol "ATG." As of
June 30, 2004 AGL Resources had $64,923,654 shares of common stock issued and
outstanding. As of and for the six months ended June 30, 2004, AGL Resources had
total assets of $4.01 billion, net utility plant assets of $2.26 billion, total
operating revenues of $945 million, operating income of $186 million and net
income of $87 million. As of June 30, 2004, AGL Resources, in conjunction with
its subsidiaries, employed approximately 1,996 full-time employees.
b. Utility Subsidiaries
(i) Atlanta Gas Light Company
AGLC is a natural gas local distribution utility with distribution systems
and related facilities serving 237 cities throughout Georgia, including Atlanta,
Athens, Augusta, Brunswick, Macon, Rome, Savannah and Valdosta. AGLC also has
approximately 6.0 billion cubic feet, or Bcf, of liquefied natural gas ("LNG")
storage capacity in three LNG plants to supplement the supply of natural gas
during peak usage periods.
The Georgia Public Service Commission regulates AGLC with respect to rates,
maintenance of accounting records and various other service and safety matters.
As of and for the six months ended June 30, 2004, AGLC had total assets of $2.41
billion, total operating revenues of $308 million and net income of $76 million.
AGLC owns all of the outstanding stock of AGL Rome Holdings, Inc. AGL Rome
Holdings, Inc. owned property associated with a former manufactured gas plant in
Rome, Georgia, but sold that property in December 2003.
(ii) Chattanooga Gas Company
CGC is a natural gas local distribution utility with distribution systems
and related facilities serving 12 cities and surrounding areas, including the
Chattanooga and Cleveland areas of Tennessee. CGC also has approximately 1.2 Bcf
of LNG storage capacity in its LNG plant.
The Tennessee Regulatory Authority regulates CGC with respect to rates,
maintenance of accounting records and various other service and safety matters.
As of and for the six months ended June 30, 2004, CGC had total assets of $147
million, total operating revenues of $55 million and net income of $7 million.
6
(iii) Virginia Natural Gas, Inc.
VNG is a natural gas local distribution utility with distribution systems
and related facilities serving eight cities in the Hampton Roads region of
southeastern Virginia. VNG owns and operates approximately 155 miles of a
separate high-pressure pipeline that provides delivery of gas to customers under
firm transportation agreements within the state of Virginia. VNG also has
approximately 5.0 million gallons of propane storage capacity in its two propane
facilities to supplement the supply of natural gas during peak usage periods.
The Virginia State Corporation Commission ("VSCC") regulates VNG with
respect to rates, maintenance of accounting records and various other service
and safety matters. As of and for the six months ended June 30, 2004, VNG had
total assets of $736 million, total operating revenues of $210 million and net
income of $21 million.
c. Nonutility Subsidiaries
AGL Resources owns several nonutility subsidiaries. The Commission has
previously authorized the retention of AGL Resources' nonutility subsidiaries./4
2. NUI Corporation
a. Utility Subsidiaries
NUI, a New Jersey corporation, has two public utility subsidiary companies,
NUI Utilities and Virginia Gas Distribution Company ("VGDC"). Through its
subsidiaries, NUI operates natural gas distribution systems and natural gas
storage and pipeline businesses.
(i) NUI Utilities, Inc.
Through its three regulated utility divisions, Elizabethtown Gas Company
("Elizabethtown Gas"), City Gas Company of Florida ("City Gas") and Elkton Gas,
NUI Utilities distributes natural gas to approximately 371,000 customers in New
Jersey, Florida and Maryland. Each division is subject to regulation by the
public service commission in the states where it operates.
During the first nine months of fiscal year 2004, the operating revenues
associated with the provision of distribution services by NUI Utilities'
regulated utility divisions was approximately $484.8 million, representing 95%
of the total operating revenues of NUI. Of this amount, 85% was generated by
utility operations in New Jersey, where approximately 71% of NUI Utilities'
customers are located. Total utility gas volumes sold or transported by such
utility operations amounted to 63.7 Bcf, of which 87% was sold or transported in
New Jersey.
NUI Utilities distributes gas through approximately 6,200 miles of steel,
cast iron and plastic mains. The company has physical interconnections with five
interstate pipelines in New Jersey and a single interstate pipeline in both
Maryland and Florida. Common interstate pipelines along the
____________________
4 AGL Resources Inc., et al., Holding Co. Act Release No. 27243 (Oct. 5, 2000).
7
company's operating system provide the company with the flexibility to manage
pipeline capacity and supply, thereby optimizing system utilization.
Through its Elizabethtown Gas and City Gas divisions, NUI Utilities also
has an appliance service, sales, leasing and financing businesses in New Jersey
and Florida that complement its natural gas utility services in those states.
The appliance group generated operating revenues of $11.4 million in the first
nine months of fiscal year 2004 and had operating margins of $3.2 million in the
same period.
Presently, NUI Utilities has a capacity management arrangement with Cinergy
Marketing & Trading LLC ("CMT"), wherein CMT supplies NUI Utilities with gas at
market-based prices and pays NUI Utilities a fixed fee to manage its interstate
pipeline assets. Prior to entering into its agreement with CMT, NUI Utilities
made off-system sales to non-jurisdictional customers utilizing assets under
contract from interstate pipelines. Such assets include interstate pipeline and
storage capacity. Off system sales margins retained by NUI Utilities totaled
$0.1 million in the first nine months of fiscal year 2004.
(ii) Virginia Gas Distribution Company
VGDC is an indirect wholly owned public utility subsidiary of NUI and a
direct subsidiary of VGC, a holding company for certain utility and nonutility
businesses./5 VGDC distributes gas to approximately 275 customers in Virginia.
During first nine months of fiscal year 2004, VGDC sold approximately 200.785
Mcf of gas, of which 4% were sold to residential customers and 96% to commercial
and industrial customers.
b. Nonutility Subsidiaries
(i) NUI Capital Corp.
NUI's nonutility businesses are carried out primarily by NUI Capital Corp.
("NUI Capital") and its subsidiaries./6 NUI Capital's only remaining
non-regulated subsidiary with substantial continuing operations is Utility
Business Services, Inc. ("UBS"), a billing and customer information systems and
services subsidiary. NUI's other non-regulated subsidiaries are winding down
their operations. These subsidiaries include: NUI Energy, Inc. ("NUI Energy"),
an energy retailer; NUI Energy Brokers, NUI's wholesale energy trading and
portfolio management subsidiary;/7 OAS Group, Inc. ("OAS"), the
____________________
5 VGC's nonutility operations are discussed below.
6 A complete list and description of NUI's nonutility subsidiaries, which
discusses the basis for retention for each subsidiary that would be retained, is
included as Exhibit J-1. These companies are collectively referred to as "NUI
Nonutility Subsidiaries."
7 During January 2004, NUI began to wind down the trading operations of NUI
Energy Brokers and discontinued trading operations altogether at NUI Energy
Brokers in March 2004, although NUI Energy Brokers continues to manage its prior
contractual obligations under a long-term sales agreement in addition to two
long-term gas storage and transportation agreements.
8
company's digital mapping operation;/8 and TIC Enterprises, LLC ("TIC"), a sales
outsourcing subsidiary that sold wireless and network telephone services.
UBS is a wholly owned subsidiary of NUI Capital. UBS provides outsourced
customer information systems and services to NUI Utilities as well as
investor-owned and municipal water/wastewater utilities. UBS offers customer and
utility operations information systems and services, including account
management, reporting, bill printing and mailing, and payment processing
services. UBS presently serves 13 clients. The majority of UBS' clients are
municipally-owned and operated water utilities across the United States. UBS'
top three clients in terms of revenue generation are United Water, NUI Utilities
and Middlesex Water. Over the past nine months, NUI Utilities has provided
approximately 36% of UBS' revenues. UBS has been profitable in every year since
1995.
(ii) Virginia Gas Company
VGC is a natural gas storage, pipeline and distribution company with
principal operations in Southwestern Virginia. In addition to owning VGDC, a gas
utility described above, VGC operates two storage facilities; one a
high-deliverability salt cavern facility in Saltville, Virginia (the "Saltville
Storage Project") and the other a depleted reservoir facility in Early Grove,
Virginia. Combined, the facilities have approximately 2.6 Bcf of working gas
capacity. VGC also owns and operates a 72-mile 8" intrastate pipeline and serves
as the construction and operations manager for the Saltville Storage Project as
discussed below. All of VGC's businesses are regulated by the VSCC, and the
Saltville Storage Project is regulated by the Federal Energy Regulatory
Commission ("FERC"). VGC, which was acquired by NUI in March 2001 had operating
margins of $6.1 million in the first nine months of fiscal year 2004.
(iii) NUI Saltville Storage, Inc.
NUI's wholly owned subsidiary, NUI Saltville Storage, Inc. ("NUISS"), is a
fifty-percent member of Saltville Gas Storage Company, LLC ("SSLLC"). SSLLC is a
joint venture between subsidiaries of NUI and Duke Energy Gas Transmission
("DEGT") that is developing a natural gas storage facility in Saltville,
Virginia. SSLLC plans to expand the present Saltville Storage Project from its
current capacity of 1 Bcf to approximately 12 Bcf in several phases. The
Saltville Storage Project connects to DEGT's East Tennessee Natural Gas
interstate system and its Patriot pipeline. SSLLC is subject to regulation by
FERC under the Natural Gas Act.
In conjunction with the development of the Saltville Storage Project, NUI
Energy Brokers entered into a twenty-year agreement with DEGT for the firm
transportation of natural gas in the Patriot pipeline and a twenty-year
agreement with SSLLC for the firm storage of natural gas. NUI is not using the
Patriot pipeline transportation capacity at this time since it has discontinued
its trading operations.
____________________
8 Effective April 1, 2004, OAS has subcontracted all of its existing services to
a third party engineering firm. OAS has notified its customers that upon
expiration of their current contracts, their relationship with OAS will
terminate.
9
(iv) NUI Storage, Inc.
NUI Storage, Inc. ("NUI Storage") is a wholly owned subsidiary of NUI.
Through its wholly owned subsidiaries, NUI Storage has acquired options on the
land and mineral rights for property located in Richton, Perry County,
Mississippi that the company plans to develop into a natural gas storage
facility to help serve the Southeast United States. Like its companion storage
facility in Saltville, Richton is expected to offer the high-deliverability
capabilities of salt dome storage for natural gas and will have access to a
number of major interstate pipelines, including Destin Pipeline and its
connections to Gulf South, Gulfstream, Florida Gas Transmission, SONAT,
Tennessee Natural Gas and Transco. Through its connection to Destin Pipeline,
Richton will have direct access to the gas supplies in the Gulf of Mexico, as
well as supplies from the interconnected interstate pipelines referenced.
Richton can also serve as a potential storage facility for the various proposed
liquefied natural gas projects in the Gulf Coast. It is anticipated that Richton
will be subject to FERC regulation.
c. Recent Developments
Corporate Governance
In November 2003, the New Jersey Attorney General's Office ("NJAGO")
subpoenaed NUI for certain documents and information related to the practices of
NUI Energy Brokers. On June 30, 2004, NUI Energy Brokers entered into an
agreement with the NJAGO whereby NUI Energy Brokers pled guilty to a charge of
Misconduct by a Corporate Official in the third degree. This plea agreement
provides that NUI Energy Brokers must pay a $500,000 fine and must cooperate
fully with the NJAGO continuing investigation. NUI is a party to a separate
agreement related to NUI Energy Brokers' plea, but NUI did not plead guilty to
any crimes. NUI guaranteed NUI Energy Brokers' payment of the fine and agreed to
cooperate fully with the NJAGO continuing investigation and to develop, fund and
operate community service programs within the Elizabethtown Gas service
territory. The plea concludes the investigation by the NJAGO of NUI and its
subsidiaries.
As a result of NUI and NUI Utilities' credit downgrades during 2003,
negative credit rating comments and concerns raised during a routine competitive
services audit of NUI Utilities operating division, Elizabethtown Gas, conducted
by the NJBPU, in March 2003, the NJBPU ordered a focused audit of NUI, NUI
Utilities and Elizabethtown Gas in six key areas: (1) strategic planning; (2)
affiliate transactions; (3) financial structure and interaction; (4) accounting
and property records; (5) corporate governance; and (6) executive compensation.
The NJBPU retained The Liberty Consulting Group ("Liberty") as the auditors for
the focused audit. On March 17, 2004, the NJBPU released the final report for
the focused audit, which, among other things, cited weaknesses in each of the
foregoing six areas. The NJBPU's review of NUI, including matters related to NUI
Energy Brokers, concluded with the settlement agreement entered into on April
13, 2004, among NUI, NUI Utilities, Elizabethtown Gas and the NJBPU regarding
the issues raised in the focused audit. Under the settlement agreement,
10
NUI Utilities agreed to provide a $28 million refund to Elizabethtown Gas
ratepayers and to pay a $2 million penalty to the State of New Jersey over five
years./9
In November 2003, the SEC advised NUI that it is conducting an informal
inquiry relating to NUI Energy Brokers. On March 1, 2004, the SEC requested NUI
produce voluntarily certain documents in furtherance of its informal inquiry.
NUI is fully cooperating with the SEC.
As indicated below, after the acquisition closes, the NUI Board of
Directors and the NUI Utilities Board of Directors will be replaced with
directors selected by AGL Resources. The NUI companies would, therefore, benefit
from AGL Resources' strong governance processes and procedures.
The Board of Directors of AGL Resources currently consists of eleven
members: ten independent, outside directors plus Ms. Rosput, AGL Resources'
Chairman, President and CEO. The independent members of the Board meet regularly
without the presence of management, and they meet with management without the
presence of the CEO. These private meetings are intended to ensure that the
Board receives the unvarnished version of the facts in every situation.
Furthermore, the charters of each of the Board committees clearly establish
their respective roles and responsibilities, including the independence of
outside auditors and consultants, who are retained by the Board directly. The
charters may be found on AGL Resources' website at www.aglresources.com at the
section entitled, "Investor Information - Corporate Governance - Highlights."
AGL Resources has formed committees of its Board of Directors for risk
management and corporate governance, has set clearly established internal rules
for delegation of authority, and has implemented a strong set of policies on
ethics and honesty for all employees.
AGL Resources is also committed to providing the investment community and
its regulators with information that is accurate, timely and as transparent as
possible. AGL Resources' independent auditors PricewaterhouseCoopers LLP report
directly to the Audit Committee. AGL Resources has also adopted a Code of
Business Conduct. All employees must confirm annually, in writing, their
acceptance of the Code of Business Conduct. AGL Resources also has an insider
trading policy, to which all directors and employees, including our key
corporate decision makers, must strictly adhere. To foster an environment of
compliance, AGL Resources has, for years, maintained a hotline available for
employees to anonymously and confidentially report any questionable practices,
actions or activities at the company. AGL Resources also surveys its employees
in the accounting and control area of the company periodically to ensure that
they are satisfied with the control environment and the company's practices. AGL
Resources also surveys employees annually for a broad set of reasons, including
testing the compliance environment.
____________________
9 The $28 million will be credited to ratepayers as follows: $7 million in NUI's
fiscal year 2004, $6 million in NUI's fiscal year 2005 and $5 million in each of
NUI's fiscal years 2006, 2007 and 2008. The $2 million penalty must be paid in
$400,000 annual installments in each of NUI's fiscal years 2004 through 2008.
The company has the option to make a balloon payment of all outstanding amounts
due under the terms of the settlement agreement at any time. In addition, upon
the close of a sale of NUI Utilities, any outstanding balance is required to be
paid in full by NUI Utilities within a period to be determined by the NJBPU.
11
After the acquisition, a vast majority of NUI's current business processes
that impact control over financial reporting will be conformed to the processes
used by AGL Resources, which will replace NUI's current control processes. Any
processes that are unique to NUI that remain in place after the acquisition will
be subject to the corporate governance and entity-level control provisions of
AGL Resources. Moreover, since AGL Resources is regulated under PUHCA, the NUI
companies will likewise comply with PUHCA requirements following the close of
the acquisition.
Capital Structure
The capital structures of NUI, NUI Utilities and VGDC as of June 30, 2004
are shown in the table below.
---------------------------------------------------------------------------------------------
NUI (6/30/04) NUI Utilities (6/30/04)
---------------------------- ------------------------------- --------------------------------
($MM) % of total cap ($MM) % of total cap
---------------------------- -------------- ---------------- --------------- ----------------
Long-term debt 199 28.4% 199 39.1%
Short-term debt
(including current
maturities of long-term 294 (1) 42.0% 86 (2) 16.9%
debt)
Preferred stock
Common stock equity 207 29.6% 224 44.0%
============================ ============== ================ =============== ================
Total capitalization $700 100.0% $509 100.0%
---------------------------------------------------------------------------------------------
(1) Net of $111 million of cash at June 30, 2004.
(2) Net of $66 million of cash at June 30, 2004.
------------------------------------------- -------------------------------------------------
VGDC (6/30/04)
------------------------------------------- -------------------------------------------------
($MM) % of total cap
------------------------------------------- ------------------------ ------------------------
Long-term debt 0 -
Short-term debt (including current (1)(1) 50%
maturities of long-term debt)
Preferred stock - -
Common stock equity (1) 50%
=========================================== ======================== ========================
Total capitalization (1) 100.0%
------------------------------------------- ------------------------ ------------------------
(1) Net of $1 million of cash at June 30, 2004
12
NUI, and NUI Utilities have the following ratings. VGDC has no rated debt.
--------------------------------------------------------------------------------
NUI NUI Utilities
---------------------------------------- --------------- -----------------------
Caa1 B1
Moody's outlook Developing Developing
S&P corporate credit rating -- BB
S&P outlook -- CreditWatch with
developing implications
--------------------------------------------------------------------------------
C. Description of the Transaction
1. The Merger
On September 26, 2003, the Board of Directors of NUI announced its
intention to pursue the sale of the company. Applicants have entered into an
Agreement and Plan of Merger by and among AGL Resources Inc., Cougar
Corporation/10 and NUI Corporation, dated as of July 14, 2004 ("Merger
Agreement"), pursuant to which AGL Resources has agreed to acquire all the
outstanding shares of NUI for $13.70 per share in cash, or $220 million in the
aggregate based on approximately 16 million shares currently outstanding. AGL
Resources will assume the outstanding indebtedness of NUI at closing. As of June
30, 2004, NUI had approximately $604 million in debt and $111 million of cash on
its balance sheet, bringing the current net value of the acquisition to $713
million. AGL Resources anticipates that the amount of NUI debt and cash will
change prior to the time of closing.
2. Financing the Merger
The purchase of NUI shares will be funded primarily through the issuance of
AGL Resources common stock at or prior to closing. AGL Resources also must
refinance a substantial portion of NUI and NUI Utilities' outstanding debt upon
closing, due to "change in control" provisions included in these financings. AGL
Resources expects to maintain its strong investment-grade ratings and its
current dividend policy post-acquisition. As a result of the announcement of the
acquisition, however, the outlooks on AGL Resources' credit ratings have
changed. Moody's recently affirmed AGL Resources' ratings, but changed its
rating outlook to negative from stable. Both Standard & Poor's and Fitch changed
AGL Resources' credit ratings to "on watch" status with negative outlooks. These
rating agencies have indicated their actions are the result of the execution
risks in consummating, financing and integrating the NUI acquisition, and
concerns regarding issues and risks associated with NUI's business. This
placement of AGL Resources on credit "watch" by the major credit rating agencies
is
____________________
10 Cougar Corporation is a wholly owned subsidiary of AGL Resources organized
under the laws of New Jersey. It was incorporated on July 14, 2004 solely for
the purposes of the Merger and is engaged in no other business.
13
customary, and this action is not expected to result in any adverse ratings
actions. AGL Resources can readily finance this acquisition without significant
pressure on the balance sheet or on its credit rating. AGL Resources expects to
maintain its strong investment-grade rating and its current dividend policy
post-acquisition. After the Merger, AGL Resources' ratio of equity to total
capitalization will remain well above 30%./11
AGL Resources may elect to finance the cash portion of the purchase price
through the issue of common stock at or prior to closing if market conditions
are favorable. This approach has been used in other recent acquisitions in the
utility industry./12 The Financing Order provides sufficient authority for AGL
Resources to proceed in this fashion because, in the unlikely event that AGL
Resources were to sell common stock and not close the NUI acquisition, the
proceeds of the stock issuance would be used only for permitted corporate
purposes. AGL Resources currently is authorized to issue equity and debt
securities in an aggregate amount outstanding at any one time not to exceed $5
billion through March 31, 2007. AGL Resources is not requesting additional
financing authorization to finance the purchase price.
3. Conditions
The transaction is subject to the approval of NUI's shareholders; the
Securities and Exchange Commission; the Federal Communications Commission
("FCC"); the state regulatory agencies of New Jersey, Maryland and Virginia; and
any necessary approval or the expiration or termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
These approvals are further discussed in Item 4, below.
The consummation of the transaction is further subject to the following
conditions: (i) NUI shall have received orders approving the transaction from
the above referenced state utility commissions that contain certain terms
specified by AGL Resources, except as would not have a material adverse effect
on NUI, NUI Utilities, or AGL Resources; (ii) neither NUI nor any of its
subsidiaries shall have been indicted or criminally charged for a felony
criminal offense by any Governmental Entity (with the express exception of NUI
and NUI Energy Brokers with respect to the matters specified in the Settlement
with the NJAGO) relating to the matters that are the subject of the NJBPU
Settlement Order and the Stipulation and Agreement referred to therein, the
NJAGO Settlement or the Stier Anderson Report (as those terms are defined in the
Merger Agreement, see Exhibit B-1 hereto), and NUI and its subsidiaries shall
not have received any notice of non-compliance in any material respect with the
NJAGO Settlement, and there shall have been no revocation of or material changes
to the terms of the NJAGO Settlement; (iii) neither NUI nor its subsidiaries
shall be the subject of an active investigation with respect to the matters that
are the subject of the NJBPU
____________________
11 See Pro Forma Capitalization Table at Item 3.B.1.c, supra.
12 For example, in Ameren Corporation, Holding Co. Act Release No. 27449 (Oct.
5, 2001) ("Ameren Financing Order"), the Commission authorized Ameren to issue
common stock, among other things, as consideration for the equity securities or
assets of other companies, provided that such acquisitions were either expressly
authorized by separate Commission order or exempt under the Act. Ameren
subsequently financed its acquisition of CILCORP Inc. with common stock issued
prior to the issuance of the Commission order approving the acquisition. See
Ameren Corporation, Holding Co. Act Release No. 27645 (Jan. 29, 2003). Ameren
has indicated that it will follow the same approach in its acquisition of
Illinois Power. See Ameren Corp. Application on Form U-1/A filed June 25, 2004
(SEC File No. 70-10220).
14
Settlement Order and the Stipulation Agreement referred to therein, the NJAGO
Settlement or the Stier Anderson Report, which, individually or in the
aggregate, would reasonably be expected to have a material adverse effect on NUI
or NUI Utilities; and (iv) no other material adverse effect as defined in the
Merger Agreement has occurred.
AGL Resources has the right to terminate the Merger Agreement if NUI does
not have necessary interim financing in place by September 30, 2004. On
September 29, 2004, NUI announced that it and NUI Utilities had obtained credit
facilities aggregating $95 million. AGL Resources has reviewed the terms of the
credit facilities and currently believes that the credit facilities conform with
the terms and requirements of the Merger Agreement. AGL Resources may also
terminate the agreement if NUI and NUI Utilities do not have certain other
financing facilities in place or drawn, or there is a payment default or an
acceleration of indebtedness.
Lastly, the Merger Agreement may be terminated (i) by NUI in order for NUI
to pursue a superior acquisition proposal; (ii) by AGL Resources based upon the
board of directors of NUI withdrawing its recommendation of the Merger Agreement
or recommending a superior acquisition proposal to the shareholders of NUI;
(iii) by either party due to the consummation of the merger not occurring by
April 13, 2005 (which is subject to a 90 day extension to obtain regulatory
approvals); (iv) by either party due to the shareholders of NUI failing to
approve the Merger Agreement; or (v) by AGL Resources based upon the existence
of a material, uncured breach of the Merger Agreement by NUI, provided that in
the cases of clauses (iii)-(v) above, a termination fee (as described below) is
payable only if and when NUI enters into a definitive agreement with respect to
an alternative acquisition proposal within 12 months of such termination. In the
event of a termination of the Merger Agreement pursuant to the circumstances
provided in (i) and (ii), NUI will have to pay AGL Resources a termination fee
of $7.5 million. The Merger Agreement also contains other customary termination
rights, which do not result in the payment of a termination fee.
4. Management and Operations Following the Merger
Pursuant to the Merger Agreement, AGL Resources has agreed to acquire NUI
in a reverse triangular merger in which, at closing, a newly created subsidiary
of AGL Resources will merge with and into NUI. Upon the consummation of the
Merger, NUI will be a wholly owned direct subsidiary of AGL Resources./13
Exhibit K-1 sets forth the organizational structure of the combined company
after the Merger, simplified to show only major subsidiaries.
Upon closing, Craig Matthews, NUI's current CEO, will leave the company.
AGL Resources is evaluating the appropriate composition of NUI's senior
management after closing as a part of the work of a combined AGL Resources and
NUI transition team. The members of the NUI and NUI Utilities Boards of
Directors will resign and new directors will be selected from the management of
AGL Resources and its subsidiaries. The AGL Resources Board of Directors intends
to add a New Jersey
____________________
13 While AGL Resources has not made any definitive decisions regarding its
corporate structure following the closing, given NUI's exposure to certain
post-closing liabilities and obligations, it is desirable to keep NUI's
corporate structure in existence for some time following the closing.
Consequently, AGL Resources would not be the direct holder of the capital stock
of NUI's utility business.
15
resident of significant professional stature and business qualification to the
AGL Resources Board. Since the closing the VNG acquisition, AGL Resources has
sought to have at least one Virginian business leader on its Board./14
AGL Resources is still evaluating personnel to fill key management
positions and roles at NUI. AGL Resources intends to manage and govern NUI and
NUI Utilities in the same manner in which it currently manages its other
utilities. At the corporate level, it is clear that there is some overlap among
employees at AGL Resources, NUI and NUI Utilities, particularly in the
"corporate services" area, including accounting, finance, legal, and public
relations. AGL Resources and NUI have established an integration team that will
identify redundancies that should be addressed as AGL Resources integrates NUI's
corporate management into AGL Resources' existing management structure.
5. Benefits of the Merger
The acquisition will strengthen AGL Resources' position as a preeminent
operator of natural gas utility assets in the Eastern United States by
incrementally expanding its base of strong urban utility operations. With this
acquisition, AGL Resources will expand its geographic footprint along the East
Coast, reaching from Florida to New Jersey; and increase its customer base by
approximately 20 percent to a total of more than 2.2 million customers. In
addition, the acquisition will allow AGL Resources to modernize operations and
upgrade service quality to NUI's customers; acquire strategic natural gas
storage assets and pipeline connections; and enhance its asset management
capabilities. AGL Resources expects to see earnings accretion within the first
full year after closing, based on its experience integrating VNG.
AGL Resources expects to improve NUI's business to a level on par with AGL
Resources' utility subsidiaries for the benefit of all of its stakeholders. The
Merger will provide an incremental opportunity for AGL Resources to build on its
track record for running utility operations and enhancing shareholder value.
a. Benefits from AGL Resources' Financial Strength
As an investment-grade company, AGL Resources brings financial strength and
resources to the transaction. As of June 30, 2004, AGL Resources had an
enterprise value of $3 billion and total operating revenues of $945 million. AGL
Resources' Senior Notes are currently rated Baa1/BBB+/A- by Moody's, Standard &
Poor's and Fitch, respectively. AGL Resources was one of the few energy
companies to receive a credit rating upgrade (by Fitch Ratings) in 2003.
Recently, Platts Global Energy named AGL Resources its "2003 Gas Company of the
Year."
The most significant benefit of the Merger is the increased financial
stability for NUI's utilities as a result of AGL Resources' financial strength.
That strength will support NUI's utility customer growth and related capital
requirements as well as the significant working capital necessary to purchase
and deliver natural gas at today's higher commodity prices. A pro forma forecast
with
____________________
14 Henry C. Wolf, Vice Chairman and Chief Financial Officer of Norfolk Southern
Corporation, is from Norfolk, Virginia and is currently a director of AGL
Resources.
16
selected financial information of NUI, NUI Utilities and VGDC, prepared by AGL
Resources, is provided in Confidential Exhibit M-3 hereto.
Because of NUI's weakened credit ratings, it must prepay gas commodity and
demand charges at a significant cost. In addition, NUI is incurring significant
bank fees and high interest rates because of its poor credit ratings. Being a
part of an investment grade company will, in the short run, significantly reduce
the interest rate at which NUI Utilities currently borrows and will also allow
NUI Utilities access to capital in the future at attractive prices, clearly a
benefit in the long run.
The Merger should reduce the possibility of a liquidity crisis at NUI and
NUI Utilities that could be triggered if a payment default or acceleration of
indebtedness were to occur under the terms of each company's debt financing. As
indicated above, under the terms of the Merger Agreement, AGL Resources would
not be obligated to complete the acquisition if either a payment default or
acceleration of indebtedness were to occur.
AGL Resources will need to refinance much of NUI and NUI Utilities' debt at
closing -- an amount that, depending on the date of the closing, could exceed
$530 million. This debt includes the approximately $405 million that is
currently outstanding under NUI and NUI Utilities' current credit facilities,
which terminate at closing; up to $95 million of any additional borrowings that
may be outstanding at closing under NUI and NUI Utilities' new credit facilities
("Seasonal Bridge"), which terminate at closing; and up to $30 million payable
by NUI Utilities after closing under the Settlement Agreement with the NJBPU./15
AGL Resources intends to finance the repayment of NUI and NUI Utilities'
indebtedness at closing by issuing unsecured indebtedness to external creditors
and then loaning the proceeds of the issuance to NUI and NUI Utilities through
long-term intercompany debt (the "Intercompany Notes")./16 NUI and NUI Utilities
will use the funds borrowed under the Intercompany Notes to repay indebtedness
to third party lenders under the Credit Agreement and Seasonal Bridge, and under
its Settlement Agreement with the NJBPU. AGL Resources anticipates that the
principal of the Intercompany Notes will equal the amount that NUI and NUI
Utilities require for repayment of indebtedness under these facilities and will
otherwise be on no less favorable terms (e.g., weighted average interest rate,
maturities, placement costs) than those upon which AGL Resources financed the
repayment in the marketplace. AGL Resources expects that the Intercompany Notes
will refinance NUI and NUI Utilities' existing indebtedness on terms that are
more favorable to NUI and NUI Utilities than those that are currently provided
under the Credit Agreement and Seasonal Bridge. A form of Intercompany Note is
attached as Exhibit L-2 hereto.
The Merger will not jeopardize AGL Resources' financial condition. AGL
Resources plans to issue a substantial amount of equity to finance the
acquisition and maintain a balanced, post-Merger capital structure. In addition,
the NUI and NUI Utilities debt that AGL Resources proposes to refinance will be
significantly less costly and, therefore, more supportable by the acquired
companies.
____________________
15 The repayment of NUI's bank loans would eliminate external debt at the NUI
level.
16 AGL Resources or its financing subsidiary, AGL Capital Corporation, may issue
indebtedness and fund NUI and NUI Utilities by acquiring the Intercompany Notes.
17
NUI Utilities is also one-fourth to one-fifth the current size of AGL Resources,
depending on the measure used,/17 so AGL Resources financial structure should
not be subjected to unreasonable financial stress as a consequence of the
Merger. Lastly, NUI Utilities is fundamentally a sound public utility company
that is expected to contribute positively to the earnings of AGL Resources. A
memorandum discussing the litigation and government investigations involving NUI
is attached as Confidential Exhibit M-2.
As part of the due diligence process associated with the Merger, AGL
Resources conducted a thorough review of the pending litigation and governmental
investigations disclosed by NUI in the Merger Agreement. In general, AGL
Resources reviewed the applicable court filings, correspondence and other
relevant documents, interviewed NUI's in-house and outside counsel and retained
outside counsel to evaluate the potential for liability and the amount of
exposure, if any.
AGL Resources does not believe that any of the disclosed matters will have
a materially adverse impact on its business or assets for several reasons,
including the fact that NUI will be maintained as a separate subsidiary of AGL
Resources upon the closing of the transaction. As a result, NUI, and not AGL
Resources, would be liable for any damages, fines or other payments relating to
the pending matters. In addition, NUI maintains various insurance coverages that
are applicable to these liabilities. AGLR took into account reasonable estimates
of NUI's potential liabilities when it valued NUI for purposes of the merger.
Finally, AGL Resources included in the Merger Agreement as closing conditions
requirements that (i) NUI will not be subject to any active governmental
investigations relating to the matters that are the subject of the New Jersey
Attorney General's Office investigation, if such investigation could have a
material adverse effect on NUI and (ii) NUI will not be the subject of any
further felony criminal indictments with respect to such matters.
Moody's recently affirmed AGL Resources' credit rating following the public
announcement of the acquisition. Moody's indicated that its negative outlook
reflects the execution risks in consummating, financing, and integrating this
transaction. Moody's concluded, however, that the terms of the Merger Agreement
protect AGL Resources from certain of NUI's outstanding contingencies as they
allow AGL Resources to abandon the purchase should NUI be unable to satisfy AGL
Resources' concerns with regard to certain matters.
Moody's negative outlook (as opposed to a review for possible downgrade)
denotes its expectation that the strains in AGL Resources' credit profile
brought from this purchase will be temporary and AGL Resources will recover over
an 18-24 month time horizon. Moody's affirmed AGL Resources' ratings and noted
its expectation that the company's financial resources and financial flexibility
should enable AGL Resources to absorb a temporary near-term strain of acquiring
a smaller, financially weaker entity.
____________________
17 In terms of size, NUI's assets are over a quarter that of AGL Resources, its
customer base is about a fifth of that of AGL Resources.
18
b. Benefits From AGL Resources' Utility Experience
AGL Resources has been operating natural gas local distribution systems for
almost 150 years and has a strong track record of well-run utility operations.
AGL Resources' business model will produce efficiencies in the delivery of
superior service to NUI's customers. Because of its own geographic scope, AGL
Resources will be able to integrate all four of NUI's utility distribution areas
into its system without disruption, thereby providing a smooth transition for
customers in all states where NUI is doing business.
Upon closing, AGL Resources will be the largest local distribution company,
in terms of number of customers, along the east coast of the United States. This
scale allows the company to continue its strategy of investment in modernizing
technologies, which improve customer service and provide other benefits for
ratepayers. AGL Resources intends to improve NUI's financial condition and to
implement operational and infrastructure improvements in NUI's utility
operations.
AGL Resources' utility businesses use state-of-the-art technology and
field-tested best practices to provide superior service. The integration of this
technology at NUI should include improvements such as the implementation of
compliance tracking systems to track system leaks; use of work management system
software and practices for deployment of field work; use of an automated
dispatch system to allow field service work to be real-time system generated;
upgrades to the customer information system to improve the response of the
customer service representatives; and use of workforce planning tools to
forecast call volumes to match customer service representation. These systems
and adherence to best practices will benefit NUI utility services and enhance
service to NUI's customers. AGL Resources is confident that it will be able to
improve upon NUI's utility customer service, safety and reliability record over
time.
Additionally, to improve systems reliability for NUI's utilities, AGL
Resources will also seek to accelerate NUI's existing pipeline replacement
program which is aimed at replacing bare steel and cast iron pipe. AGL has the
engineering construction and design management expertise to manage replacement
programs efficiently and effectively. Finally, AGL Resources will initiate the
tracking of NUI utilities' operational metrics in order to manage the business
by benchmarking these metric across AGL Resources' utilities as well as with
other utilities.
The Merger will have benefits for AGL Resources' current utility businesses
as well. For example, Elizabethtown Gas is located in a region where there is
strong base usage and where gas is the preferred energy alternative. NUI is also
positioned in the geographic area where AGL Resources conducts wholesale asset
management operations. Additionally, the increase to the number of AGL
Resources' utility customers means that AGL Resources will be able to allocate
its corporate overhead over a larger number of ratepayers. This should lead to
better use of pipeline capacity and storage for which NUI Utilities is already
contracted but which is not being utilized, thus yielding benefits now and in
the future.
19
D. Financing Authority
On April 1, 2004, the Commission issued an order authorizing AGL Resources
and its utility and nonutility subsidiaries to engage in various financing
transactions summarized in Item 3, below./18 The authorization period of the
Financing Order extends from April 1, 2004 through March 31, 2007
("Authorization Period"). As more fully described in Item 3 below, Applicants
seek approval pursuant to Sections 6(a), 7, 9(a), 10, 12(b), 12(c), and 13(b) of
the Act and Rules 43, 45, 46 and 54 for the NUI Group of companies to, after the
consummation of the Merger, undertake any of the transactions in which current
subsidiaries of AGL Resources may engage under the Financing Order during the
Authorization Period. The NUI Group companies would be subject to the same
financing limitations and conditions as set forth in the Financing Order.
In particular, Applicants propose to extend to the NUI Group authority
concerning:
o Utility subsidiary short-term debt
o Authorization and operation of the money pools
o Guarantees
o Hedging
o Changes in capital stock of wholly-owned subsidiaries
o Financing entities
o Restructuring and reorganization
o Intermediate subsidiaries
o Payment of dividends out of capital and unearned surplus
Each of these areas of financing authority is discussed in greater detail
in Item 3, below.
E. Affiliate Transactions
On October 5, 2000, the Commission issued an order which, among other
things, approved the formation of a system service company and authorized
certain intrasystem transactions.19 NUI proposes that it and its subsidiaries
would enter into a services agreement with AGL Services pursuant to the
Commission-approved form of services agreement, a copy of which is attached
herein as Exhibit L-1.
1. Gas Procurement and Asset Management Arrangement
NUI Utilities also proposes to enter into a three year gas procurement and
asset management arrangement with a subsidiary of AGL Resources, Sequent Energy
Management ("Sequent"). Sequent provides gas procurement and transportation and
storage capacity asset management services to AGLC, VNG and CGC pursuant to
arrangements with the respective state commissions with jurisdiction over AGLC,
VNG and CGC. Under these arrangements, Sequent provides commodity gas, including
related procurement services, and also acts as agent for AGLC, VNG and CGC in
____________________
18 See Financing Order, supra, note 3.
19 AGL Resources Inc., Holding Co. Act Release No. 27243 (Oct. 5, 2000)
("Intrasystem Transactions Order").
20
connection with transactions for gas transportation and storage capacity. These
transactions are exempt from regulation under Section 13(b) of the Act by virtue
of Rules 80 and 81. The rules exempt transactions in natural gas from the
definition of goods under the Act and provide that transportation and similar
services, the sale of which is normally subject to public regulation are
exempted from the provisions of Section 13. Gas transportation and storage
services are subject to the regulation of the FERC. Sequent proposes to provide
similar services to NUI Utilities and VGDC subject to the approval of the NJBPU
and VSCC.
The asset management model that Sequent employs provides for revenue
sharing between the asset manager and the utility's ratepayers. As noted above,
Sequent currently manages the assets of AGLC, VNG and CGC and under these
arrangements, Sequent contributed approximately $3 million to customers in the
first six months of 2004.
2. Billing Services
NUI Utilities currently has an Agreement for Billing Services, dated
February 18, 2004, with NUI's Nonutility Subsidiary, UBS, under which UBS
provides NUI Utilities with certain billing related services using NUI
Utilities' customer information system and certain other data center services on
UBS' mainframe computer, including operating systems related to NUI Utilities'
work order management, leak management, meter management, time entry and field
services. The agreement is effective until March 31, 2007, but may be terminated
by NUI Utilities with 180 days prior written notice. This agreement has been
approved by the NJBPU.
UBS charges NUI Utilities market rates for the provision of these services.
After closing, AGL Resources is willing to cause UBS and NUI Utilities to amend
the agreement to require the services to be provided to NUI Utilities at UBS'
cost. Prior to implementing such amendment, however, AGL Resources must
determine whether a change in the pricing standard to terms more favorable to
NUI Utilities would trigger contractual obligations to provide cost-based
pricing to UBS' unaffiliated customers. In addition, if NJBPU approval of the
amended contract is required, AGL Resources will need to seek such authorization
before restructuring the contract between UBS and NUI Utilities. AGL Resources
therefore requests a temporary exception to the "at cost" provisions of Section
13(b) of the Act and the rules thereunder, for two years, to provide adequate
time to restructure this contract. It is possible that at the end of the
two-year period AGL Resources will be able to restructure all of UBS' existing
contracts so that it may consolidate UBS with NUI Utilities.
3. Construction and Management Services
Through a wholly owned subsidiary, VGC provides construction and operations
management services to SSLLC. VGC's wholly owned subsidiary, Virginia Gas
Pipeline Company ("VGPC"), serves as the construction and operations manager to
SSLLC, pursuant to an Operating Agreement, dated August 15, 2001. Under the
terms of this agreement, SSLLC reimburses VGPC for the costs it incurs to
construct, maintain and operate SSLLC's facilities, including VGPC's
administration and labor costs. This service arrangement is permitted under Rule
87(b)(1) and is consistent with the cost pricing standard of Rule 90.
21
F. Tax Allocation Agreement
On December 23, 2003, the Commission issued a Supplemental Order
authorizing AGL Resources' tax allocation agreement./20 AGL Resources proposes
to add the NUI Group companies to the existing tax allocation arrangements
approved by the Commission for the AGL Resources system.
G. Rule 16 Exemption
As discussed in Item 3 below, SSLLC seeks to rely on an exemption under
Rule 16 from the obligations, duties and liabilities imposed upon it under the
Act as a subsidiary or affiliate of a registered holding company. Accordingly,
Applicants request that the Commission authorize AGL Resources to acquire NUI's
interest in SSLLC under Sections 9(a)(1) and 10.
H. Section 3(a)(1) Exemption Request for VGC
As discussed in Item 3 below, Applicants also request that the Commission
issue an order pursuant to Section 3(a)(1) of the Act providing that VGC, a
Virginia corporation with a Virginia utility subsidiary operating solely in
Virginia, and each of its subsidiary companies as such, will be exempt from all
provisions of the Act, except Section 9(a)(2).
Item 2. Fees, Commissions and Expenses.
Applicants estimate the fees associated with the completion of the
transaction to be as follows (amounts in $ millions):
----------------------------------------------------------------
($ millions) AGL NUI Total
---------- -------
Resources(1)
----------------------------------------------------------------
Legal 3.3 5.3 8.6
Accounting 0.6 0.2 0.8
Bankers 4.0 10.2 14.2
----------------------------------------------------------------
Total $7.9 $15.7 23.6
----------------------------------------------------------------
(1) The amounts shown do not include the costs associated with
refinancing NUI's debt or the issuance of equity by AGL
Resources. Such costs are subject to the terms of the Financing
Order.
Item 3. Applicable Statutory Provisions.
A. Applicable Provisions
Sections 5(b), 6(a), 7, 9(a), 10, 11, 12(b), 12(c), and 13(b) of the Act
and Rules 20, 43, 45, 46, and 54 thereunder are considered applicable to the
proposed transactions.
____________________
20 AGL Resources Inc., et al., Holding Co. Act Release No. 27781 (Dec. 23, 2003)
("Tax Allocation Order"). The Commission's Order of October 5, 2000, AGL
Resources Inc., et al., Holding Co. Act Release No. 27242 (Oct. 5, 2000) had
reserved jurisdiction, pending completion of the record over (among other
things) the tax allocation agreement.
22
To the extent that the proposed transactions are considered by the
Commission to require authorizations, exemption or approval under any section of
the Act or the rules and regulations thereunder other than those set forth
above, request for such authorization, exemption or approval is hereby made.
B. Legal Analysis
1. Sections 9(a), 10 and 11
Section 9(a)(2) of the Act makes it unlawful, without approval of the
Commission under Section 10, "for any person ... to acquire, directly or
indirectly, any security of any public utility company, if such person is an
affiliate ... of such company and of any other public utility or holding
company, or will by virtue of such acquisition become such an affiliate." Under
the definition set forth in Section 2(a)(11)(A) of the Act, an "affiliate" of a
specified company means "any person that directly or indirectly owns, controls,
or holds with power to vote, 5 per centum or more of the outstanding voting
securities of such specified company."
AGL Resources is the owner of 100% of the voting stock of three public
utility companies, AGLC, CGC and VNG. Because AGL Resources will, as a result of
the Merger, own more than five percent of the outstanding voting securities of
more than one public utility company, AGL Resources must obtain the approval of
the Commission for the Merger under Sections 9(a)(2) and 10 of the Act. The
statutory standards to be considered by the Commission in determining whether to
approve the proposed Merger are set forth in Sections 10(b), 10(c) and 10(f) of
the Act.
As described below, the Merger complies with all of the applicable
provisions of Section 10 of the Act.
a. Section 10(b)(1)
The Commission may not approve the Merger if it determines, pursuant to
Section 10(b)(1), that such acquisition will tend towards interlocking relations
or the concentration of control of public-utility companies, of a kind or to an
extent detrimental to the public interest or the interest of investors, or
consumers. For the reasons given below, there is no basis in this case for the
Commission to make either of those negative findings concerning the Merger.
By its nature, any merger results in new links between theretofore
unrelated companies./21 These links, however, are not the types of interlocking
relations targeted by Section 10(b)(1), which
_______________
21 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) ("interlocking
relationships are necessary to integrate [the two merging entities]").
23
was primarily aimed at preventing business combinations unrelated to operating
efficiencies./22 The Merger will not result in an undue concentration of control
of public utility companies.
Upon closing, Craig Matthews, NUI's current CEO, will leave the company.
AGL Resources is evaluating the composition of NUI's senior management as a part
of the work of a combined AGL Resources and NUI transition team. The members of
the NUI and NUI Utilities Boards of Directors will resign. After the
consummation of the acquisition, each of NUI's and NUI Utilities' Boards of
Directors will be comprised of officers of AGL Resources, much like the current
boards of AGLC, VNG and CGC. AGL Resources' Board of Directors will also be
considering revisions to the charter of its Environmental and Corporate
Responsibility Committee to contemplate oversight of the post-acquisition
integration of the NUI Utilities and VGDC, with proper recognition of the public
interest considerations of the states in which the acquired utilities operate.
In addition, it is the practice of AGL Resources' Board of Directors to hold one
board meeting a year outside of Georgia and invite public and community
officials to meet with board members so that they may hear first-hand how AGL
Resources is doing in the local area.
AGL Resources is still evaluating personnel to fill key management
positions and roles at NUI. AGL Resources intends to manage and govern NUI and
NUI Utilities in the same manner in which it currently manages its other
utilities. At the corporate level, it is clear that there is some overlap among
employees at AGL Resources, NUI and NUI Utilities, particularly in the
"corporate services" area, including accounting, finance, legal, and public
relations. AGL Resources intends to work closely with NUI management to develop
a framework to address any redundancies that become apparent as AGL Resources
integrates NUI's corporate management into AGL Resources' existing management
structure.
In addition, the Merger will not create a "huge, complex and irrational"
system./23 In applying Section 10(b)(1) to utility acquisitions, the Commission
must determine whether the acquisition will create "the type of structures and
combinations which the Act was specifically directed [to prohibit]."/24 The
transaction is not undertaken specifically for the purpose of extending AGL
Resources' control over regulated public utilities as such. As indicated above,
the acquisition will allow AGL Resources to modernize operations and upgrade
service quality to NUI's customers; acquire strategic natural gas storage assets
and pipeline connections; and enhance its asset management capabilities.
Size: With this acquisition, AGL Resources will expand its geographic reach
along the east coast, reaching from Florida to New Jersey, and increase its
customer base by approximately 20 percent to a total of more than 2.2 million
customers. This is in line with existing holding company systems./25
___________________
22 See Section 1(b)(4) of the Act (finding that the public interests of
consumers are adversely affected "when the growth and extension of holding
companies bears no relation to economy of management and operation or the
integration and coordination of related operating properties. . . .").
23 American Electric Power Co., Holding Co. Act Release No. 20633 (July 21,
1978).
24 Vermont Yankee Nuclear Corp., Holding Co. Act Release No. 15958 (Feb. 6,
1968).
25 For example, NiSource Inc. has 3.3 million gas customers in nine states. See
NiSource Inc. Annual Report on Form 10-K for fiscal year ended December 31,
2003, File No. 001-16189, filed Mar. 12, 2004. Xcel Energy Inc. has
approximately 1.8 million gas customers in 11 states. See Xcel Energy Inc.
Annual Report on Form 10-K for fiscal year ended December 31, 2003, File No.
001-03034, filed Mar. 15, 2004.
24
Efficiencies and economies: As described above, AGL Resources anticipates
it will be able to absorb all four of NUI's utility operations into its system
without disruption, and it will implement best practices and technology
enhancements to provide service in a more efficient and economic manner. AGL
Resources expects the Merger to produce efficiencies associated with more
economical gas purchasing, information technology initiatives, improved
transmission capacity and storage utilization, and general and administrative
expense reductions. AGL Resources has analyzed performance metrics at NUI and
NUI Utilities and compared them to the performance of AGL Resources and its
subsidiaries. Based on this analysis, AGL Resources is confident that the Merger
will produce economies and efficiencies.
Competitive effects: The Merger does not reduce competition in any relevant
market. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR
Act") and rules thereunder, the Merger may not be consummated until AGL
Resources and NUI each have filed Notification and Report Forms with the United
States Department of Justice ("DOJ") and Federal Trade Commission ("FTC")
describing the effects of the transaction on competition in the relevant market,
and the required waiting period has expired. On August 5, 2004, AGL Resources
and NUI filed such pre-merger notifications with the DOJ and FTC. Accordingly,
unless the DOJ and/or FTC request additional information, the waiting period
will expire on or before September 7, 2004.
b. Section 10(b)(2)
The Commission may not approve the Merger if it determines, pursuant to
Section 10(b)(2), that the consideration (including the fees and expenses
associated with the transaction) to be paid by AGL Resources is not reasonable
or does not bear fair relation to the investment in and the earning capacity of
the utility assets underlying the securities being acquired. For the reasons
given below, there is no basis in this case for the Commission to make either of
these negative findings concerning the consideration being offered by AGL
Resources.
The process by which AGL Resources and NUI reached agreement on the Merger
demonstrates that the requirements of Section 10(b)(2) have been satisfied. The
negotiation between NUI and AGL Resources was at arms-length and the
consideration agreed to by the parties was the product of a competitive process.
In 2003, as a result of the negative impact on NUI resulting from its
credit downgrades and adverse business conditions, the NUI Board of Directors
established a Special Committee to assess the company's alternatives. After
considering a number of strategic alternatives, on September 26, 2003, the Board
of Directors of NUI concluded that the sale of the company was in the best
interests of its shareholders and other key stakeholders, including its
customers, and announced its intention to pursue the sale of the company.
Thereafter, NUI began a public auction process. A detailed account of the
auction process and related events is available as part of the NUI Corporation
Proxy Statement, Exhibit B-2.
25
Once the decision to pursue a sale was made, the NUI Board of Directors
engaged Credit Suisse First Boston LLC and Berenson & Company, LLC to act as its
financial advisors through the sale process. These advisors issued opinions that
the consideration was fair, from a financial point of view, to the holders of
NUI's shares./26 A detailed Confidential Information Memorandum by NUI was
prepared during November 2003, and initial expressions of interest from
potential purchasers were sought in December 2003. Approximately 60 interested
parties, both strategic and financial entities, were contacted and approximately
half of those parties submitted written expressions of interest. Eight parties
were invited into the second round of the sale process. Detailed due diligence
was conducted by prospective bidders during the first several months of 2004,
and binding bids were submitted on June 2, 2004. Detailed negotiations were
conducted with bidders, and ultimately NUI negotiated a definitive agreement
with AGL Resources. NUI determined that being purchased by AGL Resources was the
best strategic alternative for the company based on the key issues of price,
certainty of closing and time required to complete the merger. The final sales
price was negotiated by the parties and an agreement and plan of merger was
reached between NUI and AGL Resources on July 14, 2004, which agreement is
Exhibit B-1 herein.
This Commission has previously recognized that, as here, when the agreed
consideration for an acquisition is the result of arms-length negotiations
between the managements of the companies involved, supported by the opinions of
financial advisors, there is persuasive evidence that the requirements of
Section 10(b)(2) have been satisfied./27
Further, AGL Resources believes that the fees, commissions and expenses
paid or incurred or to be paid or incurred in connection with the Merger,
estimated in Item 2 above, are reasonable and fair in light of (1) the size and
complexity of the transaction relative to other similar transactions; (2) the
context and prolonged process of the auction; (3) the various legal and other
issues that faced NUI throughout the auction process; (4) the regulatory
processes and consents required for the Merger; and (5) the anticipated benefits
of the transaction to the public, investors and consumers. Given the
circumstances, the fees, commissions and expenses are consistent with recent
precedent, and meet the standards of Section 10(b)(2). Legal fees for both AGL
Resources and NUI are expected to comprise 1.2% of the total value of the
acquisition (i.e., $691 million). The combined accounting fees are expected to
comprise 0.1% of the acquisition value. Lastly, the combined bankers fees are
expected to comprise 2.1% of the acquisition value. Although the aggregate fees,
commissions and expenses expected to be incurred in connection with the
transaction (3.4%) are somewhat higher on a percentage basis than the
percentages in other mergers approved by the Commission, the fees, commissions
and expenses in this case are within the range of prior cases on an absolute
basis ($23.6 million) and are reasonable given the complexity of the transaction
and the other factors listed above./28
_________________
26 These opinions are printed as part of NUI's preliminary proxy statement filed
with the SEC Friday, August 13, 2004, and included herein as Exhibit B-2.
27 See Entergy Corporation, et al., Holding Co. Act Release No. 25952 (Dec. 17,
1993), petition for reconsideration denied, Holding Co. Act Release No. 26037
(Apr. 28, 1994).
28 See Unisource Energy Corporation, Holding Co. Act Release No. 27706 (Aug. 1,
2003) (fees, commissions and expenses that were incurred in connection with the
transaction totaled approximately $5.6 million or approximately 2.4% of the
total consideration to be paid); PEPCO Holdings Inc., Holding Co. Act Release
No. 27553 (July 24, 2002) (fees and expenses incurred in connection with the
transaction total approximately $45.8 million. This amount represents 2.1%
(based on a
26
c. Section 10(b)(3)
The Commission may not approve the Merger if it determines, pursuant to
Section 10(b)(3), that the acquisition will unduly complicate the capital
structure of AGL Resources or will be detrimental to the public interest or the
interest of investors or consumers or the proper functioning of such
holding-company system. For the reasons given below, there is no basis in this
case for the Commission to make either of these negative findings concerning the
Merger.
The capital structure of AGL Resources after the transaction will not be
unduly complicated and will be substantially unchanged from AGL Resources'
capital structure prior to the completion of the transaction. The proposed
acquisition is of manageable size and hence credit neutral to AGL Resources. NUI
will represent approximately 20% of the combined company only. AGL Resources can
readily finance this acquisition without significant pressure on its balance
sheet or credit rating. The transaction is limited in scope and should
strengthen AGL Resources' financial performance in the near term. NUI's current
financial difficulties have arisen from issues related to mismanagement of
utility assets, including unsuccessfully executed diversification strategies;
downgrades in NUI and NUI Utilities' credit ratings; the related high cost debt
and gas commodity purchases and subsequent regulatory audits, investigations and
in some cases criminal indictments. Regardless of these difficulties, NUI's
utility businesses are fundamentally sound. The nonutility businesses that gave
rise to NUI's financial difficulties have been wound down and will soon be
divested or closed. Further, NUI, and eventually AGL Resources, will continue
implementing procedures that will address NUI's prior mismanagement of accounts
and controls and internal audit issues.
The pro forma capitalization table below further demonstrates that the
combination would not result in a complex or unsound capital structure. In this
regard, the Commission is principally concerned that there be an adequate level
of equity in the top level holding company and each utility in the system./29 As
shown in the table below, the combined entity will have in excess of 42% common
equity as a percentage of total capitalization, well in excess of the
Commission's traditional minimum 30% common equity standard./30
___________________
purchase price of $2.2 billion) of the value of the consideration to be paid);
New Century Energies, Inc., Holding Co. Act Release No. 27212 (Aug. 16, 2000)
(fees and expenses of approximately $52 million represented approximately 1.4%
of the value of the consideration to be paid); American Elec. Power Co., Inc.
and Central and South West Corp., Holding Co. Act Release No. 27186 (June 14,
2000) (fees and expenses of approximately $73 million represented approximately
1.1% of the value of the consideration to be paid); Entergy Corp., Holding Co.
Act Release No. 25952 (Dec. 17, 1993) (fees and expenses represented
approximately 1.7% of the value of the consideration paid); Northeast Utilities,
Holding Co. Act Release No. 25548 (June 3, 1992) (fees and expenses of
approximately 2% of the value of the assets to be acquired).
29 To protect investors against unsound and complex capital structures, the SEC
also would not favor a transaction that resulted in the creation or maintenance
of an outstanding minority interest in a public utility subsidiary company.
30 "Capitalization" for purposes of this test is the sum of short-term debt
(including current maturities of long-term debt), long-term debt, preferred
stock and common stock equity.
27
----------------------------------------------------------------------------------------------------------------------------------
AGL Resources (6/30/04) NUI (6/30/04) Adjustments Pro Forma Combined
----------------------- ------------- ----------- ------------------
----------------------------------------------------------------------------------------------------------------------------------
% of total
($MM) % of total cap ($MM) % of total cap ($MM) ($MM) capitalization
----- -------------- ----- -------------- ----- ----- --------------
-----------------------------------------------------------------------------------------------------------------------------------
Long-term 962 44.4% 199 28.4% 295 1,456 50.7%
debt
Short-term
debt
(including 9.0% 294 (1) 42.0% (295) 195 6.8%
current 195
maturities of
long-term
debt)
Preferred
stock
Common
stock equity 1,011 46.6% 207 29.6% 1,218 42.5%
=================================================================================================================================
Total $2,168 100.0% $700 100.0% $ 0 $2,869 100.0%
capitalization
---------------------------------------------------------------------------------------------------------------------------------
(1) Net of $111 million of cash at June 30, 2004.
Finally, as set forth more fully in the discussion of the standards of
Section 10(c)(2) below and elsewhere in the Application, the Merger will be in
the public interest and the interest of investors and consumers, and will not be
detrimental to the proper functioning of the resulting holding company system.
d. Section 10(c)(1)
Section 10(c)(1) requires that the Commission not approve an acquisition of
securities or utility assets, or any other interests, which is unlawful under
the provisions of Section 8 or is detrimental to the carrying out of the
provisions of Section 11.
(i) Section 8
Section 8 refers to the requirements of state law as it may relate to
ownership or operation by a single company of the utility assets of an electric
utility company and a gas utility company serving substantially the same service
territory. Since AGL Resources does not own any electric utility facilities and
will not acquire such facilities as a result of the Merger, Section 8 is not
applicable to the Merger.
28
(ii) Section 11
Section 11(b)(1) generally confines the utility properties of a registered
holding company to a "single integrated public-utility system," either gas or
electric. An exception to this requirement is provided in Section 11(b)(1)(A)
through (C) of the Act./31 In this case, the combined gas properties of the
operating subsidiaries of AGL Resources and NUI will constitute a single
integrated gas utility system within the meaning of Section 2(a)(29)(B).
Further, Section 11(b)(2) of the Act requires that "the corporate structure
or continued existence of any company in the holding-company system does not
unduly or unnecessarily complicate the structure, or unfairly or inequitably
distribute voting power among security holders, of such holding-company system."
Section 11(b)(2) also directs regulated companies "to take such action as
the Commission shall find necessary in order that such holding company shall
cease to be a holding company with respect to each of its subsidiary companies
which itself has a subsidiary company which is a holding company," in other
words, to eliminate "great-grandfather" holding companies. However, the
Commission has in the past recognized the necessity of permitting the continued
existence of intermediate holding companies in registered holding company
systems in order to achieve economic and tax efficiencies that would not
otherwise be achievable in the absence of such arrangements./32
After the consummation of the proposed transaction, AGL Resources will
become a "great-grandfather" holding company with respect to VGDC, because there
will be three holding companies in its chain of ownership; AGL Resources, NUI
and VGC. This structure results from the need to retain the existing structure
of the NUI Group companies as separate legal entities post-acquisition until all
potential liabilities associated with NUI's pre-acquisition activities have been
finally resolved. Particularly, those liabilities that may result from
activities uncovered during recent investigations as discussed above. The
Commission has permitted the existence of a great-grandfather holding company,
for example in Ameren Corp./33 The Commission found in Ameren that the continued
___________________
31 Section 11(b)(1) states, in relevant part:
[T]he Commission shall permit a registered holding company to continue
to control one or more additional integrated public-utility systems,
if, after notice and opportunity for hearing, it finds that --
(A) Each of such additional systems cannot be operated as an
independent system without the loss of substantial economies which can
be secured by the retention of control by such holding company of such
system;
(B) All of such additional systems are located in on estate, or in
adjoining States, or in a contiguous foreign country; and
(C) The continued combination of such systems under the control of such
holding company is not so large (considering the state of the art and
the area or region affected) as to impair the advantages of localized
management efficient operation, or the effectiveness of regulation.
32 See, e.g., Pepco Holdings Inc. et al., Holding Co. Act Release No. 27553
(July 24, 2002); see also Energy East Corp., et al., Holding Co. Act Release No.
27546 (June 27, 2002).
33 Ameren Corp. et al., Holding Co. Act Release No. 27645 (Jan. 29, 2003).
29
existence of a secondary holding company within the Ameren system would not
unduly complicate Ameren's capital structure. Moreover, the Commission noted
that there were significant financial disincentives to eliminating the secondary
holding company at the time. In that case, to eliminate the secondary holding
company as a subsidiary, Ameren would either have to prepay outstanding debt or,
alternatively, assume the debt by means of a merger or otherwise. The prepayment
alternative would significantly increase the cost of debt. The assumption of the
debt would result in undesirable restrictions on future issuances by Ameren.
Conversely, leaving the existing debt in place would not negatively affect the
capital structure of Ameren's utility subsidiaries or be detrimental to
investors. Therefore, the Commission found that Ameren's continued ownership of
the secondary holding company did not implicate any of the abuses that Section
11(b)(2) of the Act was intended to prevent.
Similarly, in Pepco Holdings Inc.,/34 the Commission found that the
continued existence of a secondary holding company within the public utility
holding system would not unduly complicate the system capital structure. The
Commission had previously approved this structure, finding that temporary
authority was appropriate to prevent economic injury to the company,
shareholders and consumers because the structure could not be altered without a
substantial tax burden.
The Merger presents a similar situation where eliminating a holding company
level, namely NUI and VGC, prematurely could be detrimental to investors and
consumers by exposing AGL Resources to risks and liabilities associated with
NUI's operations prior to the Merger, including but not limited to, liabilities
and obligations with respect to NUI's plea agreements with the NJAGO;
investigations of NUI by the SEC and other state regulators; on-going litigation
matters and other post-closing matters. The proposed post-closing corporate
structure enables AGL Resources to segregate the liabilities and obligations of
the NUI Group companies to those companies and limits any risk or exposure to
the rest of its system.
In addition, there are tax reasons to maintain the current structure of the
NUI group. The elimination of NUI may cause AGL Resources to incur significant
adverse tax consequences because the elimination of NUI may either result in:
(1) AGL Resources' acquisition being recharacterized in a manner that would
result in two levels of tax being imposed on the acquisition instead of one
level of tax, or (2) if the acquisition is not recharacterized, AGL Resources
permanently losing its cost-based tax basis (and the associated tax benefits) in
the NUI stock. The acquisition of the NUI stock is intended to be characterized
for U.S. tax purposes as a taxable stock acquisition resulting in one level of
tax being imposed on the shareholders of NUI with respect to their sale of the
NUI stock and with AGL Resources obtaining a tax basis in the stock of NUI equal
to the purchase price paid to the shareholders.
If NUI is liquidated or otherwise eliminated as part of AGL Resources'
acquisition there is a significant risk the Internal Revenue Service (the
"Service") may recharacterize the acquisition as AGL Resources acquiring the
assets of NUI (i.e., the stock in NUI's subsidiaries) in a taxable purchase and
NUI redeeming the stock held by its shareholders in a taxable redemption. This
recharacterization would cause AGL Resources' acquisition to trigger two levels
of tax instead of the single level of tax described in the previous paragraph.
Due to the nature of AGL Resources' acquisition, AGL
___________________
34 Pepco Holdings Inc., et al., Holding Co. Act Release No. 27553 (July 24,
2002).
30
Resources would be fully liable for the additional tax described above. The
magnitude of this liability could be substantial since it is probable NUI does
not have significant tax basis in the stock of certain of its subsidiaries such
as NUI Utilities.
If the transaction were not recharacterized, the elimination of NUI would
result in AGL Resources permanently losing its tax basis in the stock of NUI.
Under U.S. tax principles, the post-acquisition elimination of NUI, through a
liquidation or merger, would result in AGL Resources acquiring the assets of NUI
(i.e., the stock in NUI's subsidiaries) in a tax-free transaction and AGL
Resources would succeed to NUI's historic tax basis in such assets. The
transaction would also result in AGL Resources' tax basis in the NUI stock being
permanently eliminated when the stock of NUI is cancelled. Consequently, the
elimination of NUI would result in AGL Resources (and indirectly its
shareholders) losing the tax benefits associated with AGL Resources having
obtained a cost-based tax basis in the NUI stock.
The proposed corporate structure does not implicate the abuses that section
11(b)(2) was designed to address, i.e., the pyramiding of holding company groups
with the interposition of one or more holding companies between the ultimate
parent holding company and the operating companies, and the issuance, at each
level of the structure, of different classes of debt or stock with unequal
voting rights./35
Therefore, the Commission should permit the retention of NUI and VGC within
the post-acquisition AGL Resources registered holding company system. AGL
Resources would commit to reorganizing its corporate structure in order to
eliminate the great-grandfather structure as soon as it is reasonably practical
to do so.
To that end, AGL Resources is considering the combination of VGDC into VNG.
Such a restructuring would simplify the corporate structure and eliminate the
"great-grandfather" issue because VGC would cease to be a holding company. AGL
Resources is evaluating the consents and authorizations that may be required to
effect such a restructuring and the tax implications of the transaction. If the
restructuring is effected as an asset transfer pursuant to the express
authorization of the VSCC, the transaction would be exempt under Section 9(b)(1)
of the Act and could be effected without further SEC authorization. AGL
Resources believes that it can complete the combination of VGDC and VNG by the
end of 2005, subject to the necessary state and other regulatory approvals.
e. Section 10(c)(2)
Section 10(c)(2) states that the Commission may not approve the acquisition
of securities or utility assets of a public utility or holding company unless
such acquisition will serve the public interest by tending towards the
economical and efficient development of an integrated public utility system. The
economic efficiencies produced by the Merger are discussed in Item 1 above. The
integrated public utility system resulting from the Merger is discussed below.
_________________
35 Exelon Corp., Holding Co. Act Release No. 27256 (Oct. 19, 2000); KeySpan
Corp., Holding Co. Act Release No. 27271 (Nov. 7, 2000).
31
The Merger will tend toward the development of an integrated public utility
system. An integrated gas public utility system is defined as "a system of one
or more gas utility companies which are so located and related that substantial
economies may be effectuated by being operated as a single coordinated system
confined in its operations to a single area or region, in one or more states,
not so large as to impair (considering the state of the art and the area or
region affected) the advantages of localized management, efficient operation,
and the effectiveness of regulation: provided, that gas utility companies
deriving gas from a common source of supply may be deemed to be included in a
single area or region."/36
Operation as a Single Coordinated System
As discussed in Item 1 above, the Merger will allow AGL Resources to
modernize operations and upgrade service quality to NUI's customers; acquire
strategic natural gas storage assets and pipeline connections; and enhance its
asset management capabilities. AGL Resources' business model will produce
efficiencies in the delivery of service to NUI's customers through the use of
coordinated management and technology systems. Further, both AGL Resources and
NUI will benefit from coordinated gas purchasing operations. In particular, AGL
Resources anticipates it will integrate all four of NUI's utility operations
into its system without disruption, thereby providing service in a more
efficient and economic manner. As an example of the opportunity to improve
economies in the delivery of services, AGL Resources' utilities operating and
maintenance metrics show a marked improvement over those currently existing at
NUI. AGL Resources' operating and maintenance expense is currently $169 less per
customer than that of NUI Utilities. AGL Resources' utilities serve
approximately 400 more customers per employee than currently at NUI's utilities.
The Merger will provide substantial economic efficiencies associated with more
economical gas purchasing, information technology initiatives, transmission
capacity and storage utilization, and general and administrative expense
reductions.
As previously described, AGL Resources' operating subsidiaries and NUI's
operating subsidiaries currently manage similar physical properties and
contractual assets (gas supply, transportation, and storage contracts of varying
types and duration). Each company maintains a professional staff that performs
services related to essential portfolio management functions, including
portfolio design, portfolio strategy, procurement, storage optimization, price
risk management, and contract administration. In AGL Resources' case, the
functions of portfolio design, portfolio strategy, pipeline and storage contract
service procurement, and price risk management strategy are performed by AGL
Services. The functions of asset management, including natural gas commodity
procurement and portfolio management, together with the execution of price risk
management strategy, are performed by Sequent. AGL Services and Sequent perform
the respective contract administration services for the applicable functions
that they perform. In NUI's case, the functions of pipeline and storage contract
service procurement, portfolio and design planning and dispatch and optimization
services are performed by employees at NUI Utilities. Cinergy Marketing and
Trading, with whom NUI Utilities currently has an asset management and gas
procurement agreement (after the wind down of NUI Energy Brokers), procures gas
on behalf of NUI Utilities, assists NUI Utilities with its risk management
functions, and provides NUI Utilities' winter peaking services.
__________________
36 PUHCA Section 2(a)(29)(B).
32
After the Merger, the two gas supply departments will be consolidated into
AGL Services, which will integrate the overall planning and management of the
two companies' respective portfolios of physical and contractual assets. We
anticipate that Sequent will also perform the same services for NUI Utilities as
those described above that Sequent performs for the other utilities of AGL
Resources. Specifically, the NUI Utilities gas supply department will be
functionally merged with that of AGL Services. In addition, as discussed above,
AGL Services will provide business services to NUI and its utility and
nonutility companies under the same terms and conditions as AGL Services serves
the companies currently within the AGL Resources registered holding company
system, as approved by the Commission.
Single Area or Region
The single area or region requirement is typically demonstrated by showing
significant overlap between the gas supply basins, transmission pipelines,
storage areas and market hubs used by the public utility companies in the
combined group.
NUI's gas utility operations are located on the East Coast and bracket the
existing gas utility operations of AGL Resources on the north and south. See the
map in Exhibit D-1. The map indicates that several pipelines carry gas from the
Gulf Coast to the East Coast. All gas utilities in the combined company will,
therefore, derive the substantial majority (more than 50%) of the gas used in
operations from the Gulf Coast supply basin. The distance between AGL Resources'
current utility operations and those of NUI is commensurate with Commission
precedent involving other gas utility acquisitions./37 The Commission should not
find that "the distance contravenes the policy of the Act against 'scatteration'
-- the ownership of widely dispersed utility properties which do not lend
themselves to efficient operation and effective state regulation."/38 As
discussed below, the expansion of the AGL Resources system by the acquisition of
the NUI system also will not have an adverse effect upon localized management,
efficient operation or effective regulation.
Common Source of Supply. Historically, in determining whether two gas
companies share a "common source of supply," the Commission has looked at
whether the two entities purchase significant percentages of their total gas
supply from production in one or more common basins, as well as whether they are
served by a common pipeline or pipelines./39 Both AGL Resources' current
utilities and the utilities added by the NUI acquisition will access primarily
Gulf Coast natural gas supplies, with the Appalachian basin as a secondary
supply source. The common gas pipelines serving the integrated public utility
system would be Transcontinental Gas Pipeline, Dominion Transmission, and
Columbia Gas Transmission (serving VNG, as well as Elizabethtown Gas and Elkton)
as well as Tennessee Gas Pipeline (serving CGC and Elizabethtown Gas). Some of
Elizabethtown Gas' supplies come from Texas Eastern Transmission which does not
currently supply AGL Resources' existing
____________________
37 See e.g., NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb.
10, 1999) (authorizing acquisition of Massachusetts gas utility by an Indiana
combination gas and electric utility holding company); Sempra Energy, Holding
Co. Act Release No. 26971 (Feb. 1, 1999).
38 NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10, 1999).
39 See MCN Corporation, 62 SEC Docket 2379 (Sept. 17, 1996).
33
utilities. City Gas obtains transportation service from Florida Gas
Transmission, which does not serve any of AGL Resources' current utilities.
The NUI utilities and the utilities in the AGL Resources group also share
several common storage contracts. These include Transco GSS, LSS, SS-1, ESS,
LGA, and WSS; Columbia Gas Transmission FSS, Tennessee FS-MA, and CNG GSS
storage. Applicants expect that both AGL Resources' and NUI's subsidiaries will
continue to derive significant percentages of their total gas requirements for
the foreseeable future from the same supply basins. Accordingly, there is
substantial evidence that AGL Resources' and NUI's gas utility operations share
a common source of supply.
State of the Art. Any determination of the appropriate size of the "area or
region" calls for consideration of the "state of the art" in the gas industry.
In NIPSCO Industries, the Commission noted that:
The industry continues to evolve, primarily as a result of
decontrol of wellhead prices, the continuing development of an
integrated national gas transportation network, the emergence of
marketers and brokers, and the "unbundling" of the commodity and
transportation functions of the interstate pipelines in response
to various FERC initiatives. In particular, Order 636 has
dramatically altered the way in which local gas distribution
companies purchase and transport their required gas supplies.
The concept of a "common source of supply" is susceptible of a
different understanding today than in 1935, when the "single area
or region" was generally defined in terms of the pipeline
delivery points (i.e., the city-gate) where system local
distribution companies purchased their gas. The ... relevant
inquiry today is whether the system utilities purchase
substantial quantities of gas produced in the same supply basins,
and whether there is sufficient transportation capacity available
in the marketplace to assure delivery on an economical and
reliable basis./40
As discussed above, the integrated gas utility system will be able to
obtain gas from producers and market hubs in the Gulf area and to arrange
transportation through many common pipelines. In addition, the combined systems
will be able to obtain gas from the Gulf and other supply regions by flexible
and efficient means, due to the development of market centers, hubs and pooling
points that facilitate transactions between gas buyers and sellers. The
interstate pipelines on which AGL Resources and NUI have contracted for
transportation service have access to significant supply resources at industry
recognized supply pools. These supply pools, (e.g., Transco Station 65,
Tennessee Zone 1, Columbia Gulf Onshore) have significant liquidity and most are
traded over electronic exchanges (e.g., the Intercontinental Exchange). Because
AGL Resources' and NUI's gas utility subsidiaries share access through their
respective pipeline transporters to several industry-
________________
40 Nipsco Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10, 1999).
34
recognized market and supply-area hubs, they will have the ability to physically
coordinate and manage their portfolios of supply, transportation and storage.
No Impairment
After the Merger, NUI's local retail gas distribution operations will be
staffed with management that is responsible for the local utility. From its
experience running public utilities, AGL Resources has learned that local
employees are vital to maintaining a connection to the local community. AGL
Resources is still in the process of reviewing NUI's utility operations to
determine the appropriate employee levels in order to continue to ensure that
each franchise is operated safely and reliably. As part of this evaluation, AGL
Resources will appropriately balance the necessity to improve customer service,
support its long term commitment to NUI's employees and contribute to the
economic vitality of the service territories.
As discussed in Item 4, the Merger also is subject to the review of the
state regulatory commissions in New Jersey, Maryland and Virginia. The
authorization of these commissions, which AGL Resources expects will be granted,
will further evidence that the Merger does not have adverse effects on local
regulatory authority.
f. Section 10(f)
Section 10(f) prohibits the Commission from approving an acquisition
unless the Commission is satisfied that the acquisition will be undertaken in
compliance with applicable state laws. As explained in Item 4 below, AGL
Resources and NUI are in the process of seeking all necessary state regulatory
approvals associated with the Merger. Copies of the respective state regulatory
applications are included at Exhibits C-1 through C-3.
2. Section 3(a)(1) Exemption Request for VGC
Applicants also requests that the Commission issue an order pursuant to
Section 3(a)(1) of the Act confirming that VGC, and each of its subsidiary
companies as such, will be exempt from all provisions of the Act, except Section
9(a)(2). Section 3(a)(1) provides that the Commission shall exempt a holding
company, and every subsidiary thereof as such, from some or all provisions of
the Act, unless such exemption would be detrimental to the public interest or
the interests of investors and consumers, if:
such holding company, and every subsidiary company thereof which
is a public-utility company from which such holding company
derives, directly or indirectly, any material part of its income,
are predominantly intrastate in character and carry on their
business substantially in a single State in which such holding
company and every such subsidiary company thereof are organized.
After the Merger, VGC and each of its public-utility subsidiary companies
from which it derives any material part of its income, will remain predominantly
intrastate in character and carry on their business substantially in a single
state, namely Virginia.
35
VGC and its only utility subsidiary, VGDC, carry on their utility
operations exclusively within Virginia where each company is incorporated.
Following the Merger, this will remain unchanged. Notably, the VSCC will have
the same jurisdiction and authority over all of VGDC's rates, services and
operations following the acquisition as it currently has, and its ability to
protect ratepayers will not be impaired by virtue of VGC's ownership by an
out-of-state holding company. The VSCC will have the ability to protect utility
customers of VGDC against any possible detriment that might be associated with
the relationship of such companies to AGL Resources. Granting the request for an
exemption, therefore, will not be "detrimental to the public interest or
interest of investors or consumers."
3. Financing Authority
After the closing of the Merger, NUI will register as a holding company
under the Act and the NUI Group companies will need financing authorization.
Applicants seek authorization pursuant to Sections 6(a), 7, 9(a), 10, 12(b), and
12(c) of the Act and Rules 43, 45, 46 and 54 for the NUI Group companies to,
after the consummation of the Merger, undertake any or all of the transactions
described herein, which current subsidiaries of AGL Resources were authorized to
engage in during the Authorization Period. The NUI Group companies would be
subject to the same limitations and conditions as set forth in the Financing
Order and described herein. The authorizations requested are described below.
Use of proceeds. The proceeds from the sale of securities in financing
transactions for which authorization is requested herein will be used for
general corporate purposes, including the financing, in part, of the capital
expenditures and working capital requirements of the NUI Group, for the
acquisition, retirement or redemption of securities previously issued by the NUI
Group, and for authorized investments in companies organized in accordance with
Rule 58 under the Act, and for other lawful purposes.
Financial flexibility. The approval by the Commission of this Application
will give the Applicants, after the consummation of the Merger, the same
flexibility to respond quickly and efficiently to their financing needs and to
changes in market conditions that the AGL Resources group companies enjoy today.
That flexibility will allow them to carry on business activities designed to
provide benefits to their customers and shareholders. Approval of the financing
transactions contemplated herein is consistent with the Financing Order and
existing Commission precedent./41
Financing Limitations. Financings by the NUI Group companies will be
subject to the following limitations ("Financing Limitations") which are the
same as those contemplated in the Financing Order:/42
__________________
41 See, e.g., Pepco Holdings Inc., Holding Co. Act Release No. 27557 (July 31,
2002); E.ON AG, Holding Co. Act Release No. 27539 (June 14, 2002); First Energy
Corp., Holding Co. Act Release No. 27459 (Oct. 29, 2001); Exelon Corp., Holding
Co. Act Release No. 27266 (Nov. 2, 2000); Dominion Resources, Inc., Holding Co.
Act Release No. 27112 (Dec. 15, 1999); and Conectiv, Inc., Holding Co. Act
Release No. 26833 (Feb. 26, 1998).
42 The Commission has previously authorized financing transactions subject to
these same general parameters. See SCANA Corporation, Holding Co. Act Release
No. 27649 (Feb. 12, 2003).
36
o Effective Cost of Money. The effective cost of money on long-term
debt borrowings in accordance with authorizations granted under
the Application will not exceed the greater of (a) 500 basis
points over the comparable-term U.S. Treasury securities or (b) a
gross spread over U.S. Treasuries that is consistent with similar
securities of comparable credit quality and maturities issued by
other companies./43 The effective cost of money on short-term
debt borrowings in accordance with the authorizations granted in
the Application will not exceed the greater of (a) 500 basis
points over the comparable-term London Interbank Offered Rate
("LIBOR") or (b) a gross spread over LIBOR that is consistent
with similar securities of comparable credit quality and
maturities issued by other companies.
o Maturity. The maturity of long-term debt will be between one and
50 years after the issuance thereof. Short-term debt will mature
within a year.
o Issuance Expenses. The underwriting fees, commissions or other
similar remuneration paid in connection with the non-competitive
issue, sale or distribution of securities pursuant to this
Application will not exceed the greater of (i) 5% of the
principal or total amount of the securities being issued or (ii)
issuance expenses that are generally paid at the time of the
pricing for sales of the particular issuance, having the same or
reasonably similar terms and conditions issued by similar
companies of reasonably comparable credit quality./44
o Common Equity Ratio. Each of NUI Utilities and VGDC on an
individual basis will maintain common stock equity of at least
30% of total capitalization as shown in its most recent quarterly
balance sheet.
o Investment Grade Ratings. Except for securities issued for the
purpose of funding Money Pool operations, no guarantees or other
securities, other than common stock, may be issued in reliance
upon the authorization granted by the Commission pursuant to this
Application, unless (i) the security to be issued, if rated, is
rated investment grade; (ii) all outstanding securities of the
issuer that are rated, are rated investment grade; and (iii) all
outstanding securities of AGL Resources that are rated, are rated
investment grade. For purposes of this provision, a security will
be deemed to be rated "investment grade" if it is rated
investment grade by at least one nationally recognized
statistical rating organization ("NRSRO"), as that term is used
in paragraphs (c)(2)(vi)(E), (F) and (H) of Rule 15c3-1 under the
Securities Exchange Act of 1934, as amended
________________
43 Substantially similar interest rate provisions have been authorized by the
Commission in Energy East Corp., et al., Holding Co. Act Release No. 27643 (Jan.
28, 2003); E.ON AG, Holding Co. Act Release No. 27539 (June 14, 2002); Ameren
Corp. et al., Holding Co. Act Release No. 27655 (Feb. 27, 2003).
44 See, e.g., NiSource, Inc., Holding Co. Act Release No. 27789 (December 30,
2003); SCANA Corp., Holding Co. Act Release No. 27649 (Feb. 12, 2003).
37
("1934 Act"). Applicants request that the Commission reserve
jurisdiction over the issuance of any such securities that are
rated below investment grade. Applicants further request that the
Commission reserve jurisdiction over the issuance of any
guarantee or other securities in reliance upon the authorization
granted by the Commission pursuant to this Application at any
time that the conditions set forth in clauses (i) through (iii)
above are not satisfied. A security issued prior to the
consummation of the Merger, under the Act or in accordance with
any applicable rule, regulation or order of the Commission under
the Act, would remain validly issued notwithstanding a change,
subsequent to the issuance, in the rating of that security or
other securities issued by any company in the AGL Resources
system.
o Authorization Period. No security will be issued pursuant to the
authorization sought herein after the last day of the
Authorization Period (March 31, 2007).
In particular, Applicants request the following authorizations.
a. NUI Financing
NUI requests authorization to issue and sell debt and equity securities to
AGL Resources and/or its financing subsidiaries (e.g., AGL Capital) as necessary
to finance the authorized and permitted businesses of the NUI Group. In
particular, NUI requests authorization to issue Intercompany Notes to AGL
Resources or a financing subsidiary thereof in connection with the refinancing
of NUI's pre-Merger indebtedness. A form of Intercompany Note, containing the
applicable terms and conditions is attached as Exhibit L-2. Intercompany Notes
would be issued by NUI in an amount at any one time outstanding of up to $285
million. NUI would not issue debt or equity securities to third-party,
unaffiliated entities post-Merger without seeking subsequent Commission
authorization. NUI also requests authorization to acquire the securities of its
direct and indirect subsidiaries and to extend credit thereto for purposes of
financing such companies' authorized and permitted businesses in an aggregate
amount outstanding during the Authorization Period not to exceed $300 million.
b. Subsidiary Debt
Applicants request authorization for NUI Utilities and VGDC to (a) enter
into, perform, purchase and sell Hedging Instruments; (b) to issue short-term
debt consisting of commercial paper, secured or unsecured bank loans and
borrowings under the utility money pool ("Utility Money Pool"), at any one time
outstanding during the Authorization Period ("Utility Short-Term Debt Limit"),
all such securities to be issued pursuant to the Financing Limitations.
Applicants also request authorization for NUI Utilities and VGDC to be made
party to any AGL Resources' credit facility as back up to commercial paper
issued under rule 52 of the Act or under an applicable Commission order.
As with AGLC, CGC and VNG, authorization for the issuance of secured
short-term debt as requested herein will enable NUI Utilities and VGDC to take
advantage of more beneficial financing terms to meet the companies' working
capital needs. The issuance of secured short-term debt by NUI Utilities and VGDC
would be limited to circumstances when the issuer can expect a savings in costs
over the issuance of unsecured short-term debt or when unsecured credit is
unavailable, except at a higher cost than secured short-term debt. Applicants
anticipate that the collateral offered as security
38
would generally be limited to short-term assets such as the issuer's inventory
and/or accounts receivable.
In this Application, Applicants request authorization for NUI Utilities and
VGDC to issue up to $600 million and $250 million, respectively, of intercompany
debt, commercial paper, secured or unsecured bank loans and borrowings under the
Utility Money Pool, all with terms of less than a year. This level of short term
financing authorization is necessary to assure that NUI Utilities and VGDC have
adequate working capital to finance the acquisition of gas supply, particularly
in the current high-cost gas market.
NUI Utilities also requests authorization to issue Intercompany Notes to
AGL Resources or a financing subsidiary thereof in connection with the
refinancing of NUI Utilities' pre-Merger indebtedness. A form of Intercompany
Note, containing the applicable terms and conditions is attached as Exhibit L-2.
Intercompany Notes would be issued by NUI Utilities in an amount at any one time
outstanding of up to $275 million, respectively. (The Intercompany Notes issued
by NUI Utilities would be for terms longer than one year and accordingly such
issuances would not count against the $600 million short-term debt limit stated
above.) AGL Resources is evaluating the economics of refinancing an additional
amount of debt issued by NUI Utilities in the amount of approximately $200
million. The refinancing of this amount, if consummated, and the post-Merger
financing of NUI Utilities with securities other than short-term debt would be
conducted on an exempt basis under Rule 52(a) through the sale of securities by
NUI Utilities externally to third parties or on an intercompany basis./45
c. Authorization and Operation of the Money Pools
Applicants request that NUI Utilities and VGDC be authorized to participate
in AGL Resources' existing Utility Money Pool, and be authorized to make
unsecured short-term borrowings from the Utility Money Pool, to contribute
surplus funds to the Utility Money Pool, and to lend and extend credit to (and
acquire promissory notes from) one another through the Utility Money Pool
subject to the terms and conditions set forth herein. Specifically, the Utility
Money Pool funds are available for short-term loans to the participating
companies from time to time from (i) surplus funds in the treasuries of
participants and (ii) proceeds received by the participants from the sale of
commercial paper and borrowings from banks ("External Funds"). Funds are made
available from sources in the order that AGL Services, as the administrator
under the Utility Money Pool Agreement, determines would result in a lower cost
of borrowing compared to the cost that would be incurred by the borrowing
participants individually in connection with external short-term borrowings,
consistent with the individual borrowing needs and financial standing of Utility
Money Pool participants that invest funds in the Utility Money Pool.
NUI Utilities and VGDC would borrow pro rata from each Utility Money Pool
participant that invests surplus funds, in the proportion that the total amount
invested by the investing participant bears to the total amount then invested in
the Utility Money Pool. The interest rate that will be charged to
____________________
45 Financing by VGDC would generally be subject to the jurisdiction of the VSCC
and, except as authorized pursuant to this Application or other Commission rule
or order, would be conducted on an exempt basis under Rule 52(a).
39
NUI Utilities and VGDC on borrowings under the Utility Money Pool would be equal
to AGL Resources' actual cost of external short-term borrowings and the interest
rate paid on loans to the Utility Money Pool would be a weighted average of the
interest rate earned on loans made by the Utility Money Pool and the return on
excess funds earned from the investments described below. The interest income
and investment income earned on loans and investments of surplus funds would be
allocated among those Utility Money Pool participants that have invested funds
in accordance with the proportion each participant's investment of funds bears
to the total amount of funds invested in the Utility Money Pool.
Funds not required by the Utility Money Pool to make loans (with the
exception of funds required to satisfy the Utility Money Pool's liquidity
requirements) are ordinarily invested in one or more short-term investments,
including: (i) obligations issued or guaranteed by the U.S. government and/or
its agencies and instrumentalities; (ii) commercial paper; (iii) certificates of
deposit; (iv) bankers' acceptances; (v) repurchase agreements; (vi) tax exempt
notes; (vii) tax exempt bonds; (viii) tax exempt preferred stock; and (ix) other
investments that are permitted by section 9(c) of the Act and rule 40
thereunder.
Each company receiving a loan through the Utility Money Pool is required to
repay the principal amount of the loan, together with all interest accrued
thereon, on demand and in any event within one year after the date of the loan.
All loans made through the Utility Money Pool may be prepaid by the borrower
without premium or penalty and without prior notice. The Nonutility Money Pool
is operated on the same terms as the Utility Money Pool.
Borrowings by NUI Utilities from the Utility Money Pool would be subject to
the $600 million limit stated above, and borrowings by VGDC would be limited to
$250 million at any one time outstanding.
In addition, to the extent not exempt under Rule 52(b), Applicants request
that NUI's Nonutility Subsidiaries be authorized to participate in AGL
Resources' existing Nonutility Money Pool, and to make unsecured short-term
borrowings from the Nonutility Money Pool, to contribute surplus funds to the
Nonutility Money Pool, and to lend and extend credit to (and acquire promissory
notes from) one another through the Nonutility Money Pool.
AGL Resources and NUI may contribute surplus funds and lend and extend
credit to (i) all the utility subsidiaries in the AGL Resources system through
the Utility Money Pool and (ii) all the nonutility subsidiaries in the AGL
Resources system through the Nonutility Money Pool. AGL Resources and NUI would
not borrow from either the Utility Money Pool or the Nonutility Money Pool. AGL
Services will continue to serve as administrator for both the Utility Money Pool
and the Nonutility Money Pool and will provide the administrative services at
cost.
d. Guarantees
Applicants also request authorization for AGL Resources to guarantee the
obligations of the NUI Group subject to the limits set forth in the Financing
Order. In addition, Applicants request authority for NUI, NUI Utilities, VGC and
VGDC to enter into guarantees, obtain letters of credit, enter into expense
agreements or provide credit support with respect to obligations of their
subsidiaries ("Guarantees") subject to the terms and conditions below in the
amount of $150 million and $100
40
million, with respect to NUI Utilities and VGDC, and in the amount of $300
million and $75 million with respect to NUI and VGC.
Guarantees may take the form of, among others, direct guarantees,
reimbursement undertakings under letters of credit, "keep well" undertakings,
agreements to indemnify, expense reimbursement agreements, and credit support
with respect to the obligations of the NUI Group as may be appropriate to enable
the system companies to carry on their respective authorized or permitted
businesses. Any Guarantee that is outstanding at the end of the Authorization
Period will remain in force until it expires or terminates in accordance with
its terms. Certain Guarantees may be in support of obligations that are not
capable of exact quantification. In these cases, for purposes of measuring
compliance with the appropriate Guarantee limit, the exposure under a Guarantee
would be determined by appropriate means, including estimation of exposure based
on potential payment amounts. Applicants also request authorization for each NUI
Group company to be charged a fee for any Guarantee provided on its behalf that
is not greater than the cost, if any, incurred by the guarantor in obtaining the
liquidity necessary to perform the Guarantee for the period of time the
Guarantee remains outstanding.
e. Hedges
Applicants request authorization for NUI, NUI Utilities, VGC and VGDC to
enter into, perform, purchase and sell financial instruments intended to manage
the volatility of interest rates, including but not limited to interest rate
swaps, caps, floors, collars and forward agreements or any other similar
agreements ("Hedging Instruments"). Hedging Instruments, in addition to the
foregoing sentence, may also include the issuance of structured notes (i.e., a
debt instrument in which the principal and/or interest payments are indirectly
linked to the value of an underlying asset or index), or transactions involving
the purchase or sale, including short sales, of U.S. Treasury or agency (e.g.,
Federal National Mortgage Association) obligations or London Inter-Bank Offer
Rate-based swap instruments. These companies would employ Hedging Instruments as
a means of prudently managing the risk associated with any of its outstanding
debt 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, these
companies 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 the companies' 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 as determined by any one of Standard & Poor's, Moody's Investors Service,
Inc. or Fitch IBCA, Inc. ("Approved Counterparties").
In addition, Applicants request authorization for NUI, NUI Utilities, VGC
and VGDC 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
Hedging Instruments ("Forward Sale"); (ii) the purchase of put options on
Hedging Instruments ("Put Options Purchase"); (iii) a Put Options Purchase in
combination with the sale of call options on Hedging Instruments ("Zero Cost
Collar"); (iv) transactions involving the purchase or sale, including short
sales, of Hedging Instruments; or (v) some
41
combination of a Forward Sale, Put Options Purchase, Zero Cost Collar and/or
other derivative or cash transactions, including, but not limited to structured
notes, caps and collars, appropriate for the Anticipatory Hedges.
Hedging Instruments may be executed on-exchange ("On-Exchange Trades") with
brokers through the opening of futures and/or options positions traded on the
Chicago Board of Trade, the opening of over-the-counter positions with one or
more counterparties ("Off-Exchange Trades"), or a combination of On-Exchange
Trades and Off-Exchange Trades. The companies will determine the optimal
structure of each Hedging Instrument transaction at the time of execution.
f. Changes in Capital Stock of Wholly-Owned Subsidiaries
Applicants request authorization to change the terms of the authorized
capital stock of NUI and any wholly owned subsidiary of NUI by an amount deemed
appropriate by AGL Resources or other intermediate parent company subject to
certain conditions. Specifically, the authorization is limited to NUI's wholly
owned subsidiaries and will not affect the aggregate limits or other financing
conditions stated herein. A subsidiary will be able to change the par value, or
change between par value and no-par stock, without additional Commission
approval. Any such action by NUI Utilities or VGDC would be subject to and would
only be taken upon the receipt of any necessary approvals by the state
commission in the state or states where such company is incorporated and doing
business. In addition, NUI Utilities and VGDC will maintain, during the
Authorization Period, a common equity capitalization of at least 30%.
g. Payment of Dividends Out of Capital or Unearned Surplus
Applicants request authorization for NUI and the NUI Nonutility
Subsidiaries to pay dividends from time to time through the Authorization
Period, out of capital and unearned surplus. NUI and the NUI Nonutility
Subsidiaries would only declare or pay dividends to the extent permitted under
applicable corporate law and state or national law applicable in the
jurisdiction where each company is organized, and any applicable financing
covenants and in addition, will not declare or pay any dividend out of capital
or unearned surplus unless it: (i) has received excess cash as a result of the
sale of some or all of its assets; (ii) has engaged in a restructuring or
reorganization; and/or (iii) is returning capital to an associate company.
This authorization will permit AGL Resources to effectively wind up the NUI
nonutility businesses. Without such authorization, liquidation proceeds may be
trapped in companies with cash but insufficient retained earnings to pay
dividends. As noted below, however, Applicants request that the Commission
reserve jurisdiction over NUI Utilities' payment of dividends out of capital and
unearned surplus in an amount up to its pre-merger retained earnings and out of
post-merger earnings without regard to any deductions attributable to the
impairment of goodwill pending the completion of the record with regard to such
relief.
The application of the purchase method of accounting to the Merger will
cause the reclassification of the retained earnings of NUI Utilities to
additional paid-in capital, and give rise to goodwill, the difference between
the aggregate fair values of all identifiable tangible and intangible assets,
and the total consideration to be paid and the fair values of the liabilities
assumed. In accordance with the Commission's Staff Accounting Bulletin No. 54,
Topic 5J ("Staff Accounting
42
Bulletin"), the goodwill will be "pushed down" and reflected as additional
paid-in-capital in the financial statements of these entities. Goodwill must
periodically be examined for impairment and, to the extent impaired, it must be
written down. Any write down of goodwill will constitute a non-cash charge to
net income and, therefore, decrease current earnings available for dividends
and/or retained earnings, the traditional sources of dividend payments, of NUI
Utilities.
Section 12(c) of the Act and Rule 46 thereunder generally prohibit the
payment of dividends out of "capital or unearned surplus" except pursuant to an
order of the Commission. The legislative history explains that this provision
was intended to "prevent the milking of operating companies in the interest of
the controlling holding company groups."/46 In determining whether to permit the
payment of 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. Further, the payment of the dividend
must be "appropriate in the public interest."/47
In support of their request, Applicants assert that each of the standards
listed above are satisfied:
(i) After the Merger, and giving effect to the pushdown of goodwill, NUI
Utilities' common equity as a percentage of total capitalization is estimated to
be 45%, substantially in excess of the traditional levels of equity
capitalization that the Commission has authorized for other registered holding
company systems.
(ii) NUI Utilities has a favorable history of prior earnings.
(iii) Applicants anticipate that NUI Utilities' cash flow after the Merger
will not differ significantly from its cash flow prior thereto and that earnings
before any write down of goodwill, therefore, should remain stable after the
Merger.
(iv) The requested dividend payments are in the public interest. NUI
Utilities is in sound financial condition as indicated by its equity ratio
discussed above. The expectations of continued strong financial condition and
the financial backing of AGL Resources should allow NUI Utilities to continue to
provide safe and reliable service and to fund any required capital improvement
projects. In addition, the dividend payments are consistent with investor
interests because they prevent "trapped" equity in the capital structure of NUI
Utilities, permitting adjustments to appropriate levels of debt and equity.
Applicants represent that NUI Utilities will not declare or pay any
dividend out of capital or unearned surplus in contravention of any law
restricting the payment of dividends. NUI Utilities also will comply with the
terms of any credit agreements and indentures that restrict the amount and
timing of distributions to shareholders. Lastly, NUI Utilities would not pay
dividends out of capital or
_________________
46 S. Rep. No. 621, 74th Cong., 1st Sess. 3434 (1935) cited in Eastern Utilities
Associates, 50 SEC 582, 584 (1991).
47 Eastern Utilities Associates, 50 SEC 582, 583 (1991) citing Commonwealth &
So. Corp., 13 SEC 489, 492 (1943).
43
unearned surplus if to do so would cause the equity of such company to decline
to less than 30% of total capitalization.
Applicants request that the Commission reserve jurisdiction over NUI
Utilities' payment of dividends out of capital and unearned surplus in an amount
up to the company's pre-merger retained earnings and any amounts attributable to
impaired goodwill post-merger on its books pending the completion of the record
with regard to such relief.
h. Financing Entities
Applicants request authorization for NUI and its subsidiaries to organize
new corporations, trusts, partnerships or other entities, or to use existing
Financing Entities that will facilitate financings by issuing short-term debt,
long-term debt, preferred securities, equity securities, or other securities to
third parties and transfer the proceeds of these financings to the respective
parent of such Financing Entities. To the extent not exempt under Rule 52,
Applicants request authorization for the Financing Entities to issue these
securities to third parties.
Applicants also request authorization for NUI and its subsidiaries to enter
into support or expense agreements ("Expense Agreement") with certain Financing
Entities to pay the expenses of any such entities subject to certain terms and
conditions. In connection with this method of financing, NUI and the
subsidiaries may: (i) issue debentures or other evidences of indebtedness to
Financing Entities in return for the proceeds of the financing; (ii) acquire
voting interests or equity securities issued by the Financing Entities to
establish ownership of the Financing Entities (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 Entities); and (iii) guarantee a Financing Entity's obligations in
connection with a financing transaction. Any amounts issued by Financing
Entities to a third party under this authorization will be included in the
overall external financing limitation authorized herein for the immediate parent
of the Financing Entity. However, the underlying intra-system mirror debt and
parent guarantee shall not be so included. NUI and the subsidiaries also request
authorization to enter into support or expense agreements ("Expense Agreement")
with Financing Entities to pay the expenses of any such entity. In cases where
it is necessary or desirable to ensure legal separation for purposes of
isolating a Financing Entity from its parent or another subsidiary for
bankruptcy purposes, the ratings agencies require that any Expense Agreement
whereby the parent or subsidiary provides services related to the financing to
the Financing Entity be at a price, not to exceed a market price, consistent
with similar services for parties with comparable credit quality and terms
entered into by other companies so that a successor service provider could
assume the duties of the parent or subsidiary, in the event of the bankruptcy of
the parent or subsidiary, without interruption or an increase of fees.
Applicants request authorization, under Section 13(b) of the Act and Rules
87 and 90 thereunder, to provide such services at a charge not to exceed a
market price but only for so long as such Expense Agreement established by the
Financing Entity is in place.
i. Intermediate Subsidiaries
Applicants request authorization for NUI to acquire, directly or
indirectly, the securities of one or more entities ("Intermediate
Subsidiaries"), which would be organized exclusively for the purpose
44
of acquiring, holding and/or financing the acquisition of the securities of or
other interest in one or more EWGs, FUCOs, Rule 58 Companies, ETCs, or other
non-exempt nonutility subsidiaries (as authorized in this proceeding or in a
separate proceeding), provided that Intermediate Subsidiaries may also engage in
administrative activities ("Administrative Activities") and development
activities ("Development Activities"), defined below, relating to these
subsidiaries.
Administrative Activities include ongoing personnel, accounting,
engineering, legal, financial, and other support activities necessary to manage
investments in nonutility subsidiaries. Development Activities are 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, and other project
contractors; negotiation of financing commitments with lenders and other
third-party investors; and other preliminary activities that 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.
An Intermediate Subsidiary may be organized, among other things: (i) to
facilitate the making of bids or proposals to develop or acquire an interest in
any EWG, FUCO, Rule 58 Company, ETC or other nonutility subsidiary; (ii) after
the award of such a bid proposal, to facilitate closing on the purchase or
financing of an acquired company; (iii) at any time subsequent to the
consummation of an acquisition of an interest in any such company to, among
other things, effect an adjustment in the respective ownership interests in such
business held by NUI and non-affiliated investors; (iv) to facilitate the sale
of ownership interests in one or more acquired non-utility companies; (v) to
comply with applicable laws of foreign jurisdictions limiting or otherwise
relating to the ownership of domestic companies by foreign nationals; (vi) as a
part of tax planning in order to limit NUI's exposure to taxes; (vii) to further
insulate NUI, NUI Utilities and VGDC from operational or other business risks
that may be associated with investments in non-utility companies; or (viii) for
other lawful business purposes.
Investments in Intermediate Subsidiaries may take the form of any
combination of the following: (i) purchases of capital shares, partnership
interests, member interests in limited liability companies, trust certificates
or other forms of equity interests; (ii) capital contributions; (iii) open
account advances with or without interest; (iv) loans; and (v) guarantees
issued, provided or arranged in respect of the securities or other obligations
of any Intermediate Subsidiaries. Funds for any direct or indirect investment in
any Intermediate Subsidiary will be derived from: (i) financings authorized in
this proceeding; (ii) any appropriate future debt or equity securities issuance
authorization obtained by NUI from the Commission; and (iii) other available
cash resources, including proceeds of securities sales by Nonutility
Subsidiaries under rule 52. To the extent that NUI provides funds or Guarantees
directly or indirectly to an Intermediate Subsidiary that are used for the
purpose of making an investment in any EWG, FUCO, or Rule 58 Company, the amount
of the funds or Guarantees are included in AGL Resources' "aggregate investment"
in these entities, as calculated in accordance with rule 53 or rule 58, as
applicable.
In addition, AGL Resources and NUI request authorization to consolidate or
otherwise reorganize all or any part of its direct and indirect ownership
interests in the NUI Nonutility Subsidiaries, and the activities and functions
related to these investments. To effect any consolidation
45
or other reorganization, AGL Resources or NUI may wish to merge or contribute
the equity securities of one nonutility subsidiary to another nonutility
subsidiary (including a newly formed Intermediate Subsidiary) or sell (or cause
a nonutility subsidiary to sell) the equity securities or all or part of the
assets of one nonutility subsidiary to another one. To the extent that these
transactions are not otherwise exempt under the Act or rules thereunder, AGL
Resources and NUI request authorization to consolidate or otherwise reorganize
under one or more direct or indirect Intermediate Subsidiaries, their ownership
interests in existing and future NUI Nonutility Subsidiaries. These transactions
may take the form of a nonutility subsidiary selling, contributing, or
transferring the equity securities of a subsidiary or all or part of a
subsidiary's assets as a dividend to an Intermediate Subsidiary or to another
nonutility subsidiary, and the acquisition, directly or indirectly, of the
equity securities or assets of the subsidiary, either by purchase or by receipt
of a dividend. The purchasing nonutility subsidiary in any transaction
structured as an intrasystem sale of equity securities or assets may execute and
deliver its promissory note evidencing all or a portion of the consideration
given. Each transaction would be carried out in compliance with all applicable
laws and accounting requirements.
AGL Resources also requests that its authorization to make expenditures on
Development Activities, as defined above, in an aggregate amount of up to $600
million be extended to include the NUI Nonutility Subsidiaries. The Commission
authorized a "revolving fund" concept for permitted expenditures on Development
Activities. Thus, to the extent a nonutility subsidiary in respect of which
expenditures for Development Activities were made subsequently becomes an EWG,
FUCO, or Rule 58 Company, the amount so expended will cease to be considered an
expenditure for Development Activities, but will instead be considered as part
of the "aggregate investment" in the entity under rule 53 or 58, as applicable.
Neither AGL Resources nor any of its subsidiaries presently has an interest
in any EWG or FUCO.
j. Rule 54 Analysis
The proposed financing transactions are subject to Rule 54, which refers to
Rule 53. Rule 54 under the Act provides that in determining whether to approve
certain transactions other than those involving EWGs or FUCOs, as defined in the
Act, the Commission will not consider the effect of the capitalization or
earnings of any subsidiary which is an EWG or FUCO if Rule 53(a), (b) and (c)
under the Act are satisfied. Neither AGL Resources nor any of its subsidiaries
presently has or will have after the consummation of the Merger an interest in
any EWG or FUCO and, accordingly, Rule 53 is satisfied.
4. Affiliate Transactions
a. AGL Services
AGL Services is a service company established in accordance with Section
13(b) of the Act. AGL Services provides business services to AGL Resources and
its subsidiaries including: rates and regulatory services, internal auditing,
strategic planning, external affairs, gas supply and capacity management, legal
services and risk management, marketing, financial services, information systems
and technology, corporate services, investor relations, customer services,
purchasing, employee services, engineering, business support, facilities
management and other services, such as business
46
development, that may be agreed upon by the subsidiaries and AGL Services. As
compensation for services, the services agreement between the subsidiaries and
AGL Services provides for client companies to pay to AGL Services the cost of
these services, computed in accordance with the applicable rules and regulations
under the Act and appropriate accounting standards.
AGL Services will provide business services to the NUI Group under the same
terms and conditions as AGL Services serves the companies currently within the
AGL Resources registered holding company system, as approved by the
Commission./48
5. Rule 16 Exemption
SSLLC, a 50% joint venture between NUI Saltville Storage and Duke Energy
Gas Transmission is developing a natural gas storage facility in Saltville,
Virginia. SSLLC will not have more than 50% of its voting securities controlled
by a registered holding company. Pursuant to Rule 16, SSLLC is entitled to an
exemption from the obligations, duties and liabilities imposed upon it under the
Act as a subsidiary or affiliate of a registered holding company. SSLLC seeks to
rely on such exemption and therefore, Applicants request that the Commission
authorize AGL Resources to acquire NUI's interest in SSLLC under Sections
9(a)(1) and 10. The exemption under Rule 16 will permit SSLLC to continue to
operate in accordance with its usual practice without the need for additional
authorization under the Act.
6. Retention of Nonutility Subsidiaries
Exhibit J-1 describes AGL Resources' current plans for retaining or
divesting each of NUI's other nonutility businesses and discusses the legal
basis for retention where applicable. Numerous Nonutility Subsidiaries
referenced in Exhibit J-1 will be wound down, liquidated or dissolved. AGL
Resources will endeavor to exit these investments as soon as is prudent, giving
due regard for the need to insulate the rest of the AGL Resources group from any
liabilities or obligations that may be associated with such companies.
In addition, AGL Resources seeks authorization to retain UBS and for UBS to
continue to provide services to NUI Utilities under its current arrangement for
no less than two years after the date of the order authorizing this acquisition.
Specifically, AGL Resources intends to maintain the existing services
arrangements between UBS and NUI Utilities for as long as two years after the
date of the SEC's order granting this Application. During that time, AGL
Resources will endeavor to either restructure the existing UBS services
agreements with NUI Utilities so that services thereunder may be provided at
cost (provided that such modification is practicable given UBS' other
contractual arrangements), or would otherwise endeavor to consolidate the
applicable portions of UBS's current operations into NUI Utilities.
UBS' operating revenues and operating margins were $6.1 million and $3.6
million, respectively, in fiscal year 2003. UBS provides customer information
systems and services to investor-owned and municipal utilities, as well as third
party providers in the water, wastewater and
_________________
48 See Intrasystem Transactions Order, supra.
47
gas markets. A customer information system developed and maintained by UBS is
presently serving 13 clients in support of more than 1.5 million customers. UBS
provides billing and payment processing services to NUI Utilities under a
service agreement approved by the NJBPU. In June 2003 NUI approved a plan to
sell UBS. However, the September 2003 decision to sell NUI reduced the
probability that a sale of UBS would occur, given that there was no guarantee
that UBS' largest customer, NUI Utilities, would maintain a long-term
relationship with UBS after the sale. After the acquisition, its is expected
that the activities of UBS would be folded into NUI Utilities or replaced.
The Commission has previously authorized subsidiaries of registered holding
companies to offer data processing and other business support services. See
Cinergy Corp., Holding Co. Act Release No. 26662 (Feb. 7, 1997) and CP&L Energy,
Inc., Holding Co. Act Release No. 27284 (Nov. 27, 2000) (authorizing retention
of application services provider that provides, supports and manages a broad
range of specialized facilities management software and information systems
designed to help businesses and organizations manage and maintain facilities and
equipment more efficiently).
7. NUI Reporting
NUI will register as a holding company under the Act by filing a
Notification of Registration on Form U5A upon the consummation of the Merger.
Thereafter NUI will join AGL Resources in the filing of a joint Annual Report on
Form U5S on or before May 1, 2005 and annually thereafter. NUI requests that the
Commission find under Section 5(b) and Rule 20(a)(3) that the joint AGL
Resources - NUI Annual Report on Form U5S filed on or before May 1, 2005 may
also serve as NUI's Registration Statement on Form U5B, given that both the
Annual Report and the Registration Statement would cover NUI's position at the
close of the year 2004 and contain substantially equivalent information about
NUI's subsidiaries, investments, financings, directors, affiliate transactions,
and other matters. It would be duplicative to cause NUI to file a separate
Registration Statement on Form U5B within 90 days of the Merger and NUI's
registration under the Act, and then cause NUI to provide largely similar
information only a few months later in the joint Annual Report on Form U5S. As
required by Item 10 of Form U5S, the joint Annual Report on Form U5S would
include consolidating financial statements for AGL Resources and each of its
subsidiary companies, including NUI and its subsidiaries. In addition,
Applicants would commit to provide as a supplement to the Form U5S submission
any information required by Form U5B that the Commission staff deems necessary
or appropriate for the combined filing./49
Item 4. Regulatory Approval.
The federal and state regulatory requirements described below, with the
exception of the notice required under Florida law, must be complied with before
the Applicants can complete the Merger. The Applicants currently believe that
the necessary approvals can be obtained by October 31, 2004.
________________
49 See Enron Corp., Holding Co. Act Release No. 27809 (March 9, 2004) (finding
that a modification to the Commission's reporting requirement on Form U5B was
acceptable where applicant's chapter 11 plan disclosure statement contained a
substantial portion of the information that is required of a registrant under
Form U5B, and where the applicant has undertaken to provide additional
information required in Form U5B but not included in the disclosure statement).
48
A. State Approvals
1. New Jersey
NUI Utilities' Elizabethtown Gas division is subject to the jurisdiction of
the NJBPU as a public utility. The approval of the NJBPU is required before any
person may directly or indirectly acquire control of a New Jersey public
utility. In considering a request to acquire control of a public utility, the
NJBPU evaluates the impact of the acquisition on competition, on the ratepayers
affected by the acquisition of control, on the employees of the affected public
utility or utilities, and on the provision of safe and adequate utility service
at just and reasonable rates. AGL Resources and NUI filed an application on July
30, 2004 seeking the approval of the NJBPU consistent with these requirements.
The Applicants have requested approval be granted on an expedited basis, with
October 31, 2004 as the target date for approval.
2. Florida
NUI Utilities' City Gas division is subject to the jurisdiction of the
Florida Public Service Commission ("Florida Commission") as a public utility.
Subject to the plenary jurisdiction of the Florida Commission over the
operations of NUI, no filing or approval of the merger by the Florida Commission
is required by Florida law. However, within ten days of the consummation of the
Merger, AGL Resources is required to file a notice with the Florida Commission
stating that the tariffs then charged by City Gas of Florida will continue to
remain in effect. AGL Resources will make such a filing after consummation of
the Merger.
3. Maryland
The Maryland Public Service Commission ("Maryland Commission") is granted
general authority to supervise and regulate public utilities with operations in
the State of Maryland. NUI Utilities' Elkton Gas division has utility operations
in the State of Maryland. AGL Resources and NUI have filed an application with
the Maryland Commission under the Commission's general authority to determine
whether the Merger will have an adverse effect on the relevant Maryland
franchises. AGL Resources and NUI filed an application seeking the approval of
the Maryland Commission consistent with these requirements on August 20, 2004.
4. Virginia
VGDC provides utility service in Virginia and is subject to the
jurisdiction of the VSCC as a public service company and a public utility. The
VSCC must approve the acquisition of any Virginia public utility and the
disposition of any utility assets located in Virginia. The applicants must show
that the provision of adequate service at just and reasonable rates will not be
threatened or impaired by the Merger. AGL Resources and NUI have filed an
application seeking the approvals of the VSCC consistent with these
requirements. AGL Resources and NUI filed an application seeking the approval of
the VSCC consistent with these requirements on August 10, 2004.
49
B. Federal Approvals
1. Hart-Scott-Rodino Antitrust Improvements Act of 1976
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the rules promulgated thereunder by the FTC, the Merger may
not be consummated until AGL Resources and NUI file notifications and provide
specified information to the FTC and the Antitrust Division of the DOJ and
specified waiting period requirements are satisfied. A review process under the
HSR Act is undertaken for the purpose of determining whether a proposed
transaction will have an adverse effect on competition in the marketplace in
which the companies involved in that transaction currently operate. Since the
Merger falls within the scope of the transactions to which the HSR Act is
applicable, the companies must file notifications with, and present information
to, the DOJ and the FTC so as to provide an opportunity for the DOJ, the FTC and
the public to evaluate whether the Merger might have any such anti-competitive
effects. Even after the HSR Act waiting period expires or terminates, the FTC or
the Antitrust Division of the DOJ may later challenge the Merger on antitrust
grounds. If the transaction is not completed within 12 months after the
expiration or earlier termination of the initial HSR Act waiting period, the
parties would be required to submit new information under the HSR Act and a new
waiting period would begin. On August 5, 2004, the parties filed their
notification and report forms under the HSR Act with the FTC and the Antitrust
Division of the DOJ.
2. Communications Act of 1934
The Communications Act of 1934 prohibits the transfer, assignment or
disposal in any manner of any construction permit or station license or any
related rights, to any person without approval from the Federal Communications
Commission. The Federal Communications Commission will approve a transfer of
control if it serves the public convenience, interest and necessity. Applicants
will seek the necessary approval from the Federal Communications Commission for
the transfer of control of licenses held by NUI and its various subsidiaries.
Item 5. Procedure.
NUI Utilities may not have sufficient sources of cash or liquidity to
finance its gas supply requirements through the 2004-2005 heating season and NUI
may need additional cash to fund its operations. NUI Utilities has filed in New
Jersey for approval of a secured seasonal facility of at least $75 million to
meet its seasonal gas requirement, and an additional $20 million working capital
facility at NUI to fund its operations through closing. Additionally, both of
NUI and NUI Utilities have extended the terms of their existing credit
facilities (with amounts drawn at over $350 million) to November of 2005; these
facilities were originally scheduled to terminate in November 2004. The terms of
each of these bridge facilities and the extension of the existing facilities are
onerous and expensive to NUI's operations.
Due in large part to the risk and expense of NUI's current liquidity
situation, AGL Resources has requested that each of the state regulatory
agencies having jurisdiction over the transaction approve
50
the acquisition of NUI on an expedited basis. The state agencies have
acknowledged the desire to approve and have the transaction completed as soon as
practicable./50 Therefore, Applicants request that this application also be
processed on an expedited basis, with due regard for the risks and expense that
delay may have on NUI, NUI Utilities, and its customers.
The Commission is thus respectfully requested to publish the requisite
notice under Rule 23 with respect to this Application as soon as possible, such
notice to specify a date by which comments must be entered and such date being
the date when an order of the Commission granting and permitting this
Application to become effective may be entered by the Commission. Applicants
request that the Commission's order be issued as soon as the rules allow, and
that there should not be a 30-day waiting period between issuance of the
Commission's order and the date on which the order is to become effective.
Applicants hereby waive a recommended decision by a hearing officer or any other
responsible officer of the Commission and consent that the Division of
Investment Management may assist in the preparation of the Commission's decision
and/or order, unless the Division opposes the matters proposed herein.
Item 6. Exhibits and Financial Statements.
Exhibits
A-1 Amended and Restated Articles of Incorporation of AGL Resources Inc., filed
with the Securities and Exchange Commission as Exhibit B to Amendment No. 1
to AGL Resources Inc.'s Registration Statement on Form S-4, SEC File No.
33-99826 (incorporated by reference).
A-2 Bylaws of AGL Resources Inc., as amended October 29, 2003, filed with the
Securities and Exchange Commission as Exhibit 3.2 to the AGL Resources
Inc.'s Annual Report on Form 10-K filed on February 6, 2004, SEC File No.
001-14174 (incorporated by reference).
A-3 Certificate of Incorporation of Cougar Corporation.
A-4 By-laws of Cougar Corporation.
A-5 Certificate of Incorporation, Amended and Restated, and Certificate of
Amendment of Restated Certificate of Incorporation of NUI Corporation,
filed with the Securities and Exchange Commission as Exhibit 3(i) of NUI
Corporation's Quarterly Report on Form 10-Q for quarter ended December 31,
2001, SEC File No. 001-16385, dated February 14, 2002 (incorporated by
reference).
A-6 By-laws of NUI Corporation, as amended and restated, filed with the
Securities and Exchange Commission as Exhibit 3(ii) of NUI Corporation's
Annual Report on Form 10-K for the year ended September 30, 1997, SEC File
No. 8353, dated September 30, 1997 (incorporated by reference).
__________________
50 See Exhibit M-1, NJBPU Press Release dated July 15, 2004, stating that the
NJBPU will establish an expedited review schedule and that it expects that the
full merger review will take approximately six months instead of the typical 12
month period.
51
B-1 Agreement and Plan of Merger by and among AGL Resources Inc., Cougar
Corporation and NUI Corporation, dated July 14, 2004, incorporated by
reference to AGL Resources Inc.'s Current Report on Form 8-K, filed on July
15, 2004, SEC File No. 001-14174 (incorporated by reference).
B-2 Proxy Statement of NUI Corporation Pursuant to Section 14(a) of the
Securities Exchange Act of 1934, incorporated by reference to NUI
Corporation's Preliminary Proxy Statement on Form PREM14A filed with the
Securities and Exchange Commission on August 13, 2004, SEC File No.
001-16385 (incorporated by reference).
C-1 Application to the New Jersey Board of Public Utilities.
C-2 Application to the Maryland Public Service Commission.
C-3 Application to the Virginia State Corporation Commission.
C-4 Order of the New Jersey Board of Public Utilities.*
C-5 Order of the Maryland Public Service Commission.*
C-6 Order of the Virginia State Corporation Commission.*
D-1 Map of the Utility Service Territories of the AGL Resources System and NUI
Corporation System.
E-1 Opinion of Counsel - AGL Resources Inc.*
E-2 Opinion of Counsel - NUI Corporation.*
F-1 Past tense opinion of counsel.*
G-1 FTC and DOJ filings under Hart-Scott-Rodino.
G-2 Application to the Federal Communications Commission.
G-3 Order of the Federal Communications Commission.*
H-1 AGL Resources Inc.'s 2003 Annual Report on Form 10-K for the fiscal year
ended December 31, 2003 filed with the Securities and Exchange Commission
on February 6, 2004, SEC File No. 001-14174 (incorporated by reference).
H-2 NUI Corporation's 2003 Annual Report on Form 10-K for the fiscal year ended
September 30, 2003, filed with the Securities and Exchange Commission on
May 13, 2004, SEC File No. 001-16385 (incorporated by reference).
H-3 AGL Resources Inc.'s Quarterly Report on Form 10-Q for Period Ended June
30, 2004, filed with the Securities and Exchange Commission on July 29,
2004, SEC File No. 001-14174 (incorporated by reference).
52
H-4 NUI Corporation's Quarterly Report on Form 10-Q for Period Ended June 30,
2004, filed with the Securities and Exchange Commission on August 16, 2004,
File No. 001-16385 (incorporated by reference).
I-1 Proposed Form of Notice.
J-1 Description of NUI Nonutility Subsidiaries.
K-1 Post-Transaction Corporate Chart.
L-1 Form of Service Agreement (incorporated by reference).
L-2 Form of Intercompany Note.
M-1 Press Release of the New Jersey Board of Public Utilities, dated July 15,
2004.
M-2 Memorandum discussing the litigation and government investigations
involving NUI. (confidential treatment requested)
M-3 Pro forma forecast with selected financial information of NUI, NUI
Utilities and VGDC. (confidential treatment requested)
* To be filed by amendment.
Financial Statements
FS-1 AGL Resources Inc.'s Consolidated Balance Sheet as of December 31, 2003,
incorporated by reference to AGL Resources Inc.'s Annual Report on Form
10K, filed on February 6, 2004, SEC File No. 001-14174 (incorporated by
reference).
FS-2 AGL Resources Inc.'s Consolidated Statement of Income for the year ended
December 31, 2003, incorporated by reference to AGL Resources Inc.'s Annual
Report on Form 10K, filed on February 6, 2004, SEC File No. 001-14174
(incorporated by reference).
FS-3 AGL Resources Inc.'s Consolidated Statements of Common Shareholders' Equity
for the year ended December 31, 2003, incorporated by reference to AGL
Resources Inc.'s Annual Report on Form 10K, filed on February 6, 2004, SEC
File No. 001-14174 (incorporated by reference).
FS-4 AGL Resources Inc.'s Consolidated Statement of Cash Flows for the year
ended December 31, 2003, incorporated by reference to AGL Resources Inc.'s
Annual Report on Form 10K, filed on February 6, 2004, SEC File No.
001-14174 (incorporated by reference).
FS-5 Notes to Consolidated Financial Statements, incorporated by reference to
AGL Resources Inc.'s Annual Report on Form 10K, filed on February 6, 2004,
SEC File No. 001-14174 (incorporated by reference).
53
FS-6 NUI Corporation's Consolidated Balance Sheet for fiscal year ended
September 30, 2003, incorporated by reference to NUI Corporation's Annual
Report on Form 10K, filed on May 13, 2004, SEC File No. 0001-16385
(incorporated by reference).
FS-7 NUI Corporation's Consolidated Statement of Income for fiscal year ended
September 30, 2003, incorporated by reference to NUI Corporation's Annual
Report on Form 10K, filed on May 13, 2004, SEC File No. 0001-16385
(incorporated by reference).
FS-8 NUI Corporation's Consolidated Statement of Shareholders' Equity for fiscal
year ended September 30, 2003, incorporated by reference to NUI
Corporation's Annual Report on Form 10K, filed on May 13, 2004, SEC File
No. 0001-16385 (incorporated by reference).
FS-9 NUI Corporation's Consolidated Statement of Cash Flows for fiscal year
ended September 30, 2003, incorporated by reference to NUI Corporation's
Annual Report on Form 10K, filed on May 13, 2004, SEC File No. 0001-16385
(incorporated by reference).
FS-10 Notes to Consolidated Financial Statements for fiscal year ended September
30, 2003, incorporated by reference to NUI Corporation's Annual Report on
Form 10K, filed on May 13, 2004, SEC File No. 0001-16385 (incorporated by
reference).
Item 7. Information as to Environmental Effects.
The proposed transactions involve neither 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.
54
SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned companies have duly caused this Pre-effective Amendment
No. 1 to be signed on their behalf by the undersigned thereunto duly authorized.
AGL Resources Inc.
AGL Services Company
Atlanta Gas Light Company
By: /s/ Richard T. O'Brien
-----------------------
Richard T. O'Brien
Executive Vice President and Chief Financial
Officer
Chattanooga Gas Company
Virginia Natural Gas, Inc.
By: /s/ Kevin P. Madden
-------------------
Kevin P. Madden
Chairman and Chief Executive Officer.
NUI Corporation
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President, Chief Financial Officer,
General Counsel, Treasurer and Secretary
NUI Utilities, Inc.
By: /s/ M. Patricia Keefe
----------------------
M. Patricia Keefe
Vice President, Regulatory Affairs
General Counsel and Secretary
Virginia Gas Company
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President and Secretary
Virginia Gas Distribution Company
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President and Secretary
55
Virginia Gas Pipeline Company
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President and Secretary
Virginia Gas Storage Company
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President and Secretary
NUI Capital Corp.
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President and Secretary
Utility Business Services, Inc.
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President, Treasurer and Secretary
NUI Service, Inc.
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President and Secretary
NUI Energy Inc.
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President
NUI Energy Brokers Inc.
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President, Treasurer and Secretary
56
NUI Energy Solutions, Inc.
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President
OAS Group, Inc.
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President and Secretary
NUI Sales Management, Inc.
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
President, Treasurer and Secretary
TIC Enterprises, LLC
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
President and Treasurer
NUI Saltville Storage, Inc.
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President and Secretary
NUI Storage, Inc.
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President and Secretary
NUI Richton Storage, Inc.
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President and Secretary
57
Richton Gas Storage Company, LLC
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President and Secretary
NUI/Caritrade International LLC
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President and Secretary
NUI Hungary, Inc.
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Vice President and Secretary
NUI International, Inc.
By: /s/ Steven D. Overly
--------------------
Steven D. Overly
Managing Director, President, Treasurer and
Secretary
Date: October 28, 2004
58
EXHIBIT INDEX
---------------- -------------------------------------------------------------- --------------------------------------
Exhibit No. Exhibit Description
---------------- -------------------------------------------------------------- --------------------------------------
A-3 Certificate of Incorporation of Cougar Corporation. Filed herewith
---------------- -------------------------------------------------------------- --------------------------------------
A-4 By-laws of Cougar Corporation. Filed herewith
---------------- -------------------------------------------------------------- --------------------------------------
C-1 Application to the New Jersey Board of Public Utilities. Filed herewith
---------------- -------------------------------------------------------------- --------------------------------------
C-2 Application to the Maryland Public Service Commission. Filed herewith
---------------- -------------------------------------------------------------- --------------------------------------
C-3 Application to the Virginia State Corporation Commission. Filed herewith
---------------- -------------------------------------------------------------- --------------------------------------
D-1 Map of the Utility Service Territories of the AGL Resources Filed under cover of Form SE.
System and NUI Corporation System.
---------------- -------------------------------------------------------------- --------------------------------------
G-1 FTC and DOJ Filings under Hart-Scott-Rodino. Filed herewith
---------------- -------------------------------------------------------------- --------------------------------------
G-2 Application to the Federal Communications Commission Filed herewith
---------------- -------------------------------------------------------------- --------------------------------------
I-1 Proposed Form of Notice. Filed herewith
---------------- -------------------------------------------------------------- --------------------------------------
J-1 Description of NUI Nonutility Subsidiaries. Filed herewith
---------------- -------------------------------------------------------------- --------------------------------------
K-1 Post-Transaction Corporate Chart. Filed under cover of Form SE.
---------------- -------------------------------------------------------------- --------------------------------------
L-1 Form of Service Agreement. Incorporated by reference.
---------------- -------------------------------------------------------------- --------------------------------------
L-2 Form of Intercompany Note Filed herewith
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M-1 Press Release of the New Jersey Board of Public Utilities, Filed herewith
dated July 15, 2004.
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M-2 Memorandum discussing the litigation and government Filed herewith with a request for
investigations involving NUI. confidential treatment.
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M-3 Pro forma forecast with selected financial information of Filed herewith with a request for
NUI, NUI Utilities and VGDC. confidential treatment.
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59