Holding Company Act Release 27600
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27600; 70-10074)
National Fuel Gas Company, et al.
Order Authorizing External Financing, Credit Support Arrangements, Intrasystem Financing, Acquisition of Financing Subsidiaries and Special Purpose Subsidiaries, Continuation of the System Money Pool, Hedging Transactions, Changes in Capital Structure of Certain Subsidiaries, and Reorganization of Nonutility Subsidiaries.
November 12, 2002
National Fuel Gas Company ("NFG"), a registered holding company, National Fuel Gas Distribution Corporation ("Distribution"), National Fuel Gas Supply Corporation, Horizon Energy Development Inc. and its subsidiaries, Highland Forest Resources Inc., Leidy Hub Inc., Data-Track Account Services Inc., Seneca Independence Pipeline Company, all located at Buffalo, New York , Seneca Resources Corporation and its subsidiaries, Upstate Energy Inc., Niagara Independence Marketing Company, all located at Houston, Texas; and National Fuel Resources Inc. and Horizon Power Inc. ("Horizon Power"), located at Williamsville, New York, (collectively, "Applicants"), have filed an application-declaration ("Application") with the Securities and Exchange Commission ("Commission") under sections 6(a), 7, 9(a), 10, 12(b), 12(c), 12(e) and 12(f) of the Public Utility Holding Company Act of 1935, as amended, ("Act") and rules 43, 45, 46, 62, and 65 under the Act. The Commission issued a notice of the Application on October 4, 2002 (HCAR No. 35-27573).
The Applicants include one utility subsidiary, which is Distribution. The remaining Applicants, excluding NFG, are nonutility subsidiaries ("Nonutility Subsidiaries"). Distribution and the Nonutility Subsidiaries are collectively referred to as "Subsidiaries."
In summary, the Applicants request approval to: a) carry out a program of external financing, credit support arrangements, and intrasystem financing; b) acquire financing subsidiaries ("Financing Subsidiaries") and special purpose subsidiaries ("Special Purpose Subsidiaries"); c) continue the NFG money pool; d) enter into hedging transactions; f) make changes in the capital structure of majority-owned Nonutility Subsidiaries; and g) reorganize Nonutility Subsidiaries. Authority for the various requests is sought for the period through December 31, 2005 ("Authorization Period"). The financing authority sought will replace the current financing order for NFG ("Current Financing Order') (HCAR No. 26847, March 20, 1998, as modified by HCAR No. 27170, April 21, 2000).
External Financing By NFG
NFG requests authority to increase its equity and long-term debt capitalization during the Authorization Period in an aggregate amount of up to an additional $1.5 billion through the issuance and sale from time to time, directly or indirectly through one or more Financing Subsidiaries or Special Purpose Subsidiaries, of any combination of common stock, preferred securities, unsecured long-term debt, stock purchase contracts and/or stock purchase units, excluding any shares of common stock that may be issued under NFG's shareholder rights plan.
Except in accordance with a further order of the Commission, NFG will not publicly issue any long-term debt or preferred securities (or to the extent they are rated, stock purchase contracts and/or stock purchase units) unless these securities are rated at the time of issuance at the investment grade level as established by at least one "nationally recognized statistical rating organization," 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. Applicants request that the Commission reserve jurisdiction over the issuance by NFG of any securities that are rated below investment grade.
NFG proposes to use the proceeds of the proposed financings, together with other available funds, to (a) make investments in Subsidiaries so they can finance capital expenditures, (b) fund short-term loans to certain Subsidiaries either directly or through the NFG money pool as described below, (c) finance future investments in exempt wholesale generators ("EWGs") and foreign utility companies ("FUCOs") as defined under the Act, subject to the limitations of Rule 53 or other order of the Commission, and "energy-related" and "gas-related" companies, subject to the limitations of Rule 58, (d) acquire, retire or redeem securities issued by NFG or any Financing Subsidiary or Special Purpose Subsidiary as described below, and (e) provide working capital and other general corporate needs of NFG and its Subsidiaries. Distribution proposes to utilize the proceeds of authorized money pool borrowings temporarily to fund capital projects, to finance inventories, and for other general corporate purposes.
The terms of inter-company loans by NFG to its Subsidiaries will be designed to parallel the effective cost of NFG's long-term debt or short-term debt, as applicable, and the terms will reflect an equitable allocation of placement fees, commitment fees, underwriting or selling fees and commissions and discounts, if any, as well as any associated rating agency fees paid or incurred by NFG in connection with the issuance of long-term debt or short-term debt.
The Applicants represent that no financing proceeds will be used to acquire the equity securities of any new company unless this acquisition has been approved by the Commission or is in accordance with an available exemption under the Act. NFG further represents that it will not undertake any transaction otherwise authorized by the Commission during the Authorization Period that would cause the common equity of NFG, as a percentage of its consolidated capitalization (inclusive of short-term debt), to fall below 30%, and will not undertake any transaction otherwise authorized by the Commission during the Authorization Period that would cause the common equity of Distribution, as a percentage of capitalization of Distribution, to fall below 30%. NFG's forecasted cash flow analysis and capitalization forecast for the calendar years 2002 through 2005, which assumes that NFG will issue $351 million of common stock out of the $1.5 billion overall long-term financing authority requested, indicate that NFG's common equity will remain above 30% of its consolidated capitalization for the period.
Common Stock: NFG seeks authority to issue and sell additional shares of its authorized common stock, par value $1.00 per share ("Common Stock"), or options or warrants exercisable for Common Stock, according to underwriting or purchase agreements of a type generally standard in the industry. Public distributions may be through private negotiation with underwriters, purchasers, dealers or agents, as discussed below, or effected through competitive bidding. In addition, sales may be made through private placements or other non-public offerings to one or more persons. All Common Stock sales will be at prices and under conditions negotiated or based upon, or otherwise determined by, competitive capital markets.
Specifically, NFG may issue and sell Common Stock through underwriters or dealers, through agents, or directly to a limited number of purchasers or a single purchaser. If underwriters are used in the sale of Common Stock, the securities will be acquired by the underwriters for their own account and may be resold from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. Common Stock may be offered to the public either through underwriting syndicates (which may be represented by a managing underwriter or underwriters designated by NFG) or directly by one or more underwriters acting alone. Common Stock may be sold directly by NFG or through agents. If dealers are utilized in the sale of Common Stock, NFG will sell the Common Stock to the dealers as principals. Any dealer may then resell the Common Stock to the public at varying prices to be determined by the dealer at the time of resale.
NFG may also issue Common Stock and/or purchase shares of its Common Stock in the open market for purposes of reissuing the shares, and/or options, warrants or other stock purchase rights exercisable for Common Stock, in public or privately negotiated transactions in exchange for the equity securities or assets of other companies, provided that the acquisition of any equity securities or assets has been authorized in a separate proceeding or is exempt under the Act or the rules under the Act. The value of Common Stock issued in exchange for equity securities or assets of another company will be counted against the overall limitation on financing. The value will be as determined in accordance with any agreement with the seller or, if no value is specified in any agreement, then the value will be the closing price of NFG's Common Stock on the New York Stock Exchange on the trading day next preceding the date of the acquisition.
NFG also proposes to issue Common Stock under plans ("Stock Plans") that allow shareholders, customers, officers, employees, non-employee directors and new investors to acquire shares of Common Stock. Currently, NFG maintains the National Fuel Direct Stock Purchase and Dividend Reinvestment Plan, which provides for purchasing shares of Common Stock directly from NFG and permits participants to reinvest cash dividends in shares of Common Stock without the payment of any brokerage commissions or service charges. NFG also maintains (a) 401(k) and Employee Stock Ownership Plans that allow employees to invest in Common Stock and reinvest cash dividends paid on the Common Stock, in addition to a variety of other investment alternatives, (b) various award and option plans that provide for the issuance of one or more of the following to key employees: incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, and performance units or performance shares, and (c) a Director Stock Plan, under which it issues shares of Common Stock to its non-employee directors as partial consideration for their services as directors.
NFG proposes to issue shares of its Common Stock, as well as stock options, restricted stock awards, performance units, performance shares, and other Common Stock-based awards in order to satisfy its obligations under the Stock Plans. Shares of Common Stock issued or purchased for delivery under the Stock Plans may either be newly issued shares, treasury shares or shares purchased by NFG in the open market with its own funds (either currently or under forward contracts) for purposes of reissuance under any Stock Plan. NFG will make open-market purchases of Common Stock in accordance with the terms of or in connection with the operation of the Stock Plans as provided for in rule 42 under the Act. NFG also proposes, within the limitations set forth in the Application, to issue and/or purchase shares of Common Stock according to these existing Stock Plans, as they may be amended or extended, and similar plans or plan funding arrangements adopted without any additional Commission order. Stock transactions of this variety would, therefore, be treated the same as other stock transactions for which authority is sought. In connection with the adoption of any new Stock Plan or any extension of or amendment to an existing Stock Plan, Applicants request authorization to solicit any required shareholder approvals; however, Applicants request that the Commission reserve jurisdiction over any solicitation of shareholder approvals for the adoption of any new Stock Plans or any extension or amendment to an existing Stock Plan pending completion of the record.
Preferred Securities: NFG, directly or through a Financing Subsidiary or Special Purpose Subsidiary, also proposes to issue and sell shares of its authorized preferred stock, par value $1.00 per share and/or other types of unsecured preferred securities (collectively, "Preferred Securities") in one or more series with rights, preferences, and priorities as may be designated in the instrument creating each series, as determined by NFG's board of directors or a committee of the board. Preferred Securities may be redeemable or may be perpetual in duration. The dividend or distribution rate on any series of Preferred Securities will not exceed at the time of issuance 500 basis points over the yield to maturity of a U.S. Treasury security having a remaining term equal or closest to the term of the Preferred Securities. Dividends or distributions on any series of Preferred Securities will be made periodically and to the extent funds are legally available for that purpose, but may be made subject to terms which allow the issuer to defer dividend payments or distributions for specified periods. Preferred Securities may be convertible or exchangeable into shares of Common Stock.
Long-term Debt: NFG, directly or through a Financing Subsidiary, also proposes to issue and sell from time to time additional long-term indebtedness ("Long-term Debt"). Long-term Debt of a particular series (a) will be unsecured, (b) may be convertible into any other authorized securities of NFG, (c) will have a maturity ranging from one year to 50 years, (d) will bear interest at a rate not to exceed at the time of issuance 500 basis points over the yield to maturity of a U.S. Treasury security having a remaining term equal or closest to the term of the Long-term Debt, (e) may be subject to optional and/or mandatory redemption, in whole or in part, at par or at various premiums above the principal amount, (f) may be entitled to mandatory or optional sinking fund provisions, (g) may provide for reset of the coupon according to a remarketing arrangement, and (h) may be called from existing investors by a third party. The maturity dates, interest rates, redemption and sinking fund provisions and conversion features, if any, with respect to the Long-term Debt of a particular series, as well as any associated placement, underwriting or selling agent fees, commissions and discounts, if any, will be established by negotiation or competitive bidding.
Stock Purchase Contracts and Stock Purchase Units: NFG, directly or through a Financing Subsidiary, may also issue and sell from time to time stock purchase contracts ("Stock Purchase Contracts"), including contracts obligating holders to purchase from NFG and/or NFG to sell to the holders, a specified number of shares or aggregate offering price of Common Stock at a future date. The consideration per share of Common Stock may be fixed at the time the Stock Purchase Contracts are issued or may be determined by reference to a specific formula set forth in the Stock Purchase Contracts. The Stock Purchase Contracts may be issued separately or as part of units ("Stock Purchase Units") consisting of a Stock Purchase Contract and Long-term Debt and/or Preferred Securities and/or U.S. Treasury securities, securing holders' obligations to purchase Common Stock under the Stock Purchase Contracts. The Stock Purchase Contracts may require holders to secure their obligations in a specified manner.
Short-term Debt: To provide financing for general corporate purposes, including making advances to participating subsidiaries through the NFG money pool, making advances directly to nonutility subsidiaries, and temporarily funding investments in new or existing subsidiaries, NFG requests authorization to issue and reissue from time to time during the Authorization Period, up to $750 million at any time outstanding of unsecured short-term debt securities in the form of promissory notes evidencing borrowings under its credit facilities, commercial paper notes, and other forms of short-term financing generally available to borrowers with investment grade credit ratings. The maturity of all Short-term Debt will be less than one year and will bear interest at a rate not to exceed at the time of issuance 300 basis points over the London Interbank Offered Rate (LIBOR) for maturities of up to one year.
Commercial Paper: Commercial paper may be sold by NFG, from time to time, in established domestic or foreign commercial paper markets directly or through dealers and placement agents at prevailing discount rates, or at prevailing coupon rates, at the date of issuance for commercial paper of comparable quality and maturities sold to commercial paper dealers generally. It is expected that the dealers and placement agents acquiring commercial paper from NFG will re-offer the paper at a discount to corporate, institutional and, with respect to foreign commercial paper, also to individual investors. Corporate and institutional investors may include, among others, commercial banks, insurance companies, pension funds, investment trusts, mutual funds, foundations, colleges and universities, finance companies and nonfinancial corporations. Back-up bank lines of credit for 100% of the outstanding amount of commercial paper may be required in order to obtain an investment grade rating by the credit rating agencies. NFG currently has a committed credit facility which acts as back-up to its commercial paper program.
Other Credit Facilities: National also proposes to establish credit facilities with various banks and/or other financial institutions and to issue and sell, from time to time, short-term notes. These notes would bear interest at rates comparable to, or lower than, those available through other forms of short-term borrowing with similar terms as proposed above. The total amount of notes outstanding at any time, when added to the aggregate amounts of short-term borrowing outstanding under other forms of short-term borrowing proposed, would not exceed the total amount of Short-term Debt for which authorization is requested. Borrowing arrangements with banks and financial institutions may require compensating balances and/or commitment fees or similar fees. NFG, at all times, will attempt to negotiate the most favorable effective borrowing rate taking into account any compensating balances and/or other fees.
Other Securities: NFG may also engage in other types of short-term financing as it may deem appropriate in light of its needs and market conditions at the time of issuance. This short-term financing may include, without limitation, bank borrowings under uncommitted lines and issuance of bid notes to individual banks.
Financing Subsidiaries and Special Purpose Subsidiaries
NFG requests authority to acquire, directly or indirectly, the equity securities of one or more Financing Subsidiaries or Special Purpose Subsidiaries, which would be organized specifically for the purpose of facilitating the issuance of certain types of long-term securities described above. Certain of the Nonutility Subsidiaries also propose to organize and acquire the equity securities of Financing Subsidiaries or Special Purpose Subsidiaries in order to facilitate financing of their operations. NFG represents that it has in place sufficient internal controls to enable it to monitor the creation and use of any of these entities. No Financing Subsidiary or Special Purpose Subsidiary shall acquire or dispose of, directly or indirectly, any interest in any "utility asset," as that term is defined under the Act. Of the overall $1.5 billion proposed authorization for long-term securities, NFG requests authority to issue up to $500 million outstanding at any one time through Financing Subsidiaries and/or Special Purpose Subsidiaries.
Financing Subsidiaries: NFG proposes to acquire all of the outstanding shares of common stock or other equity interests of one or more Financing Subsidiaries. A separate Financing Subsidiary may be used by NFG with respect to financings of different types of non-core businesses. In connection with these financing transactions, NFG may enter into one or more guarantees or other credit support agreements in favor of the Financing Subsidiary. The amount of any guarantees or credit support would not count against the limit on guarantees that is proposed.
NFG has not created to date any direct Financing Subsidiary under the authority contained in the current financing order. However, NFG's natural gas and oil exploration and production subsidiary, Seneca Resources Corporation, has organized certain Financing Subsidiaries, which are expected to increase the tax efficiencies of its operations in Canada. Any Financing Subsidiary or Special Purpose Subsidiary organized by NFG under the authority granted by the Commission in this proceeding shall be organized only if, in management's opinion, the creation and utilization of a Financing Subsidiary or Special Purpose Subsidiary, will likely result in tax savings, increased access to capital markets and/or lower cost of capital for NFG.
Special Purpose Subsidiaries: In connection with the issuance of certain types of Preferred Securities, NFG and/or a Financing Subsidiary propose to organize one or more separate Special Purpose Subsidiaries as any one or any combination of (a) a limited liability company, (b) a limited partnership, (c) a business trust, or (d) any other entity or structure, foreign or domestic, that is considered advantageous by NFG. In the event that any Special Purpose Subsidiary is organized as a limited liability company, NFG or the Financing Subsidiary may also organize a second special purpose wholly-owned subsidiary ("Partner Sub") for the purpose of acquiring and holding Special Purpose Subsidiary membership interests in order to comply with any requirement under the applicable law that a limited liability company have at least two members. In the event that any Special Purpose Subsidiary is organized as a limited partnership, NFG or the Financing Subsidiary also may organize a Partner Sub for the purpose of acting as the general partner of a Special Purpose Subsidiary and may acquire, either directly or indirectly through the Partner Sub, a limited partnership interest in a Special Purpose Subsidiary to ensure that the Special Purpose Subsidiary will have a limited partner to the extent required by applicable law.
NFG, the Financing Subsidiary and/or a Partner Sub will acquire all of the common stock or all of the general partnership or other common equity interests, as the case may be, of any Special Purpose Subsidiary for an amount not less than the minimum required by any applicable law (i.e., the aggregate of the equity accounts of the Special Purpose Subsidiary). The aggregate of the investment by NFG, the Financing Subsidiary and/or a Partner Sub is referred to as the equity contribution ("Equity Contribution"). Remaining equity would be obtained through the sale of Preferred Securities. NFG and/or the Financing Subsidiary may issue and sell to any Special Purpose Subsidiary, at any time or from time to time in one or more series, unsecured subordinated debentures, unsecured promissory notes or other unsecured debt instruments (individually, a "Note" and collectively, the "Notes") governed by an indenture or other document, and the Special Purpose Subsidiary will apply both the Equity Contribution made to it and the proceeds from the sale of Preferred Securities by it from time to time to purchase Notes. Alternatively, NFG and/or a Financing Subsidiary may enter into a loan agreement or agreements with any Special Purpose Subsidiary under which the Special Purpose Subsidiary will loan to NFG and/or the Financing Subsidiary (individually, a "Loan" and collectively, the "Loans") both the Equity Contribution to the Special Purpose Subsidiary and the proceeds from the sale of Preferred Securities by the Special Purpose Subsidiary from time to time, and NFG and/or the Financing Subsidiary will issue to the Special Purpose Subsidiary Notes evidencing these borrowings. The terms (e.g., interest rate, maturity, amortization, prepayment terms, and default provisions) of any Notes would be designed to parallel the terms of the Preferred Securities to which the Notes relate.
NFG or any Financing Subsidiary also proposes to guarantee solely in connection with the issuance of Preferred Securities by a Special Purpose Subsidiary (a) payment of dividends or distributions on the securities by the Special Purpose Subsidiary if and to the extent the Special Purpose Subsidiary has funds legally available for this use, (b) payments to the holders of the securities due upon liquidation of the Special Purpose Subsidiary or redemption of the Preferred Securities of the Special Purpose Subsidiary, and (c) certain additional amounts that may be payable in respect of the Preferred Securities. Alternatively, NFG may provide credit support for any guarantee that is provided by a Financing Subsidiary. The amount of any guarantees or credit support provided by NFG for this purpose would not be counted against the limitation on guarantees as proposed.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of any Special Purpose Subsidiary, the holders of Preferred Securities issued by the Special Purpose Subsidiary will be entitled to receive, out of the assets of the Special Purpose Subsidiary available for distribution to its shareholders, partners or other owners (as the case may be), an amount equal to the par or stated value or liquidation preference of the Preferred Securities, plus any accrued and unpaid dividends or distributions.
The constituent instruments of each Special Purpose Subsidiary will provide, among other things, that the Special Purpose Subsidiary's activities will be limited to the issuance and sale of Preferred Securities from time to time and the lending to the Financing Subsidiary or Partner Sub of the proceeds of any issuance or sale and the Equity Contribution to a Special Purpose Subsidiary, and certain other related activities.
Financing by Subsidiaries
Distribution seeks authority to issue short-term debt securities through the money pool as discussed below. The Nonutility Subsidiaries seek authority to engage in financing transactions to develop and expand energy-related or functionally related nonutility businesses. Most often these financing transactions by the Nonutility Subsidiaries will be exempt under rule 52(b) of the Act; however, in the limited circumstances where the Nonutility Subsidiary making the borrowing is not wholly-owned by NFG, directly or indirectly, authority is requested for NFG or any other Nonutility Subsidiary to make loans to Nonutility Subsidiaries at interest rates and maturities designed to provide a return to the lending entity of not less than its effective cost of capital. However, no loans will be made to a Nonutility Subsidiary that is less than wholly-owned if Nonutility Subsidiary sells any services or goods to Distribution or to any other Nonutility Subsidiary which, in turn, sells goods or services to Distribution.
Certain of the Nonutility Subsidiaries may be able to achieve tax and other benefits by issuing securities through Financing Subsidiaries or Special Purpose Subsidiaries, and, accordingly, request authorization to organize and acquire the equity securities of these entities in the same manner as described above in connection with proposed financings by NFG.
Continuation of Money Pool Arrangements
Under the Current Financing Order, Distribution, National Fuel Gas Supply Corporation, Seneca Resources Corporation, Highland Forest Resources Inc., Leidy Hub Inc., Horizon Energy Development Inc., Data-Track Account Services Inc., National Fuel Resources Inc., Upstate Energy Inc., Niagara Independence Marketing Company, and Seneca Independence Pipeline Company are authorized to participate in a money pool as both borrowers and lenders. Horizon Power is authorized to invest surplus funds in the money pool and to withdraw those funds when needed, but may not borrow through the money pool. NFG is authorized to lend funds through the money pool but may not borrow funds through the money pool. The Applicants propose to continue participation in, and, with the exception of NFG and Horizon Power, to incur short-term borrowings through the money pool on the same terms as approved under the Current Financing Order. Authority is sought for the money pool participants, other than NFG and Horizon Power, ("Eligible Borrowers") to borrow short-term funds through the money pool. The maximum amount of money pool borrowings outstanding for each Eligible Borrower will be determined by NFG and each Eligible Borrower in accordance with business needs.
NFG will administer the money pool and coordinate short-term borrowings by Eligible Borrowers. NFG proposes to make loans available to Eligible Borrowers through the money pool utilizing the proceeds of borrowings under various credit facilities, including but not limited to commercial paper, short-term lines of credit, demand credit facilities, and committed credit facilities ("Credit Facilities"), as determined by NFG, and issued in accordance with the authorization currently sought. In addition, at certain times during the year, NFG and certain of its Subsidiaries may generate surplus funds, which they may choose to invest in the money pool. Therefore, funds available for borrowings through the money pool will be derived from one or more of the following sources: surplus funds of NFG or one or more of its Subsidiaries, proceeds from NFG's sale of commercial paper, and borrowings by NFG under other Credit Facilities.
NFG will match, to the extent possible, the short-term cash surpluses and borrowing requirements of itself and its Subsidiaries. In the event that at any time during the Authorization Period there are insufficient funds available from money pool sources to satisfy money pool borrowing requirements of all Eligible Borrowers, Distribution will receive borrowing priority over the Nonutility Subsidiaries. Borrowings through the money pool would be met first from available surplus funds of the Subsidiaries and then from available surplus funds of NFG. Once these sources of funds become insufficient to meet the short-term loan requests, borrowings will be made by NFG through the issuance and sale of commercial paper or borrowings under other Credit Facilities.
Distribution seeks approval to make borrowings through the money pool in an amount not to exceed $500 million at any time outstanding. Distribution proposes to repay money pool borrowings principally by means of funds received as a result of providing services to its customers under its tariffs, and from the possible sale of long-term debt or equity securities.
Borrowings through the money pool and repayments will be adequately documented and will be evidenced on the books of each participant that is borrowing funds or lending surplus funds. If only internal funds (surplus funds of NFG and the Subsidiaries) make up the funds available in the money pool, the interest rate applicable and payable to or by Subsidiaries for all loans from internal funds will be the rates for high-grade, unsecured, 30-day commercial paper sold through dealers by major corporations, as quoted in The Wall Street Journal or other national financial publications. Borrowings consisting wholly or in part of funds obtained through the sale of commercial paper or borrowings under other Credit Facilities by NFG will bear interest at a rate equal to NFG's net weighted daily average cost for external borrowings. Interest will be payable by the borrowing Subsidiary until the principal amount borrowed is fully repaid. Fees, commissions and expenses incurred by NFG to establish and maintain Credit Facilities used to fund loans through the money pool, including rating agency fees, bank commitment fees, and transaction costs (such as legal fees incurred in connection with negotiating and documenting credit facilities), will be allocated to all Eligible Borrowers. Each Eligible Borrower's share of allocated expenses is a fraction of the total expenses. The numerator of the fraction is the respective per book capitalization plus the average daily balance of short-term borrowings outstanding during the twelve months ended as of the date of the most recent quarterly consolidating financial statements for each Eligible Borrower. The denominator of the fraction is the sum of all the numerators used in the calculation.
To the extent that there are excess funds available in the money pool from time to time because (a) there are no borrowings under the Credit Facilities that may be currently repaid, (b) there is no commercial paper that is maturing, or (c) no Eligible Borrower has a need for excess funds available from other money pool participants, the excess funds will normally be invested in one or more short-term investments. The Applicants propose amendment of Article IV of the Money Pool Agreement to provide that these short-term investments may include any of the following: (a) interest-bearing accounts with banks; (b) obligations issued or guaranteed by the U.S. government or its agencies and instrumentalities, or by any state or political subdivision of a state; (c) tax exempt notes; (d) tax exempt bonds; (e) tax exempt preferred stock; (f) commercial paper rated not less than A-1 or P-1 or their equivalent by a nationally recognized statistical rating organization; (g) money market funds; (h) bank certificates of deposit and bankers acceptances; (i) Eurodollar certificates of deposit or time deposits; (j) repurchase agreements with respect to any of the foregoing; and (k) other investments as are permitted by the Act and the rules under the Act. With the exception of Article IV, no other substantive changes to the Money Pool Agreement as currently in effect are proposed.
NFG requests authority to enter into guarantees, obtain letters of credit, enter into expense agreements or otherwise provide credit support (collectively, "Guarantees") with respect to the obligations of any Subsidiary. Authority is sought to enter into Guarantees in an aggregate principal amount not to exceed $2 billion outstanding at any time, provided that any Guarantee outstanding on December 31, 2005, shall terminate or expire in accordance with its terms and provided further that the amount of any Guarantees with respect to the obligations of any Subsidiaries shall be subject to the limitations of rule 53(a)(1) or rule 58(a)(1), as applicable. Guarantees of the obligations of any Financing Subsidiary or Special Purpose Subsidiary, as described above, will not count against this limitation.
NFG requests authority to charge each Subsidiary a fee for providing credit support. The fee will be determined by multiplying the amount of the Guarantee provided by the cost of obtaining the liquidity necessary to perform the Guarantee (for example, bank line commitment fees or letter of credit fees, plus other transactional expenses, if any) for the period of time the Guarantee remains outstanding.
Interest Rate Hedges: NFG and, to the extent not exempt under Rule 52, the Subsidiaries, request authorization to enter into Interest Rate Hedges, subject to certain limitations and restrictions, in order to manage interest rate cost. Interest Rate Hedges would only be entered into with counterparties ("Approved Counterparties") whose senior debt ratings, or the senior debt ratings of the parent companies of the counterparties, as published by Moody's Investors Service, are equal to or greater than "Baa," or an equivalent rating from Standard and Poor's Ratings Group or Fitch Inc.
Interest Rate Hedges will involve the use of financial instruments commonly used in today's capital markets to manage the volatility of interest rates, including but not limited to interest rate swaps, swaptions, caps, collars, floors, forwards, rate locks, 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), and short sales of U.S. Treasury securities. The Applicants would use Interest Rate Hedges as a means of prudently managing the risk associated with any outstanding debt by, for example, (a) converting variable rate debt to fixed rate debt, (b) converting fixed rate debt to variable rate debt, or (c) limiting the impact of changes in interest rates resulting from variable rate debt. The transactions would be for fixed periods and stated notional amounts, which in no case would exceed the principal amount of the underlying debt instrument. Fees, commissions and other amounts payable to the counterparty or exchange (excluding, however, the swap or option payments) in connection with an Interest Rate Hedge will not exceed those generally obtainable in competitive markets for parties of comparable credit quality.
Anticipatory Hedges: In addition, NFG and the Subsidiaries request authorization to enter into Anticipatory Hedges, subject to certain limitations and restrictions. Anticipatory Hedges would only be entered into with Approved Counterparties and would be utilized to fix and/or limit the interest rate risk associated with any new issuance through (a) forward sale of exchange-traded U.S. Treasury futures contracts, U.S. Treasury securities and/or a forward swap (each a "Forward Sale"), (b) the purchase of put options on U.S. Treasury securities (a "Put Options Purchase"), (c) a Put Options Purchase in combination with the sale of call options on U.S. Treasury securities (a "Zero Cost Collar"), (d) transactions involving the purchase or sale, including short sales, of U.S. Treasury securities, or (e) some combination of a Forward Sale, Put Options Purchase, Zero Cost Collar and/or other derivative or cash transactions, including but not limited to structured notes, caps and collars, appropriate for the Anticipatory Hedges.
Anticipatory Hedges 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 ("CBOT"), 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. NFG or a Subsidiary will determine the optimal structure of each Anticipatory Hedge transaction at the time of execution.
NFG represents that each Interest Rate Hedge and Anticipatory Hedge will be treated for accounting purposes under generally accepted accounting principles. NFG will comply with Statement of Financial Accounting Standard ("SFAS") 133 (Accounting for Derivative Instruments and Hedging Activities) and SFAS 138 (Accounting for Certain Derivative Instruments and Certain Hedging Activities) or other standards relating to accounting for derivative transactions as are adopted and implemented by the Financial Accounting Standards Board.
Changes in Capital Structure of Majority-Owned Nonutility Subsidiaries
The portion of an individual Nonutility Subsidiary's aggregate financing to be effected through the sale of stock to NFG or other immediate parent company during the Authorization Period according to rule 52 and/or according to this order cannot be ascertained at this time. The proposed sale of capital securities may in some cases exceed the then authorized capital stock of a Nonutility Subsidiary. In addition, the Nonutility Subsidiary may choose to use capital stock with no par value. Also, a Nonutility Subsidiary may wish to engage in a reverse stock split to reduce franchise taxes or for other corporate purposes. As needed to accommodate these types of proposed transactions and to provide for future issuances of securities, the Applicants request authority to change the terms of any majority-owned Nonutility Subsidiary's authorized capitalization by an amount deemed appropriate by NFG or other parent company, provided that the consent of all other shareholders has been obtained for the change. A Nonutility Subsidiary would be able to change the par value, or change between par value and no-par value stock, or change the form of equity from common stock to limited partnership or limited liability company interests or similar instruments, or from these types of instruments to common stock, without additional Commission approval.
Nonutility Subsidiary Reorganizations
NFG requests approval to consolidate or otherwise reorganize all or any part of its direct and indirect ownership interests in Nonutility Subsidiaries and the activities and functions related to these investments. To effect any consolidation or other reorganization, NFG may wish to either contribute the equity securities of one Nonutility Subsidiary to another Nonutility 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. These transactions may also take the form of a Nonutility Subsidiary selling or transferring the equity securities of a subsidiary or all or part of a subsidiary's assets as a dividend to NFG or to another Nonutility Subsidiary, and the acquisition, directly or indirectly, of the equity securities or assets of a subsidiary, either by purchase or by receipt of a dividend. The purchasing company 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 U.S. or foreign laws and accounting requirements, and any transaction structured as a sale would be carried out for consideration equal to the book value of the equity securities being sold.
Certificates of Notification
NFG will file certificates of notification according to rule 24 that report each of the transactions carried out in accordance with the terms and conditions of and for the purposes represented in this Application. The certificates will be filed within 60 days after the end of each of the first three fiscal quarters, and 90 days after the end of the last fiscal quarter, in which transactions occur, commencing with the report for the quarter ended March 31, 2003. The rule 24 certificates will contain the following information for the reporting period:
(a) Any sales of Common Stock by NFG, the sale price per share and the market price per share at the date of the agreement of sale;
(b) The total number of shares of Common Stock issued or issuable under options granted under NFG's benefit plans or otherwise;
(c) If Common Stock has been issued as consideration in connection with the acquisition of securities or assets of any company, the number of shares so issued and the market price per share at the time of issuance;
(d) The amount and terms of any Preferred Securities, Long-term Debt, Stock Purchase Contracts and/or Stock Purchase Units issued by NFG directly or indirectly through a Financing Subsidiary or Special Purpose Subsidiary;
(e) With respect to each participant in the money pool, the maximum amount of borrowings from and loans to the money pool, and the interest rate(s) applied to money pool borrowings and loans;
(f) The amount of any Guarantee issued, and the Subsidiary on whose behalf the Guarantee was issued;
(g) The notional amount and a brief description of any Interest Rate Hedge or Anticipatory Hedge entered into and the identity of the parties to the instruments;
(h) With respect to any Financing Subsidiary or Special Purpose Subsidiary, (i) the name of the subsidiary; (ii) the value of NFG's or Nonutility Subsidiary's investment account in the subsidiary; (iii) the balance sheet account where the investment and the cost of the investment are booked; (iv) the amount invested in the subsidiary by NFG or Nonutility Subsidiary, as the case may be; (v) the form of organization (e.g., corporation, limited partnership, trust, etc.); (vi) the percentage owned by NFG or Nonutility Subsidiary, as the case may be; (vii) the identification of other owners if not 100% owned by NFG or a Nonutility Subsidiary; (viii) the purpose of the investment in any subsidiary; and (ix) the amounts and types of securities to be issued by any subsidiary;
(i) A list of Form U-6B-2 statements filed with the Commission, including the name of the filing entity and the date of the filing; and
(j) Consolidated balance sheets as of the end of the quarter, and separate balance sheets as of the end of the quarter for each company, including NFG, that has engaged in authorized financing transactions.
Any of the information described in items (a) through (j) that is provided in filings or reports required under the Securities Act of 1933 or the Securities Exchange Act of 1934 may be incorporated by reference into the rule 24 certificate.
To the extent that any securities issued by any Financing Subsidiary or Special Purpose Subsidiary are not set forth on the balance sheet of NFG or a Nonutility Subsidiary, a description of the terms and conditions of the securities will be included in the applicable certificate of notification. These filings will also include a representation that the financial statements of NFG shall account for any Financing Subsidiary or Special Purpose Subsidiary in accordance with generally accepted accounting principles.
Fees, Commissions and Expenses
The fees, commissions and expenses incurred or to be incurred in connection with the transactions proposed are estimated at $75,000. The above fees do not include underwriting fees, placement fees, rating agency fees, dealer discounts, commitment fees and/or compensating balances, registration fees, and other similar fees and expenses that would customarily be incurred in connection with any specific financing transaction for which authority is sought but for which the amount cannot be determined at this time. The Applicants state that, for any specific financing carried out according to this order, the fees and expenses will not exceed 6% of the proceeds of the financing.
Compliance with Rules 53 and 54
The transactions proposed are subject to rules 53 and 54. Applicants state that the conditions specified in rule 53(a) are satisfied and that none of the adverse conditions specified in rule 53(b) exist. As a result, the Commission will not consider the effect on the NFG system of the capitalization or earnings of any NFG subsidiary that is an EWG or FUCO, as each is defined in sections 32 and 33 of the Act, respectively, in determining whether to approve the proposed transactions.
Applicants state that no state or other federal agency, other than this Commission has jurisdiction over the proposed transactions.
Due notice of the filing of this Application has been given in the manner prescribed in rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, the Commission finds that, except as to those matters over which jurisdiction has been reserved, the applicable standards of the Act and rules are satisfied and that no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and the rules under the Act, that, except as to those matters over which jurisdiction has been reserved, the Application, as amended, be granted and permitted to become effective immediately, subject, to the terms and conditions prescribed in rule 24 under the Act.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland
Action as set forth or recommended herein
APPROVED pursuant to authority delegated by the
Commission under Public Law 87-592.
For The Division of Investment Management
November 12, 2002