Holding Company Act Release 27609
SECURITIES AND EXCHANGE COMMISSION
(Release No. 27609, 70-10084)
Unitil Corporation, et al.
Order Authorizing Merger of Two Utility Subsidiaries of a Registered Holding Company
December 2, 2002
Unitil Corporation ("Unitil'), a registered holding company under the Public Utility Holding Company Act of 1935, as amended, ("Act"), located at Hampton, New Hampshire, and two of its retail electric utility subsidiaries, Concord Electric Company ("CECo"), Concord, New Hampshire, and Exeter & Hampton Electric Company ("E&H"), Kensington, New Hampshire, (collectively, "Applicants"), have filed an application-declaration, as amended ("Application"), with the Securities and Exchange Commission ("Commission") under sections 6, 7, 9, 10,12(c) and 12(e) of the Act and rules 43, 44, 45, 54 and 62 under the Act. The Commission issued a notice of the Application on October 18, 2002 (HCAR No. 27580).
The Application seeks approvals relating to the proposed merger of CECo and E&H. Applicants propose that E&H will merge into CECo to form a single retail electric utility subsidiary of Unitil to be named Unitil Energy Systems Inc. ("UES"). Applicants state that the proposed merger is one element of Unitil's restructuring proposal under the New Hampshire Electricity Restructuring Law (codified at RSA 374-F). By merging E&H into CECo, the Applicants state that they will simplify the corporate structure of Unitil's holding company system and achieve cost efficiencies and service quality improvements.
CECo is engaged in the transmission and distribution of electric energy at regulated rates to approximately 28,000 customers in Concord and the capital region of New Hampshire. CECo is regulated as a public utility by the New Hampshire Public Utilities Commission ("NHPUC"). As of June 30, 2002, CECo reported net utility plant of $37,417,000 and operating revenues for the 12 months ended June 30, 2002 of $52,263,000.
E&H is engaged in the transmission and distribution of electric energy at regulated rates to approximately 41,000 customers in Exeter and the seacoast region of New Hampshire. E&H is regulated as a public utility by the NHPUC. As of June 30, 2002, E&H reported net utility plant of $43,221,000 and operating revenues for the 12 months ended June 30, 2002 of $58,053,000.
The utility operations of CECo and E&H are administered and coordinated through Unitil's centralized service company, Unitil Service Corp., and since 1986 each company has secured all of its requirements for electric energy from Unitil Power Company ("UPC"), a subsidiary generating company of Unitil. The companies have different retail tariffs, rates and rate bases. As proposed, the merger will result in a new unified rate structure and a single rate base as well as the elimination of any inefficiencies and duplicative costs resulting from the operation of the companies as two separate entities.
To accomplish the merger, the companies have entered into an agreement approved by their respective boards of directors ("Merger Agreement"). Consummation of the transactions proposed in the Merger Agreement is subject to the receipt of all necessary regulatory approvals and to approval by the shareholders of each company. As a result of the merger, all of E&H's assets and liabilities will, by operation of law, become the assets and liabilities of CECo.
Description of Outstanding Equity Securities of CECo and E&H
CECo currently has 250,000 authorized shares of common stock ("CECo Common Stock"), of which 131,745 shares are issued and outstanding and owned both of record and beneficially by Unitil; 2,250 authorized shares of non-cumulative preferred stock ("CECo Non-Cumulative Preferred Stock"), all of which are issued and outstanding and none of which is owned, of record or beneficially, by Unitil; and 15,000 authorized shares of cumulative preferred stock ("CECo Cumulative Preferred Stock"), of which 2,150 shares are issued and outstanding in a single series designated the "8.70% Series," none of which is owned, of record or beneficially, by Unitil. Holders of the CECo Common Stock and the CECo Non-Cumulative Preferred Stock are entitled to vote on all matters brought before the shareholders of CECo. Each outstanding share is entitled to one vote. The CECo Non-Cumulative Preferred Stock is not entitled to vote as a separate class. The CECo Cumulative Preferred Stock is not entitled to vote on any matter, except as may otherwise be authorized or required by the New Hampshire Business Corporation Act. Under the Business Corporation Act, the CECo Cumulative Preferred Stock will not be entitled to vote on the merger and related transactions.
E&H currently has 197,417 authorized shares of common stock ("E&H Common Stock"), of which 195,000 shares are issued and outstanding and owned both of record and beneficially by Unitil; and 25,000 authorized shares of cumulative preferred stock ("E&H Cumulative Preferred Stock"), of which a total of 9,704 shares are issued and outstanding in four series as follows: 840 shares of the "5% Dividend Series," 1,680 shares of the "6% Dividend Series," 3,331 shares of the "8.75% Dividend Series" and 3,853 shares of the "8.25% Dividend Series." None of the E&H Cumulative Preferred Stock is owned, of record or beneficially, by Unitil. The E&H Cumulative Preferred Stock is not entitled to vote as a separate class, unless such a class vote is otherwise authorized or required by the Business Corporation Act. Under the Business Corporation Act, each series of the E&H Cumulative Preferred Stock will be entitled to vote as a separate class on the proposed merger with CECo, since, as described below, the terms of the Merger Agreement provide for the issuance to the holders of the E&H Cumulative Preferred Stock in exchange for their shares of E&H Cumulative Preferred Stock an equal number of shares of CECo Cumulative Preferred Stock in four new series which will have the same terms and conditions as the existing series of the E&H Cumulative Preferred Stock. As part of the Merger Agreement, the board of directors of CECo and the holders of CECo Common Stock and CECo Non-Cumulative Preferred Stock have approved an amendment to the CECo Articles of Incorporation creating the four new series of CECo Cumulative Preferred Stock to be issued in the merger to the holders of the E&H Cumulative Preferred Stock.
The authorized and unissued shares of CECo Cumulative Preferred Stock may be issued in series by CECo from time to time upon authorization of its board of directors, with the terms of each new series to be approved by the vote of two-thirds of the outstanding shares of CECo Common Stock and CECo Non-Cumulative Preferred Stock.
Terms of the Merger Agreement
The Merger Agreement requires all of the issued and outstanding shares of E&H Common Stock to be converted into a single share of CECo Common Stock, and each share of E&H Cumulative Preferred Stock to be converted into a share of a new series of CECo Cumulative Preferred Stock. The shares of CECo Common Stock, CECo Non-Cumulative Preferred Stock and CECo Cumulative Preferred Stock issued and outstanding immediately prior to the merger will remain outstanding and will not be affected by the merger.
Amendments to Debt Indentures
E&H is party to an Indenture of Mortgage and Deed of Trust dated December 1, 1952 ("E&H Indenture"), and CECo is party to an Indenture of Mortgage and Deed of Trust dated July 15, 1958 ("CECo Indenture"). There are currently three series of bonds outstanding under each of the indentures. The Applicants propose to consolidate the indentures. All of the currently outstanding bonds of E&H and CECo would remain outstanding. Bondholders under the new indenture would be secured ratably in all of the real property assets of UES on the same terms on which they are currently secured in the real property assets of CECo and E&H
While the CECo Indenture and the E&H Indenture are largely identical instruments, there are differences between them. As part of the combination, amendment and restatement process, CECo and E&H propose to conform the provisions of the indentures. Any special provisions applicable to the separate series of bonds under each indenture which are contained in supplemental indentures will be preserved in the combination, amendment and restatement of the two indentures. The proposed combination, amendment and restatement will not effect any material economic change in the provisions applicable to the bonds or any series of the bonds, such as their respective rates of interest, maturities, amounts outstanding or redemption features.
However, in the process of amending, restating and combining the two indentures, there are certain differences that the companies are proposing to conform. The following list summarizes the only material differences between the two indentures, and the manner in which the differences are proposed to be resolved:
a. Section 4.04 of each indenture contains a test governing the issuance of additional bonds under the indenture, based upon a calculation of "Net Bondable Expenditures" for property additions. The E&H Indenture currently permits the issuance of additional bonds to the extent of 60% of Net Bondable Expenditures for property additions, while the CECo Indenture permits the issuance of additional bonds to the extent of 68% of Net Bondable Expenditures for property additions. The Applicants propose using the 68% test in the amended and restated indenture.
b. Section 6.01 of each of indenture contains a test for the issuance of bonds against cash deposits, which is based on a multiple of earnings available for interest charges. The multiple in the case of the E&H Indenture is 2; and in the case of the CECo Indenture it is 2 1/2. The Applicants propose that the amended and restated indenture use a multiple of 2 in this provision. It should be noted that neither company has ever issued bonds under this provision.
c. Section 10.04A of each indenture permits the release of property from the lien of the indenture under certain circumstances, including an annual exemption for nonutility property having a value of not more than $150,000. The Applicants propose to increase this amount to $350,000 in the amended and restated indenture.
d. Rather than being secured in the separate property of CECo and E&H, the CECo and E&H bondholders will be secured ratably in all of the property of the combined entity upon the effectiveness of the merger and the amendment and restatement of the two indentures into a single indenture.
The holders of the bonds outstanding under both the CECo Indenture and the E&H Indenture have executed consents to the merger of E&H into CECo and the assumption by CECo of the E&H Indenture upon consummation of the merger. They have also agreed to the amendment, restatement and combination of the E&H Indenture and the CECo Indenture into a single indenture under which all of the bonds will remain outstanding, pending completion of definitive documentation for the amendment, restatement and combination. The Applicants anticipate that the closing of the amendment, restatement and combination of the indentures will occur prior to December 31, 2002, but subsequent to the effective date of the merger.
Boards of Directors and Shareholder Approvals
The Merger Agreement was approved by the boards of directors of CECo and E&H on June 20, 2002, and September 27, 2002. In addition, the Merger Agreement and related amendments to CECo's Articles of Incorporation were approved by the holders of CECo Common Stock and CECo Non-Cumulative Preferred Stock on November 27, 2002.
Approval of the Merger Agreement by the holders of E&H Common Stock was assured since Unitil controls the vote of these shares. Unitil does not, however, control the vote of any outstanding series of E&H Cumulative Preferred Stock. Unitil has solicited written consents in favor of the Merger Agreement and related transactions from the holders of each outstanding series of the E&H Cumulative Preferred Stock. The solicitation of consent was subject to New Hampshire law and the terms of E&H's governance documents. Under Section 7.04 of the New Hampshire Business Corporation Act, the holders of E&H Cumulative Preferred Stock can take action by unanimous written consent, and E&H's governance documents are in agreement. Each holder of the 8.75% Dividend Series and the 8.25% Dividend Series executed a written consent in favor of the Merger Agreement and related transactions effective November 1, 2002. E&H had the right to call each outstanding series for redemption under the terms of each series. The 5% Dividend Series and 6% Dividend Series were redeemed.
Tax and Accounting Consequences of the Merger
The merger has been structured to qualify for tax purposes as a tax-free "reorganization" under section 368(a) of the Internal Revenue Code. As a result, no gain or loss will be recognized by CECo or E&H or the holders of CECo Common Stock, CECo Non-Cumulative Preferred Stock, CECo Cumulative Preferred Stock, E&H Common Stock or E&H Cumulative Preferred Stock. CECo and E&H expect that the merger will qualify as a common control merger for accounting and financial reporting purposes. The accounting for a common control merger is similar to a pooling of interests. Under this accounting treatment, the combination of the ownership interests of the two companies is recognized and the recorded assets, liabilities, and capital accounts are carried forward at existing historical balances to the consolidated financial statements of UES as the surviving company following the merger.
On a pro forma basis and giving effect to the merger, as of June 30, 2002, UES will have total assets of approximately $112,047,000, including net utility plant of $80,638,000, and operating revenues for the 12 months ended June 30, 2002 of approximately $110,316,000. UES's pro forma consolidation capitalization as of June 30, 2002 (assuming the exchange of all of the E&H Cumulative Preferred Stock for new shares of UES Cumulative Preferred Stock) will be as follows:
Common Stock Equity, 28,411,000,000 amount outstanding, 35%.
Preferred Stock, 1,195,000,000 amount outstanding, 1.5%.
Short-term Debt, 1,550,000,000 amount outstanding, 1.9%.
Long-term Debt, 50,000,000,000 amount outstanding, 61.6%.
Integrated Public Utility System Maintained
Following the merger, the Unitil holding company system will remain an integrated public utility system. By order dated April 24, 1992 (HCAR No. 35-25524), the Commission found that Unitil's public utility subsidiaries, including CECo, E&H and Fitchburg Gas and Electric Light Company ("Fitchburg"), a Massachusetts gas and electric utility, constituted an integrated public utility system within the meaning of the Act. While the merger of CECo and E&H will result in the combination of two of the corporate entities in which the system's utility operations are located, it will not change the fundamental fact that the same assets will be operated by the system as one coordinated company instead of two.
Money Pool Matters
CECo and E&H participate in the Until system money pool arrangement ("Money Pool") that is funded, as needed, through bank borrowings and surplus funds invested by the participants in the Money Pool and as authorized by HCAR Nos. 26737 (June 30, 1997); 27182 (June 9, 2000); 27307 (Dec. 15, 2000) and 27345 (Feb. 14, 2001). Participation in the Money Pool, including short-term debt borrowings, by CECo and E&H are authorized by the New Hampshire Public Utility Commission and, therefore, are exempt under rule 52 of the Act. However, borrowings by and loans to Unitil's other utility subsidiary, Fitchburg Gas and Electric Light Company ("Fitchburg"), are not exempt. Following the merger, it is proposed that UES be authorized to make loans to Fitchburg on the same terms as CECo's and E&H's current authorization to make these loans. All other terms, conditions and limitations under the Money Pool orders will continue to apply without change.
Economies and Efficiencies of the Merger
By merging E&H into CECo, the Applicants believe they will simplify the corporate structure of the Unitil holding company system while achieving cost efficiency and service quality improvements. As examples of the specific benefits of the merger, the Applicants point to the following: (1) power contract management activities will become more streamlined by eliminating one of the two New Hampshire retail operating companies and consolidating power supply planning, solicitation, contracting and administrative activities; (2) distribution business development activities will be consolidated to reduce administrative tasks and reporting requirements; (3) customer service operations, which are currently consolidated, will be simplified and more efficient because one tariff and one set of rates will replace the existing two tariffs and two sets of rates; (4) a consolidated UES tariff will allow for more efficient regulatory review and will be simpler for Unitil to administer; (5) a consolidated meter reading system will be possible; and (6) consolidation of reports, analyses and filings in such areas as rates, financings, and taxes will be possible for the finance, treasury and regulatory services departments. Applicants believe the merger will generate cost efficiencies that would not be available absent the merger, and they believe the merger will have no adverse consequences for customers or shareholders.
Fees, Commissions and Expenses
Fees, commissions and expenses paid or incurred in connection with the merger and related transactions, which consist primarily of attorneys' fees, are estimated to be not more than $1 million.
Approval from the NHPUC is required to carry out the merger and the related transfer of existing franchises, rights, works and systems of CECo and E&H to UES. NHPUC must also approve the issuance of the four new series of preferred stock by UES in connection with the merger. NHPUC has approved the transactions (Order No. 24072, October 25, 2002). The Federal Energy Regulatory Commission ("FERC") must approve the merger and has done so by order dated October 23, 2002 (Docket No. EC02-111-000).
No other state or federal commission, other than this Commission, has jurisdiction over the proposed transactions.
Rule 54 Analysis
Unitil states for purposes of rule 54 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 Unitil system of the capitalization or earnings of any Unitil subsidiary that is an exempt wholesale generator or foreign utility company, as each is defined in sections 32 and 33 of the Act, respectively, in determining whether to approve the proposed transactions.
Due notice of the filing of the Application, as amended, has been given in the manner prescribed by 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 the applicable standards of the Act 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 the Application, as amended, be 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
December 2, 2002