(Release No. 35-27710; 70-10126)
KeySpan Energy Canada Partnership, et al.
August 12, 2003
KeySpan Energy Canada Partnership ("KECP") and KeySpan Energy Facilities Limited ("KEFL"), both located in Alberta, Canada (together, the "Applicants") and both nonutility subsidiaries of KeySpan Corporation (KeySpan"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"), Brooklyn, New York, have filed an application-declaration ("Application") under sections 9(a) and 10 of the Act and rule 54. The Commission issued a notice of the filing of the Application on July 9, 2003 (Holding Co. Act Release No. 27696).
KeySpan, a registered public-utility holding company, directly or indirectly owns seven public-utility companies in the northeastern United States.1 KeySpan has owned KECP, an Alberta, Canada general partnership, and KEFL, an Alberta, Canada corporation (formerly known as Gulf Midstream Services Partnership and GMS Facilities Limited, respectively) since October 2000. On November 8, 2000, KeySpan registered as a holding company under the Act when it acquired Eastern Enterprises (now known as KeySpan New England, LLC), as authorized by the Commission's November 7, 2000 order (Holding Co. Act Release No. 27271), supplemented by the order issued on December 1, 2000 (collectively, the "Merger Order").2 In the Merger Order, the Commission approved KeySpan's retention of ownership in KECP and KEFL, finding that these entities are engaged in "gas-related activities" within the meaning of the Gas-Related Activities Act of 1990 ("GRAA").
Together, KECP and KEFL own facilities located in Alberta and Saskatchewan through which they operate one of the largest natural gas midstream businesses in Canada, consisting of natural gas gathering and processing as well as natural gas liquids ("NGL") processing, transportation, storage and marketing. KECP markets natural gas products, including natural gas liquids, from numerous producers, to customers in the United States and Canada. KECP owns interests in 13 natural gas processing plants, along with associated raw gas gathering facilities, and is the operator of 11 of those plants. It also owns interests in NGL fractionation and storage facilities and an NGL pipeline. KEFL owns interests in NGL fractionation and storage facilities. KECP and KEFL together provide gas gathering and processing services to approximately 160 producers.
KECP and KEFL seek authorization for KEFL to acquire voting securities of Rimbey Pipe Line Co. Ltd. ("Rimbey Co."), pursuant to a Letter Purchase Agreement dated February 6, 2003, as amended April 3, 2003 (the "Transaction"). KEFL currently owns 40.6% of the issued and outstanding shares of Rimbey Co.,3 an Alberta, Canada corporation, and operates the facilities owned by Rimbey Co. Rimbey Co. owns the Rimbey Pipe Line, a 110 kilometer NGL pipeline, and the Rimbey Edmonton Terminal, which consists of propane treating, storage, rail loading and truck loading/offloading facilities. Rimbey Co. has a total of 9 shareholders, of which KEFL is the largest.4
In connection with its business, KECP is a party to two agreements with ConocoPhillips Canada Resources Corp. ("ConocoPhillips Resources"): a Buy-Sell Agreement dated December 1, 1998, as amended (the "Buy-Sell Agreement"), and a Natural Gas Liquids Purchase and Sale Agreement also dated December 1, 1998, as amended (the "Purchase and Sale Agreement" and together with the Buy-Sell Agreement, the "NGL Agreements"). Pursuant to the Buy-Sell Agreement, KECP purchases raw natural gas from ConocoPhillips Resources at the inlet points to certain gas processing facilities owned by KECP, processes the gas on behalf of ConocoPhillips Resources and resells the processed gas and certain gas products (exclusive of certain NGLs which are retained by KECP) to ConocoPhillips Resources at the outlet points of the relevant facilities. Under the Purchase and Sale Agreement, ConocoPhillips Resources sells NGLs to KECP at the outlet points of certain natural gas processing facilities, some of which KECP owns and at which KECP does not provide processing services for ConocoPhillips Resources.
KECP and ConocoPhillips Resources recently agreed to an Amending Agreement to revise certain price terms of each of the NGL Agreements. Consideration for KECP's entry into such Amending Agreement was, among other things, the entry by KECP and ConocoPhillips Canada Limited ("ConocoPhillips")5 into a February 6, 2003 Letter Purchase Agreement, amended April 1, 2003, by which ConocoPhillips was to transfer 2,610 shares of Rimbey Co. (representing 5.2% of issued and outstanding shares) currently held by ConocoPhillips (the "Rimbey Shares") to KECP, subject to two conditions described below.
KECP and ConocoPhillips agreed that the cash value of the consideration for the Amending Agreement associated with the transfer of the Rimbey Shares was $2.25 million Canadian. The proposed transfer of the Rimbey Shares to KECP was subject to the preferential rights of the other Rimbey Co. shareholders to purchase the shares ("Right of First Refusal") at the same aggregate price of $2.25 million Canadian. KEFL, as a current shareholder of Rimbey Co., had and could exercise a Right of First Refusal. ConocoPhillips' transfer of the Rimbey Shares to KECP was conditioned upon (i) the failure of other Rimbey Co. shareholders to exercise their Rights of First Refusal and (ii) receipt of the approval by the Commission sought in this Application. As a result of Husky Oil Operations Ltd.'s recent exercise of its Right of First Refusal to purchase 266 shares of Rimbey Co., KEFL exercised its Right of First Refusal to purchase the remaining 2,344 shares of Rimbey Co. (the "Revised Rimbey Shares"). As a result, KEFL proposes to purchase the Revised Rimbey Shares from Conoco Phillips pursuant to a separate Letter Purchase Agreement.
II. Requested Authorization
Applicants originally sought authorization for either (a) the acquisition by KECP of the Rimbey Shares from ConocoPhillips pursuant to the Letter Purchase Agreement and amending agreement ("Original Letter Purchase Agreements") or (b) the acquisition by KEFL of the Rimbey Shares (or its proportionate share thereof, if other shareholders also exercise their Rights of First Refusal) as a result of the exercise by KEFL, as a current Rimbey Co. shareholder, of its Right of First Refusal to purchase the Rimbey Shares in preference to their sale by ConocoPhillips to KECP. Applicants sought authorization in the alternative because the parties originally contemplated that KECP would acquire the Rimbey Shares as set forth in the Original Letter Purchase Agreements. KECP and KEFL have determined that it is appropriate for KEFL to acquire the shares by exercise of its Right of First Refusal both to consolidate shareholdings in Rimbey Co. in one entity and to protect against the acquisition of all of the Rimbey Shares by other Rimbey Co. shareholders (by virtue of the exercise of their Rights of First Refusal).
The parties had agreed that the cash value of the Rimbey Shares was $2.25 million Canadian, as noted above. At the generally prevailing exchange rate of approximately $0.69, that equated to a value of approximately $1.55 million in U.S. dollars. The acquisition price for the Revised Rimbey Shares is $2.02 million Canadian, which at the generally prevailing exchange rate of approximately $0.69, equates to a value of approximately $1.39 million in U.S. dollars. After consummation of the Transaction, had no other Rights of First Refusal been exercised, KEFL and/or KECP together would have owned a total of 22,913 shares (or 45.8% of issued and outstanding shares) in Rimbey Co., an increase of 2,610 shares (or 5.2%) over KEFL's existing ownership share of Rimbey Co. After consummation of the Transaction, in which KEFL will acquire the Revised Rimbey Shares, KEFL will own a total of 22,647 shares (or 45.3% of issued and outstanding shares) in Rimbey Co., an increase of 2,344 shares (or 4.5%) over KEFL's existing ownership share of Rimbey Co.
The Commission finds that the Transaction to increase KEFL's ownership in the Rimbey Co. is consistent with the standards of Section 2(b) of the GRAA and, thus, with section 10 and 11(b)(1)of the Act.
For purposes of rule 54, the Applicants state that, although KeySpan cannot rely on the safe harbor of rule 53(a), KeySpan satisfies the rule 53(c) requirements. Applicants state that KeySpan currently meets all of the conditions of rule 53(a) except for clause (1) (that aggregate investment in exempt wholesale generators ("EWGs") and foreign utility companies ("FUCOs") may not exceed 50% of the system's consolidated earnings). The Commission determined in an order dated December 6, 2002 (Holding Co. Act Release No. 27612) ("December 2002 Order"), that KeySpan's investments in EWGs and FUCOs are permitted in an aggregate amount of up to $2.2 billion6, which was and continues to be greater than 50% of Keyspan's consolidated retained earnings, and would not have the adverse effects set forth in rule 53(c).7
The Applicants further state that there has been no material adverse impact on KeySpan's consolidated capitalization resulting from KeySpan's investments in EWGs and FUCOs. The Applicants assert that the Transaction would not, by itself, or even considered in conjunction with the effect of the capitalization and earnings of KeySpan's EWGs and FUCOs, have a material adverse effect on the financial integrity of the KeySpan system, or an adverse impact on KeySpan's public-utility subsidiaries, their customers, or the ability of State commissions to protect the public-utility customers. As of June 30, 2003, KeySpan's consolidated capitalization consisted of 39.78% equity and 60.22% debt.8 These ratios meet the requirement in KeySpan's Financing Order that KeySpan's common equity be at least 30% of its capitalization and the Applicants state that the Transaction will have no adverse impact on KeySpan's ability to satisfy that requirement. In addition, the Applicants state that KeySpan's long-term public unsecured debt is rated "investment grade" by all the major rating agencies.
The Applicants state that, moreover, all of KeySpan's direct or indirect investments in EWGs and FUCOs are segregated from the public-utility subsidiaries and none of the public-utility subsidiaries provide financing for, extend credit to, or sell or pledge its assets directly or indirectly to any EWG or FUCO in which KeySpan owns any interest. Furthermore, the Applicants state KeySpan does not, and will not, seek recovery in the retail rates of any public-utility subsidiaries for any failed investment in, or inadequate returns from, an EWG or FUCO investment. Finally, the Applicants state that investments in EWGs and FUCOs will not have any negative impact on the ability of the public-utility subsidiaries to fund operations and growth. The public-utility subsidiaries currently have financial facilities in place that are adequate to support their operations. The expectation of continued strong credit ratings by the public-utility subsidiaries should allow them to continue to access the capital markets to finance their operations and growth. KeySpan's EWG and FUCO investments in the aggregate have been profitable for all quarterly periods from December 31, 2000 through June 30, 2003.
Consequently, the Commission will not consider the effect of the capitalization or earnings of any of the KeySpan EWG or FUCO subsidiaries on the KeySpan system for this Transaction. Fees, commissions and expenses of the Applicants expected to be paid or incurred in connection with the proposed Transaction are approximately $20,000 for legal fees. Applicants state that, other than this Commission, no other State, federal or foreign government approval is required to effectuate the Transaction.
Due notice of the filing of the Application 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 rules that the Application, as amended, is 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.
1 The Brooklyn Union Gas Company, d/b/a KeySpan Energy Delivery New York, distributes natural gas at retail to residential, commercial and industrial customers in the New York City Boroughs of Brooklyn, Staten Island and Queens; KeySpan Gas East Corporation, d/b/a KeySpan Energy Delivery LI, distributes natural gas at retail to customers in New York State located in the counties of Nassau and Suffolk on Long Island and the Rockaway Peninsula in Queens County; KeySpan Generation LLC owns and operates electric generation capacity located on Long Island that is sold at wholesale to the Long Island Power Authority; Boston Gas Company, d/b/a KeySpan Energy Delivery New England, distributes natural gas to customers located in Boston and other cities and towns in eastern and central Massachusetts; Essex Gas Company, d/b/a KeySpan Energy Delivery New England, distributes natural gas to customers in eastern Massachusetts; Colonial Gas Company, d/b/a KeySpan Energy Delivery New England, distributes natural gas to customers located in northeastern Massachusetts and on Cape Cod; and EnergyNorth Natural Gas, Inc., d/b/a KeySpan Energy Delivery New England, distributes natural gas to customers located in southern and central New Hampshire and the City of Berlin located in northern New Hampshire. KeySpan, through its subsidiaries, also engages in energy related nonutility activities.
2 In addition, by its November 8, 2000 order, the Commission authorized a program of external financings, credit support arrangements and related proposals for KeySpan and its subsidiaries (Holding Co. Act Release No. 27272), supplemented by the order issued on December 1, 2000 (collectively, the "Financing Order").
3 KEFL acquired these shares in 1998, prior to KeySpan's registration as a holding company. KEFL's ownership interest in Rimbey Co. is an interest in "natural gas liquids transportation facilities" within the meaning of the GRAA, i.e., the Rimbey Pipe Line, Rimbey Co.'s primary asset.
4 KEFL currently owns 20,303 shares (40.6%) of Rimbey Co. The other shareholders and their shareholdings are: EnerPro Midstream Inc. - 17,766 shares (35.5%); Shell Canada Limited - 4,320 shares (8.6%); ConocoPhillips Canada Limited - 2,610 shares (5.2%); Husky Oil Operations Ltd. - 2,312 shares (4.6%); Imperial Oil Limited - 1,287 shares (2.6%); BP Canada Energy Resources Company - 1,194 shares (2.4%); Murphy Oil Company Ltd. - 135 shares (0.35%); and The Great West Life Assurance Co. - 73 shares (0.15%).
5 ConocoPhillips is an existing Rimbey Co. shareholder and an affiliate of ConocoPhillips Resources. See note 3, supra.
6 In the November 8, 2000 Financing Order, the Commission authorized Keyspan to invest up to 250% of consolidated retained earnings in EWGs and FUCOs. The $2.2 billion authorized in the December 2002 Order represented approximately 440% of Keyspan's consolidated retained earnings for the four quarters ended September 30, 2002.
7 Applicants state that, at June 30, 2003, KeySpan's aggregate investment in EWGs and FUCOs was approximately $1,034,075,000.
8 KeySpan's common equity, expressed as a percent of consolidated capitalization, was approximately 33% as of September 30, 2002, the end of the quarter immediately preceding the issuance of the December 2002 Order.