SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27774; 70-9533)
SCANA Corporation, et al.
Supplemental Order Authorizing Amended Tax Allocation Agreement and Releasing Jurisdiction
December 18, 2003
SCANA Corporation ("SCANA"), a registered public-utility holding company under the Public Utility Holding Company Act of 1935 ("Act"), its three public-utility subsidiaries, South Carolina Electric & Gas Company ("SCE&G"), South Carolina Generating Company, Inc. ("GENCO") and Public Service Company of North Carolina, Incorporated ("PSNC") (collectively, "Utility Subsidiaries"), and its nonutility subsidiaries, South Carolina Fuel Company, Inc. ("SC Fuel"), South Carolina Pipeline Corporation ("SCPC"), SCG Pipeline, Inc., SCANA Energy Marketing, Inc. ("SCANA Marketing"), SCANA Energy Trading, LLC, SCANA Public Service Company, LLC, SCANA Communications, Inc., Servicecare, Inc. ("ServiceCare"), Primesouth, Inc., Palmark, Inc., SCANA Resources, Inc., SCANA Development Corporation, SCANA Petroleum Resources, Inc., SCANA Services, Inc. ("SCANA Services"), PSNC Blue Ridge Corporation, PSNC Cardinal Pipeline Company, LLC, and Clean Energy Enterprises Inc. (collectively "Applicants"), all located at Columbia, South Carolina, have filed with the Securities and Exchange Commission ("Commission") a post-effective amendment to an application-declaration ("Application") under sections 12(b) and (c) of the Act and rules 45, 46 and 54. The Commission issued a notice of the filing of the Application on August 31, 1999 (Holding Co. Act Release No. 27071).
SCANA directly owns three public-utility companies. PSNC purchases, transports, distributes and sells natural gas in North Carolina. SCE&G generates, transmits, distributes and sells electricity and purchases and sells natural gas in South Carolina. GENCO owns and operates a 580-megawatt generating facility in Goose Creek, South Carolina and sells all of the power generated by the facility to SCE&G.
SCANA also holds directly all of the outstanding equity securities of (1) SCANA Services, a subsidiary service company that provides administrative, management and other services to subsidiaries and business units within the SCANA system; (2) SCPC, a subsidiary engaged in the purchase, transmission and sale of natural gas to commercial, industrial and wholesale customers, including SCE&G; (3) SC Fuel, which acquires, owns and provides financing for SCE&G's nuclear fuel, fossil fuel and sulfur dioxide emission allowances; (4) SCANA Marketing, a subsidiary that markets natural gas and wholesale electricity, primarily in the southeast and provides energy-related risk management services to producers and customers; (5) ServiceCare, a subsidiary that provides energy-related products and service contracts on home appliances; (6) Primesouth, Inc., a subsidiary engaged in power plant management and maintenance services; (7) SCANA Resources, Inc., a subsidiary that conducts energy-related businesses and provides energy-related services; and (8) SCG Pipeline, Inc. a subsidiary organized to engage in the transportation of natural gas in Georgia and South Carolina. SCANA also owns all of SCANA Communications, Inc., an exempt telecommunications company, and a subsidiary that invests in telecommunications companies, among other direct and indirect nonutility subsidiaries.
By order dated February 9, 2000, the Commission authorized SCANA to acquire all of the issued and outstanding common stock of PSNC.1 In two subsequent orders, the Commission authorized SCANA, the Utility Subsidiaries and the nonutility subsidiaries to engage in certain financing and related activities.2 The Commission reserved jurisdiction pending completion of the record over Applicants' proposal to allocate the consolidated income tax liability of SCANA among the members of the consolidated group in a manner that would differ in one respect from the method allowed under rule 45(c). Applicants have now requested the Commission to release jurisdiction over the proposed Tax Allocation Agreement and permit SCANA to retain for itself the tax benefit that is attributable to the interest expense on certain acquisition debt incurred in the merger ("Acquisition Debt"), rather than allocate the tax savings to its subsidiary companies, as required by rule 45(c)(5).
The total cash paid in the merger was $700 million. SCANA financed the cash portion of the consideration paid for, and other expenses associated with, the merger by issuing $400 million of two-year floating rate notes and borrowing $300 million for a three-year term under a credit agreement with several banks. These notes and borrowings were refinanced later (by issuing medium term notes of various maturities and interest rates), totaling an aggregate debt of $700 million.3 As used in the Application and in the proposed Tax Allocation Agreement, the term "Acquisition Debt" means indebtedness incurred by SCANA to finance the merger (and any renewals or extensions and any refinancings or refundings of the debt).
SCANA's interest expense on the Acquisition Debt for 2000, 2001 and 2002 was approximately $45.1 million, $33.9 million and $25.8 million, respectively. Applicants state that the interest expense on the Acquisition Debt offsets the SCANA group's consolidated taxable income (because SCANA and its consolidated subsidiaries file a consolidated income tax return) and, as a result, reduces the overall tax liability of the group.4
Under the existing tax allocation agreement, SCANA has not been able to retain, or share in, this interest expense tax benefit, although SCANA is the entity that bears, and pays, the Acquisition Debt liability. Applicants assert that, unless the relief requested is granted, due to the rule 45(c) constraints, discussed below, SCANA will continue to be unable to retain, or share in, the tax benefit associated with the Acquisition Debt interest SCANA pays. Rule 45(c) would require the interest expense benefit to be allocated to other SCANA group members that have a positive corporate tax (primarily SCE&G and PNSC).
The Applicants state that the agreement should be permitted to provide that SCANA retain the tax benefit (in the form of the reduction in consolidated tax) attributable to the interest expense it pays on the Acquisition Debt, rather than allocate that tax savings to its subsidiaries, as required by rule 45(c).5 The Applicants state that the proposed allocation method will have the effect of assigning the tax benefit associated with the interest expense on the Acquisition Debt to the entity that is legally obligated for its payment, SCANA. At the same time, in accordance with rule 45(c)(2), the agreement will provide that the portion of the consolidated tax allocated to any of SCANA's subsidiaries will not exceed the "separate return tax" of such subsidiary (the "separate return limitation"). Consequently, Applicants assert that the proposed Tax Allocation Agreement will not shift a larger portion of the group's tax liability to any member than it would otherwise pay on a separate return basis. Any tax benefits other than those related to the Acquisition Debt accruing to SCANA will continue to be allocated to the subsidiaries as required by rule 45(c).
Tax allocation agreements between a registered holding company and its subsidiaries are subject to section 12(b) of the Act and rule 45. Rule 45(a) generally prohibits any registered holding company or subsidiary company from, directly or indirectly, lending or in any manner extending its credit to or indemnifying, or making any donation or capital contribution to, any company in the same holding company system, unless otherwise authorized by order of the Commission.
While rule 45(c) provides an exception to rule 45(a), section 12(b) and rule 45(a) remain available as a basis for obtaining Commission approval for, among other things, a tax allocation agreement that does not comply with rule 45(c) in all respects. The Commission has previously approved tax allocation methodologies that did not comply with rule 45(c) to the extent that the methodology permitted the registered holding company to retain tax benefits on indebtedness incurred in a merger transaction.6
Applicants' further state that SCANA's Acquisition Debt was incurred in connection with the Merger, not to fund investments in SCANA's other subsidiaries. The Acquisition Debt represents indebtedness of SCANA. In addition, SCANA cannot, without the approval of commissions having jurisdiction over rates of the Utility Subsidiaries, recover in the rates of the Utility Subsidiaries any costs, including the interest on the Acquisition Debt, associated with the merger. Applicants also assert that, because SCANA's subsidiaries have not assumed any legal obligation for the Acquisition Debt, it is not detrimental to SCANA's subsidiaries, or to consumers, if SCANA retains the benefit associated with its interest expense. Applicants assert, moreover, that the Acquisition Debt is and will remain unsecured. Applicants state that, as a result, lenders will not have any call on the assets of SCANA's subsidiaries or any security interest in the common stock of the subsidiaries that are held by SCANA.
Applicants also state that, although SCANA's subsidiaries do not have any legal obligation for the Acquisition Debt, SCANA's ability to pay interest on the Acquisition Debt (as well as common dividend) is largely dependent upon its receipt of dividends from subsidiaries (primarily SCE&G and PSNC, its largest subsidiaries). SCANA states that, at this time, it is not projecting any change in its dividend policy. Applicants further state that dividends will be paid from current and retained earnings of the Utility Subsidiaries, as allowed by rule 46 (except as the Commission may permit PSNC in connection with a pending application-declaration).7 Finally, Applicants state that, because the tax amount allocated to the Utility Subsidiaries will remain subject to the separate return limitation, the Tax Allocation Agreement will have no impact on the rates or revenue requirements of the Utility Subsidiaries.8
The proposed transaction is also subject to rule 54, which refers to rule 53. Rule 54 provides that, in determining whether to approve certain transactions other than those involving exempt wholesale generators ("EWGs") or foreign utility companies ("FUCOs") (as defined in sections 32 and 33 the Act, respectively), 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) are satisfied. All applicable requirements of rule 53 (a) - (c) are satisfied as rule 54 requires, as neither SCANA nor any of its subsidiaries presently has, nor as a result of the proposed transaction will have, an interest in any EWG or FUCO.
The fees, commissions and expenses paid or incurred or to be incurred in connection with the Application are estimated at not more than $25,000. Applicants state that no state commission and no federal commission, other than the Commission, has direct jurisdiction over the proposed Tax Allocation Agreement.
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 no adverse findings are necessary.
IT IS ORDERED that jurisdiction is released over the proposed Tax Allocation Agreement; and
IT IS FURTHER ORDERED, under the applicable provisions of the Act and the rules under the Act, that the Application as it relates to the Tax Allocation Agreement be granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act and provided that Applicants will supplement their rule 24 quarterly report, annually in the report following each quarter in which they file a consolidated tax return, with information showing (1) the calculation of the portion of SCANA's loss that is attributable to interest expense on Acquisition Debt and (2) the actual allocation of federal income tax liability to each of the members of the consolidated group.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland
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