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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27781; 70-9707)

AGL Resources, Inc., et al.

Supplemental Order Authorizing a Tax Allocation Agreement; Reservations of Jurisdiction

December 23, 2003

AGL Resources Inc. ("AGL Resources"), Atlanta, Georgia, a registered holding company, Virginia Natural Gas, Inc. ("VNG"), a wholly owned public-utility company subsidiary of AGL Resources, Atlanta Gas Light Company ("AGLC"), a wholly owned public-utility company subsidiary of AGL Resources, Chattanooga Gas Company, a wholly owned public-utility company subsidiary of AGL Resources, and certain direct and indirect nonutility subsidiaries of AGL Resources (collectively, "Applicants"), AGL Capital Corporation ("AGL Capital"), AGL Investments, Inc., AGL Capital Trust I, AGL Capital Trust II, AGL Energy Corporation, AGL Interstate Pipeline Company, AGL Macon Holdings, Inc., AGL Networks, LLC, AGL Peaking Services, Inc., AGL Propane Services, Inc., AGL Rome Holdings, Inc., AGL Services Company, Atlanta Gas Light Services, Inc., Customer Care Services, Inc., Georgia Energy Company, Georgia Gas Company, Georgia Natural Gas Company, Energy Risk Insurance Services Corporation, Georgia Natural Gas Services, Inc., Global Energy Resources Insurance Corporation, Pinnacle LNG, Inc., Pivotal Energy Services, Inc., Pivotal Propane of Virginia, Inc., Sequent, LLC, Sequent Energy Management, LP, Sequent Energy Marketing, LP, Sequent Holdings, LLC, Southeastern LNG, Inc., TES, Inc., Trustees Investments, Inc., a wholly owned nonutility subsidiary of AGLI, and Utilipro Inc., all Atlanta, Georgia, have filed with the Securities and Exchange Commission ("Commission") a post-effective amendment ("Post-Effective Amendment") under sections 12(b) and 12(f) of the Public Utility Holding Company Act of 1935, as amended ("Act") and rule 45 under the Act to a previously submitted application-declaration. The Commission issued a notice of the proposal contained in the Post-Effective Amendment on August 21, 2000.1

I. Background

By order dated October 5, 2000,2 the Commission authorized AGL Resources to acquire the outstanding common stock of VNG. On October 6, 2000, AGL Resources acquired all the issued and outstanding VNG common stock ("Acquisition") for a cash payment of approximately $535 million. AGL Resources financed the purchase consideration through the issuance of commercial paper with a principal amount of $660 million of which $125 million remained after the purchase of VNG's common stock and was used to repay short-term debt. AGL Resources then refinanced a portion of the debt incurred with more permanent debt financing: on February 23, 2001, AGL Capital issued senior notes under an indenture dated February 20, 2001, in an aggregate principal amount of $300 million; and in May of 2001, AGL Capital issued $150 million in principal amount of 8.0% capital securities. AGL Resources fully and unconditionally guaranteed those offerings. As of June 30, 2003, $300 million and $147.3 million in principal amounts of the senior notes and capital securities, respectively were outstanding, and $140.0 million in commercial paper borrowings with interest rates of 1.3% were outstanding as of December 31, 2002. The initial $535 million aggregate principal amount of commercial paper as it may be refinanced from time to time (including related costs) is referred to as the "Acquisition Indebtedness." The annual interest expense incurred by AGL Resources in connection with the Acquisition Indebtedness is currently approximately $43.2 million per year.

In the Merger Order, the Commission reserved jurisdiction, pending completion of the record, over (among other things) the allocation between AGL Resources and its subsidiaries ("Subsidiaries") of benefits and burdens associated with the filing of consolidated income tax returns in accordance with a tax allocation agreement, which provided for AGL Resources to retain the benefits derived from Acquisition Indebtedness, rather than allocate the benefits from those losses to the Subsidiaries as would otherwise be required by rule 45(c)(5). Applicants state that the record is now complete regarding the tax allocation agreement. Accordingly, Applicants request that the Commission release jurisdiction over this matter and authorize them to allocate system tax benefits and burdens under the tax allocation agreement.

II. Tax Allocation Agreement

Applicants state that the tax allocation agreement is consistent with rule 45(c) except that, as stated above, it allows AGL Resources to retain the tax benefits associated with the Acquisition Indebtedness. Those tax benefits are discussed below.

The companies in the AGL Resources registered holding company system ("Group") generally -- namely, those that are Applicants -- file consolidated income tax returns. As a result of the Acquisition, AGL Resources will be creating tax benefits from the interest expense on Acquisition-related debt: the interest expense on the Acquisition Indebtedness will offset part of the Group's consolidated taxable income and, consequently, reduce the Group's overall tax liability. It is estimated that interest expense deductions related to the Acquisition Indebtedness would reduce the Group's consolidated tax liability by $15.1 million per year assuming a federal tax rate of thirty-five percent on the estimated consolidated federal taxable income of the Group. The Acquisition Debt is and (in the case of refinancings) will be non-recourse to the Subsidiaries, and the proceeds will not be used to finance the operations of the Subsidiaries.

The tax allocation agreement allocates the benefits and burdens associated with the filing of consolidated income tax returns by the Group to the members of the Group ("Members"), and it applies to consolidated income tax returns filed by the Group for periods subsequent to consummation of the Acquisition (i.e., the tax allocation agreement will be effective for the tax year ending September 30, 2001, and subsequent periods). The allocation method under the tax allocation agreement is designed to comply with U.S. Treasury Regulations under the Internal Revenue Code of 1986, as amended ("Code"), and with rule 45(c) under the Act (except as previously noted). It apportions the federal consolidated tax liability of the Group among the Members under the method described in sections 1.1502-33(d)(3) and 1.1552-1(a)(2) of the Code. The general effect of this method is to first allocate the consolidated tax liability among the Members of the Group on the basis of the percentage of the total consolidated tax that the tax of such Member, if computed on a separate return basis, would bear to the total amount of the taxes for all Members of the Group, as computed on a separate return basis. Then, the method allocates an additional amount ("Tax Benefit Amount") to each Member up to, but not greater than, the excess (if any) of its separate return tax liability over the amount allocated to that Member in the first step. The total of the Tax Benefit Amounts allocated to Members is paid to the Members that had items of deduction, loss or credits to which such Tax Benefit Amount is attributable.

A registered holding company will generally have significant expenses from managing the businesses that it holds (even disregarding acquisition debt interest expenses) and little offsetting income since it is not directly engaged in businesses.3 AGL Resources' expenses create tax benefits that reduce the Tax Benefit Amount paid by its subsidiaries. For this reason, for all subsidiaries with separate taxable incomes the Tax Benefit Amount plus the Member's portion of the consolidated Group tax liability will generally be less than the Member's separate tax liability. To ensure that a Member does not pay more than its separate tax liability as a result of participating in the filing of a consolidated tax return, the tax allocation agreement provides that the Tax Benefit Amount allocated to each Member should be up to, but not greater than, the excess, if any, of the Member's separate return liability less that Member's share of the consolidated tax liability.

AGL Resources will be responsible for preparing consolidated tax returns and managing payments made under the tax allocation agreement. Tax Benefit Amount payments made to Members contributing tax benefits to the consolidated return will be made at approximately the same time the related payments of consolidated group tax are made to the appropriate taxing authorities.

The Acquisition Indebtedness that generated the tax benefits that AGL Resources seeks to retain under the tax allocation agreement is clearly identifiable to AGL Resources. The Acquisition Indebtedness is an obligation of AGL Resources, not of the other Members: the Acquisition Indebtedness it is not backed by the credit of the other Members; no other Member has pledged its assets as collateral to secure the Acquisition Indebtedness; no other Member has guaranteed these debts; other Members are not obligated to pay interest or principal payments to service the Acquisition Indebtedness; the interest expense incurred by AGL Resources continues to accrue whether or not VNG has net income or a net loss; if net operating losses incurred by AGL Resources as a result of the Acquisition Indebtedness are used in the consolidated return, AGL Resources would be precluded from carrying over the loss to future periods.

III. Conclusion

AGL Resources states, for purposes of rule 54, that it has no direct or indirect interests in exempt wholesale generators or foreign utility companies as those terms are defined in sections 32 and 33 of the Act, respectively.

The fees, commissions and expenses incurred or to be incurred in connection with seeking the relief proposed in the Post-Effective Amendment are estimated at not more than $15,000.

Upon the basis of the facts in the record, it is hereby found that, as to the tax allocation agreement, the applicable standards of the Act and rules under the Act are satisfied, and that no adverse findings are necessary.

IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that the Post-Effective Amendment, as amended be, and it hereby is, permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act; provided that AGL Resources must supplement its quarterly rule 24 report in this proceeding, for the quarterly period in which they file their consolidated federal income tax return, with: (1) information showing the calculation of the portion of AGL Resources' loss that is attributable to interest expense on the Acquisition Debt; and (2) a spreadsheet showing the actual allocation of income taxes to each of the members of the consolidated group.

IT IS FURTHER ORDERED, that jurisdiction is reserved, pending completion of the record, over the proposed retention of AGL Resources' interest in Trustees Investments, Inc. and the participation of nonutility subsidiaries formed or acquired after issuance of the Merger Order in the AGL Resources system money pool.

For the Commission, by the Division of Investment Management, under delegated authority.


Margaret H. McFarland
Deputy Secretary


Endnotes:


http://www.sec.gov/divisions/investment/opur/filing/35-27781.htm

Modified: 12/31/2003