SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27851; International Series Release No. 1276; File No. 70-9669)
Scottish Power plc, et al.
Supplemental Order Authorizing External and Intrasystem Financing and Related Transactions; Authorizing Service Agreements; and Reserving Jurisdiction
May 28, 2004
Scottish Power plc ("ScottishPower"), a foreign registered holding company, Scottish Power UK Holdings Limited ("SPUK Holdings"), a foreign utility subsidiary of Scottish Power, Scottish Power UK plc ("SPUK"), a foreign utility subsidiary of Scottish Power,1 and Scottish Power NA 1 Limited and Scottish Power NA 2 Limited, intermediate registered holding companies, all located in Glasgow, Scotland, United Kingdom; PacifiCorp Holdings Inc. ("PHI"),2 an intermediate registered holding company, PacifiCorp., an electric utility subsidiary of PHI, PacifiCorp Group Holding Company ("PGHC"), an intermediate holding company for PacifiCorp nonutility subsidiaries, and PacifiCorp's nonutility subsidiaries: PPM Energy Inc., Pacific Klamath Energy, Inc.; PacifiCorp Financial Services, Inc.; Energy West Mining Company; Glenrock Coal Company; Interwest Mining Company; Pacific Minerals, Inc. ("PMI"); PacifiCorp Environmental Remediation Company; PacifiCorp Investment Management, Inc.; PACE Group, Inc.; Enstor, Inc.; Arlington Wind LLC; and Heartland Wind LLC3; all located in Portland, Oregon (collectively, "Applicants"), have filed with the Securities and Exchange Commission ("Commission") an application-declaration, as amended ("Application"), under sections 6(a), 7, 9(a), 10, 12(b) and (c), 13(b), 32 and 33 of the Public Utility Holding Company Act of 1935, as amended ("Act") and rules 42, 43, 45, 46, 53, 54, 83, 87, 90 and 91 under the Act.
Applicants request authority to engage in various financing transactions, credit support arrangements, and other related proposals, as more fully discussed below, commencing on the effective date of an order issued in this matter and ending March 31, 2007 ("Authorization Period"). The Commission issued a notice of the Application on March 5, 2004 (Holding Co. Act Release No. 27808). The Commission did not receive any requests for a hearing. The Commission issued an order on April 1, 2004 (Holding Co. Act Release No. 27831), authorizing financing transactions and related proposals from April 1, 2004, through June 1, 2004 ("Interim Financing Order").
ScottishPower registered as a holding company under the Act following its acquisition of PacifiCorp on November 29, 1999 ("Merger").4 By order dated December 6, 2000 (Holding Co. Act Release No. 27290), as supplemented by Holding Co. Act Release No. 27292 (December 6, 2000) (collectively, "Financing Order"), the Commission authorized ScottishPower and certain of its subsidiaries to engage in various financing transactions from the date of the Financing Order through March 31, 2004. As mentioned above, the Interim Financing Order authorized jurisdictional financing transactions through June 1, 2004.
The Financing Order authorized the Applicants to engage in the following transactions: (1) external financings by ScottishPower; (2) certain external financings by PacifiCorp and the PHI Nonutility Subsidiary Companies; (3) certain intrasystem financings including the creation of a new PacifiCorp utility money pool, and guarantees of the obligations of PacifiCorp subsidiaries and of the subsidiaries of ScottishPower's foreign utility subsidiary, SPUK Holdings; (4) the payment by PacifiCorp subsidiaries and, in certain circumstances, by PacifiCorp, of dividends out of capital or unearned surplus; (5) increases in the number of shares authorized by PacifiCorp or by any of PacifiCorp's subsidiaries with respect to any capital security of the company, as well as alteration of the terms of any capital security; (6) the formation of financing entities and the issuance by such entities of securities otherwise authorized to be issued and sold under the authority requested in this filing; and (7) the formation of PHI to hold the shares of both PacifiCorp and PGHC.
The Interim Financing Order authorized many of the same financing proposals; however, the Commission reserved jurisdiction over: (1) the securities issued in reliance upon the authorization granted by the Commission in the Interim Financing Order where upon issuance, the security is rated below investment grade; (2) the issuance of any guarantee or other securities at any time that specified investment grade conditions are not satisfied; (3) use of the existing intercompany loan agreements; (4) the authority to finance exempt wholesale generator ("EWG") and foreign utility company ("FUCO") investments in excess of maintenance of its current aggregate investment; (5) approval of the Amended Tax Allocation Agreement; and (6) all activities and transactions requested in the Application occurring between June 1, 2004 and the end of the Authorization Period.
PacifiCorp is regulated by the Public Utilities Commission of the State of California, the Idaho Public Utilities Commission, the Public Service Commission of Utah, the Washington Utilities and Transportation Commission, the Public Service Commission of Wyoming, and the Oregon Public Utility Commission ("OPUC") (collectively, "State Commissions").
II. Financing Conditions
Applicants represent that during the Authorization Period the proposed financing transactions, credit support arrangements, and other related proposals will be subject to the following general terms and conditions:
The Applicants represent that no financing proceeds will be used to acquire a new subsidiary, other than a special purpose financing entity, unless such acquisition is consummated in accordance with an order of the Commission or an available exemption under the Act. The proceeds of external financings will be allocated to companies in the ScottishPower system in various ways through intrasystem financing discussed in the Application.
Applicants represent that no guarantees or other securities, other than common stock, may be issued in reliance upon the authorization to be granted by the Commission unless: (1) the security to be issued, if rated, is rated investment grade; (2) all outstanding securities of the issuer, that are rated, are rated investment grade; and (3) all outstanding securities of any registered holding company in the ScottishPower system, that are rated, are rated investment grade ("Investment Grade Conditions"). For purposes of this Investment Grade Condition, a security will be deemed to be rated "investment grade" if it is rated investment grade 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, as amended, ("1934 Act").
Applicants request that the Commission reserve jurisdiction over the issuance of any such securities that are rated below investment grade. Applicants further request that the Commission reserve jurisdiction over the issuance of any guarantee or other securities at any time that during the Authorization Period the conditions set forth in clauses (1) through (3) above are not satisfied.
III. ScottishPower External Financing
ScottishPower requests authorization to increase its capitalization by issuing and selling from time to time equity and debt securities aggregating not more than $8 billion at any one time outstanding during the Authorization Period ("External Financing Limit"). The External Financing Limit excludes any refinancing of current debt. Such securities could include ordinary shares, preferred shares, options, warrants, unsecured long- and short-term debt (including commercial paper), securities convertible into common and preferred stock, subordinated debt, bank borrowings and securities with call or put options.
Any convertible or equity-linked securities would be convertible into securities that ScottishPower is otherwise authorized to issue, directly or indirectly through a financing entity on behalf of ScottishPower. No convertible security may be convertible into an interest in a utility subsidiary of the ScottishPower system.
ScottishPower also requests authorization to maintain all existing financial arrangements regarding outstanding equity and debt securities. ScottishPower proposes to also enter into currency and interest rate swaps as described below.8
ScottishPower proposes that the various securities to be issued would fall within the following limits, but would not in the aggregate exceed the External Financing Limit stated above:
A. Ordinary Shares
ScottishPower's common stock equity consists of ordinary shares, with a par value of 50 pence each, that are listed on the London Stock Exchange. ScottishPower currently has American Depositary Shares ("ADSs") in the U.S. which trade as American Depositary Receipts ("ADRs") and represent four ordinary shares each. ScottishPower has established a sponsored ADR program in the U.S. and has its ADSs listed on the New York Stock Exchange and registered under the Securities Act of 1933, as amended ("1933 Act").9
ScottishPower seeks authority to use its ordinary shares (or associated ADSs) as consideration for acquisitions that are otherwise authorized or exempt under the Act. Among other things, transactions may involve the exchange of parent company equity securities for securities of the company being acquired in order to provide the seller with certain tax advantages. For purposes of the External Financing Limit, ScottishPower ordinary shares used to fund an acquisition of a company through the exchange of ScottishPower equity for securities being acquired would be valued at market value based upon the closing price of the ordinary shares on the London Stock Exchange on the day before closing of the sale or issuance.
Ordinary share financings covered by this Application may occur in any one of the following ways: (1) through underwriters or dealers; (2) through agents; (3) directly to a number of purchasers or a single purchaser; (4) directly to employees (or to trusts established for their benefit) and other shareholders through ScottishPower system employee benefit schemes; or (5) through the issuance of anti-dilution and/or bonus shares (i.e., stock dividends) to existing shareholders.
In addition to other general corporate purposes, the ordinary shares will be used to fund employee benefit plans. ScottishPower and PacifiCorp currently maintain a number of employee benefit plans for personnel in the ScottishPower system pursuant to which employees may acquire or may be granted equity interests as part of their compensation.
More particularly, ScottishPower intends to issue ADSs to U.S. employees through PacifiCorp Stock Incentive Plan, Compensation Reduction Plan and K Plus Employee Savings and Stock Ownership Plan ("U.S. Plans"). In addition, other share-based plans may be developed to motivate and retain key executives. In addition, ScottishPower intends to issue ADSs to U.S. employees and ordinary shares to U.K. employees through its Executive Share Option Plan 2001 (the U.S./U.K. plan). In addition, ScottishPower intends to issue ordinary shares to its U.K. employees through its Long Term Incentive Plan, its Executive Share Option Scheme, its Sharesave Scheme and its Employee Share Ownership Plan (the "U.K. Plans").
ScottishPower requests authority to issue approximately 82 million ordinary shares to employees under its existing plans, the U.S. Plans, the U.K. Plans and such additional plans created after the date of the requested order in this matter that may be developed for the purposes stated above. Securities issued by ScottishPower under all of the plans will be included within the External Financing Limit and will be valued, if ordinary shares, at market value based on the closing price on the London Stock Exchange on the day before the award. Securities issued that are not ordinary shares will be valued based on a reasonable and consistent method applied at the time of the award.10
B. Preferred Stock
ScottishPower proposes to issue preferred stock from time to time during the Authorization Period in an amount not to exceed the External Financing Limit and within the financing parameters specified above. Any such preferred stock would have dividend rates or methods of determining the same, redemption provisions, conversion or put terms and other terms and conditions as ScottishPower may determine at the time of issuance, provided that the cost of money (dividend rate giving effect to the economic life of the instrument) on preferred stock of ScottishPower, when issued, will not exceed 500 basis points over that for comparable term U.S. treasury securities or government benchmark for the currency concerned. In addition, all issuances of preferred stock will be at rates or prices based upon or otherwise determined by competitive capital markets.
1. Long-Term Debt
The Applicants propose to issue unsecured debt securities from time to time in an amount not to exceed the External Financing Limit and within the financing parameters specified above during the Authorization Period. Any debt securities would have the designation, aggregate principal amount, interest rate(s) or method of determining the same, terms of payment of interest, redemption provisions, non-refunding provisions, sinking fund terms, conversion or put terms and other terms and conditions as are deemed appropriate at the time of issuance, provided however, that the cost of money (interest rate giving effect to the economic life of the instrument) on debt financings will not exceed 300 basis points over that for comparable term U.S. treasury securities or government benchmark for the currency concerned.
2. Short-Term Debt
ScottishPower also seeks authority to issue additional unsecured short-term debt in the form of commercial paper, promissory notes and/or other forms of short-term indebtedness in an aggregate principal amount at any one time outstanding not to exceed $2 billion ("Short-Term Debt Limit"). ScottishPower proposes to establish from time to time new committed bank lines of credit, provided that only the principal amount of any borrowings outstanding under these new committed bank lines of credit will be counted against the proposed Short-Term Debt Limit. Credit lines may be set up for use by ScottishPower for general corporate purposes in addition to credit lines to support commercial paper. ScottishPower will borrow and repay under these lines of credit, from time to time, as it is deemed appropriate or necessary. All borrowings under these credit lines will mature in less than one year. ScottishPower may also engage in other types of short-term financing, including borrowings under uncommitted lines, generally available to borrowers with comparable credit ratings as it may deem appropriate in light of its needs and market conditions at the time of issuance.
ScottishPower may also sell commercial paper in established U.S. or European commercial paper markets, from time to time, and this commercial paper would be sold to dealers at the discount rate or the coupon rate per annum prevailing 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 acquiring commercial paper from ScottishPower will reoffer such paper at a discount to corporate, institutional and, with respect to European commercial paper, individual investors. Institutional investors are expected to include commercial banks, insurance companies, pension funds, investment trusts, foundations, colleges and universities and finance companies.
D. Hedging Transactions
1. Interest Rate Hedges
In order to protect the ScottishPower system from adverse interest rate movements, the interest rate on the debt portfolio is managed through the use of fixed-rate debt, combined with interest rate and cross currency swaps, options and option-related instruments with a view to maintaining a significant proportion of fixed rates over the medium term. The proportion of debt at fixed rates is varied over time and within policy guidelines, depending on debt projections and market levels of interest rates. The resulting position as of September 30, 2003, was that 95% of the ScottishPower system borrowings were at fixed rates of interest. ScottishPower requests authorization to enter into interest rate and currency hedges in order to reduce or manage interest rate cost and foreign exchange exposures, subject to certain limitations and restrictions, through the Authorization Period.11 Applicants state that ScottishPower will not engage in speculative hedging transactions and all hedging transactions in financial instruments and products are matched to an underlying business requirement. In no case will the notational principal amount of any hedging instrument exceed that of the underlying debt instrument and related interest rate exposure.
2. Anticipatory Hedges
ScottishPower also requests authorization to enter into anticipatory hedges, subject to certain limitations and restrictions. ScottishPower produces accounts according to UK GAAP (International Accounting Standards ("IAS") with effect from April 1, 2005 or such later date as IAS becomes effective) but produces a reconciliation to U.S. GAAP which 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), and SFAS 1149 (Amendment of Statement 133 on Derivative Instruments and Hedging Activities) or other standards relating to accounting for derivative transactions as are adopted and implemented by the Financial Accounting Standards Board ("FASB"). ScottishPower represents that in the event that transactions in instruments or products are qualified for hedge accounting treatment under UK GAAP (or after April 1, 2005, IAS), but not under U.S. GAAP, ScottishPower's financial statements filed in accordance with Form 20-F will contain a reconciliation of the difference between the two methods of accounting treatment. Applicants state that because of the international nature of ScottishPower's business and the complex nature of its debt portfolio it cannot represent that each interest rate and currency hedge and each anticipatory hedge will qualify for hedge accounting treatment under the current FASB standards in effect and as determined as of the date such interest rate and currency hedge or anticipatory hedge is entered into but it is their intention to achieve such hedge accounting treatment wherever possible. The Applicants will also comply with any future FASB financial disclosure requirements associated with hedging transactions.12 No gain or loss on any internal interest rate and/or cross-currency swap or hedging transaction entered into by ScottishPower and/or SPUK, will be allocated to PacifiCorp.
IV. Intermediate Companies
Each of the Intermediate Companies is seeking authorization to continue to issue and sell securities to, and acquire securities from, its immediate parent, subsidiary companies and fellow Intermediate Companies, respectively. Each of the Intermediate Companies and ScottishPower is also seeking authorization to continue to issue guarantees and other forms of credit support to direct and indirect subsidiaries. In no case would the Intermediate Companies or ScottishPower borrow, or receive any extension of credit or indemnity from any of their respective direct or indirect subsidiary companies. The interest rates and maturity dates of any debt security issued by PacifiCorp to its immediate parent company will be designed to parallel the effective cost of capital of ScottishPower.
Authority is also sought for ScottishPower to form new intermediate holding company entities13 and the issuance and acquisition by such entities of securities in order to permit both reinvestment and repatriation of the profits of PacifiCorp and the PHI Nonutility Subsidiary Companies to ScottishPower in an efficient manner. ScottishPower will continue to be the ultimate owner of PacifiCorp and the PHI Nonutility Subsidiary Companies.
V. PacifiCorp and PHI Nonutility Subsidiary Company Financings
Applicants state that the existing financing arrangements, with the exception of the commercial paper transactions discussed below, of PacifiCorp and the PHI Nonutility Subsidiary Companies are exempt under rule 52 and therefore, do not require Commission authorization and will remain in place. The Applicants request, to the extent the Commission has jurisdiction, to maintain all its financing through the Authorization Period.14 PacifiCorp and the PHI Nonutility Subsidiary Companies financing authority requested below is in addition to the External Financing Limit requested by ScottishPower for the ScottishPower system.
A. Existing Intercompany Arrangements
The Applicants request, to the extent the Commission has jurisdiction, to maintain all its financing through the Authorization Period.15 The PHI Nonutility Subsidiary Companies and the PacifiCorp financing authority requested below is in addition to the $8 billion external financing limit. Currently, PacifiCorp and the PHI Nonutility Subsidiary Companies have two intercompany lending arrangements. Applicants state that the existing financing arrangements of the PHI Nonutility Subsidiary Companies under the first agreement are exempt under rule 52 and therefore, do not require Commission authorization and will remain in place.16
The second loan agreement allows for loans between PacifiCorp, PGHC and PMI, the "umbrella loan agreement". This intercompany loan agreement has been authorized by the OPUC up to $200 million for loans by PacifiCorp and unlimited amounts for loans to PacifiCorp. These loans are payable on demand, are evidenced by notes and with interest at PacifiCorp's short-term borrowing rate whether the loan is to or from PacifiCorp. PacifiCorp will not lend to PGHC under the umbrella loan agreement. Because the umbrella loan agreement is not exempt under rule 52, Applicants request authorization under sections 6, 7 and 12(b) to continue the use of the umbrella agreement through the Authorization Period.
PacifiCorp and the PHI Nonutility Subsidiary Companies cash management and banking services are managed centrally by the PacifiCorp Treasury Department. These services include maintaining checking accounts, electronic disbursement facilities and cash concentration facilities in the name of each legal entity as necessary to support their business needs. Fees for banking and other third party services are paid directly by the appropriate regulated or nonutility company. Fees for internal services will be paid for by the subsidiaries through fees collected through a variety of means, including the inclusion of the fee into the interest payments made by the respective subsidiaries.
B. Short-Term Debt
Authority is requested for PacifiCorp to issue commercial paper and promissory notes not to exceed the aggregate amount of $1.5 billion to be outstanding at any one time during the Authorization Period. The OPUC has not authorized the issuance of the commercial paper because it is not jurisdictional.
PacifiCorp requests authority to enter into short-term financing arrangements described above through the Authorization Period. Subject to the limitations set forth in the Application, commercial paper borrowings will be tailored to mature at such time as excess funds from PacifiCorp are expected to become available for loans through the existing intercompany borrowing arrangements.
VI. Guarantees and Loans
ScottishPower and the Intermediate Companies request authorization to the extent necessary under the Act to enter into guarantees, obtain letters of credit, enter into guarantee-type agreements, make loans or capital contributions, or otherwise provide credit support with respect to the obligations of PacifiCorp and the PHI Nonutility Subsidiary Companies and the SPUK Holdings Group as may be appropriate to enable such system companies to carry on their respective authorized or permitted businesses and to maintain, to the extent not exempted under rule 45, all existing guarantee and loan arrangements through the Authorization Period.17 Such credit support may be in the form of committed bank lines of credit. Such guarantees and credit support to be made to the SPUK Holdings Group will be included in the aggregate investment of ScottishPower for the purposes of rule 53. The cost of such guarantees and loans will parallel the cost of obtaining the liquidity necessary to support the guarantee or loan, as the case may be.
In addition, authority is requested for the PHI Nonutility Subsidiary Companies to enter into similar arrangements with one another, to the extent not exempted under rule 45. Guarantees, capital contributions, and loans entered into by ScottishPower and the Intermediate Companies and the PHI Nonutility Companies will be subject to an $8 billion limit ("Guarantee Limit") (not included in the $8 billion External Financing Limit), based upon the amount at risk. ScottishPower's currently outstanding guarantees will be included in the Guarantee Limit. All debt guaranteed will comply with the financing parameters described above to the extent they remain outstanding during the Authorization Period.
VII. Other Transactions
A. Financing Entities/Special Purpose Entities
Authority is sought for ScottishPower and PacifiCorp and the PHI Nonutility Subsidiary Companies to organize new corporations, trusts, partnerships or other entities created for the purpose of facilitating financings through their issuance to third parties of income preferred securities or other securities authorized in this order or issued pursuant to an applicable exemption through the Authorization Period. Request is also made for these financing entities to issue such securities to third parties in the event such issuances are not exempt pursuant to rule 52. Additionally, request is made through the Authorization Period to (1) issue debentures or other evidences of indebtedness by any of ScottishPower or PacifiCorp and the PHI Nonutility Subsidiary Companies to a financing entity in return for the proceeds of the financing, (2) acquire voting interests or equity securities issued by the financing entity to establish ownership of the financing entity, by any of ScottishPower or PacifiCorp and the PHI Nonutility Subsidiary Companies, and (3) guarantee by the Applicants of such financing entity's obligations in connection with such acquisition. Each of ScottishPower and PacifiCorp and the PHI Nonutility Subsidiary Companies also may enter into expense agreements with its respective financing entity, pursuant to which it would agree to pay all expenses of such entity. All expense reimbursements would be at cost. Applicants seek authorization for such expense reimbursement arrangements under section 7(d)(4) of the Act, regarding the reasonableness of fees paid in connection with the issuance of a security, and/or under section 13 of the Act to the extent the financing entity is deemed to provide services to an associate company.
Any amounts issued by such financing entities to third parties pursuant to this authorization will count against the external financing limits authorized in this matter for the immediate parent of such financing entity. However, the underlying intra-system mirror debt and parent guarantee will not count against the External Financing Limit or the separate ScottishPower Guarantee Limit.
Applicants also request authorization to acquire, directly or indirectly, the equity securities of one or more financing/special purposes subsidiaries ("Financing/Special Purpose Subsidiaries") organized exclusively for the purpose of acquiring, financing, and holding the securities of, one or more existing or future nonutility subsidiaries. Financing/Special Purpose Subsidiaries may also provide management, administrative, project development and operating services to these entities.
Financing/Special Purpose Subsidiaries may be corporations, partnerships, limited liability companies or other entities in which ScottishPower, directly or indirectly, may have a 100% interest, a majority equity or debt position, or a minority debt or equity position. Financing/Special Purpose Subsidiaries would engage only in businesses to the extent that ScottishPower is authorized, whether by statute, rule or regulation, to engage in those businesses. ScottishPower commits that the requested authorization will not result in the entry into a new, unauthorized line of business by the SPUK Holdings Group or PacifiCorp and the PHI Nonutility Subsidiary Companies.
Financing/Special Purpose Subsidiaries would be organized for the purpose of acquiring, holding and/or financing the acquisition of the securities of, or other interest in, one or more EWGs, FUCOs, subsidiaries engaged in rule 58 activities ("Rule 58 Company"), or Exempt Telecommunications Companies ("ETCs"). Financing/Special Purpose Subsidiaries may also engage in development activities ("Development Activities") and administrative activities ("Administrative Activities") relating to the permitted businesses of the nonutility subsidiaries.
Development Activities will include due diligence and design review; market studies; preliminary engineering; site inspection; preparation of bid proposals, including, in connection therewith, posting of bid bonds; application for required permits and/or regulatory approvals; acquisition of site options and options on other necessary rights; negotiation and execution of contractual commitments with owners of existing facilities, equipment vendors, construction firms, power purchasers, thermal "hosts," fuel suppliers and other project contractors; negotiation of financing commitments with lenders and other third-party investors; and such other preliminary activities as may be required in connection with the purchase, acquisition, financing or construction of facilities or the acquisition of securities of, or interests in, new businesses. Administrative Activities will include ongoing personnel, accounting, engineering, legal, financial and other support activities necessary to manage ScottishPower and PacifiCorp and the PHI Nonutility Subsidiary Companies' investments in nonutility subsidiaries.
A Financing/Special Purpose Subsidiary may be organized, among other things, (1) to facilitate the making of bids or proposals to develop or acquire an interest in any EWG, FUCO, Rule 58 Company, energy-related subsidiary, ETC; (2) after the award of the a bid proposal, to facilitate closing on the purchase or financing of the acquired company; (3) at any time subsequent to the consummation of an acquisition of an interest in any company in order, among other things, to effect an adjustment in the respective ownership interests in a business held by ScottishPower or PacifiCorp and the PHI Nonutility Subsidiary Companies and non-affiliated investors; (4) to facilitate the sale of ownership interests in one or more acquired nonutility companies; (5) to comply with applicable laws of foreign jurisdictions limiting, or otherwise relating to, the ownership of domestic companies by foreign nationals; (6) as a part of financial optimization or tax planning; or (7) to further insulate PacifiCorp from operational or other business risks that may be associated with investments in nonutility companies.
ScottishPower requests authorization for the Financing/Special Purpose Subsidiaries to provide management, administrative, project development and operating services to direct or indirect subsidiaries at cost in accordance with section 13 of the Act and related rules, including rules 90 and 91. ScottishPower also proposes, however, that development subsidiaries would provide services and sell goods at fair market prices, under an exemption from the at-cost standard of section 13(b) of the Act and rules 90 and 91 under the Act, when the associate company receiving the goods or services is:
B. Corporate Restructuring
ScottishPower anticipates that as it continues to review the combined operations of the ScottishPower system, it may prove prudent to continue to reorganize its nonutility companies. Specifically, ScottishPower proposes to engage in corporate restructuring or reorganization of its nonutility companies without additional Commission approval. Restructuring could involve the acquisition of one or more new Financing/Special Purpose Subsidiaries to acquire and hold direct or indirect interests in any or all of ScottishPower's existing or future authorized nonutility businesses. Restructuring could also involve consolidation, redemption and the retirement of the securities of such nonutility businesses or the transfer of existing subsidiaries, or portions of existing businesses, among the ScottishPower group companies and/or the reincorporation of existing subsidiaries in a different jurisdiction. Applicants would seek authorization under the Act for the sale or transfer of a nonutility subsidiary held by a FUCO to another company in the ScottishPower system, unless the associate company's acquisition of the nonutility subsidiary being sold or transferred by the FUCO and the associate company itself would otherwise be exempt under the Act.
C. Changes in Capital Stock of Majority Owned Subsidiaries
The portion of the aggregate financing of PacifiCorp or an individual wholly-owned subsidiary of PacifiCorp and the PHI Nonutility Subsidiary Companies to be effected through the sale of equity securities to its immediate parent company during the Authorization Period cannot be determined at this time. The proposed sale of capital securities may in some cases exceed the authorized capital stock of PacifiCorp or such PHI Nonutility Subsidiary Company. In addition, PacifiCorp or such PHI Nonutility Subsidiary Company may choose to use other forms of capital securities. Capital stock includes common stock, preferred stock, other preferred securities, options and/or warrants convertible into common or preferred stock, rights, and similar securities. As needed to accommodate the sale of additional equity, Applicants request the authority to increase the amount or change the terms of any wholly-owned subsidiary of PacifiCorp and the PHI Nonutility Subsidiary Companies authorized capital securities, without additional Commission approval. The terms that may be changed include dividend rates, conversion rates and dates, and expiration dates. Applicants note that each of the Intermediate Companies will be wholly owned directly or indirectly by ScottishPower and that none will have third-party investors. Applicants request authorization to make changes to the capital stock of PacifiCorp or any wholly-owned subsidiary of PacifiCorp and the PHI Nonutility Subsidiary Companies.
Any such action by a utility subsidiary of ScottishPower would be subject to and would only be taken upon the receipt of any necessary approvals by the state commission in the state or states where the utility subsidiary is incorporated and doing business.
D. Payment of Dividends
Applicants state that there may be situations in which one or more of the PHI Nonutility Subsidiary Companies will have unrestricted cash available for distribution in excess of current and retained earnings. Consistent with these considerations, the Applicants request authorization for the current and future PHI Nonutility Subsidiary Companies to pay dividends out of capital and unearned surplus, through the Authorization Period, provided, however, that, without further approval of the Commission, no PHI Nonutility Subsidiary Company will declare or pay any dividend out of capital or unearned surplus if the PHI Nonutility Subsidiary Companies derives any material part of its revenues from the sale of goods, services or electricity to PacifiCorp. In addition, the PHI Nonutility Subsidiary Companies will not declare or pay any dividend out of capital or unearned surplus unless it: (1) has received excess cash as a result of the sale of its assets; (2) has engaged in a restructuring or reorganization; and/or (3) is returning capital to an associate company.
The Applicants request authority for PacifiCorp to continue to pay dividends, of up to $220.3 million, out of capital and unearned surplus to the extent of the proceeds it received from the sale of its previously owned Australian FUCOs (Powercor, Australia Limited and its affiliates Eastern Investment Company, PacifiCorp Australia, LLC, Pan-Pacific Global Corp, PacifiCorp Australia Limited, Pacific Global Inc. and Hazelwood Pacific Pty Ltd.).18
E. EWGs and FUCOs
ScottishPower has adopted a corporate structure that separates its existing foreign operations from its U.S. utility operations. The organization of foreign activities under SPUK, and U.S. utility activities under PacifiCorp, reflects ScottishPower's intent to develop these two business areas in a financially independent manner. ScottishPower is seeking authority to finance EWG and FUCO investments and operations in an aggregate amount of up to $12.5 billion at any one time outstanding, during the Authorization Period ("EWG/FUCO Financing Limit").19
As of September 30, 2003 the ScottishPower system had an "aggregate investment", as the term is defined in rule 53 under the Act, in EWGs and FUCOs of $2.47 billion (based on the aggregate investment, as recorded in the accounts of their respective immediate parent companies, for SPUK and SP Manweb plc). This investment represents 79% of the ScottishPower system consolidated retained earnings as of September 30, 2003 calculated in accordance with U.S. GAAP. As a consequence, ScottishPower's aggregate investment exceeds the safe harbor requirement of rule 53(a).20 ScottishPower was granted authority to invest up to $4.68 billion in the Current Authorization Period.
ScottishPower proposes to maintain its current level of "aggregate investment", as the term is defined in rule 53 under the Act, in EWGs and FUCOs ("Current Aggregate Investment") and requests a reservation of jurisdiction over its ability to increase its aggregate investment up to $12.5 billion, pending completion of the record.
F. Tax Allocation Agreement
The Applicants ask the Commission to approve an amended agreement for the allocation of consolidated tax among PHI, PacifiCorp and the PHI Nonutility Subsidiary Companies ("Amended Tax Allocation Agreement").
In the Amended Tax Allocation Agreement, PHI makes the election under rule 45(c)(2)(ii) to apportion the consolidated tax among the members of the group in proportion to the separate return tax of each member, provided that the tax apportioned to any subsidiary shall not exceed the "separate return tax" of that subsidiary. (i.e., the amount of tax that subsidiary would have paid computed as though it were not a member of a consolidated group).
Rule 45(c)(4) provides that an allocation agreement may exclude companies not having positive corporate taxable income for the year (i.e., loss subsidiaries) from the allocation provided for under rule 45(c)(2), provided that the agreement contains an "appropriate and equitable provision for preserving to each subsidiary company so excluded the equivalent of any rights which such company would have had under the applicable tax law, had it filed a separate return to use in other years any loss or credit availed of by the group through the consolidated return."
As an alternative to rule 45(c)(4), rule 45(c)(5) provides that a tax allocation agreement may include all members of the group in the tax allocation, recognizing negative corporate taxable income or a negative corporate tax, according to the allocation method chosen. But under rule 45(c)(5) only "subsidiary companies" shall be paid for their negative tax allocation, and any company that does not meet the definition of "subsidiary company," such as PHI, may not receive current payment of its corporate tax benefits, except pursuant to Commission order.
ScottishPower intends that the Amended Tax Allocation Agreement comply with rule 45( c)(5), except that it provides for the retention by PHI, the U.S. parent of the U.S. consolidated tax group, of certain tax benefits rather than the allocation of these tax benefits (i.e., losses) to the profitable subsidiaries in that consolidated group without compensation. Under the Amended Tax Allocation Agreement, PHI would retain only the benefits of those PHI tax losses that have been generated by PHI in connection with the financing, including any refinancing, of the acquisition of Pacificorp by ScottishPower.21 The financing costs of acquiring PacifiCorp generate tax benefits in PHI of approximately $61 million annually, and are attributable to the interest expense on the acquisition-related debt that is non-recourse to PacifiCorp and is unrelated to the financing of operations.22 The Amended Tax Allocation Agreement is effective for the fiscal year starting April 1, 2004 and is filed as part of this Application and will be filed in the ScottishPower Form U5S for the period ended March 31, 2004 as Exhibit D.
VIII. Service Company Approvals
PacifiCorp has been providing administrative, management, technical, legal and other support services to its subsidiaries for many years. In addition, there have been occasions when subsidiaries of PacifiCorp have provided services to PacifiCorp or to other PHI Nonutility Subsidiary Companies. PacifiCorp now proposes to continue these arrangements, with PacifiCorp providing services to the PHI Nonutility Subsidiary Companies and other associate companies in the holding company system pursuant to rule 87 under the Act. PHI Nonutility Subsidiary Companies propose to provide services to PacifiCorp pursuant to section 13(b). All service transactions, as explained above, will be priced at cost in accordance with section 13 of the Act and the rules under the Act. In the event that the market rate of the services is less than cost, neither PacifiCorp nor the PHI Nonutility Subsidiary Companies will provide such services. PacifiCorp also proposes to engage in service activities with SPUK and certain members of the SPUK Holdings Group.
In addition, SPUK proposes to perform services for PacifiCorp and the PHI Nonutility Subsidiary Companies. All service transactions will be priced at cost in accordance with section 13 of the Act and the rules under section 13.
The current preliminary estimate of total charges by SPUK to PacifiCorp or the PHI Nonutility Subsidiary Companies for the provision of anticipated services will be approximately $20 million annually (of which $14-17 million is estimated to be for PacifiCorp). SPUK will provide approximately $61 million annually of services to all other associate companies including ScottishPower. All of the charges are expected to be made on a direct charge, directly allocated or on an apportioned costs basis for a variety of services. SPUK anticipates that group corporate charges will be allocated across four primary divisions of the ScottishPower System, PacifiCorp, Infrastructure, UK Division and PPM, Energy, Inc. and ScottishPower. Applicants state that it is anticipated that substantially all of the services provided by SPUK to PacifiCorp will be that of corporate services.
The corporate center of SPUK is expected to provide services to PacifiCorp through representation on the PacifiCorp Board of Directors as well as administrative services. These will include shareholder services, investor relations, senior management, human resources, payroll and pensions. In addition, there is expected to be some management oversight in the areas of internal audit, tax and treasury, and consultation regarding engineering, research and development projects, and transmission best practices.
Whenever, practicable, the costs of services provided by SPUK will be directly charged to ScottishPower, PacifiCorp or a specific member of the PHI Nonutility Subsidiary Companies. SPUK will bill PacifiCorp or the PHI Nonutility Subsidiary Companies monthly in arrears. The billing format will list charges by corporate department, detailing total time applicable to PacifiCorp or the PHI Nonutility Subsidiary Companies multiplied by the current rate, to give the total charge for the month.
Moreover, no change to the methods of allocating costs to associate companies, or in the scope or character of the services to be rendered subject to section 13 of the Act, or any rule under section 13, shall be made unless and until SPUK shall first have given the Commission written notice of the proposed change not less than 60 days prior to the proposed effectiveness of any such change. If, upon the receipt of any such notice, the Commission shall notify SPUK within the 60-day period that a question exists as to whether the proposed change is consistent with the provisions of section 13 of the Act, or of any rule under section 13, then the proposed change shall not become effective unless and until SPUK shall have filed with the Commission an appropriate declaration regarding such proposed change and the Commission shall have permitted such declaration to become effective.
PacifiCorp and the PHI Nonutility Subsidiary Companies request authorization under section 13(b) of the Act to provide services and sell goods to its members and the SPUK Holdings Group at fair market prices determined without regard to cost, and request an exemption under section 13(b) from the cost standards of rules 90 and 91 as applicable to these transactions, in any case in which the non-utility subsidiary purchasing these goods or services is:
It is proposed that, with respect to ScottishPower and PacifiCorp (each of which, as noted above, has registered under the 1934 Act in connection with its sponsored ADR program and securities outstanding in public hands, respectively), the reporting systems of the 1934 Act and the 1933 Act be integrated with reports under the Act. This would eliminate duplication of filings with the Commission that cover essentially the same subject matters, and reduce burdens on both the Commission and ScottishPower. To effect such integration, the Applicants propose to incorporate by reference into the rule 24 certificates notification under this file the portion of the 1933 Act and 1934 Act reports containing or reflecting disclosures of transactions occurring pursuant to the authorization granted in this proceeding. The certificates would also contain all other information required by rule 24, including the certification that each transaction included in the report had been carried out in accordance with the terms and conditions of and for the purposes represented in this Application.
ScottishPower prepares and publishes consolidated financial information at least quarterly. Applicants will provide rule 24 certificates on a quarterly basis.
Applicants also request an exemption from rule 26(a)(1) under the Act, regarding the maintenance of financial statements in conformance with Regulation S-X, for any subsidiary of ScottishPower organized outside the U.S. Due to ScottishPower's extensive foreign holdings, significant additional work and expense would be required for the holding company to prepare consolidated financial statements in conformity with Regulation S-X.
The Applicants will file Form U5S annually within 120 days of the close of ScottishPower's fiscal year and will specifically comply with item 10 of Form U5S. In addition, as required by the 1934 Act and the 1933 Act, ScottishPower will file Form 20-F and reports on Form 6-K and PacifiCorp will continue to file the Forms 10-K, 10-Q and 8K.
ScottishPower will provide rule 24 certificates to the Commission within 90 days after the end of ScottishPower's fiscal year and within 60 days of the end of its other fiscal quarters. The rule 24 certificates will contain the following information:
ScottishPower also will report annually, as a supplement to the Form U5S, service transactions among the ScottishPower System companies. The report will contain the following information:
Applicants state that the fees, commissions and expenses to be incurred in connection with the proposed transactions are estimated to be $75,000. Applicants state the public utility commissions of California, Idaho, Utah, Washington, and Wyoming have jurisdiction over the issuance of commercial paper. Applicants also state that no other state or federal commission, other than this Commission, has jurisdiction over the proposed transactions.
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 except with respect to those matters over which jurisdiction has been reserved, 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 under the Act, except as to those matters over which jurisdiction has been reserved, that the Application be granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
IT IS FURTHER ORDERED that jurisdiction is reserved, pending completion of the record, over: (1) securities issued in reliance upon the authorization granted by the Commission pursuant to this Application where upon issuance the security is rated below investment grade; and (2) the issuance of any guarantee or other securities at any time that the Investment Grade Conditions are not satisfied; and (3) the authority to finance EWG and FUCO investments in excess of maintenance of its Current Aggregate Investment.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland
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