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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27908; 70-10185)

C&T Enterprises, Inc., et al.

Order Authorizing Acquisition and Granting Exemptions to Holding Companies

November 4, 2004

C&T Enterprises, Inc. ("C&T"), a holding company exempt by order under section 3(a)(1) of the Act from all provisions of the Public Utility Holding Company Act of 1935, as amended ("Act") except section 9(a)(2),1 Lewisburg, Pennsylvania, and its parent companies Claverack Rural Electric Cooperative, Inc. ("Claverack"), Wysox, Pennsylvania, and Tri-County Rural Electric Cooperative, Inc. ("Tri-County" and collectively, "Applicants"), Mansfield, Pennsylvania, both Pennsylvania rural electric cooperatives and holding companies exempt by order under section 3(a)(1) of the Act from all provisions of the Act except section 9(a)(2),2 have filed an application ("Application") with the Securities and Exchange Commission ("Commission") under sections 3(a)(1) and 9(a)(2) of the Act. The Commission issued a notice of the Application on January 9, 2004 (Holding Co. Act Release No. 27792).

I. Background

A. Applicants

Claverack, a Pennsylvania corporation and an exempt holding company, is a rural electric cooperative. As of December 31, 2003, it rendered service to approximately 17,600 customers in an eight-county region in north-central and northeastern Pennsylvania. Its service territory is approximately 1,820 square miles and is limited primarily to Pennsylvania. Claverack also serves a small percentage of customers in bordering counties of New York. Its New York sales are all a result of four metering points where electricity is sold to New York State Electric & Gas Co. for resale to New York consumers near the Pennsylvania/New York border. Claverack is not subject to utility regulation by any state or federal agency. Its operations are overseen by the United States Department of Agriculture's Rural Utilities Services' Division.

For the year ended December 31, 2003, Claverack's operating electric revenues were approximately $21.8 million (on a non-consolidated basis). As of December 31, 2003, its assets were worth approximately $59 million, consisting of approximately $45 million in identifiable electric utility property, plant and equipment and approximately $14 million in other corporate assets. Claverack's net income for the year ended December 31, 2003 was $2,264,838. Claverack and Tri-County each hold a 50% ownership interest in C&T, another exempt holding company described further below.

Tri-County is a rural electric cooperative rendering retail electric service predominantly to the residents of the following Pennsylvania counties: Bradford, Cameron, Clinton, Lycoming, McKean, Potter and Tioga.3 As of December 31, 2003, Tri-County provided retail electric service to approximately 17,900 customers, in an area encompassing 4,484 square miles. For the year ended December 31, 2003, Tri-County had electric operating revenues of approximately $20.8 million (on a non-consolidated basis). The assets of Tri-County were approximately $44 million in identifiable electric utility property, plant and equipment and approximately $18 million in other corporate assets. Tri-County's net income for the year ending December 31, 2003 was $1,247,313. Tri-County is not subject to utility-style regulation by any state or federal agency. Like Claverack, Tri-County's operations are overseen by the United States Department of Agriculture's Rural Utilities Services' Division.

Wilderness, a Pennsylvania corporation and an exempt holding company, is a wholly owned subsidiary of Tri-County. For the year ending December 31, 2003, Wilderness' net income was $162,388, its operating revenue was $442,507, and its assets were valued at $13,525,458 (on a non-consolidated basis). Wilderness has one subsidiary, which it wholly owns: Wellsboro ("Wellsboro"), another Pennsylvania corporation.

Wellsboro provides retail electricity service in parts of Tioga County in north- central Pennsylvania, serving approximately 5,800 customers in a 266 square mile territory. It owns and operates approximately 590 circuit miles of distribution lines and is connected to the PJM power grid through an interconnection with Penelec, an unaffiliated PJM member. For the year ended December 31, 2003, Wellsboro: (1) earned approximately $9 million in electric operating revenues; (2) owned assets worth approximately $8.3 million, consisting of approximately $6.3 million in identifiable electric utility property, plant and equipment and approximately $2 million in other corporate assets; and (3) had net income of $165,000. The Pennsylvania Public Utility Commission ("Pa PUC") regulates Wellsboro's retail electricity rates, as well as the terms and conditions of its service.

C&T, a Pennsylvania corporation, is an exempt holding company. It holds all of the common stock of Citizens Electric Company ("Citizens") and Valley Energy ("Valley"), both public-utility companies, and Susquehanna Energy Plus, Inc. ("SEP"), a nonutility company. For the year ended December 31, 2003, C&T's net income was $571,000, its operating revenues were $457,000, and it owned assets worth $46,904,975.

Citizens, a Pennsylvania corporation, provides retail electricity service to approximately 6,500 customers within a fifty-five square mile service area that includes parts of Union and Northumberland Counties in central Pennsylvania. Citizens owns and operates a distribution system consisting of 306 circuit miles of 12 kV lines, and is interconnected with the PJM power grid through PPL Electric Utilities, an unaffiliated entity. For the year ended December 31, 2003, Citizens: (1) earned approximately $12.4 million in electric operating revenues; (2) owned assets worth approximately $13.1 million, consisting of approximately $6.1 million in identifiable electric utility property, plant and equipment and approximately $7 million in other corporate assets; and (3) earned $965,871 in net income. Citizens is regulated as a public utility by the Pa PUC, which establishes its retail rates and other terms of its service.

Valley, a Pennsylvania corporation, is engaged in the business of selling and distributing natural gas to approximately 6,900 retail customers in a 104 square mile territory that includes parts of Bradford County, which is in north-central Pennsylvania, and Chemung and Tioga Counties, which are in south-central New York.4 As of December 31, 2003, Valley's assets were valued at approximately $20.7 million, and the company earned approximately $10,845,200 in total utility revenues and $133,329 in net income. Valley is subject to the jurisdiction of the Pa PUC and the New York Public Service Commission, which regulate the company's retail rates, terms and conditions of service, accounting, issuance of securities, transactions with affiliated companies and other matters.

B. Reorganization

In early 2000, a committee comprised of selected directors from the boards of Claverack and Tri-County ("Joint Partnership Committee") was formed to review the existing corporate structure of C&T. In October of 2000, a utility consulting firm presented a report to the Joint Partnership Committee outlining the issues involved in transferring to C&T ownership of Susquehanna Energy, owned by Claverack, and Wellsboro, owned by Tri-County through its holding company, Wilderness. It was felt that creation of a full energy delivery platform would allow C&T and its various affiliates and subsidiaries to survive in what was becoming a competitive, total energy services market. When the acquisition of Valley was nearly complete, the Joint Partnership Committee again retained the utility consulting firm and discussed the potential benefits of consolidating all of their public-utility company subsidiaries and other for-profit entities into C&T. In October of 2002, the boards of directors of Claverack and Tri-County voted to transfer to C&T their ownership interests in SEP and Wellsboro, respectively. By order dated December 23, 2003, the Pa PUC approved the Reorganization.

The transfer Wellsboro to C&T will be accomplished through two transfers (collectively, "Reorganization"): Tri-County will transfer all of the common stock of Wilderness to C&T and, simultaneously, Wilderness will transfer all of the common stock of Wellsboro to C&T. After the Reorganization, Wilderness will be an inactive company and will no longer be a holding company within the meaning of the Act.

Claverack has already transferred its ownership of SEP to C&T. Wilderness will transfer to C&T up to $5.4 million in long-term debt that Wellsboro currently owes to Wilderness.5 Applicants state that the Pa PUC has already approved the transfer of long-term debt from Wilderness to C&T.

Wilderness will refinance with C&T its $13.2 million of debt owed to the National Rural Cooperative Finance Corporation, consisting of the $5.4 million incurred by Wellsboro and approximately $9 million in acquisition debt incurred when Wilderness purchased Wellsboro. Finally, C&T will finance the $13.2 million with the National Cooperative Services Corporation.

After the Reorganization, the two rural electric cooperatives will continue to be the sole shareholders of the common stock of C&T, C&T will continue to be a subsidiary of both Tri-County and Claverack, and C&T will hold directly all of the common stock of three public-utility companies: Citizens, Valley, and Wellsboro.

II. Proposals

Applicants request authority for Claverack and C&T to acquire all of the common stock of Wellsboro through their proposed acquisition of its parent company, Wilderness. Additionally, Applicants request from the Commission an order continuing the exemptions under section 3(a)(1) of Claverack, Tri-County, and C&T from all provisions of the Act, except section 9(a)(2).

III. Discussion

A. The Reorganization

The record demonstrates that the Reorganization, an intrasystem restructuring, is permissible under section 10 of the Act.

B. Status of Each of the Holding Companies

Under section 3(a)(1) of the Act, the Commission must exempt any holding company unless and except insofar as it finds the exemption detrimental to the public interest or the interest of investors or consumers if such holding company, and every subsidiary company thereof, which is a public utility company from which such holding company derives, directly or indirectly, any material part of its income, are predominantly intrastate in character and carry on their business substantially in a single state in which such holding company in every such subsidiary company thereof are organized.

To determine whether a holding company's operations are "predominantly and substantially intrastate in character," the Commission assesses the interstate activity of the holding company, on a consolidated basis, and on a stand-alone basis to each of its material public utility-company subsidiaries.

Section 3(a)(1) does not specify the use of any particular measures of interstate activity. Although in considering applications the Commission has considered a variety of quantifiable factors to compare a company's out-of-state presence with its in-state presence, the Commission has given the greatest deference to gross revenues. NIPSCO Industries, Holding Co. Act Release No. 26975 (February 10, 1999) ("NIPSCO").

1. C&T

After the Reorganization, C&T will hold directly all of the issued and outstanding common stock of three public-utility companies: Citizens, a Pennsylvania corporation operating solely in Pennsylvania; Wellsboro, a Pennsylvania corporation operating solely in Pennsylvania; and Valley, a Pennsylvania corporation with most of its operations in Pennsylvania and a small operating presence in New York (as discussed below), which is contiguous to Pennsylvania.

Both Citizens and Wellsboro are "predominantly intrastate in character" and carry on their businesses "substantially in a single state." C&T will derive a material part of its income from Valley, so it is necessary to determine whether Valley and the C&T system those companies are "predominantly intrastate in character" and operate "substantially in a single state." Applicants have presented the following pro forma information:

Gross Operating Revenues


Year

C&T Combined

Valley Total
Amount % of C&T

Valley New York
Amount % of C&T % of Valley

2003

32,236

10,845 - 33.6%

2,886 - 9.0% - 29.9%

2002

29,004

9,648 - 33.3%

2,062 - 7.1% - 21.4%

2001

26,955

11,074 - 41.1%

1,941 - 7.2% - 17.5%

Avg.

 

           36.0%

           7.8% - 22.9%

Operating Margins
(Gross Operating Revenue Less Cost of Purchased Power)

Year

C&T Combined

Valley Total
Amount % of C&T

Valley New York
Amount % of C&T % of Valley

2003

2,105

746 - 35.4%

57 - 2.7% - 2.0%

2002

6,523

2,863 - 43.9%

650 - 10.0% - 22.7%

2001

10,305

4,033 - 39.1%

-266 - -2.6% - -6.6%

Avg.

 

           39.5%

           3.4% - 6.0%

Utility Operating Income

Year

C&T Combined

Valley Total
Amount % of C&T

Valley New York
Amount % of C&T % of Valley

2003

962

237 - 24.6%

-41 - -4.3% - -17.3%

2002

1,541

1,013 - 65.7%

148 - 9.6% - 14.6%

2001

1,647

1,374 - 83.4%

-908 - -55.1% - -66.1%

Avg.

 

           57.9%

           -16.6% - -22.9%

Net Utility Operating Income

Year

C&T Combined

Valley Total
Amount % of C&T

Valley New York
Amount % of C&T % of Valley

2003

1,302

133 - 10.2%

-41 - -3.1% - -30.8%

2002

916

659 - 71.9%

61 - 6.7% - 9.3%

2001

209

549 - 262.7%

-611 - -292.3% - -111.3%

Avg.

 

           114.9%

           -96.3% - -44.3%

Net Utility Plant

Year

C&T Combined

Valley Total
Amount % of C&T

Valley New York
Amount % of C&T % of Valley

2003

27,796

15,380 - 55.3%

2,714 - 9.8% - 19.3%

2002

27,159

14,074 - 51.8%

2,370 - 8.7% - 16.8%

2001

26,063

13,306 - 51.1%

1,799 - 6.9% - 13.5%

Avg.

           52.7%

           8.5% - 16.5%

In certain circumstances, the Commission has relied on a comparison of net utility operating revenues, also known as operating margin, to eliminate distortions and provide an appropriate basis for comparison.6

As was the case in the Prior Order, the use of gross revenues here would create a distortion and an unfair result. A comparison based on operating margin, measured as gross revenues less the cost of gas, is more appropriate. Applicants state that Valley's revenue from Pennsylvania depends to a much greater extent on industrial customers than does its revenue from New York. Industrial customers receive only gas transportation services, and there is no cost of gas pass-through associated with those transportation-only customers. Use of gross revenues, then, would overstate the contribution of Valley's New York revenues. For the two-month period in 2002 that C&T owned Valley, Valley's total Pennsylvania gross revenues were $1,544,906, of which $261,083, or 17%, were derived from transportation charges. Valley's New York operations, on the other hand, had gross revenue of $493,932, of which only $15,911 or 3.2% was from transportation charges. Similarly, in fiscal year 2003, Valley's Pennsylvania operations received a larger proportion of its gross revenue from transportation charges ($1,261,109 out of revenues of $7,958,980, or 15.85%) than its New York operations ($92,405 out of $2,886,220 or 3.3%).

As discussed below, both Valley and C&T meet the predominantly/substantially standard. Valley is the only utility subsidiary of C&T that has utility operations outside of Pennsylvania. Looking at Valley on a stand-alone basis, for the last three years of operation, an average of 6.0% of its operating margin was derived from New York utility operations. On a consolidated basis, during the same time period, C&T derived an average of 3.4% of its operating margin from New York utility operations.

It further appears that the requested exemptions will not be detrimental to the public interest or the interests of investors or consumers. As noted above, the State commission with authority to approve the proposed transaction has done so.

2. Tri-County and Claverack

The Commission finds that Tri-County and Claverack satisfy the formal requirements for exemption, and that the exemptions do not appear detrimental to the public interest or the interest of investors or consumers.

Applicants have provided the following gross operating revenue information for Tri-County (in thousands of dollars):

 

Total

PA Stand-Alone

NY Stand-Alone

NY % of Stand-Alone

C&T Total Rev.

C&T NY7

Consolidat. Total

Consolidat. NY Total

Consolidat. NY % of Total

03

20,833

20,757

74

.36%

16,118

1,443

36,951

1,517

4.11%

02

19,114

19,055

59

.31%

10,575

1,031

33,616

1,090

3.24%

01

17,612

17,556

56

.32%

13,478

971

31,090

1,027

3.30%

00

17,114

17,058

56

.33%

12,562

783

29,676

839

2.83%

99

16,067

16,015

52

.33%

11,825

778

27,892

830

2.98%

Applicants have provided the following gross operating revenue information for Claverack (also in thousands of dollars):

 

Total

PA Stand-Alone

NY Stand-Alone

NY % of Stand-Alone

C&T Total Rev.

C&T NY8

Consolidat. Total

Consolidat. NY Total

Consolidat. NY % of Total

03

21,821

21,807

14

.07%

16,118

1,443

37,939

1,457

3.84%

02

21,149

21,136

13

.07%

10,575

1,031

35,651

1,044

2.93%

01

19,617

19,604

13

.07%

13,478

971

33,094.5

984

2.97%

00

18,292

18,278

14

.08%

12,562

783

30,853.5

797

2.58%

99

17,672

17,655

17

.10%

11,825

778

29,497

795

2.70%

For the past five years, neither Tri-County nor Claverack derived more than 4.11% of its gross operating revenues from New York. Both Tri-County and Claverack are entitled to exemptions under section 3(a)(1) as they are predominantly intrastate in character and carry on their utility operations in Pennsylvania, the State in which they are organized.

IV. Conclusion

Applicants state that no State or federal regulatory agency, other than the Commission and the Pa PUC (as discussed above), has jurisdiction over the Reorganization. In addition, Applicants state that that the fees, commissions and expenses to be paid or incurred, directly or indirectly, in connection with the Reorganization will be approximately $31,000.

Due notice of the filing of the application has been given in the manner prescribed in rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. Upon the basis of the facts in the record, it is hereby found that the applicable standards of the Act and rules thereunder are satisfied, and that no adverse findings are necessary:

IT IS ORDERED, under the applicable provisions of the Act and rules thereunder, that the Application is approved, subject to the terms and conditions prescribed in rule 24 under the Act and to the following: C&T will file certificates under rule 24 within 90 days after the close of the Applicants' fiscal year stating the operating margin for each of C&T, Valley, and Valley's New York operations (before intercompany eliminations) and the percentage contribution of each for the past year, to the total combined operating margin (after intercompany eliminations) of C&T and Valley; the certificates will also include financial statements for C&T, Claverack, Tri County and Valley;

IT IS FURTHER ORDERED, under section 3(a)(1) of the Act that each of C&T, Tri County, Claverack, and Wilderness are exempt from all provisions of the Act except section 9(a)(2) following consummation of the Reorganization.

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/35-27908.htm

Modified: 11/08/2004