SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27931; 70-10237)
Black Hills Corporation, et al.
Order Authorizing Financing and Certain Related Transactions, Including Investment in Exempt Wholesale Generators and Foreign Utility Holding Companies; Approving Service Company and Intrasystem Transactions; and Reserving Jurisdiction
December 28, 2004
Black Hills Corporation ("Black Hills"), a public-utility holding company exempt from registration under section 3(a)(1) of the Public Utility Holding Company Act of 1935, as amended ("Act"), by rule 2, and its sole utility subsidiary, Black Hills Power, Inc. ("Black Hills Power" or "Utility Subsidiary"), both located in Rapid City, SD, and its nonutility subsidiaries ("Nonutility Subsidiaries")1 (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, 11, 12(b) and (c), 13(b), 32, 33 and 34 of the Act and rules 42, 43, 45, 52, 53, 54, 58 and 88 through 92 under the Act. The Commission issued a notice of the Application on November 1, 2004 (Holding Co. Act Release No. 27907).
Black Hills, a South Dakota corporation, is an energy company with three principal subsidiaries engaged in three major lines of business: (i) Black Hills Power, a subsidiary electric-utility company engaged in the generation, transmission, distribution and sale of electricity to customers in South Dakota, Wyoming and Montana and the wholesale sale of power in the western United States;2 (ii) Black Hills Energy, Inc. ("Black Hills Energy"), a direct wholly owned subsidiary engaged, through subsidiaries, in the development, ownership and operation of exempt wholesale generators, as defined in section 32 of the Act ("EWGs"), and qualifying facilities as defined in the Public Utility Regulatory Policies Act of 1978, as amended ("PURPA") ("QFs"), the production, transportation and marketing of natural gas, oil, coal and other energy commodities, power marketing and other energy-related activities; and (iii) Black Hills FiberCom, LLC ("Black Hills FiberCom"), a subsidiary of Black Hills Energy engaged in telecommunications activities and which Applicants anticipate will become an exempt telecommunications company, as defined in section 34 of the Act ("ETC"). Black Hills Power is regulated as a public-utility company by the states of South Dakota, Wyoming and Montana, with these states regulating Black Hills Power's retail electric rates and charges and most of its securities issuances. Black Hills Power is also subject to regulation, under the Federal Power Act, by the Federal Energy Regulatory Commission ("FERC"). Black Hills Energy, directly and indirectly, owns Black Hills' interests in Nonutility Subsidiaries, all primarily engaged in energy-related or telecommunications activities. Black Hills states that it intends to register as a public-utility holding company under section 5 of the Act upon the issuance of the Commission's order in this matter. Black Hills also intends to purchase an additional electric-utility company, Cheyenne Light, Fuel & Power Company, which is currently a subsidiary of Xcel Energy, Inc., a registered holding company under the Act. The Commission issued a notice of the application-declaration in the proposed acquisition on November 19, 2004 (Holding Co. Act Release No. 27914).3
Black Hills proposes to continue developing generation projects, expanding its power marketing operations and pursuing additional, related growth opportunities. Black Hills seeks authorizations to enable it, and its Utility Subsidiary and Nonutility Subsidiaries (collectively, "Subsidiaries"), to operate and engage in financing and investment activities, intrasystem services and other related activities and transactions following its registration as a public-utility holding company under the Act. Black Hills also proposes to form Black Hills Services Company, Inc. ("Black Hills Services"), upon its registration, to provide centralized services (such as accounting, financial, human resources, information technology and legal services) to the companies in the Black Hills system ("Black Hills System"). Applicants request authority for various related affiliate transactions in connection with Black Hills' registration and the establishment of Black Hills Services.
II. Summary of Requested Authority
Applicants request the following financing authorizations, for the period beginning with the effective date of an order issued in this matter, through December 31, 2007 ("Authorization Period"), and authorizations for certain related actions, as described further in subsequent sections of this order:
III. General Financing Parameters and Use of Proceeds
Black Hills proposes that the following general terms be applicable to the external financing transactions.
A. Effective Cost of Money
Applicants propose that the effective cost of capital on the proposed Preferred Securities, Short-Term Debt and Long-Term Debt and Black Hills' Subsidiaries' preferred securities, short-term debt and long-term debt will not exceed competitive market rates available at the time of the issuance of securities, having the same or reasonably similar terms and conditions issued by companies of reasonably comparable credit quality; provided that in no event will the effective cost of capital exceed, (1) on any series of Preferred Securities, Long-Term Debt or Subsidiary Preferred Securities or Subsidiary Long-Term Debt, 500 basis points over a U.S. Treasury security having a remaining term equal to the term of the series; and (2) on Short-Term Debt, or Subsidiary Short-Term Debt, 300 basis points over the London Interbank Offered Rate ("LIBOR") for maturities of less than one year.
B. Maturity of Debt and Final Redemption of Preferred Securities
Applicants state that the maturity of the proposed long-term indebtedness will not exceed 50 years. In addition, they state that all preferred securities are to be redeemed no later than 50 years after their issuance.
C. Issuance Expenses
Applicants state that the underwriting fees, commissions or other similar remuneration paid in connection with the non-competitive issue, sale or distribution of a security that is the subject of this Application (not including any original issue discount) will not exceed 5% of the principal or total amount of the security being issued.
D. Common Equity Ratio and Investment Grade Condition
The consolidated common equity of Black Hills was 47.5% of total consolidated capitalization (all common stock equity (comprised of common stock, additional paid-in capital, retained earnings and/or treasury stock), minority interests, preferred stock, preferred securities, equity-linked securities and long-term and short-term debt and current maturities), as of September 30, 2004. Black Hills and its Utility Subsidiary commit that they will each maintain a common equity ratio (as reflected in the most recent Form 10-K or 10-Q (filed with the Commission as required by the Securities Exchange Act of 1934, as amended ("34 Act"), and as adjusted to reflect subsequent events that affect capitalization) of at least 30% of capitalization.
Applicants represent that, apart from securities issued for the purpose of funding money pool operations, no guarantees or other securities, other than common stock, may be issued in reliance upon the authorization to be granted by the Commission in this matter, unless (i) the security to be issued, if rated, is rated investment grade; (ii) all outstanding securities of the issuer, that are rated, are rated investment grade; and (iii) all outstanding securities of Black Hills, that will be registered, that are rated, are rated investment grade ("Investment Grade Condition"). 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 34 Act. The Investment Grade Condition ratings test will not apply to any issuance of common stock. Applicants request that the Commission reserve jurisdiction over the issuance of any of 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 the conditions set forth in clauses (i) through (iii) above are not satisfied.
E. Use of Proceeds
Applicants state that proceeds from the sale of securities in external financing transactions will be used for general corporate purposes, including, in part, capital expenditures of the Black Hills System, working capital requirements of the Black Hills System, the acquisition, retirement or redemption under rule 42 of the securities previously issued by Black Hills or its Subsidiaries and other purposes, including direct or indirect investment in authorized assets and securities (i.e., energy-related assets and companies, EWGs, FUCOs and ETCs).
IV. Retention and Refinancing of Existing Financing
Applicants request authorizations, during the Authorization Period, for Black Hills, directly or indirectly, to retain and refinance existing outstanding financing arrangements and debt issuances in the total amount of up to $1.524 billion, consisting of, approximately, (a) $798 million in Utility and Nonutility debt arrangements; (b) up to $350 million in Existing Short-Term Debt; and (c) $376.2 million in Existing Guarantees. With respect to its Existing Short-Term Debt, Black Hills requests that the Commission include in its approval the retention and refinancing of Black Hills' existing revolving credit facilities (up to $350 million in borrowing ability at any one time on a short-term basis), although Black Hills may not draw down the full amount of its facilities at the time of a Commission order and, thus, not have actually incurred "short-term debt."4
V. Proposed Additional Financing and Other Related Authority
Applicants request authority to issue and sell additional equity and debt securities in an amount of up to $1 billion (the Aggregate Additional Financing Limit) (subject to the Commission's reservation of jurisdiction over a $250 million, pending completion of the record) and Additional Guarantees in an amount of up to $400 million, among other things, in addition to the refinancing of its Existing Financings (described above), during the Authorization Period. Specifically, Black Hills requests authorization to issue, directly and indirectly, (a) common stock (other than 2.7 million shares for employee benefits plans or stock purchase and dividend reinvestment plans, discussed below), (b) preferred stock and preferred securities, (c) long-term debt and (d) short-term debt, in an aggregate amount of up to $1 billion (the Aggregate Additional Financing Limit), and guarantees and other credit support in an aggregate amount of up to $400 million (the Additional Guarantee Limit). Applicants also seek financing authority (a) for certain energy-related investments, in an aggregate amount of up to $300 million (the Energy-Related Assets Financing Limit), and (b) for investments in EWGs and FUCOs, in an aggregate amount of up to $1.4 billion (including existing EWG investments) (the Aggregate EWG/FUCO Financing Limit), during the Authorization Period and other related authority, described further below.
A. Common Stock
Black Hills requests authority to issue and sell its common stock, denominated as "common stock," and including (unless the context indicates otherwise) outstanding options, warrants and other stock purchase rights exercisable for Black Hills' common stock (but not Black Hills' Preferred Stock that is convertible into its common stock, prior to conversion) ("Common Stock"), subject to the Aggregate Additional Financing Limit, during the Authorization Period.
In addition, Black Hills requests authority to issue up to 2.7 million additional shares of Common Stock through various plans, in accordance with the terms of the programs.5 Black Hills proposes in this regard, from time to time, to issue new shares and/or acquire in open market transactions, or by some other method, up to 400,000 additional shares of Black Hills Common Stock, during the Authorization Period. Black Hills also proposes to issue new shares and/or acquire in open market transactions, or by some other method, up to 2.3 million additional shares of Black Hills Common Stock under the employee stock-based plans (excluding shares that may be issued through the exercise of outstanding options and issuance of shares for outstanding restricted stock units and performance shares), from time to time, during the Authorization Period.6
B. Preferred Securities
Black Hills requests authority to issue additional shares of its authorized Preferred Stock, defined below, or other types of preferred securities of Black Hills Corporation (including trust-preferred securities, monthly income preferred securities and equity-linked securities) (together, "Preferred Securities"), directly or indirectly through one or more financing entities ("Financing Subsidiaries," as defined below), organized by Black Hills, subject to the Aggregate Additional Financing Limit. Preferred Stock is defined as stock of Black Hills Corporation denominated as "preferred stock" and having preference rights with respect to payment of dividends and other benefits, which may include, in certain circumstances, the right of conversion into Common Stock.7
C. Debt Securities
1. Long-Term Debt
Black Hills requests authority to issue and sell unsecured long-term debt securities, comprised of notes and debentures and other forms of unsecured indebtedness having maturities of one year or longer ("Long-Term Debt"), up to the Aggregate Additional Financing Limit (which excludes renewals of Existing Financings).8
2. Short-Term Debt
Black Hills seeks authority to issue unsecured short-term debt securities, comprised of commercial paper, promissory notes and other forms of indebtedness having maturities of less than one year ("Short-Term Debt"), up to the Aggregate Additional Financing Limit (which excludes renewals of Existing Financings).9
D. Subsidiary Financings
Applicants also request that Black Hills' Subsidiaries be authorized to issue and sell Subsidiary Common Stock and Subsidiary Preferred Securities, Subsidiary Long-Term Debt and Subsidiary Short-Term Debt, subject to the Aggregate Additional Financing Limit and the parameters described in section III, above, during the Authorization Period. Black Hills' Utility Subsidiary and its Nonutility Subsidiaries request this financing authority to the extent that Subsidiaries may require financing that is outside rule 52 exempt financing.10 The Utility Subsidiary specifically requests authority to issue unsecured and secured short-term debt securities, including commercial paper and credit lines, subject to the Aggregate Additional Financing Limit and the parameters described in section III, above, during the Authorization Period. Black Hills and Black Hills Power state, in addition, that Black Hills Power's borrowings (whether through external or internal financings, including the Utility Money Pool) will not exceed a sublimit of $350 million.
E. Financing Risk Management Devices
Black Hills, directly or indirectly through its Subsidiaries, requests authority to enter into interest rate hedging transactions with respect to outstanding indebtedness utilizing various financial instruments (collectively, "Interest Rate Hedges"), subject to certain limitations and restrictions, in order to reduce or manage interest rate costs.
Applicants state that Interest Rate Hedges (other than exchange-traded interest rate futures or options contracts)11 will only be entered into with counterparties whose senior debt ratings, or the senior debt ratings of any credit support providers who have guaranteed the obligations of such counterparties, as published by Standard and Poor's Ratings ("Standard and Poor's"), are equal to or greater than BBB, or an equivalent rating from Moody's Investor Service ("Moody's"), Fitch Investor Service ("Fitch") or Duff and Phelps ("Approved Counterparties"). Applicants also state that fees, commissions and other amounts payable to an Approved Counterparty or exchange or other party (excluding, however, the swap or option payments) in connection with an Interest Rate Hedge, will not exceed those generally obtainable in competitive markets for parties of comparable credit quality.
Applicants also request authority to enter into interest rate hedging transactions for anticipated debt offerings ("Anticipatory Hedges"). Black Hills states that Anticipatory Hedges would be utilized to fix and/or limit the interest rate risk associated with any new issuance.12 Anticipatory Hedges may be executed on-exchange ("On-Exchange Trades"), through brokers by the opening of futures and/or options positions traded on the Chicago Board of Trade, the opening of over-the-counter positions with one or more Approved Counterparties ("Off-Exchange Trades") or a combination of On-Exchange Trades and Off-Exchange Trades.
Black Hills states that Applicants will not engage in speculative transactions. Applicants state that they will comply with Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivatives 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"). The Interest Rate Hedges and Anticipatory Hedges will qualify for hedge accounting treatment under the FASB standards in effect and as determined at the date Interest Rate Hedges or Anticipatory Hedges are entered into.
F. Additional Guarantees ($400 Million)
Applicants request authority to guarantee performance, and provide other forms of credit support, of Subsidiaries ("Guarantees") in an aggregate principal amount not to exceed $400 million outstanding at any one time, the Additional Guarantee Limit, during the Authorization Period. Applicants also request authority to charge each Subsidiary a guarantee fee that is comparable to those fees charged by third parties. Black Hills further requests that any Guarantees outstanding at the end of the Authorization Period be permitted to continue until expiration or termination in accordance with their terms.13
G. Financing Subsidiaries
Applicants request authority to acquire, directly or indirectly, the equity securities of one or more corporations, trusts, partnerships, limited liability companies, or other entities, created specifically for the purpose of facilitating the financing of authorized and exempt activities (including authorized and exempt acquisitions) ("Financing Subsidiaries"), through the issuance of Subsidiary Common Stock or Subsidiary Preferred Securities, or Subsidiary Long-Term Debt, and to transfer of the proceeds to the Black Hills System company involved.14 Applicants also request authority to issue Guarantees for the Financing Subsidiaries, subject to the Additional Guarantee Limit. Applicants further request authority to enter into support, servicing or expense agreements ("Expense Agreements") for obligations of Financing Subsidiaries.15 Applicants request authority for Financing Subsidiaries to pledge revenues or other assets or grant security interests solely to accommodate the intrasystem mirror structure of the financings; provided that the security pledged will not consist of the assets (other than an income stream in support of the financing) or stock of any Black Hills Utility Subsidiary or nonutility entity dedicated to serving a Utility Subsidiary.16
Black Hills and its Subsidiaries also request authority to issue and sell to any Financing Subsidiary, from time to time, in one or more series, unsecured debentures, unsecured promissory notes, or other unsecured debt instruments ("Notes").17 Applicants further request authority for the Financing Subsidiaries to apply the proceeds of any external financing by a Financing Subsidiary, plus the amount of any equity contribution made to it, from time to time, by its parent corporation and other funds that may be available, or obtained in an exempt financing transaction, to purchase Notes. Applicants state that amounts issued by Financing Subsidiaries to third parties will be subject to the Aggregate Additional Financing Limit. However, Applicants request that the underlying intrasystem mirror debt (including Notes), and parent guarantee, not be so included, so as to avoid double counting.
H. Money Pools
Black Hills and its Utility Subsidiary request authorization to establish a utility money pool ("Utility Money Pool") and Black Hills and its Nonutility Subsidiaries request authority to establish a nonutility money pool ("Nonutility Money Pool"), separate from the Utility Money Pool. Black Hills represents that it will not borrow from either of the money pools. Black Hills also asks the Commission to reserve jurisdiction over the addition of other participants to the Nonutility Money Pool in the future.18
Black Hills states that it will form and operate the Utility and Nonutility Money Pools by July 1, 2005. The Utility Subsidiary, to the extent not exempted under rule 52, requests authority to make unsecured short-term borrowings from, contribute surplus funds to, and to lend and extend credit to (and acquire promissory notes from) other participants in the Utility Money Pool, through the Utility Money Pool.19 The Utility Subsidiary also will be subject to a financing sublimit, described in section V.D. above.
Applicants propose that the Nonutility Money Pool would be operated on the same terms and conditions as the Utility Money Pool, except that Black Hills' funds made available to Money Pools will be made available to the Utility Money Pool first and only afterward to the Nonutility Money Pool. No loans would be made to, and no borrowings from, the Nonutility Money Pool by a Utility Subsidiary.
Black Hills requests authorization to contribute surplus funds and to lend and extend credit to: (1) the Utility Subsidiary through the Utility Money Pool and (2) the Nonutility Subsidiaries through the Nonutility Money Pool. Black Hills and the Utility Subsidiary may contribute funds from the issuance of short-term debt to the Utility Money Pool. Black Hills and the Nonutility Subsidiaries may contribute funds from the issuance of short-term debt to the Nonutility Money Pool.20 Black Hills also requests authority, for both the Utility Money Pool and the Nonutility Money Pool, to make certain short-term investments with funds not required by the respective money pool to make loans (with the exception of funds required to satisfy the money pool's liquidity requirements).21 In addition, Black Hills requests the Commission to reserve jurisdiction over these investments in (a) short-term debt securities rated AAA by Standard and Poor's, Aaa by Moody's, or AAA by Fitch and (b) short-term debt securities issued or guaranteed by an entity rated AAA by Standard and Poor's, AAa or by Moody's, or AAA by Fitch, pending completion of the record.
I. Intrasystem Financing
Black Hills and the Subsidiaries request that they be permitted, when making intrasystem loans or extending intrasystem credit (in the event a loan or an extension of credit is not exempt under rules 45(b) or 52), to charge interest at the same effective rate of interest as the daily weighted average of commercial paper, revolving credit and/or other short-term borrowings of the respective lending Subsidiary, including an allocated share of commitment fees and related expenses.22Applicants also request authority for Black Hills, directly or indirectly through a Nonutility Subsidiary, to make loans to partially owned Subsidiaries at interest rates and maturities designed to provide a return to the lending company of not less than its effective cost of capital.23
J. Energy-Related Activities and Other Additional Nonutility Investments
Applicants seek authorization for certain activities related to nonutility investments in EWGs, FUCOs and other energy-related investments permitted under rule 58, as well as investments in Energy-Related Assets and Non-U.S. Energy Related Subsidiaries, for the duration of the Authorization Period, i.e., Permitted Nonutility Investments, as discussed below.
1. Certain Energy-Related Activities
Black Hills requests authority, directly or indirectly through Nonutility Subsidiaries, to (a) engage in Energy Marketing24 in Canada and Mexico and elsewhere in the world outside of the United States, subject to the Commission's reservation of jurisdiction over these activities outside of the United States, Mexico and Canada, and (b) render Energy Management Services25 and Consulting Services26 anywhere in the world outside of the United States. To the extent that operations outside the U.S. involve additional or different risks than U.S. operations, Black Hills states that it will evaluate and seek to mitigate those risks in a manner similar to the manner in which it evaluates and addresses EWG and FUCO investments, described below. The Commission has authorized these activities in other recent instances.27
2. Additional Investments in Energy-Related Assets ($300 Million)
Black Hills also requests authority, directly or indirectly through Nonutility Subsidiaries, to invest in nonutility energy assets that are incidental and related to its business as an electricity and energy commodities marketer and broker28 ("Energy-Related Assets") in an amount of up to $300 million ("Energy-Related Assets Financing Limit"). We have concluded, as Black Hills requests, that Black Hills' existing investments in Energy-Related Assets should be disregarded for purposes of calculating the dollar limitation upon investment in energy-related companies under rule 58.29
3. Additional Investment in EWGs and FUCOs ($1.4 Billion)
Applicants also seek financing authority in an aggregate amount of up to $1.4 billion for investments in EWGs and FUCOs (including Black Hills existing EWG investments as of September 30, 2004, of $718 million) during the Authorization Period ("Aggregate EWG/FUCO Investment Limit").30 The proposed investment limit represents approximately 448% of Black Hills' "average consolidated retained earnings," as defined in rule 53(a)(1), for the four quarterly periods ending September 30, 2004.
Black Hills states that it is able to satisfy Commission requirements for its proposed Aggregate EWG/FUCO Investment Limit by meeting the statutory requirements of sections 32 and 33 of the Act, as well as standards provided by rule 53(c).31 In addition, Black Hills states that the proposed Aggregate EWG/FUCO Investment Limit compares favorably with other EWG/FUCO investment limits authorized by the Commission.32
Black Hills states that there have been significant changes to the electric utility industry in recent years and, further, that one profound change has been the divestiture by many traditional vertically integrated utilities of their generation assets. Generation has developed as a viable business, which may, but need not be, associated with transmission and distribution companies. Key to Black Hills' overall business strategy is the continued growth of its generation business through additional investment in EWGs and large dollar investments are required to participate in larger, more energy-efficient operating projects, as compared to the investment capacity available under rule 53. Black Hills is of the view that the ability to bid on the full range of available opportunities in both regulated and deregulated generation markets, especially in the larger, more significant transactions, is vital to Black Hills' growth strategies, just as it is for Black Hills' competitors. In order to compete effectively, Black Hills states that it must be on an equal footing with its competitors with authority well in excess of the rule 53(a) partial safe harbor.
3.a. Rule 53 Analysis of Black Hills' Proposed EWG/FUCO Investments
EWG and FUCO investments by a registered holding company are subject to, among other things, rule 53 and sections 32 and 33 of the Act. Rule 53(c) provides standards to consider in connection with a proposal by a registered holding company that is unable to satisfy the requirements of rule 53(a) and to which rule 53(b) does not apply, to issue and sell securities to finance an investment in any EWG, or to guarantee the securities of any EWG. Rule 53(c) states, among other things, that a registered holding company must "affirmatively demonstrate" that the proposal to issue securities to finance the acquisition of an EWG or the guarantee of a security of an EWG: "(1) will not have a substantial adverse impact upon the financial integrity of the registered holding company system; and (2) will not have an adverse impact on any utility subsidiary of the registered holding company, or its customers, or on the ability of state commissions to protect such subsidiary or customers." As discussed below, Black Hills states that it satisfies each of these prongs of the rule 53(c) standard.
3.a.1. Impact of Investments in EWGs and FUCOs on Financial
>Integrity of Black Hills Holding Company System
Black Hills states that additional investments in EWGs and FUCOs, and financing for that purpose, will not have a substantial adverse impact on the financial integrity of the Black Hills System. The lack of any "substantial adverse impact" on Black Hills' financial integrity can be demonstrated in several ways, including an analysis of historic trends in Black Hills existing EWG investment, its consolidated capitalization ratios and retained earnings and the market view of Black Hills' securities.
Black Hills' consolidated retained earnings at September 30, 2004, were approximately $313 million, and Black Hills' expects that its retained earnings will continue to increase steadily during the Authorization Period as a result of a conservative payout ratio.
3.a.2. Rule 53(c)(2) - Impact of Investments in EWGs and FUCOs on Black Hills' Utility Subsidiary, Customers and on the Ability of State Commissions to Protect Them
The second prong of rule 53(c) requires that the investments "not have an adverse impact on any utility subsidiary of the registered holding company, or its customers, or on the ability of state commissions to protect such subsidiary or customers." Black Hills states that its proposed Aggregate EWG/FUCO Investment Limit will not have an adverse impact on Black Hills Power or its customers, or on the ability of the South Dakota Commission, the Wyoming Commission, or the Montana Commission to protect Black Hills Power and its customers because of the insulation of (1) Black Hills Power and its customers from potential direct adverse effects of Black Hills' investments in EWGs and FUCOs; (2) Black Hills Power's current financial health, and (3) the proven effectiveness of state commission oversight over Black Hills Power.
(a) (Insulation from Risk. All of Black Hills' investments in EWGs and FUCOs are, and will remain, segregated from Black Hills Power and any future Utility Subsidiary of Black Hills by, among other things, being held in separate corporate entities within the Black Hills System. In addition, Black Hills commits that no Black Hills Utility Subsidiary will provide financing for, extend credit to, or sell or pledge its assets directly or indirectly to any EWG in which Black Hills owns any interest; the indebtedness of any Black Hills EWG project will not otherwise be recourse to any Black Hills Utility Subsidiary; and there will be no contractual relationship between any Black Hills EWG and any Black Hills Utility Subsidiary other than as permitted by law. Black Hills acknowledges that rules 46(a) and 42 limit Black Hills' ability to make equity distributions from capital surplus without Commission approval.
Moreover, to the extent that EWG and FUCO investments may have an indirect effect on Black Hills (for example, on Black Hills' cost of capital), Black Hills states that the state commissions have broad discretion to set the cost of capital for any utility subject to their jurisdiction, with a variety of means available to them, and are able to exclude costs caused by EWGs and FUCOs and prevent those costs from being passed on to utility customers. Black Hills commits that it will not seek recovery in retail rates of any Black Hills Utility Subsidiary for any failed investment in, or inadequate returns from, an EWG or FUCO investment.
Black Hills also states that no Utility Subsidiary will increase staffing levels to support the operations of any EWG or FUCO. Development of new EWG or FUCO projects will be conducted through Black Hills Energy or one or more of its Subsidiaries.36
(b) (Financial Health of Black Hills Power. Black Hills states that its Utility Subsidiary, Black Hills Power, has stable earnings and cash flows and sound investment grade ratings from the major nationally recognized rating agencies. At September 30, 2004, Black Hills Power's common equity ratio was 45%. In addition, Black Hills has committed that it will, and it will cause its Utility Subsidiary to, adhere to the Commission's 30% common equity ratio requirement. See section III.D., above.
Black Hills also states that its current and proposed investments in EWGs and FUCOs will not have any negative impact on Black Hills Power's ability to fund operations and growth. It states that current projections indicate that Black Hills Power will continue to fund operations and construction expenditures primarily from internal sources of cash and credit facilities. Moreover, Black Hills states that Black Hills Power can access capital markets as needed, although its ability to issue debt and preferred equity securities in the future depends upon market factors at the time such securities are issued.
(c) (Utility Subsidiary Credit Ratings. Black Hills Power's Issuer ratings are: Baa2 (Moody's) and BBB- (Standard and Poor's). Its senior secured debt ratings are: Baa1 (Moody's) and BBB (Standard and Poor's). Black Hills Power's pollution control revenue bond ratings are: Baa2 (Moody's) and No Rating (Standard and Poor's).
(d) (Adequacy of State Commission Oversight. Three state commissions have jurisdiction over the operations of the Black Hills Power -- the South Dakota Commission, the Wyoming Commission and the Montana Commission. Black Hills believes that these state commissions are able to protect utility customers of their states. The Commission solicited the views of each of the state commissions regarding their ability to protect the ratepayers of their states from the proposed transactions and none of the state commissions opposed the proposal.
4. Investment in Development Activities and Administrative Activities
Black Hills and its Subsidiaries also request authority to invest, using a "revolving fund" concept described below, an amount of up to $100 million, in (i) Development Activities37 and (ii) Administrative Activities38 related to EWGs, FUCOs, Rule 58 Subsidiaries, Energy-Related Assets and Non-U.S. Energy-Related Subsidiaries. Development Activities will be designed to result in nonutility investments, eventually, such as EWGs, FUCOs, Rule 58 Subsidiaries, Energy-Related Assets or Non-U.S. Energy-Related Subsidiaries.
Black Hills proposes a "revolving fund," which would provide that, to the extent that funds are expended for Development Activities (or Administrative Activities, as the case may be) and result in an EWG, FUCO, or a Rule 58 Subsidiary, or other authorized investment, the amount will cease to be allocable to the Development Activities financing limit of $100 million, but will then be allocable to the particular, applicable investment limit related to the investment. For example, Development Activities expenditures that result in an EWG would count against the Aggregate EWG/FUCO Financing Limit (described in section V.J.3., above) and expenditures resulting in a Rule 58 Subsidiary would count against the limitation on investment in rule 58, or expenditures resulting in an Energy-Related Asset would count against the Energy-Related Assets Financing Limit (described in section V.J.2., above), or any other applicable limitation.39
J. Changes in Capital Stock of Subsidiaries
Applicants request authority to change the terms of any wholly owned Subsidiary's authorized capital stock capitalization or other equity interests by an amount deemed appropriate by Black Hills or another intermediate parent company, as needed to accommodate transactions and future issuances. Applicants propose that a wholly owned Subsidiary be able to change the par value, or change between par value and no-par stock, without additional Commission approval.40
Black Hills also states that the Utility Subsidiary would only take this action upon receipt of necessary approvals from interested state commissions. Black Hills also requests that the Commission reserve jurisdiction over these transactions by partially owned Subsidiaries, pending completion of the record.
K. Nonutilities' Payment of Dividends Out of Capital and Unearned Surplus
Black Hills Energy and Black Hills FiberCom also request that they be permitted, directly or indirectly through their Nonutility Subsidiaries, to pay dividends, from time to time, out of capital and unearned surplus (including revaluation reserve), to the extent permitted under applicable state corporate law, during the Authorization Period.
Applicants state that Black Hills and its Nonutility Subsidiaries 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 some or all of its assets; (2) has engaged in a restructuring or reorganization and/or (3) is returning capital to an associate company.
L. Intermediate Subsidiaries
Black Hills requests authority to acquire, directly or indirectly through Nonutility Subsidiaries, the securities of one or more corporations, trusts, partnerships, limited liability companies or other entities to be created and organized exclusively for the purpose of acquiring, holding and/or financing or facilitating the acquisition or disposition of investments ("Intermediate Subsidiaries").41 Black Hills states that, to the extent that it provides funds to an Intermediate Subsidiary for investment in an EWG, FUCO or a Rule 58 Subsidiary or other investment, the amount will be included in Black Hills' Aggregate EWG/FUCO Financing Limit or other applicable financing limit, as the case may be. Black Hills states that the transactions will not involve the sale, transfer, or other disposition of any utility assets of any Utility Subsidiary to any other person. The transactions will also not involve any change in the corporate ownership of, or involve any restructuring of, the Utility Subsidiaries.
M. Internal Corporate Reorganizations
Applicants request authority to undertake internal reorganizations of Nonutility Subsidiaries and businesses. Internal reorganizations may be accomplished through a contribution, sale, distribution, assignment or other transfer from one entity, and the acquisition by another entity, of the securities, assets or interests in an entity.
To effect a consolidation or other reorganization, Black Hills or a Nonutility Subsidiary may wish to either contribute the equity securities of one Nonutility Subsidiary to another Nonutility Subsidiary (including a newly formed Intermediate Subsidiary) or sell (or cause a Nonutility Subsidiary to sell) the equity securities or all or part of the assets of one Nonutility Subsidiary to another one. These transactions may also take the form of a Nonutility Subsidiary selling or transferring the equity securities of a subsidiary or all or part of that subsidiary's assets as a dividend to an Intermediate Subsidiary or to another Nonutility Subsidiary, and the acquisition, directly or indirectly, of the equity securities or assets of that subsidiary, either by purchase or by receipt of a dividend. The purchasing Nonutility Subsidiary in any transaction structured as an intrasystem sale of equity securities or assets may execute and deliver its promissory note evidencing all or a portion of the consideration given. Black Hills also requests that it be permitted, following direct or indirect acquisition of securities of Nonutility Subsidiaries, to transfer securities or assets of Nonutility Subsidiaries to other Subsidiaries using any tof these methods or to liquidate or merge Nonutility Subsidiaries.
N. Proposed Service Company and Certain Intrasystem Transactions
The companies will engage in a variety of affiliate transactions for the provision of goods, services and construction. Certain of these intrasystem transactions are described below. The transactions will be carried out in accordance with the requirements of rules 87, 90 and 91 under section 13(b) of the Act, unless otherwise authorized by the Commission by order or rule. With respect to the requested exemptions to the at-cost requirement, described below, for an interim period following Black Hills registration, Black Hills commits that within 12 months of its receipt of an order in connection with this Application, all transactions subject to the requested interim exemptions will be priced at cost in accordance with the requirements of section 13(b) of the Act and rules 90 and 91.
1. Black Hills Services
Following the registration, Black Hills Services will provide to Black Hills Subsidiaries various corporate, administrative, management and support services, including services relating to electric and gas plant operations.42 Black Hills requests the Commission to find under rule 88(b) that Black Hills Services "is so organized and conducted, or to be so conducted, as to meet the requirements of section 13(b) of the Act with respect to reasonable assurance of efficient and economical performance of services or construction or sale of goods for the benefit of associate companies, at cost fairly and equitably allocated among them (or as permitted by [rule] 90)."
Black Hills Services proposes to enter into a Services Agreement with its Utility Subsidiary and one with its Nonutility Subsidiaries. The proposed Services Agreements are structured to comply with the requirements of section 13 of the Act and related rules. Charges for services provided by Black Hills Services to system utilities will be at cost, in compliance with rules 90 and 91 under the Act. Except for certain exceptions discussed below, services to associate nonutilities will be at cost.
Black Hills states that no change in the organization of Black Hills Services, the type and character of the companies that will receive services, the factors for allocating costs to associate companies, or the broad categories of services to be rendered shall be made unless and until Black Hills Services has first given the Commission written notice of the proposed change not less than 60 days prior to the proposed effective date of the change. If, upon the receipt of any such notice, the Commission shall notify Black Hills Services within the 60-day period that a question exists whether the proposed change is consistent with the provisions of section 13 of the Act and related rules or orders, the proposed change shall not become effective unless and until Black Hills Services shall have filed an appropriate declaration regarding the proposed change and the Commission shall have permitted the declaration to become effective.
Black Hills anticipates that Black Hills Services will be formed and partially operational within 60 days after Black Hills' receipt of an order in connection with this Application.43 However, to allow time for the development of all required systems, Applicant requests authority to delay the full implementation of all services and systems that are relevant under the Act for an interim period of not longer than 12 months following receipt of an order in connection with this Application. No later than October 1, 2005, Black Hills will file a post-effective amendment in this filing describing the required accounting systems and cost allocation methodologies and requesting a supplemental order of the Commission. Black Hills will file as exhibits to the amendment the documents necessary to demonstrate compliance with the Act.
2. Other Affiliate Transactions
The Utility Subsidiary may provide services incidental to its utility businesses, such as infrastructure services and storm outage emergency repairs, to another Black Hills utility subsidiary company, in the future, and other associate companies in accordance with rules 87, 90 and 91. In accordance with these rules also, a utility may provide certain goods, through a leasing arrangement or otherwise, to one or more associate companies, and may use certain assets for the benefit of one or more associate companies.
Black Hills Services and the Nonutility Subsidiaries will provide certain construction, goods or services at fair market value, under certain circumstances, to certain associate nonutility companies. Black Hills requests an exemption under section 13(b) of the Act from the at-cost standards of rules 90 and 91 with respect to transactions involving:
In addition, under section 13(b) of the Act, the Commission will grant Black Hills approval to retain an existing affiliate arrangement in which Wyodak Resources Development Corporation ("Wyodak Resources") sells delivered coal produced at its Wyodak coal mine to Black Hills Power under a cost-based pricing formula methodology. Black Hills Power uses the coal procured from Wyodak Resources to fuel its coal-fired generating facilities, some of which are mine-mouth plants located at the Wyodak mine site.
Black Hills is engaged in nonutility businesses through Subsidiaries and investments in business ventures, including: (1) EWGs and QFs, (2) energy-related businesses involving exploration and production, transmission and distribution and cogeneration, among other things; and (3) telecommunication activities. These various nonutility interests are described, and the legal bases for their retention are explained, in Appendix A to this order.
We have examined the Application under the applicable standards of the Act and have concluded that the proposed transactions are consistent with those standards. We have reached those conclusions on the basis of the complete record before us.
Except as described above, no state regulatory commission and no federal regulatory commission, other than this Commission, has jurisdiction over any of the proposed transactions. Black Hills expects to pay or incur approximately $250,000 in aggregate fees, commissions, and expenses, directly or indirectly, in connection with 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 the applicable standards of the Act are satisfied and that no adverse findings are necessary.
IT IS ORDERED that, except as to those matters over which jurisdiction is reserved, the Application is granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 and provided that Applicants file reports on a quarterly basis, for the periods ended March 31, June 30, September 30 and December 31 of each year (such reports to be submitted within 60 days after the end of each calendar quarter and 90 days after the end of the last calendar quarter, commencing with the first calendar quarter following the date of the Commission's order in this proceeding (unless otherwise stated below)) including:44
IT IS FURTHER ORDERED that jurisdiction is reserved over (1) an additional $250 million in authority under the Aggregate Additional Financing Limit; (2) Energy Marketing outside the United States, Mexico and Canada; (3) issuance of any securities that fail to meet the Investment Grade Condition; (4) (a) addition of participants to the Nonutility Money Pool and (b) the use of short-term debt securities rated AAA by Standard and Poor's, Aaa by Moody's, or AAA by Fitch, or short-term debt securities issued or guaranteed by an entity rated AAA by Standard and Poor's, AAa by Moody's, or AAA by Fitch, as short-term investments for excess money pool funds, (5) changes in capital stock of partially owned Subsidiaries, (6) the retention of entities for which EWG or QF or ETC status is not yet determined, all pending completion of the record.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
See also: Appendix A
Margaret H. McFarland
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