-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Eky4Dg+vhzrz/uueKTaUBSJYDSLJuW6CBQmpXoMs2lZmurL9fyGS2ss2PdpJWxfX RTL1VQGHjiuXvt+9chRUMQ== 0001015402-02-000741.txt : 20020415 0001015402-02-000741.hdr.sgml : 20020415 ACCESSION NUMBER: 0001015402-02-000741 CONFORMED SUBMISSION TYPE: U-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20020307 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DUKE ENERGY CORP CENTRAL INDEX KEY: 0000030371 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 560205520 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: U-1/A SEC ACT: 1935 Act SEC FILE NUMBER: 070-10013 FILM NUMBER: 02569543 BUSINESS ADDRESS: STREET 1: 526 SOUTH CHURCH STREET CITY: CHARLOTTE STATE: NC ZIP: 28201-1006 BUSINESS PHONE: 7045946200 MAIL ADDRESS: STREET 1: 422 S CHURCH ST CITY: CHARLOTTE STATE: NC ZIP: 28242 FORMER COMPANY: FORMER CONFORMED NAME: DUKE POWER CO /NC/ DATE OF NAME CHANGE: 19920703 U-1/A 1 doc1.txt FILE NO. 70-10013 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 4 TO FORM U-1 APPLICATION/DECLARATION UNDER SECTION 3(b) AND RULE 10 OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 -------------------------------------------- DUKE ENERGY CORPORATION 526 S. Church Street Charlotte, North Carolina 28202 (Name of the company filing this application and address of its principal executive office) --------------------------------------------- David L. Hauser Senior Vice President and Treasurer Duke Energy Corporation 526 S. Church Street Charlotte, North Carolina 28202 (Name and address of agent for service) Please also submit copies of all correspondence to: Adam Wenner, Esq. Catherine O'Harra, Esq. Vinson & Elkins L.L.P. The Willard Office Building 1455 Pennsylvania Avenue, N.W. Washington, D.C. 20004-1008 J. Curtis Moffatt, Esq. Van Ness Feldman A Professional Corporation 1050 Thomas Jefferson St. Washington, D.C. 20007-3877 ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION Applicant Duke Energy Corporation ("Duke Energy"), a North Carolina corporation, has entered into an Amended and Restated Combination Agreement with Westcoast Energy Inc. ("Westcoast"), a corporation organized under the laws of Canada, pursuant to which Duke Energy will acquire the stock of Westcoast(1) in exchange for $3.5 billion in cash and stock and the assumption of approximately $5 billion in Westcoast debt (the "Acquisition"). Duke Energy intends to finance the cash portion of the consideration to be paid for the Acquisition primarily through the sale of equity-linked securities. Duke Energy hereby applies under Section 3(b) of the Public Utility Holding Company Act of 1935, as amended ("1935 Act"), for an order exempting certain foreign companies that will be acquired by Duke Energy in conjunction with the Acquisition.(2) Westcoast has three subsidiaries that are public-utility companies operating exclusively outside the United States ("Non-U.S. Utilities").(3) None of the Non-U.S. Utilities, either before or after the Acquisition, will serve customers in the United States, nor will the Non-U.S. Utilities derive any income directly or indirectly from sources within the United States.(4) The Non-U.S. Utilities are as follows: - ---------------- 1 The stock of Westcoast is traded on the New York Stock Exchange under the ticker symbol "WE." 2 The Commission issued notice of the Acquisition on February 1, 2002, with comments due by February 26, 2002. No comments were filed. 3 Westcoast previously had an interest in one other subsidiary that is a public-utility company that is operating exclusively outside the United States: Shanghai WEI-Gang Energy Company Ltd., ("WEI-Gang") a 50%-owned, indirect subsidiary company of Westcoast, which is engaged in the generation and sale of electric power to industrial customers in Shanghai, China. Westcoast has, but prior to the completion of this Application will sell, interests in Centra Gas British Columbia Inc., a wholly-owned, indirect subsidiary company of Westcoast, which is engaged in the transportation of natural gas and the distribution of natural gas to residential, commercial and industrial customers in British Columbia, Canada, and Centra Gas Whistler Inc., a wholly-owned, indirect subsidiary company of Westcoast, which is engaged in the transportation of natural gas and the distribution of natural gas to residential, commercial and industrial customers in British Columbia, Canada. On March 6, 2002, Westcoast sold its interest in WEI-Gang. As indicated in Exhibit 13, Duke Energy will submit evidence of the sale by Westcoast of its ownership interest in these entities. 4 Although the facilities of Union Gas Limited ("Union Gas") are located within Ontario, Canada, Union Gas provides storage service in Canada on behalf of several U.S. customers. This stored gas is owned by Union Gas's customers, and, when released, is delivered to pipelines in Canada for transportation within Canada and into the United States. Union Gas also provides transportation service to customers within the United States, by transporting natural gas in Canada up to the Canadian border with the United States. Union Gas does not, however, provide transportation service into or in the United States. As with storage service, Union Gas's transportation service is limited to transporting gas owned by its customers only within Canada. Union Gas does not sell any natural gas in the United States and Union Gas never acquires title to natural gas that may be subsequently transported into and sold in the United States. The only natural gas bought by Union Gas, i.e., to which it takes title, is that which Union Gas sells to its customers in Ontario, Canada. In addition, Union Gas does not provide either storage or transportation service in the United States to any affiliate of Duke Energy or Westcoast. Pursuant to Commission precedent, these activities of Union Gas do not result in Union Gas's deriving income from U.S. sources. See e.g., Emera Incorporated, HCAR No. 27445 (Oct. 1, 2001) (electric utility company's sales of power at the Canadian border do not make the company ineligible for foreign utility company ("FUCO") status. Section 33 of the 1935 Act, which relates to FUCOs, contains an analogous restriction on sales in or into the United States.). To the extent that a marketer affiliate of Union Gas may sell natural gas in the United States, such marketer does not own or (continued) 1 1. Union Gas, a wholly-owned, direct(5) subsidiary of Westcoast, is engaged in the transportation and storage of natural gas and the distribution of natural gas to residential, commercial and industrial customers in Ontario, Canada; 2. Pacific Northern Gas Ltd. ("Pacific Northern"), a 40.04%-owned, direct subsidiary company of Westcoast,(6) is engaged in the transportation of natural gas and the distribution of natural gas to residential, commercial, and industrial customers in British Columbia, Canada; and 3. P.T. Puncakjaya Power ("PJP"), a 42.86%-owned, indirect subsidiary company of Westcoast, is engaged in the generation and sale of electric power to industrial customers in Irian Jaya, Indonesia. Union Gas is a public company. Westcoast directly owns 100% of the voting common shares of Union Gas stock. The public holds 100% of the Class A, Class B and Class C preferred, non-voting shares of Union Gas stock. The preferred shares of Union Gas trade on the Toronto Stock Exchange. The voting common shares are not listed. After acquiring Westcoast, Duke Energy, through its ownership interest in Westcoast, will indirectly own 100% of the voting shares of Union Gas stock. The public will continue to hold the Class A, Class B and Class C preferred, non-voting shares. Pacific Northern is a public company and has Class A Non-Voting Common Shares with a par value of $2.50 each and 6.75% Cumulative Redeemable Preferred Shares with a par value of $25.00 each that trade on the Toronto Stock Exchange. Westcoast currently owns 40.04% of the non-voting Class A Common shares of Pacific Northern and 100% of the voting Class B Common shares, without intermediate subsidiaries. The public owns the balance of the Class A Common shares and all (200,000 shares) of the 6.75% Preferred shares. After the transaction, Pacific Northern will be a 40.04%-owned, indirect subsidiary company of Duke Energy. The remainder of Pacific Northern's stock will continue to be owned by the public. - ---------------- (continued) operate any facilities used for the retail distribution of natural gas, and is consequently not a "gas utility company" within the meaning of the 1935 Act. Moreover, even if any income from the above-described storage and transportation services were considered to be derived from U.S. sources, Union Gas's income from such sources clearly is not material. The income Union Gas derives from the above-described activities constitutes only 2.40 percent of its net income, 1.28 percent of its gross revenue, and 2.6 percent of its total margin. The Commission previously has held that with regards to Section 3(a)(1) of the 1935 Act, net income within 10.8 and 11.2 percent of a utility's total net income does not rise to the level of being "material." See NIPSCO Industries, Inc., HCAR No. 26975 (Feb. 10, 1999). Although the Commission has not considered "materiality" with respect to Section 3(b), its determinations with respect to other subsections of Section 3 should apply equally in this matter. 5 Westcoast directly owns all of the common shares of Union Gas. Union Gas is currently 100% owned by Centra Gas Utilities Inc., which is 100% owned by Centra Gas Holdings Inc., which is 100% owned by Westcoast Gas Inc., which is 100% owned by Westcoast Gas Holdings Inc., which is 100% owned by Westcoast. However, these four intermediate companies will be amalgamated into Westcoast prior to closing. 6 Westcoast directly owns 40.04% of the non-voting Class A Common stock and 100% of the voting Class B Common stock of Pacific Northern. 2 Westcoast indirectly owns, through Westcoast (PJP) Holdings, Inc., a corporation organized under the laws of Canada, a 42.86% share of PJP. Westcoast (PJP) Holdings, Inc., is a wholly-owned, direct subsidiary company of Westcoast. Duke Energy also currently indirectly owns a 42.86% share of PJP through Duke Energy International PJP Holdings (Maruritius), Ltd. ("Duke PJP Holdings"), an Indonesian company. Duke PJP Holdings is a wholly-owned subsidiary company of Duke Energy International PJP Holdings Ltd., a company established under the laws of Bermuda. Duke Energy International PJP Holdings Ltd. is a wholly-owned subsidiary company of Duke Energy International Asia Pacific Ltd. ("Duke Energy Asia Pacific"), which was also established under the laws of Bermuda. Duke Energy Group, Inc., a Delaware corporation, holds a 32% interest in Duke Energy Asia Pacific. Texas Eastern (Bermuda), Ltd., a company established under the laws of Bermuda, which is a wholly-owned subsidiary company of Duke Energy Group, Inc., holds the remaining 68% interest in Duke Energy Asia Pacific. Duke Energy Group, Inc. is a wholly-owned subsidiary company of Duke Energy International, LLC, a Delaware limited liability company, which is a wholly-owned subsidiary company of Duke Energy Global Markets, Inc., a Nevada corporation. Duke Energy Global Markets, Inc. is a wholly-owned subsidiary company of Duke Energy Services, Inc., a Delaware corporation, which is a wholly-owned subsidiary company of PanEnergy Corp., a Delaware Corporation, which is a wholly-owned subsidiary company of Duke Capital Corporation ("Duke Capital"), a Delaware corporation. The remaining 14.28% interest in PJP is owned by P.T. Austindo Nusantara Jaya, a limited liability company established under the laws of the Republic of Indonesia. After Duke Energy's acquisition of Westcoast, PJP will be an 85.72%-owned, indirect subsidiary company of Duke Energy. P.T. Austindo Nusantara Jaya will continue to own its 14.28% interest. Upon and after the effective date of the Acquisition, Duke Energy may, for tax, legal, regulatory or administrative reasons, restructure the corporate organization described above. If this restructuring involves the creation of any special purpose subsidiary company, such company will meet the requirements for exemption under the 1935 Act. APPLICANT'S STATEMENTS IN SUPPORT OF APPLICATION In support hereof, the Applicant states: (1) Duke Energy is a publicly held corporation organized under North Carolina law with its principal offices located at 526 S. Church Street, Charlotte, North Carolina 28202. Duke Energy engages directly and indirectly in the generation, transmission, distribution and sale of electric energy to retail and wholesale customers in the States of North Carolina and South Carolina. Duke Energy is an electric utility company and a public-utility company as such terms are defined in the 1935 Act. Because Duke Energy operates in a divisional structure, it is not a holding company under the 1935 Act. Consequently, it is not regulated as a holding company under the 1935 Act, nor is any Duke Energy subsidiary company or affiliate regulated as such under the 1935 Act. Duke Energy's senior debt is currently rated Standard & Poors' Corporation - A+; Moody's Investor Service - A1; and Fitch - A+. (2) Union Gas is organized under the laws of Ontario, Canada. Pacific Northern is organized under the laws of British Columbia, Canada. PJP is organized under the laws of the Republic of Indonesia. The Non-U.S. Utilities will not engage in any business other than the acquisition of Canadian or Indonesian public-utility companies, the supervision of Duke 3 Energy's investments in Canada or Indonesia, and the participation in the management and operation of Canadian or Indonesian public-utility companies. (3) The Non-U.S. Utilities derive no material part of their income, either directly or indirectly, from sources within the United States. Each of the Non-U.S. Utilities operate exclusively, in all respects, outside the United States. The Non-U.S. Utilities are not qualified to do business in any state of the United States, nor is any Non-U.S. Utility a public-utility company operating in the United States. The Non-U.S. Utilities have no plan to derive any income from United States operations, from any company qualified to do business in any state of the United States, or from any public-utility company operating in the United States. None of the Non-U.S. Utilities nor any of their subsidiary companies is a public-utility company operating in the United States. (4) Section 3(b) of the 1935 Act provides that the Commission "shall exempt any subsidiary company, as such, from any provision or provisions of [the 1935 Act]. . . if such subsidiary company derives no material part of its income, directly or indirectly, from sources within the United States, and neither it nor any of its subsidiary companies is a public-utility company operating in the United States," provided that the Commission finds that the application of the 1935 Act to such subsidiary company is "not necessary in the public interest or for the protection of investors. . ." (5) The proposed investment will not affect the Non-U.S. Utilities' status as public utility companies subject to regulation by the laws of the jurisdiction in which the Non-U.S. Utilities are organized and operate. As explained below, regulation of the Non-U.S. Utilities under the 1935 Act is not necessary in the public interest, or for the protection of investors or consumers. Therefore, as in the following cases, each of the Non-U.S. Utilities satisfies the standards of Section 3(b) and should be accorded an unqualified exemption, as a subsidiary company, from all provisions of the 1935 Act. See Public Service Company of Colorado, HCAR No. 26671 (Feb. 19, 1997) ("PSC Colorado"); UtiliCorp United, Inc., HCAR No. 26353 (Aug. 7, 1995) ("UtiliCorp 1995"); UtiliCorp United, Inc., HCAR No. 26919 (Sept. 28, 1998) ("UtiliCorp 1998"). (6) Although the Non-U.S. Utilities would satisfy the requirements under Section 33(a)(3) of the 1935 Act and become a FUCO as defined therein upon the filing of a notice on Form U-57, the capitalization limits established by Section 33(f) would restrict the ability of Duke Energy to finance the acquisition of the Non-U.S. Utilities as FUCOs.(7) The Commission has previously recognized that Section 3(b) provides an alternative route for foreign acquisitions in identical circumstances. See PSC Colorado; UtiliCorp 1995; UtiliCorp 1998. - ---------------- 7 In 1994, Duke Energy submitted a Notification of Foreign Utility Company Status on behalf of PJP. Form U-57, December 16, 1994. Upon obtaining the exemption requested herein and prior to acquiring the stock of Westcoast, Duke Energy will withdraw the Notification of Foreign Utility Company Status and PJP will no longer be a FUCO. Through its subsidiaries, Westcoast previously owned an interest in another FUCO, WEI-Gang. On January 23, 2002, WEI-Gang filed an application with the Federal Energy Regulatory Commission ("FERC") for a determination of exempt wholesale generator ("EWG") status. As discussed above, Westcoast has sold its interest in WEI-Gang to a third party. 4 (These opinions were issued after October 24, 1992, the date upon which Section 33 was added to the 1935 Act.) (7) The legislative history of the Energy Policy Act of 1992, through which Section 33 became law, makes clear that Section 33 was to be read in a permissive -not a restrictive -manner. Senator Donald Riegle, the Chairman of the Senate Banking Committee and a primary Senate proponent of the Section 33 legislation, stated that "[w]hile section 33 is important, we must remember that international activities by utilities is permitted by current law. Specifically, under current law, the Securities and Exchange Commission has the authority to permit, on a case-by-case basis, utility functions outside the United States. . . The provisions of section 33 supplement these foreign options for ---------- utility operations and do not in any way limit the ability to pursue the SEC approval under current law. . .We must remember that the purpose of section 33 ------------------------- is to facilitate foreign investment, not burden it." Congressional Record, 102nd - -------------------------------------------------- Cong., Oct. 8, 1992, 138 Cong. Rec. S. 17625 (emphasis supplied). See also Energy Policy Act of 1992, H.R. Conf. Report No. 102-1018 at 388, 1992 U.S.C.C.A.N. 2472, 2479 (1992); Entergy Corp. et al., HCAR No. 25706 (Dec. 14, 1992). (8) Duke Energy will not seek recovery through higher rates to its domestic regulated utility customers for any possible loss it might sustain by reason of the proposed investment in the Non-U.S. Utilities or for any inadequate returns on that investment. Duke Energy's domestic utility customers will not be put at risk of any adverse financial effects resulting from the operations of the Non-U.S. Utilities, nor will the ability of the state public utility commissions of North Carolina and South Carolina, which have regulatory jurisdiction over the retail rates of Duke Energy to protect the interests of consumers in their respective states, be adversely affected. The domestic utility customers of Duke Energy will not be put at risk of any adverse financial effects resulting from the operations of the Non-U.S. Utilities. (9) Duke Energy has filed herewith, as Exhibits 3 and 4, respectively, its October 10, 2001 application to the North Carolina Utilities Commission ("NCUC") and its October 12, 2001 application to the Public Service Commission of South Carolina ("SCPSC") (collectively, the "State Commissions"), as amended. Both applications sought approval of the Acquisition and the issuance of Duke Energy stock in connection with the Acquisition. Among other things, these applications sought (i) approval of Duke Energy's indirect acquisition of the Non-U.S. Utilities, and (ii) a determination by the State Commissions that Duke Energy's stock issuance will be compatible with the public interest, will be necessary and appropriate for, and consistent with, the proper performance by Duke Energy of its service to the public as a utility, will not impair its ability to perform that service, and will be reasonably necessary and appropriate for such purpose. Submitted as Exhibits 7 and 8, respectively, are the State Commissions' rulings approving the Acquisition. As more thoroughly provided below, the orders of the State Commissions provide that they have the authority and resources to protect ratepayers subject to their jurisdiction and that they intend to exercise their authority.(8) - ---------------- 8 See Exhibit 7 at 3; Exhibit 8 at 3. Also, both the North Carolina and South Carolina Public Service Commissions have previously issued letters to the SEC with regard to Duke Energy, stating that each Commission "has the authority and resources to protect ratepayers subject to its jurisdiction and that it intends to exercise its authority." These certifications, which appear in Exhibit 6 to the Application, are not limited to any specific non-U.S. acquisition, and thus represent the State Commissions' generally applicable views as to their ability to protect (continued) 5 (10) Duke Energy has also filed herewith as Exhibit 10, its December 14, 2001, application to the FERC for approval, pursuant to Section 203 of the Federal Power Act, for its proposed change in control over Engage Energy America LLC ("Engage Energy") and Frederickson Power L.P. ("Frederickson Power"), both of which are subsidiary companies of Westcoast.(9) Engage Energy is a power marketer with market-based rate approval from the FERC.(10) Frederickson Power is an EWG with market-based rate authority.(11) On February 27, 2002, FERC issued an order granting the section 203 application.(12) (11) Duke Energy's domestic utility operations are, and will continue to be, fully separated from Duke Energy's foreign operations. Moreover, since Duke Energy is a publicly-traded company subject to the continuous disclosure requirements of the Securities Exchange Act of 1934, as amended, regulation under the federal securities laws offers significant additional protections for the interest of investors. As a result of the Acquisition, each of the Non-U.S. Utilities will be a "subsidiary company" of Duke Energy within the meaning of Section 2(a)(8) of the 1935 Act. Regulation of the Non-U.S. Utilities as subsidiaries of a holding company is not necessary for either the public interest or for the protection of investors. (12) Duke Energy will maintain separate books of account for the Non-U.S. Utilities and any of its subsidiaries that may control the Non-U.S. Utilities and will commit to provide access to those books and records to each State Commission with retail rate jurisdiction to the extent not already required under state law. Duke Energy commits that it will maintain corporate separation from the Non-U.S. Utilities. (13) Section 33(f) of the 1935 Act relates to the acquisition of FUCOs. This transaction does not involve the acquisition of any FUCOs or interests in FUCOs. Section 33(f)(2)(C) considers the relationship of the "transaction" in which a FUCO is acquired to the capitalization of the acquiring public-utility company. This section does not indicate whether the percentage should be limited to the costs associated with the FUCO being acquired, where the FUCO is a subsidiary company of a non-FUCO entity, or should reflect the entire purchase. In order to address both of these approaches, Applicant provides this information (1) based on the entire acquisition of Westcoast, including all of its subsidiary companies, and (2) based on just Westcoast's subsidiary public-utility companies. - ---------------- (continued) ratepayers and their intent to do so. The Commission has relied on similar certifications granting exemptions under Section 3(b) of the 1935 Act. See, e.g., PSC Colorado. 9 Duke Energy's application describes Engage Energy and Frederickson Power on pages 9-12. 10 Newco US, L.P., Docket No. ER97-654-000 (Dec. 30, 1996) (unpublished Letter Order). 11 See Frederickson Power L.P., 95 FERC P. 62,151 (2001) (granting EWG determination); Frederickson Power L.P., Docket No. ER01-2262-000 (Feb. 21, 2002) (unpublished Letter Order) (granting market-based rate authority). 12 See Exhibit 11, filed herewith. 6 (a) The acquisition of Westcoast, including all of its subsidiary companies: Duke Energy is acquiring Westcoast for $8.5 billion, including assumption of debt; $3.5 billion without debt. Of the amount Duke Energy will pay Westcoast for its stock, 50% will be in cash and 50% will be in Duke Energy stock. The cash portion is estimated to equal 2.79 billion Canadian dollars. Using the approximate exchange rate of 1.54 Canadian dollars to 1 U.S. dollar (the actual exchange rate will be the rate on the date Duke Energy acquires Westcoast), Duke Energy will pay approximately $1.8 billion in cash to Westcoast. The value of the stock portion is also approximately $1.8 billion. Duke Energy's total market capitalization is presently $43 billion, consisting of $28 billion in equity and $15 billion in debt as of December 31, 2001. The total purchase price (cash and stock) for the acquisition of Westcoast (not taking into account the assumption of Westcoast debt) represents approximately 13% of the value of the equity of Duke Energy. If the debt of the two companies is considered, the total purchase price represents approximately 20% of the total market capitalization of Duke Energy. (b) The acquisition of Union Gas, Pacific Northern, and PJP: The portion of the total purchase price (cash and stock) paid by Duke Energy for Westcoast relating to Union Gas, Pacific Northern, and PJP (not taking into account the assumption of a proportionate amount of Westcoast debt) represents approximately 3% of the value of the equity of Duke Energy (2% for Union Gas, less than 1% for Pacific Northern and less than 1% for PJP). As indicated in Exhibit H, this information is based on an allocation of the total purchase price based on the book value of these companies.(13) Including a proportionate amount of the assumed Westcoast debt, the acquisition of Union Gas, Pacific Northern, and PJP represents approximately 6% of the current market capitalization of Duke Energy (5% for Union Gas, less than 1% for Pacific Northern and less than 1% for PJP). (14) The tables below show the capitalization of Duke Energy and Westcoast (including its interests in the Non-U.S. Utilities) as of September 30, 2001, December 31, 2000, and December 31, 1999, respectively, as well as the anticipated pro forma capitalization of Duke Energy post-Acquisition, according to U.S. GAAP.
DUKE ENERGY BALANCE SHEET DATA 9/30/01 12/31/00 12/31/99 Total Assets 50,463 58,176 33,409 - ------------------------------------------------------------------------------- Capitalization Notes Payable and Commercial Paper 951 1,826 267 Long-Term Debt (including current portion)(a) 12,390 11,489 9,198 Guaranteed Preferred Beneficial Interests in Subordinated Notes of DEC or Subsidiaries 1,407 1,406 1,404 Preferred and Preference Stock 247 247 280 Minority Interest 2,528 2,435 1,200 - ---------------- 13 These calculations are based on data for Westcoast's most recent fiscal year end, December 31, 2001. 7 Total Common Stock Equity 12,501 10,056 8,998 ------- -------- -------- Total Capitalization 30,024 27,459 21,347 WESTCOAST (U.S. DOLLAR/CANADIAN GAAP) BALANCE SHEET DATA 9/30/01 12/31/00 12/31/99 Total Assets 9,345 10,088 8,156 - ------------------------------------------------------------------------------- Capitalization Notes Payable 371 556 539 Long-Term Debt (including current portion) 3,936 4,121 4,066 Guaranteed Preferred Beneficial Interests in Subordinated Notes of DEC or Subsidiaries - - - Preferred and Preference Stock 548 577 599 Minority Interest 108 111 115 Total Common Stock Equity 1,925 1,843 1,659 ------- -------- -------- Total Capitalization 6,889 7,208 6,979 PRO FORMA BALANCE SHEET DATA 9/30/01 Total Assets 62,224 - ----------------------------------------------------------- Capitalization Notes Payable and Commercial Paper 1,012 Long-Term Debt (including current portion)(b) 18,783 Guaranteed Preferred Beneficial Interests in Subordinated Notes of DEC or Subsidiaries 1,407 Preferred and Preference Stock 247 Minority Interest 3,325 Total Common Stock Equity 14,108 ------- Total Capitalization(c) 38,882 (a) Includes $875 million in mandatorily convertible securities (equity units). Each equity unit contains a purchase contract obligating the investors to purchase shares of Duke Energy Common Stock in 2004. An equity unit consists of two components: a purchase contract and a Duke Capital Senior Note. The purchase contract obligates the investor to purchase newly issued shares of Duke Energy common stock in approximately three years from the date of issue of the purchase contract according to a settlement rate. The senior note is issued to the investor coincidently with the purchase contract and serves as collateral for the investor to fulfill his obligation. The senior note is issued for a period of five years; however, in year three, the senior note is remarketed for a remaining two-year period. During the first three years of the security's life, the investor receives semi-annual coupon payments consisting of an interest payment on the senior notes and a contract adjustment payment associated with the purchase contract. In the last two years, the investor of the senior note will receive interest payments. (b) For purposes of the pro forma financial statements, it was assumed that $1,834 in mandatorily convertible equity units would be issued to fund the portion of the purchase price that is payable in cash, for a total of $2,709 million in mandatorily convertible securities at September 30, 2001. (c) These pro forma financial statements indicate that equity will comprise 37% of the capitalization of the combined companies. If, however, it were assumed that all of the mandatorily convertible equity units are converted to common shares, approximately $2 billion in debt would become equity. Under this assumption, the capitalization of the combined companies would be 42% equity.
8 (15) On the basis of the facts set forth in this Application/Declaration, the Commission should grant the Non-U.S. Utilities the exemption without qualification provided for by Section 3(b) of the 1935 Act. (16) If the Non-U.S. Utilities are exempt without qualification under Section 3(b) of the 1935 Act, then Duke Energy and each of its respective subsidiary companies that directly or indirectly hold interests in the Non-U.S. Utilities (the "Intermediate Subsidiary Companies") would be entitled to the exemption provided for by Rule 10 of the 1935 Act. Duke Energy and the Intermediate Subsidiary Companies will rely upon Rule 10(a)(1) to provide an exemption insofar as each is a holding company. Duke Energy and the Intermediate Subsidiary Companies will rely upon Rule 11(b)(1) to provide an exemption from the approval requirements of Sections 9(a)(2) and 10 to which they would otherwise be subject. (17) Duke Energy hereby consents to file with the Commission reports under Rule 24 of the Commission's regulations, on a quarterly basis. Duke Energy will submit its first such report within sixty days of the end of the first calendar quarter after the date the Commission issues its order granting the requests sought in this Application/Declaration. Duke Energy will then submit updated reports within sixty days after the end of each of the first three calendar quarters, and one hundred twenty days after the end of the last calendar quarter, or year end. Duke Energy will provide the following information in those reports: (1) the capitalization of Duke Energy according to U.S. GAAP (total capitalization is to include all current maturities and all short-term indebtedness and commercial paper); and (2) the most recent senior debt ratings of Duke Energy as published by a nationally recognized statistical ratings organization ("NRSRO"). In addition, if since the end of the last calendar quarter, either (1) there has been a 10% or greater decline in Duke Energy's common stock equity for U.S. GAAP purposes; or (2) an NRSRO has downgraded the senior debt ratings of Duke Energy by one full rating level (e.g., from A to BBB), Duke Energy consents to file a report informing the Commission of the event within ten business days of its occurrence. ITEM 2. FEES, COMMISSIONS AND EXPENSES An estimate of the fees and expenses to be paid or incurred by the Applicants in connection with the proposed transaction is set forth below: Counsel Fees. . . . . . . . . . . . . . . . . . . . . . . . . $10,000 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000 ITEM 3. APPLICABLE STATUTORY PROVISIONS Sections 3(b), 9(a)(2), and 10 and Rules 10 and 11(b)(1) of the 1935 Act are or may be applicable to the proposed transaction described herein. To the extent any other sections of the 1935 Act may be applicable to the proposed transaction, Applicant hereby requests appropriate orders thereunder. ITEM 4. REGULATORY APPROVAL In addition to the approval of the Commission under Section 3(b) requested in this Application/Declaration, Duke Energy has sought approval by the North Carolina Utilities 9 Commission ("NCUC"), Public Service Commission of South Carolina ("SCPSC"), the New York Public Service Commission ("NYPSC"), the Federal Energy Regulatory Commission ("FERC"), and the Federal Trade Commission ("FTC"). The Acquisition also requires the approval of the British Columbia Utilities Commission ("BCUC") and other agencies of the Canadian government under the Competition Act of Canada and the Investment Canada Act. These approvals are necessary for Duke Energy's acquisition of Westcoast, its indirect acquisition of the Non-U.S. Utilities and its issuance of stock in order to carry out the Acquisition. The NCUC approved the Acquisition as being in the public interest and also authorized Duke Energy to issue securities in connection with the Acquisition. The NCUC found that the Acquisition and the issuance by Duke Energy of its securities in connection therewith would not adversely affect Duke Energy's retail rates, would be consistent with the proper performance by Duke Energy of its service to the public, would not impair Duke Energy's ability to perform that service, would be compatible with the public interest, and would be justified by the public convenience and necessity. The SCPSC similarly approved the Acquisition as being in the public interest and authorized Duke Energy to issue stock in connection with the Acquisition. The SCPSC concluded that the purpose of the issue of securities is proper, the property to be acquired by the issue is appropriately valued, and the amount of such securities is reasonably necessary for the acquisition of Westcoast. The SCPSC found that the proposed acquisition would not have any adverse effect on Duke Energy's electric rates. The SCPSC also found that a settlement agreement between Duke Energy and Consumer Advocate for South Carolina protects South Carolina retail customers from any detrimental effect of the Acquisition on retail rates and charges. The NYPSC approved the Joint Petition for Approval of Stock Acquisition submitted by Duke Energy, Westcoast, and 3946509 Canada Inc.(14) Pursuant to Section 70 of the New York Public Service Law, the acquisition of Westcoast by Duke Energy is subject to NYPSC jurisdiction because Westcoast indirectly owns the Empire State Pipeline, which provides natural gas to distribution companies, power plants and marketers in western New York. The NYPSC found that the Acquisition is in the public interest and would not impair the NYPSC's ability to exercise its jurisdictional authority over Empire State Pipeline. Based on the FERC's review of the Acquisition under Section 203 of the Federal Power Act and the requirements of the Merger Policy Statement,(15) the FERC concluded that the Acquisition would not adversely affect competition, rates or regulation.(16) The FERC reviewed the impact of the Acquisition on competition in affected electric power and "upstream" natural - ---------------- 14 3946509 Canada Inc. is an indirect, wholly-owned subsidiary company of Duke Energy. 15 See Inquiry Concerning the Commission's Merger Policy Under the Federal Power Act: Policy Statement, Order No. 592, 61 Fed. Reg. 68,595 (Dec. 30, 1996), FERC Stats. and Regs. Regulations Preambles P. 31,044 at 30,117-18 (1996), reconsideration denied, Order No. 592-A, 62 Fed. Reg. 33,341 (June 19, 1997), 79 FERC P. 61,321 (1997). 16 Engage Energy America, LLC, Frederickson Power L.P., Duke Energy Corporation, 98 FERC P. 61,207 (2002). 10 gas and natural gas pipeline markets and on Duke Energy's wholesale rates, and concluded that the Acquisition is consistent with the public interest. Under the Hart-Scott-Rodino Antitrust Improvements Act ("HSR") and related rules, the Acquisition may not be consummated prior to the expiration or termination of the applicable waiting period. The waiting period applicable to the Acquisition pursuant to the HSR was terminated on March 1, 2002. Under the HSR, the FTC and the Antitrust Division of the U.S. Department of Justice review mergers and acquisitions to determine whether the effect of the transaction, in any line of commerce or in any activity affecting commerce in any section of the country, may be substantially to lessen competition, or tend to create a monopoly. Under the Competition Act of Canada, the Acquisition may not be completed before the expiration or earlier termination of the applicable waiting period after notice of the Acquisition, together with certain prescribed information, has been provided to the Commissioner of Competition. This waiting period expired on November 1, 2001. The Commissioner reviews the effects of a proposed transaction on competition in Canada. With respect to the Acquisition, the Commissioner issued a "no action letter" on January 4, 2002, concluding that there were no grounds at that time to challenge the Acquisition. The Utilities Commission Act provides that the Acquisition cannot be consummated without the approval of the BCUC. The BCUC may not give its approval unless it determines that the Acquisition will not detrimentally affect any Canadian public utility or the users of the service of any Canadian public utility. The BCUC concluded that the Acquisition will not detrimentally affect the public utilities subject to its jurisdiction or the users of the services of those utilities. Under the Investment Canada Act, Duke Energy cannot acquire the Westcoast Common Shares unless it has first received the approval of the federal Industry Minister. The Minister will approve the Acquisition if he is satisfied that it is likely to be of net benefit to Canada. Duke Energy is seeking the Minister's approval of the Acquisition in early March 2002 (to be filed as Exhibit 14). The Supreme Court of British Columbia declared under section 192 of the Canada Business Corporations Act (the "CBCA") that the terms and conditions of the Acquisition were substantively and procedurally fair and reasonable to the persons affected. In addition, the Court ordered that the Acquisition was approved pursuant to section 192 of the CBCA and would upon filing of articles of arrangement and the issuance of a certificate of arrangement be effective in accordance with its terms. The Court order included a stipulation that it would take effect only upon the filing by Westcoast of a confirmation (in the form attached to the order) that all regulatory approvals that are conditions precedent to the consummation of the transaction contemplated by the amended and restated combination agreement among Westcoast, Duke Energy, 3058368 Nova Scotia Company and 3946509 Canada Inc. have been obtained. Under the Federal Law on Economic Competition of Mexico, the Federal Competition Commission must be notified of and approve the Acquisition. The Federal Competition Commission issued its approval on December 7, 2001, finding that the Acquisition did not reduce, impair or prevent competition in Mexico. 11 Except as discussed above, no other state or federal commission has jurisdiction over this Acquisition. ITEM 5. PROCEDURE Applicant requested that the Commission issue and publish no later than February 1, 2002, the requisite notice under Rule 23 with respect to the filing of this Application/Declaration, such notice to specify a date not later than February 26, 2002 as the date after which an order granting and permitting this Application/Declaration to become effective may be entered by the Commission, and that, in order not to delay the closing date for the Transaction, the Commission enter not later than March 6, 2002, an appropriate order granting and permitting this Application/Declaration to become effective. The Commission issued notice of the Acquisition on February 1, 2002, with comments due by February 26, 2002. Duke Energy hereby waives a hearing with respect to this Application/Declaration and requests that there be no 30-day waiting period between the issuance of the Commission's order and the date on which it is to become effective. Duke Energy hereby waives a recommended decision by a hearing officer or other responsible officer of the Commission and hereby consents that the Division of Investment Management may assist in the preparation of the Commission's decision and/or order. ITEM 6. EXHIBITS The following exhibits are hereby filed as a part of this Application/Declaration: EXHIBIT 1 Form of Notice. EXHIBIT 2 Opinion of Counsel (filed herewith). EXHIBIT 3 Application of Duke Energy to the North Carolina Utilities Commission, dated October 10, 2001, as amended. EXHIBIT 4 Application of Duke Energy to the Public Service Commission of South Carolina, dated October 12, 2001, as amended. EXHIBIT 5 Joint Petition of Duke Energy, Westcoast and 3946509 Canada Inc. for Approval of Stock Acquisition to the New York State Public Service Commission, filed October 16, 2001. EXHIBIT 6 Duke Energy Form U-57, Notification of Foreign Utility Company Status, July 15, 1998. EXHIBIT 7 Order of the North Carolina Utilities Commission, dated February 8, 2002 (filed herewith). EXHIBIT 8 Order of the Public Service Commission of South Carolina, dated January 29, 2002 (filed herewith). EXHIBIT 9 Order of the New York State Public Service Commission, dated January 28, 2002 (filed herewith). 12 EXHIBIT 10 Application of Engage Energy America LLC and Frederickson Power L.P. and Duke Energy Corporation for Approval of Change in Upstream Control and Resulting Disposition of Jurisdictional Facilities Pursuant to Section 203 of the Federal Power Act, dated December 14, 2001. EXHIBIT 11 Order of the Federal Energy Regulatory Commission (filed herewith). EXHIBIT 12 No action letter from the Federal Trade Commission, pursuant to the Hart-Scott-Rodino Antitrust Improvements Act (to be filed by amendment). EXHIBIT 13 Evidence of the sale by Westcoast of Centra Gas British Columbia Inc., Centra Gas Whistler Inc., and Shanghai WEI-Gang Energy Company Ltd. (to be filed by amendment). EXHIBIT 14 Approval under the Investment Canada Act (to be filed on Form SE). ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS The proposed transaction does not involve major federal action having a significant effect on the environment and to the best of the Applicant's knowledge, no federal agency has prepared or is preparing an environmental impact statement with respect to the proposed transaction. It is requested that copies of all orders, notices and communications with respect to the above Application/Declaration be served as follows: David L. Hauser Vice President and Treasurer Duke Energy Corporation 526 S. Church Street Charlotte, North Carolina 28202 Adam Wenner, Esq. J. Curtis Moffatt, Esq. Catherine O'Harra, Esq. Van Ness Feldman Vinson & Elkins L.L.P. 1050 Thomas Jefferson St. The Willard Office Building Washington, D.C. 20007-3877 1455 Pennsylvania Avenue, N.W. Washington, D.C. 20004-1008 WHEREFORE, Duke Energy respectfully requests that the Commission issue an order herein determining that the Non-U.S. Utilities are entitled to the exemption without qualification provided for by Section 3(b) of the 1935 Act. 13 SIGNATURE Pursuant to the requirements of the Public Utility Holding Company Act of 1935, the undersigned company has duly caused this Application/Declaration to be signed on its behalf by the undersigned thereunto duly authorized. Respectfully submitted, DUKE ENERGY CORPORATION By: /s/ David L. Hauser -------------------------------- David L. Hauser Vice President and Treasurer Dated: March 7, 2002 14 EX-2 3 doc7.txt EXHIBIT 2 VINSON & ELKINS L.L.P. THE WILLARD OFFICE BUILDING VINSON & ELKINS 1455 PENNSYLVANIA AVE., N.W. Attorneys At Law WASHINGTON, D.C. 20004-1008 TELEPHONE (202) 639-6500 FAX (202) 639-6604 www.velaw.com ADAM WENNER Direct Dial 6533 Direct Fax 6604 awenner@velaw.com March 7, 2002 U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Duke Energy Corporation, Form U-1 Application-Declaration, File No. 70-10013 Ladies and Gentlemen: We refer to the Form U-1 Application-Declaration (the "Application-Declaration") filed by Duke Energy Corporation ("Duke Energy"), a North Carolina corporation. Capitalized terms and parties not defined herein shall have the meanings ascribed to such terms and parties in the Application-Declaration. In the Application-Declaration, Duke Energy applies under Section 3(b) of the Public Utility Holding Company Act of 1935, as amended (the "1935 Act"), for an order from the Securities and Exchange Commission (the "SEC") to exempt the following companies from the provisions of the 1935 Act: Union Gas Limited, Pacific Northern Gas Ltd. and P.T. Puncakjaya (collectively, the "Non-U.S. Utilities"). Duke Energy has entered into an agreement with Westcoast Energy Inc. ("Westcoast"), a corporation organized under the laws of Canada, to acquire the stock of Westcoast. The Non-U.S. Utilities are subsidiaries of Westcoast that operate exclusively outside the United States. We have acted as counsel for Duke Energy in connection with this Application-Declaration. The opinions expressed below in respect of the Acquisition described in the Application-Declaration are subject to the following assumptions or qualifications: a. The Acquisition shall have been duly authorized and approved by the Board of Directors of Duke Energy; b. The SEC shall have duly entered an appropriate order exempting the Non-U.S. Utilities without qualification pursuant to section 3(b) of the 1935 Act from all obligations, duties or liabilities imposed on them as subsidiary companies of a holding company, granting the Application-Declaration and permitting the Application-Declaration to become effective with respect to the Acquisition; c. The Acquisition shall have been consummated in accordance with all approvals, authorizations, consents, certificates and orders of any applicable state commission or AUSTIN - BEIJING - DALLAS - HOUSTON - LONDON - MOSCOW - NEW YORK - SINGAPORE - WASHINGTON, D.C. U.S. Securities and Exchange Commission Page 2 March 7, 2002 regulatory authority required for the consummation of the Acquisition, and all such required approvals, authorizations, consents, certificates and orders shall have been obtained and remain in effect; d. The Acquisition shall have been consummated in accordance with the Application-Declaration; e. In rendering opinions number 1 and 2 below, we have relied exclusively on a legal opinion of even date herewith from in-house counsel to Duke Energy. In rendering opinion number 3 below, we have relied exclusively, with respect to Canadian law, on a legal opinion of even date herewith from Stikeman Elliott, Duke Energy's Canadian counsel for the Acquisition, and, with respect to North Carolina and South Carolina law, on a legal opinion of even date herewith from in-house counsel to Duke Energy; f. Opinion number 2 below is limited to the laws of the States of North Carolina and South Carolina, which, according to a legal opinion of even date herewith from in-house counsel to Duke Energy, are the only states in which Duke Energy is engaged in the business of a public utility company, as defined under the 1935 Act; g. Opinion number 3 below is limited to (i) the laws of Canada and the province of British Columbia, which according to the legal opinion of even date herewith from Stikeman Elliott, Duke Energy's Canadian counsel for the Acquisition, is the only Canadian jurisdiction governing the Plan of Arrangement, pursuant to which the acquisition of securities of Westcoast contemplated by the Acquisition will occur, (ii) the laws of the States of North Carolina and South Carolina, which, according to the legal opinion of even date herewith from in-house counsel to Duke Energy, are the only states in which Duke Energy is engaged in the business of a public utility company, as defined in the 1935 Act, and (iii) the federal laws of the United States; h. No act or event other than as described herein shall have occurred subsequent to the date hereof which would change the opinions expressed above. Based upon the foregoing and upon such investigation as we have deemed necessary, we are of the opinion that: 1. Duke Energy is validly organized and duly existing under the laws of the State of North Carolina. 2. Duke Energy will have complied with all State laws applicable to the Acquisition. 3. Duke Energy will, indirectly through a subsidiary, legally acquire the common shares of Westcoast in connection with the Acquisition, which are the only securities being acquired in this Acquisition. We hereby consent to the use of this opinion as an exhibit to the Application-Declaration. We have offices in the States of New York and Texas and in Washington, D.C., and our opinions herein are limited to the laws of such jurisdictions and the federal laws of the United States. The opinions set forth herein are issued and expressed as of the date hereof. We do not assume or undertake any responsibility to U.S. Securities and Exchange Commission Page 3 March 7, 2002 advise you of changes in either fact or law which may come to our attention after the date hereof. Very truly yours, VINSON & ELKINS L.L.P. EX-7 4 doc4.txt EXHIBIT 7 STATE OF NORTH CAROLINA UTILITIES COMMISSION RALEIGH DOCKET NO. E-7, SUB 700 BEFORE THE NORTH CAROLINA UTILITIES COMMISSION In the Matter of Application of Duke Energy Corporation for Authorization ) ORDER APPROVING under North Carolina General Statute Sections 62-111 ) MERGER AND and 62-161 to Engage in and Issue Common Stock in ) ISSUANCE OF Connection with the Acquisition of Westcoast Energy Inc. ) SECURITIES HEARD IN: The Commission Hearing Room, Dobbs Building, 430 North Salisbury Street, Raleigh, North Carolina BEFORE: Commissioner Sam J. Ervin, IV, Presiding, Chair Jo Anne Sanford, and Commissioners J. Richard Conder, Robert V. Owens, Jr., Lorinzo L. Joyner, James Y. Kerr, II, and Michael S. Wilkins APPEARANCES: For Duke Energy Corporation: Robert W. Kaylor, Law Offices of Robert W. Kaylor, P.A., 225 Hillsborough Street, Suite 480, Raleigh, North Carolina 27603 Clarence W. Walker, Kennedy Covington Lobdell & Hickman, L.L.P., 100 N. Tryon Street, Suite 4200, Charlotte, North Carolina 28202-4006 For Carolina Utility Customers Association, Inc: James P. West, West Law Offices, P.C., 434 Fayetteville Street Mall, Suite 1735, Raleigh, North Carolina 27601 For the Using and Consuming Public: Antoinette R. Wike, Public Staff - North Carolina Utilities Commission, 4326 Mail Service Center, Raleigh, North Carolina 27699-4326 Leonard G. Green, North Carolina Department of Justice, P.O. Box 629, Raleigh, North Carolina 27602 BY THE COMMISSION: This matter comes before the North Carolina Utilities Commission (the Commission) on the Application, as amended, of Duke Energy Corporation (Duke Energy) for approval, pursuant to Sections 62-111 and 62-161 of the North Carolina General Statutes, to engage in and issue securities in connection with a business transaction with Westcoast Energy Inc. (Westcoast). PROCEDURAL HISTORY Duke Energy originally filed its Application on October 10, 2001, pursuant to G.S. 62-161, for approval to issue securities in connection with a business combination transaction with Westcoast. On November 7, 2001, upon motion by the Public Staff, the Commission issued an Order directing that Duke Energy file an amendment to the Application seeking approval of the Westcoast transaction pursuant to G.S. 62-111(a). On November 9, 2001, Duke Energy filed the amendment under protest and without waiver of its position that G.S. 62-111 (a) is inapplicable to the Westcoast transaction, and reserved an exception from the Commission's Order, Duke Energy also sought a waiver of the filing requirements of the Commission's November 2, 2000, Order in Docket No. M-100, Sub 129 (the merger filing requirements). The Public Staff presented the matter to the Commission at its regular Staff Conference on November 26, 2001. The Public Staff recommended that the Commission grant Duke Energy's request for a waiver of the merger filing requirements and proposed a set of nine conditions (the Conditions) to be attached to any Commission order approving the transaction, which Duke Energy agreed to and accepted. The Public Staff recommended that subject to the Conditions, the Commission issue an order finding that the proposed acquisition is justified by the public convenience and necessity as required by G.S. 62-111 (a) and that the issuance of securities in connection with the transaction meets the statutory criteria set forth in G.S. 62-161(b). Carolina Utility Customers Association, Inc, (CUCA) appeared at the Staff Conference and argued that the Commission should set an evidentiary hearing on the Application and require the filing of a cost-benefit analysis as required by the merger filing requirements. By Order dated November 30, 2001, the Commission scheduled a public hearing to begin at 10:00 am on Wednesday, January 16, 2002, required public notice, and established dates for prefiling of testimony. The Commission also required the filing of a cost-benefit analysis by Duke Energy, but waived the filing of a market power study. Three parties intervened in this docket. The Public Staff Intervened and participated pursuant to G.S. 62-15(d) and Commission Rule R1-19(e). CUCA filed a petition to Intervene on October 26, 2001 and the Commission allowed the intervention by 2 Order dated January 15, 2002. The Attorney General intervened on December 21, 2001 pursuant to G.S. 62-20. The matter came on for hearing as scheduled, with all parties present and represented by counsel. David L. Hauser, Senior Vice President and Treasurer of Duke Energy Corporation, and Steven K. Young, Vice President, Rates and Regulatory Affairs of Duke Power, a division of Duke Energy, presented testimony for Duke Energy as a panel. The Public Staff presented the testimony of its consultant, Ben Johnson, Ph.D. CUCA presented the testimony of Kevin W. O'Donnell, CFA. No other party presented witnesses and no public witnesses appeared at the hearing. After review of Duke Energy's verified Application, the testimony, exhibits and record as a whole, the Commission makes the following: FINDINGS OF FACT 1. Duke Energy is a North Carolina corporation headquartered in Charlotte and authorized by its articles of incorporation to engage in the business of generating, transmitting, distributing and selling electric power and energy. It is a public utility under the laws of North Carolina, and its operations in this state are subject to the jurisdiction of the Commission. With respect to the acquisition of Westcoast, the Commission has the authority and resources to protect ratepayers subject to its jurisdiction under State law and the Commission intends to exercise such authority. Duke Energy is also a public utility under the laws of South Carolina, and its operations in that state are subject to the jurisdiction of the Public Service Commission of South Carolina. It is also a public utility under the Federal Power Act, and certain of its operations are subject to the jurisdiction of the Federal Energy Regulatory Commission. Duke Energy and its subsidiaries and affiliates engage in a broad range of energy and energy-related businesses throughout the United States and worldwide. 2. Duke Energy proposes to acquire Westcoast through a share exchange mechanism described in detail in Duke Energy's verified Application and the exhibits thereto. In connection with the acquisition, cash, shares of Duke Energy common stock (Common Stock) and Exchangeable Shares (as defined below) will be exchanged for all of the outstanding common shares of Westcoast at the effective time of the transaction. 3. Westcoast, a Canadian corporation headquartered in Vancouver, British Columbia, is a North American energy company. Its interests include natural gas gathering, processing, transmission, storage and distribution, as well as power generation and international energy businesses. 4. Duke Energy, certain of its affiliates and Westcoast have entered into an Amended and Restated Combination Agreement dated as of September 20, 2001 (the 3 Combination Agreement), which was filed as Duke Energy Exhibit 1. The transaction will be effected through a court-approved plan of arrangement in Canada (the Plan of Arrangement) and is subject to, among other things, approval by the holders of Westcoast common shares and options as well as obtaining various regulatory approvals. As described in the Plan of Arrangement, the transaction provides for the acquisition of all outstanding common shares of Westcoast by an indirect, wholly-owned Canadian subsidiary of Duke Energy in exchange for a combination of cash, shares of Common Stock and Exchangeable Shares of a Canadian subsidiary of Duke Energy. Duke Energy plans to finance the cash portion of the transaction largely by the issuance of equity-linked securities, pursuant to authority granted or to be granted by the Commission in Docket No. E-7, Sub 707. 5. Under the terms of the Plan of Arrangement, each common share of Westcoast would be exchanged, at the election of each Westcoast shareholder, for (i) Cdn$43.80 in cash or (ii) a portion of a share, based on an exchange ratio, of either Common Stock or shares of a newly created Canadian subsidiary of Duke Energy that are exchangeable for Common Stock (the "Exchangeable Shares") or (iii) a combination of such consideration. Elections to receive cash, stock or a combination will be subject to proration so that the aggregate consideration will consist of approximately 50 percent cash and approximately 50 percent stock. For common shares of Westcoast exchanged for stock, the exchange ratio will be determined based on the 20-day weighted average trading price of Common Stock on the New York Stock Exchange during a trading period prior to the closing of the acquisition, subject to (i) a maximum exchange ratio of 0.7711 if the weighted average trading price of the Common Stock is equal to or less than $36.88; and (ii) a minimum exchange ratio of 0.6119 if the weighted average trading price of the Common Stock is equal to or more than $46.48. The precise number of shares of Common Stock to be Issued in the transaction will be determined at the end of the 20-day trading period and prior to closing. 6. A Westcoast shareholder who is a Canadian resident and desires stock consideration can elect to receive either Common Stock or Exchangeable Shares. The Exchangeable Shares are the economic and voting equivalent of Common Stock and provide the opportunity for a tax-deferred exchange under the Plan of Arrangement for holders of Westcoast common shares that are Canadian residents. A Westcoast shareholder who is not a Canadian resident and desires stock consideration may only receive Common Stock. The Exchangeable Shares are more fully described in the next section below. 7. At the consummation of the transaction, Duke Energy will issue a number of shares of Common Stock equivalent to the number of Exchangeable Shares issued pursuant to the elections of the Westcoast shareholders, subject to the proration provisions of the Plan of Arrangement, to be held in trust pursuant to the Voting and Exchange Trust Agreement as described below. Upon the exchange, retraction or 4 redemption of any Exchangeable Shares for Common Stock, the trustee will concurrently therewith distribute an equivalent number of shares of Common Stock held by the trustee to Duke Energy for issuance to the former holder of the Exchangeable Shares such that the number of shares of Common Stock held by the trustee will at all times equal the number of Exchangeable Shares outstanding. 8. The terms of the Exchangeable Shares, and Duke Energy's obligations with respect to those shares, are more fully described in the Combination Agreement and the forms of the Support Agreement and the Voting and Exchange Trust Agreement attached to the Combination Agreement. Duke Energy Exhibit 4 is a summary of the significant terms of the Support Agreement and the Voting and Exchange Trust Agreement. 9. As described further in Duke Energy Exhibit 2, a total of between approximately 37,754,000 and approximately 49,852,000 shares of Common Stock will be issued under the Plan of Arrangement, representing a maximum of approximately 6.4% of the currently outstanding Common Stock. Duke Energy will also assume Westcoast employee stock options outstanding at the effective time of the transaction, which stock options will cover up to between approximately 5,093,000 and 7,077,000 additional shares of Westcoast common stock. Duke Energy would therefore reserve up to 5,457,354 shares of Common Stock for stock options. 10. The number of shares of Common Stock Issued and reserved is subject to change prior to the effective time of the Plan of Arrangement depending upon the exchange ratio as determined at such time, options granted and exercised, and shares of Westcoast common stock issued under its dividend reinvestment plan. 11. Duke Energy will not issue or reserve more shares of Common Stock under the authority granted in this docket than required under the Plan of Arrangement. 12. As a result of the transaction, the former Westcoast shareholders will become shareholders of Duke Energy, and an indirect, wholly-owned Canadian subsidiary of Duke Energy will become the sole shareholder of Westcoast. The transaction will be accounted for as a purchase. 13. The estimated expenses to be incurred as a result of the transaction are $20 million, or less than 0.6% of the value of the consideration Duke Energy will pay to acquire Westcoast. 14. At closing, which will occur only after receipt of all required Canadian, U.S. state and U.S. federal approvals, Duke Energy will retain its current corporate form and will continue to own all its pre-acquisition assets. There will be no change of control of Duke Energy or any of its electric franchises. 5 15. Westcoast's debt will remain the obligation of Westcoast, without any guarantees of such debt from Duke Energy. 16. The transaction, and the issuance of the securities described herein, will not adversely affect Duke Energy's North Carolina retail electric operations or customers. The transaction will have a positive effect on Duke Energy's consolidated financial condition and on its ability to thrive in a rapidly changing energy environment and will benefit Duke Energy's North Carolina retail customers. 17. The Conditions recommended by the Public Staff, which are set forth in Attachment 3 to Public Staff witness Johnson's testimony, are appropriate and sufficient safeguards to ensure that the acquisition of Westcoast and the issuance by Duke Energy of its securities in connection therewith, will not adversely affect Duke Energy's retail rates, will be consistent with the proper performance by Duke Energy of its service to the public, will not impair its ability to perform that service, will be compatible with the public interest and will be justified by the public convenience and necessity. EVIDENCE AND CONCLUSIONS FOR FINDINGS OF FACT NOS. 1-3 The evidence supporting these findings of fact is contained in the verified Application, the Combination Agreement, the Commission's files and records regarding this proceeding, and the testimony of Duke Energy's witnesses, including Duke Energy's Exhibits 1 through 15. These findings are essentially informational. EVIDENCE AND CONCLUSIONS FOR FINDINGS OF FACT NOS. 4-8 The evidence supporting these findings of fact is found in Duke Energy's verified Application, the Combination Agreement, the testimony of Duke Energy witness Hauser and Duke Energy Exhibits 1 through 7, and the testimony of Public Staff witness Johnson. EVIDENCE AND CONCLUSIONS FOR FINDINGS OF FACT NOS. 9-11 The evidence supporting these findings of fact is found in Duke Energy's verified Application, the Combination Agreement, the testimony of Duke Energy witness Hauser and Duke Energy Exhibits 1, 2 and 3. Witness Hauser testified that the number of shares of Duke Energy Common Stock to be issued in the transaction will vary within maximum and minimum limits according to a formula based on the market price of Duke Energy Common Stock during a fixed trading period. Duke Energy Exhibit 3 specifies the calculation of the exchange rate. In its verified Application, Duke Energy committed that it will not issue more shares than are required by the Plan of Arrangement. The Commission concludes that, given the variable nature of the exchange rate formula and Duke Energy's commitment to issue no more shares than are required by the 6 Plan of Arrangement, this is a reasonable and appropriate way to seek approval under G. S. 62-161. EVIDENCE AND CONCLUSIONS FOR FINDINGS OF FACT NOS. 12-17 The evidence supporting these findings of fact is found in Duke Energy's verified Application, the Combination Agreement, and in the testimony of Duke Energy witnesses Hauser and Young and Public Staff witness Johnson. Witness Hauser testified that the acquisition of Westcoast meets Duke Energy's strategic objective to be a major provider of total energy services throughout North America, that the transaction is expected to be immediately accretive to Duke Energy's earnings per share and to provide opportunities for increased future earnings growth, that all three of the rating agencies that cover Duke Energy have confirmed that the transaction will result in no change in the ratings applicable to Duke Energy's long-term senior debt securities, that after considerable deliberation Duke Energy's Board of Directors unanimously approved the transaction, and that in his opinion the proposed transaction is justified by the public convenience and necessity. In its verified Application, Duke Energy stated that the proposed transaction will result in no change of control of Duke Energy or its public utility franchises. Witness Young testified that the only effect of the issuance of Duke Energy Common Stock in the transaction on Duke Energy's unconsolidated financial statements will be an increase in its common stock equity and a corresponding increase in its investments in subsidiaries. He testified that Duke Energy is not assuming any of Westcoast's debt, which will remain the separate obligation of Westcoast. He further testified that the assets owned by Westcoast are largely established gas transmission and distribution assets, and that adding these assets to the consolidated Duke Energy reduces its operating risks. He stated that the addition of Westcoast will significantly increase Duke Energy's size, adding to stability and providing a further safeguard against volatile economic conditions and unexpected adversities. Witness Young presented a cost-benefit analysis (Duke Energy Exhibit 14) which sets out the benefits and costs of the proposed transaction and he pointed out that, while none of the transaction costs will be charged to electric operations, Duke Energy's North Carolina retail consumers will receive benefits from the transaction. He stated: "I believe this acquisition will have no adverse effect on Duke Energy's North Carolina electric operations or customers and will allow Duke Energy an opportunity to partially offset future increases in its jurisdictional expenses through synergies in corporate governance costs." Witness Young concluded that in his opinion the issuance of Duke Energy's Common Stock in the transaction is for a lawful object within Duke Energy's corporate purposes, is compatible with the public interest, is necessary or appropriate for, or consistent with, the 7 proper performance by Duke Energy of its service to the public and will not impair its ability to perform that service, and is reasonably necessary and appropriate for such purpose. He further testified that the transaction is justified by the public convenience and necessity. Public Staff witness Johnson testified that he had conducted a detailed analysis of the benefits, costs and risks of Duke Energy's proposed acquisition of Westcoast, and that, while there were potential managerial, credit and regulatory risks associated with the transaction, in his opinion it is "a sound acquisition which offers far more upside potential than it does downside risks," and that the proposed Conditions agreed upon between Duke Energy and the Public Staff would serve to further mitigate the modest risks. Dr. Johnson recommended that the Commission approve the proposed transaction, subject to the Conditions, which are set forth as Attachment 3 to his prefiled testimony. There was one discrepancy between the proposed Conditions attached to Dr. Johnson's testimony (Attachment 3) and Duke Energy Exhibit 15 presented by Duke Energy witness Young: Condition No. 9 in Dr. Johnson's Attachment 3 reads as follows: (9) It Is further understood that the intent of the foregoing conditions is that Duke Energy's North Carolina retail electric customers be held harmless from any adverse effects of the transaction, and that they receive no fewer benefits from the transaction than are received by customers in other jurisdictions. This condition as set forth in Duke Energy Exhibit 15 is identical to the above except that it contains the qualifying word "electric" before "customers" in the last line. This discrepancy apparently arose out of a discussion at the November 26, 2001, Staff Conference. Mr. Young testified on cross-examination that Duke Energy would accept the version of Condition No. 9 in Dr. Johnson's Attachment 3 so long as it is understood that any determination of "benefits" and their allocation is based upon a cost causation analysis. Witness Young testified that it would be inappropriate to allocate to Westcoast's natural gas customers benefits that are related strictly to North Carolina electric operations; and it would be inappropriate to allocate to North Carolina retail customers benefits derived solely from natural gas operations in Toronto. He further testified that all required approvals had been obtained in Canada from regulators regulating rates to retail customers, and that no rate decreases had been ordered as a result of the transaction. CUCA witness O'Donnell testified that, while he was not opposed to the Duke Energy-Westcoast transaction, and did not believe it would have any adverse consequences to Duke Energy ratepayers in the short-term, he was concerned that in the long-term Duke Energy's continuing growth of its energy business beyond the Carolinas could have an adverse impact on retail electric rates. Witness O'Donnell proposed two conditions in addition to those agreed upon between Duke Energy and the Public Staff: 8 (1) If Duke files a general rate case or an unbundling rate case any time in the next five years, the Company cannot, for ratemaking purposes, request a debt ratio any lower than 40%; and (2) If any regulatory body overseeing retail service in Duke's or Westcoast's territory orders that some of the merger savings be passed on to consumers, Duke would be required to share a pro rata amount of the merger savings with captive North Carolina retail consumers. Both witness Young and witness Johnson testified that in their opinion those additional conditions were unnecessary. Mr. O'Donnell admitted on cross-examination that the Commission has authority in a rate case to base rates on a hypothetical or "reasonable" capital structure rather than an applicant's actual capital structure. The Commission concludes that, with the Condition Nos. 1 through 9 set out in Attachment 3 to the testimony of Public Staff witness Johnson, Duke Energy's acquisition of Westcoast and the related stock issuance by Duke Energy is for a lawful object within the corporate purposes of the public utility, is compatible with the public interest, is necessary or appropriate for or consistent with the proper performance by Duke Energy of its service to the public and will not impair its ability to perform that service, is reasonably necessary and appropriate for such purpose, and is justified by the public convenience and necessity. The Commission further concludes that Condition No. 9 should be interpreted to apply to benefits arising from the Westcoast acquisition received by customers in other jurisdictions, based on an analysis of any decision of another regulatory agency approving said benefits and other relevant factors. The Commission concludes that the additional conditions proposed by CUCA witness O'Donnell are unnecessary in light of Condition No. 9 and the Commission's inherent power to decide the appropriate capital structure in a ratemaking proceeding. IT IS, THEREFORE, ORDERED that: 1. With respect to Duke Energy's challenge to the Commission's authority with respect to the Westcoast transaction under G.S. 62-111(a), the Commission holds that it has the authority pursuant to G.S. 62-111(a) to require Duke Energy to make application to the Commission for approval of the Westcoast transaction, and reaffirms its Order dated November 7, 2001, requiring Duke Energy to make such application. IT IS FURTHER ORDERED that: 1. Duke Energy's Application to engage in a business combination transaction with Westcoast as described herein and to issue its securities in the amounts and the manner set forth herein and in its Application, is approved upon the following Conditions and Duke Energy is ordered to comply with these Conditions: 9 (a) All costs of the transaction, and all direct and indirect corporate cost increases, if any, attributable to the transaction, shall be excluded from Duke Energy's utility accounts, and shall also be excluded from utility costs, for all purposes that affect Duke Energy's retail electric rates and charges. For purposes of this condition, the term "corporate cost increases" is defined as costs in excess of the level that Duke Energy would have incurred on a stand-alone basis. (b) An amount equal to Duke Energy's net equity investment in Westcoast, i.e., the amount initially recorded as net investment in Westcoast in NARUC Account 123, plus future earnings of Westcoast less dividends paid by Westcoast, will be eliminated from Duke Energy's unconsolidated capital structure for all purposes that affect its North Carolina retail rates and charges. (c) To the extent the cost rate of Duke Energy's long-term debt (more than one year), short-term debt (one year or less) or preferred stock is or has been adversely affected by the transaction, through a downgrade or otherwise, a replacement cost rate to remove the effect will be used for all purposes affecting Duke Energy's North Carolina retail rates and charges. This procedure will be effective through Duke Energy's next general rate case. Any future procedures relating to a replacement cost calculation will be determined in the next rate case. This condition does not indicate a preference for a specific debt rating for Duke Energy on a current or prospective basis. (d) These conditions do not supersede any orders or directives that have been or will be issued by the Commission regarding the issuance of specific securities by Duke Energy. As with securities issuances prior to the announcement of the transaction, the issuance of securities after the announcement of the transaction does not restrict the Commission's right to review, and if deemed appropriate, adjust Duke Energy's cost of capital for ratemaking purposes for the effect of these securities. (e) Long-term debt (more than one year) issued by Duke Energy will be identified as clearly as possible with the assets that are or will be utilized to provide service to customers. (f) The cost of capital conditions of this order will apply to Duke Energy's determination of its maximum allowable AFUDC rates, the rates of return applicable to any of Duke Energy's deferral accounts and regulatory assets and liabilities that accrue a return, and any other component of Duke Energy's retail electric cost of service impacted by the cost of debt or preferred stock. (g) To the extent that Duke Energy has made commitments to its wholesale customers relating to the transaction, or that commitments are imposed on Duke Energy through an offer, settlement, or as a result of a regulatory order, the effects of which increase Duke Energy's North Carolina retail cost of service or North Carolina retail fuel 10 costs under reasonable cost allocation practices traditionally followed by Duke Energy and approved by the Commission, the effects of such commitments shall not be recognized for North Carolina retail ratemaking purposes. (h) It is understood that the transaction should not cause Duke Energy to be a registered holding company under PUHCA. If Duke Energy or its affiliates engage in acquisitions or other actions that create the possibility of Duke Energy becoming a registered holding company, Duke Energy will notify the Commission at least 30 days prior to taking such actions, will bear the full risk of any preemptive effects of the Federal Power Act or PUHCA, and will take all such actions as the Commission finds necessary and appropriate to hold North Carolina retail ratepayers harmless from such preemption. (i) It is further understood that the intent of the foregoing conditions is that Duke Energy's North Carolina retail electric customers be held harmless from any adverse effects of the transaction, and that they receive no fewer benefits from the transaction than are received by customers in other jurisdictions. 2. If a regulatory body in another jurisdiction orders Duke or Westcoast to pass through benefits of the merger to customers in that jurisdiction, Duke shall file a copy of any such order within thirty (30) days from the date of the issuance. 3. Approval of this Application does not bind the Commission as to any ratemaking treatment of the securities authorized herein. 4. This Order shall not, in any way, affect or limit the right, duty, or jurisdiction of the Commission to further investigate and order revisions, modifications, or changes with respect to any provision of this Order in accordance with the law. 5. With respect to the acquisition of Westcoast, the Commission has the authority and resources to protect ratepayers subject to its jurisdiction under State law and the Commission intends to exercise such authority. ISSUED BY ORDER OF THE COMMISSION. This the 8th day of February, 2002. --- NORTH CAROLINA UTILITIES COMMISSION /s/ Geneva S. Thigpen Geneva S. Thigpen, Chief Clerk 11 EX-8 5 doc5.txt EXHIBIT 8 BEFORE THE PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA DOCKET NO. 2001-441-E - ORDER NO. 2002-20 JANUARY 29, 2002 IN RE: Application of Duke Energy Corporation for ) ORDER RULING ON Approval Pursuant to South Carolina Code ) APPLICATION, AS Sections 58-27-1300, 58-27-1710, 58-27- ) AMENDED, OF DUKE 1720 and 58-27-1730 to Issue Securities in ) ENERGY Connection with a Business Combination ) CORPORATION Transaction with Westcoast Energy Inc. ) This matter comes before The Public Service Commission of South Carolina (the "Commission") on the Application of Duke Energy Corporation ("Duke Energy" or the "Company"), originally filed on October 12, 2001, pursuant to South Carolina Code Sections 58-27-1710, 58-27-1720 and 58-27-1730, for approval to issue securities in connection with a business transaction with Westcoast Energy Inc. ("Westcoast"). Subsequently, Duke Energy filed at the direction of the Commission on November 20, 2001 an Amendment to the Application seeking approval of the Westcoast transaction pursuant to S.C. Code Section 58-27-1300. That Amendment was filed under protest and without waiver of Duke Energy's position that Section 58-27-1300 is inapplicable to the Westcoast transaction. In this Order, the Commission hereby rules upon Duke Energy's Application, as amended. The Commission's Executive Director instructed Duke Energy to publish one time a prepared Notice of Filing in newspapers of general circulation in the affected area. The purpose of the Notice of Filing was to inform interested parties of the Company's Application and of the manner and time in which to file the appropriate pleadings for DOCKET NO. 2001-441-E - ORDER NO. 2002-20 JANUARY 29, 2002 PAGE 2 - -------------------------------------------------------------------------------- participation in the proceeding. Duke Energy complied with the instructions and provided the Commission with Affidavits of Publication of the Notice of Filing in newspapers in Charlotte, North Carolina and Anderson, Spartanburg and Greenville, South Carolina. On December 10, 2001, the Consumer Advocate for the State of South Carolina filed a Petition to Intervene. The Consumer Advocate and Duke Energy entered into a Stipulation (the "Stipulation") dated December 20, 2001 concerning conditions applicable to the transaction. The Commission is informed that, in addition to the required approval by the Public Service Commission of South Carolina, approvals are needed from Westcoast's shareholders, the North Carolina Utilities Commission, the New York Public Service Commission, the Federal Energy Regulatory Commission ("FERC"), the Federal Trade Commission, the Securities and Exchange Commission (for purposes of the Public Utility Holding Company Act of 1935, as amended) and various regulatory bodies in Canada and Mexico. Proceedings are underway or completed in these jurisdictions, and the transaction was approved by Westcoast's shareholders on December 13, 2001. In a letter dated November 1, 2001 to David Butler, General Counsel of the Commission, Duke Energy set forth its position that S.C. Code Section 58-27-1300 did not apply to the transaction. After consideration, Mr. Butler set forth the Commission's position in a November 16, 2001 letter to Duke Energy stating that such Code Section was applicable to the transaction and directed Duke Energy to amend its application to include a request for authority under that statute. As indicated above, pursuant to this direction, Duke Energy filed under protest and without waiver of its position an DOCKET NO. 2001-441-E - ORDER NO. 2002-20 JANUARY 29, 2002 PAGE 3 - -------------------------------------------------------------------------------- amendment to the application on November 20, 2001. After review of Duke Energy's Application, the Stipulation, and applicable law, the Commission makes the following findings of fact and conclusions of law: FINDINGS OF FACT ---------------- 1. The Commission has the authority and resources to protect ratepayers subject to its jurisdiction and intends to exercise its authority. Duke Energy is also a public utility under the laws of North Carolina, and its operations in that State are subject to the jurisdiction of the North Carolina Utilities Commission. It is also a public utility under the Federal Power Act, and certain of its operations are subject to the jurisdiction of the FERC. Duke Energy and its subsidiaries and affiliates engage in a broad range of energy and energy-related businesses throughout the United States and worldwide. 2. Westcoast, a Canadian corporation headquartered in Vancouver, British Columbia, is a leading North American energy company. Its interests include natural gas gathering, processing, transmission, storage and distribution, as well as power generation, international energy businesses and financial, information technology and energy services businesses. 3. Duke Energy, certain of its affiliates, and Westcoast have entered into an Amended and Restated Combination Agreement dated as of September 20, 2001 (the "Combination Agreement"). The transaction will be effected through a court-approved plan of arrangement in Canada (the "Plan of Arrangement") and is subject to, among other things, approval by the holders of Westcoast common shares and options as well as the obtaining of approvals from other regulatory bodies. As described in the Plan of DOCKET NO. 2001-441-E - ORDER NO. 2002-20 JANUARY 29, 2002 PAGE 4 - -------------------------------------------------------------------------------- Arrangement, the transaction provides for the acquisition of all outstanding common shares of Westcoast by an indirect, wholly-owned Canadian subsidiary of Duke Energy in exchange for a combination of cash, shares of Common Stock and Exchangeable Shares of a Canadian subsidiary of Duke Energy. Duke Energy plans to finance the cash portion of this transaction largely by the issuance of equity-linked securities, pursuant to authority granted by the Commission. 4. Under the terms of the Plan of Arrangement, each common share of Westcoast would be exchanged, at the election of each Westcoast shareholder, for (i) Cdn$43.80 in cash or (ii) a portion of a share, based on an exchange ratio, of either Common Stock or Exchangeable Shares of a newly created Canadian subsidiary of Duke Energy that are exchangeable for Common Stock (the "Exchangeable Shares") or (iii) a combination of such consideration. Elections to receive cash, stock or a combination will be subject to proration so that the aggregate consideration will consist of approximately 50 percent cash and approximately 50 percent stock. For common shares of Westcoast exchanged for stock, the exchange ratio will be determined based on the 20-day weighted average trading price of Common Stock on the New York Stock Exchange during a trading period prior to the closing of the acquisition, subject to (i) a maximum exchange ratio of 0.7711 if the weighted average trading price of the Common Stock is equal to or less than $36.88; and (ii) a minimum exchange ratio of 0.6119 if the weighted average trading price of the Common Stock is equal to or more than $46.48. The precise number of shares of Common Stock to be issued in the transaction will be determined at the end of the 20 day trading period and prior to closing. DOCKET NO. 2001-441-E - ORDER NO. 2002-20 JANUARY 29, 2002 PAGE 5 - -------------------------------------------------------------------------------- 5. A Westcoast shareholder who is a Canadian resident and desires stock consideration can elect to receive either Common Stock or Exchangeable Shares. The Exchangeable Shares are the economic and voting equivalent of Common Stock and provide the opportunity for a tax-deferred exchange under the Plan of Arrangement for holders of Westcoast common shares that are Canadian residents. A Westcoast shareholder who is not a Canadian resident and desires stock consideration may only receive Common Stock. The Exchangeable Shares are more fully described in the next section below. 6. At the consummation of the transaction, Duke Energy will issue a number of shares of Common Stock equivalent to the number of Exchangeable Shares issued pursuant to the elections of the Westcoast shareholders, subject to the proration provisions of the Plan of Arrangement, to be held in trust pursuant to the Voting and Exchange Trust Agreement as described below. Upon the exchange, retraction or redemption of any Exchangeable Shares for Common Stock, the trustee will concurrently therewith distribute an equivalent number of shares of Common Stock held by the trustee to Duke Energy for issuance to the former holder of the Exchangeable Shares such that the number of shares of Common Stock held by the trustee will at all times equal the number of Exchangeable Shares outstanding. The terms of the Exchangeable Shares, and Duke Energy's obligations with respect to those shares, are more fully described in the Combination Agreement and the forms of the Support Agreement and the Voting and Exchange Trust Agreement attached to the Combination Agreement as Schedules F and G, respectively, Also attached as DOCKET NO. 2001-441-E - ORDER NO. 2002-20 JANUARY 29, 2002 PAGE 6 - -------------------------------------------------------------------------------- Exhibit E to Duke Energy's Application is a summary of the significant terms of the Support Agreement and the Voting and Exchange Trust Agreement. 7. As described further in Exhibit D-1 to the Application, a total of between approximately 37,754,000 and approximately 49,852,000 shares of Common Stock will be issued under the Plan of Arrangement, representing a maximum of approximately 6.4% of the currently outstanding Common Stock. Duke Energy will also assume Westcoast employee stock options outstanding at the effective time of the transaction, which stock options will cover up to between approximately 5,093,000 and 7,077,000 additional shares of Westcoast common stock. Duke Energy would therefore reserve up to 5,457,354 shares of Common Stock for stock options. The number of shares of Common Stock issued and reserved is subject to change prior to the effective time of the Plan of Arrangement depending upon the exchange ratio as determined at such time, options granted and exercised, and shares of Westcoast common stock issued under its dividend reinvestment plan. Duke Energy will not issue or reserve more shares of Common Stock under the authority granted in this docket than required under the Plan of Arrangement. As a result of the transaction, the former Westcoast shareholders will become shareholders of Duke Energy (or holders of Exchangeable Shares), and an indirect, wholly owned Canadian subsidiary of Duke Energy will become the sole shareholder of Westcoast. The transaction will be accounted for as a purchase. The estimated expenses to be incurred as a result of the Common Stock issuance are $20 million, or less than 0.6% of the value of the consideration Duke Energy will pay to acquire Westcoast. DOCKET NO. 2001-441-E - ORDER NO. 2002-20 JANUARY 29, 2002 PAGE 7 - -------------------------------------------------------------------------------- At closing, which will occur only after receipt of all required Canadian, U.S. state and U.S. federal approvals, Duke Energy will retain its current corporate form and will continue to own all its pre-acquisition assets. There will be no change of control of Duke Energy nor will there be any sale, assignment, pledge, transfer, lease, consolidation or merger of Duke Energy's public utility property, powers, franchise, or privileges. Westcoast's debt will remain the obligation of Westcoast, without any guarantees of such debt from Duke Energy. 8. The Commission notes that Duke Energy's Application was uncontested following negotiations and a Stipulation entered into between Duke Energy and the Consumer Advocate. The Stipulation indicated that the Consumer Advocate will not object to the granting of the authority sought in the Duke Application herein and will withdraw his Petition to Intervene if and when the Commission approves this Stipulation. The conditions in the Stipulation are discussed and approved in this Order. The Stipulation resolved all matters between the two parties. Duke Energy agreed to the conditions in the Stipulation which are intended to protect South Carolina retail customers from any detrimental effect of the transaction on retail rates and charges. CONCLUSIONS ----------- 1. The Commission concludes that this matter has received due consideration and adequate notice was given to the public. 2. The Commission, over Duke Energy's objection, concludes that S.C. Code Section 58-27-1300 applies to the proposed Westcoast transaction and that the Commission's approval under that statute is therefore required before the transaction may be consummated. DOCKET NO. 2001-441-E - ORDER NO. 2002-20 JANUARY 29, 2002 PAGE 8 - -------------------------------------------------------------------------------- 3. Upon review and study of the Application, and other supporting data, the Commission is of the opinion, and so finds, that the Company is a public utility subject to the jurisdiction of this Commission with respect to its retail rates, services and securities issues and that the issuance of the shares as set forth in the Company's Application is reasonably necessary, appropriate and proper for the purpose for which they are to be issued. 4. The Commission concludes that: (i) the purpose of the issue of securities is proper, (ii) the property to be acquired by the issue is appropriately valued, and (iii) the amount of such securities prepared to be issued and assumed is reasonably necessary for the acquisition of Westcoast; and 5. The Commission concludes that this order shall serve as a certificate of authority to Duke Energy setting forth the Commission's opinions and findings that: a. the issuance and reservation of a maximum of approximately 55.3 million shares of Duke Energy Common Stock is reasonably necessary for Duke Energy's acquisition of Westcoast. The transaction includes the issuance of shares of stock without par value, and issuance of Duke Energy Common Stock in the form of restricted stock awards or upon exercise of employee stock options granted or to be granted to Westcoast employees and upon exchange of Exchangeable Shares and the reservation of shares of its Common Stock for such purpose; and b. the value of the property to be acquired by the issuance of securities and other consideration as described above is approximately US$ 10 billion. 6. The purposes of the issuance of Duke Energy's Common Stock are lawful objects within the corporate purposes of Duke Energy and are within the limits of authority and purposes set forth in Duke Energy's Articles of Incorporation, as amended, which are on file with this Commission. 7. The Commission has fully examined the terms of the Stipulation between DOCKET NO. 2001-441-E - ORDER NO. 2002-20 JANUARY 29, 2002 PAGE 9 - -------------------------------------------------------------------------------- Duke Energy and the Consumer Advocate, believes it is in the best interest of Duke Energy's retail customers and hereby adopts the conditions of that Stipulation. 8. Based on a review of the record the Commission concludes that the proposed acquisition will not have any adverse effect on Duke Energy's electric rates. Duke Energy's South Carolina retail cost of service is not adversely affected by the transaction, and neither are its jurisdictional revenues or expenses. 9. The business transaction and issuance of the securities described herein will not adversely affect Duke Energy's South Carolina retail electric operations or customers. IT IS, THEREFORE, ORDERED: 1. With respect to Duke Energy's challenge to the Commission's authority under S.C. Code Section 58-27-1300, the Commission holds that it has the specific power and authority pursuant to S.C. Code Section 58-27-1300 to require Duke Energy to make application to the Commission for approval of the Westcoast transaction, and confirms its direction to Duke Energy to make such application. IT IS FURTHER ORDERED: 1. That Duke Energy's Application to engage in the Westcoast transaction as described herein and to issue its securities in the manner set forth herein, and in its Application, is approved. 2. That the conditions set forth in subparagraphs (a) through (i) hereinbelow are hereby approved and that Duke Energy is hereby ordered to comply with such conditions: (a) All costs of the transaction, and all direct and indirect corporate cost increases, if any, attributable to the transaction, shall be excluded from Duke's utility accounts, and shall also be excluded from utility costs, for all purposes that affect Duke's retail electric rates and charges. For purposes of this condition, the DOCKET NO. 2001-441-E - ORDER NO. 2002-20 JANUARY 29, 2002 PAGE 10 - -------------------------------------------------------------------------------- term "corporate cost increases" is defined as costs in excess of the level that Duke would have incurred on a stand-alone basis. (b) An amount equal to Duke's net equity investment in Westcoast, i.e., the amount initially recorded as net investment in Westcoast in NARUC Account 123, plus future earnings of Westcoast less dividends paid by Westcoast, will be eliminated from Duke's unconsolidated capital structure for all purposes that affect its South Carolina retail rates and charges. (c) To the extent the cost rate of Duke's long-term debt (more than one year), short-term debt (one year or less) or preferred stock is or has been adversely affected by the transaction, through a downgrade or otherwise, a replacement cost rate to remove the effect will be used for all purposes affecting Duke's South Carolina retail rates and charges. This procedure will be effective through Duke's next general rate case. Any future procedures relating to a replacement cost calculation will be determined in the next rate case. This condition does not indicate a preference for a specific debt rating for Duke on a current or prospective basis. (d) These conditions do not supersede any orders or directives that have been or will be issued by the Commission regarding the issuance of specific securities by Duke. As with securities issuances prior to the announcement of the transaction, the issuance of securities after the announcement of the transaction does not restrict the Commission's right to review, and if deemed appropriate, adjust Duke's cost of capital for ratemaking purposes for the effect of these DOCKET NO. 2001-441-E - ORDER NO. 2002-20 JANUARY 29, 2002 PAGE 11 - -------------------------------------------------------------------------------- securities. (e) Long-term debt (more than one year) issued by Duke will be identified as clearly as possible with the assets that are or will be utilized to provide service to customers. (f) The cost of capital conditions of this order will apply to Duke's determination of its maximum allowable AFUDC rates, the rates of return applicable to any of Duke's deferral accounts and regulatory assets and liabilities that accrue a return, and any other component of Duke's retail electric cost of service impacted by the cost of debt or preferred stock. (g) To the extent that Duke has made commitments to its wholesale customers relating to the transaction, or that commitments are imposed on Duke through an offer, settlement, or as a result of a regulatory order, the effects of which increase Duke's South Carolina retail cost of service or South Carolina retail fuel costs under reasonable cost allocation practices traditionally followed by Duke, and approved by the Commission, the effects of such commitments shall not be recognized for South Carolina retail ratemaking purposes. (h) It is understood that the transaction should not cause Duke to be a registered holding company under PUHCA. If Duke or its affiliates engage in acquisitions or other actions that create the possibility of Duke becoming a registered holding company, Duke will notify the Commission at least 30 days prior to taking such actions, will bear the full risk of any preemptive effects of the Federal Power Act or PUHCA, and will take all such actions as the Commission DOCKET NO. 2001-441-E - ORDER NO. 2002-20 JANUARY 29, 2002 PAGE 12 - -------------------------------------------------------------------------------- finds necessary and appropriate to hold South Carolina retail ratepayers harmless from such preemption. (i) It is further understood that the intent of the foregoing conditions is that Duke's South Carolina retail electric customers be held harmless from any adverse effects of the transaction, and that they receive no fewer benefits from the transaction than are received by electric customers in other jurisdictions. IT IS FURTHER ORDERED, that; 1. Approval of this Application does not bind the Commission as to any ratemaking treatment of this issuance; 2. This Order shall not, in any way, affect or limit the right, duty, or jurisdiction of the Commission to further investigate and order revisions, modifications, or changes with respect to any provision of this Order in accordance with the law; 3. Following consummation of the acquisition of Westcoast, the Commission will continue to have the authority and resources to protect ratepayers subject to its jurisdiction and intends to exercise its authority; and DOCKET NO. 2001-441-E - ORDER NO. 2002-20 JANUARY 29, 2002 PAGE 13 - -------------------------------------------------------------------------------- 4. This Order shall remain in full force and effect until further Order of the Commission. BY ORDER OF THE COMMISSION: _____________________________________ Chairman ATTEST: _____________________________________ Executive Director (SEAL) EX-9 6 doc6.txt EXHIBIT 9 FILED: SESSION OF JAN 23 2002 Approved as Recommended and so Ordered by the Commission _________________________ JANET HAND DEIXLER Secretary STATE OF NEW YORK DEPARTMENT OF PUBLIC SERVICE ISSUED & EFFECTIVE JAN 28 2002 January 8, 2002 TO: THE COMMISSION FROM: OFFICE OF ACCOUNTING AND FINANCE SUBJECT: CASE 01-G-1629 - Joint Petition of Duke Energy Corporation, Westcoast Energy Inc., and 3946509 Canada Inc. for Approval of Duke Energy Corporation's Request to Effect the Indirect Acquisition of Empire State Pipeline by Duke Energy Corporation. SUMMARY OF RECOMMENDATION: Staff recommends that the Commission grant approval, under Sections 70 and 121(2) of the Public Service Law for (a) Duke Energy Corporation to acquire all of the outstanding stock of Westcoast Energy Inc.; and (b) for the transfer of Westcoast Energy Inc.'s interests in Empire State Pipeline's Certificate of Environmental Compatibility and Public Need to Duke Energy Corporation, subject to the conditions set forth herein. Introduction - ------------ By petition filed jointly on October 18, 2001, Duke Energy Corporation (Duke Energy), Westcoast Energy Inc. (Westcoast Energy), and 3946509 Canada Inc. (CI) seek approval, under Sections 70 and 121(2) of the Public Service Law (PSL), (1) for Duke Energy to acquire all of the outstanding capital stock of Westcoast Energy; and 2) for the transfer of Westcoast's interests in Empire State Pipeline's (Empire) Certificate of Environmental Compatibility and Public Need (CECPN) to Duke Energy. CASE 01-G-1629 Background - ---------- Empire State Pipeline Corporation (ESPC) and St. Clair Pipeline Company (St. Clair) are gas corporations organized and existing under the Transportation Corporations Law of New York and are subject to the jurisdiction of the Commission. They are the sole co-tenants in Empire. ESPC and St. Clair each own, as tenants in common, an undivided ownership interest in Empire, which was constructed and is operated pursuant to a CECPN issued by the Commission on March 1, 1991, in Case 88-T-132. At the time of the Commission's issuance of the CECPN, Empire consisted of co-tenants ESPC and St. Clair. Under a Commission order issued November 15, 1993 in Case 93-T-0805, ESPC and St. Clair transferred a portion of their ownership, and of their rights, duties and obligations under the Certificate, to Energyline Corporation (Energyline). Subsequently, under a Commission Order issued September 18, 1996 in Case 96-T-0466, Energyline transferred its ownership interest, rights and obligations back to ESPC and St. Clair. All of the outstanding common stock of ESPC was owned by American Natural Resources Company (American Natural), which was an indirect subsidiary of The Coastal Corporation (Coastal). Coastal had an agreement to merge with El Paso Energy Corporation (El Paso) pending necessary approval by regulatory agencies. As part of ongoing review of such proposed merger by the Federal Trade Commission (FTC), Coastal agreed that American Natural would sell the outstanding shares of ESPC if the FTC approved the merger. Under a Stock Purchase and Sale Agreement dated November 6, 2000, American Natural sold Westcoast the outstanding stock of ESPC at a price of $75 million in cash. The Commission approved the sale of stock and the transfer of the CECPN to Westcoast in an order issued January 24, 2001 in Case 00-M-1988. The undivided co-tenant interests in Empire are now 50% ESPC and 50% St. Clair. -2- CASE 01-G-1629 Current Petition - ----------------- In this petition Duke Energy seeks Commission approval to acquire Westcoast Energy. Under the terms of the acquisition, Duke Energy will acquire all of the outstanding capital stock of Westcoast Energy in exchange for a combination of cash, Duke Energy common stock and exchangeable shares of CI, the wholly-owned Canadian subsidiary of Duke Energy, such that fifty percent of the consideration will be paid in cash and fifty percent in stock. Canadian residents are given the option of electing to receive either Duke Energy stock or, for tax deferral purposes, exchangeable stock of CI. The petition is silent on the affect of any premium on Empire. The Commission has traditionally not allowed the recovery of a premium in rates and there is no reason to do so here. Upon completion of the acquisition, Empire will continue to be owned by ESPC and St. Clair and operated by ESPC. It will remain under the jurisdiction of the Commission. ESPC and St. Clair will continue to be directly owned by Westcoast Energy Enterprises, which will become a subsidiary of Duke Energy. Public Interest Considerations - -------------------------------- The petitioners assert that the pipeline operated by Empire was certified by the Commission, inter alia, on the basis of the need for additional pipeline capacity in western New York, and the introduction of competition and choices in the transportation of natural gas to western and central New York. Duke Energy states that ESPC has operated the pipeline to those ends. The petitioners state that Westcoast Energy's strategically placed assets in growing supply regions coupled with Duke Energy's aggressive merchant skills, market knowledge and desire to be a leader in the development of new transportation infrastructure will strengthen the connection between the energy supply and energy markets, thereby enhancing development of competitive markets. Accordingly, petitioners assert that the proposed sale of the stock of ESPC and the -3- CASE 01-G-1629 transfer of ESPC's co-tenant interest in Empire's CECPN to Duke Energy are in the public interest. The company states further that, when the transaction is completed, the acquisition will present employees with the opportunity to enhance their careers as being part of a growth-oriented, well-managed multinational energy services company. Moreover, the petitioners believe safety as well as reliability will be enhanced with the integration of operations. Too, the petitioners believe that the acquisition will result in optimal work crew deployment and the availability of a larger pool of resources that will help Empire operate more efficiently. In light of these factors, petitioners believe this acquisition is in the public interest Standard & Poor's believes Duke Energy's acquisition of Westcoast Energy will have positive credit implications for both entities. In this regard, Duke Energy's credit rating of single "A" plus was affirmed and Westcoast Energy's credit rating of single "A" minus is on CreditWatch with positive implications. A higher credit rating equates to lower financing costs for Empire. SEQRA Review Requirements - --------------------------- The purpose of the State Environmental Quality Review Act (SEQRA) and its implementing regulations (6 NYCRR Part 617 and 16 NYCRR Part 7) is to incorporate the consideration of environmental factors into the existing planning, review and decision-making processes of state, regional and local government agencies at the earliest possible time. To accomplish this goal, SEQRA requires that all agencies determine whether the actions they are requested to approve may have significant impact on the environment, and, if it is determined that the action may have a significant adverse impact, prepare or request the applicant to prepare an environmental impact statement. Aside from approval by the Public Service Commission of the transactions that are the subject of the petition, no state or local permits or approvals are required. For that reason, a coordinated review is not required pursuant to SEQRA. As soon as -4- CASE 01-G-1629 an agency receives an application for approval of an action, it determines whether the action is subject to SEQRA. Staff has reviewed the definitions of Type I and Type II SEQRA actions contained in 6 NYCRR Sec.617.4, 617.5 and 16 NYCRR Sec.7.2. The approval for Empire State Pipeline Company, Inc. to transfer its co-tenant interest in Empire State Pipeline's Certificate of Environmental Compatibility and Public Need (CECPN) to Duke Energy is classified as a Type II action. There will be no material change in permit conditions or the scope of permitted activities, because the interest in the CECPN is merely being transferred to Duke Energy. However, the approval for Westcoast to transfer its stock to Duke Energy does not meet the definitions of either Type I or Type II actions, so it is classified as an "unlisted" action requiring SEQRA review. Therefore, it is proper for the Commission as lead agency to conduct an environmental assessment and to determine the significance of the actions proposed. To facilitate the environmental assessment, SEQRA requires applicants to submit a completed Environmental Assessment Form (EAF) describing and disclosing the likely impacts of their proposed actions. For unlisted actions, the short form EAF can be used. As part of the petition, Duke Energy submitted a short form EAF. Staff reviewed the EAF and the petition and determined that the unlisted actions proposed in this proceeding will result in the sale of Westcoast stock to Duke Energy. The unlisted actions will not lead to any changes in the operations of the pipeline. Consequently, there are no significant adverse environmental impacts associated with the unlisted actions. Staff concludes that the actions proposed in this proceeding will not have a significant effect on the environment based on the criteria for determining significance listed in 6 NYCRR Sec.617.7(c). Staff recommends that the Commission, as lead agency, determine that the actions proposed in the petition will not have a significant impact on the environment and adopt a negative -5- CASE 01-G-1629 declaration pursuant to SEQRA. A Notice of Determination of Non-Significance for this unlisted action should be issued, pursuant to SEQRA and is attached. The completed EAF will be retained in agency files. Discussion - ---------- Notice of the petition was published pursuant to the State Administrative Procedure Act. No comments have been received from other parties during the public comment period. Based on the petitioners' representations and the opinion of Standard & Poor's, the proposed transaction is in the public interest. Empire did not seek to, nor should it be allowed to, recover any premium over book value in rates. The Commission's jurisdiction over Empire will in no way be hampered as long as Staff has access to the books and records of the partnership and its affiliates. Since Staff has no other objection to the proposal, staff recommends that the Commission approve the petition subject to the clauses in the above recommendation. Recommendation - -------------- It is recommend that: -------------------- 1. The petition be granted, under Sections 70 and 121(2) of the Public Service Law for (a) Duke Energy Corporation to acquire all of the outstanding stock of Westcoast Energy Inc.; and (b) for the transfer of Westcoast Energy Inc.'s interests in Empire State Pipeline's Certificate of Environmental Compatibility and Public Need to Duke Energy Corporation, subject to the following conditions: (a) the transaction shall have no harmful effect on the rates charged by Empire State Pipeline; (b) Empire State Pipeline shall neither record on its books nor recover in rates the premium over book value being paid by Duke Energy Corporation to acquire its ownership interest; (c) the PSC staff shall have access to the books and records of Empire State pipeline and, with -6- CASE 01-G-1629 appropriate confidentiality protections, access to the books and records of its affiliates; and (d) Empire State Pipeline shall bring these records to New York when requested or compensate the Department for its out of state travel 2. The proceeding be continued. Respectfully submitted, /s/ Patrick J. Barry - --------------------------------------- PATRICK J. BARRY Associate Utility Financial Analyst Reviewed: /s/ William R. Heinrich - --------------------------------------- WILLIAM R. HEINRICH Public Utilities Auditor IV /s/ Thomas Coonan - --------------------------------------- THOMAS COONAN Utility Operations Examiner IV /s/ Leonard Van Ryn - --------------------------------------- LEONARD VAN RYN Assistant Counsel Approved: RICHARD L. ANSALDO Chief, Office of Accounting and Finance /s/ Richard L. Ansaldo - --------------------------------------- -7- STATE OF NEW YORK PUBLIC SERVICE COMMISSION CASE 01-G-1629 - Joint Petition of Duke Energy Corporation, Westcoast Energy Inc., and 394609 Canada Inc. for Approval of Duke Energy Corporation's Request to Effect the Indirect Acquisition of Empire State Pipeline by Duke Energy Corporation. NOTICE OF DETERMINATION OF NON-SIGNIFICANCE NOTICE is hereby given that an Environmental Impact Statement will not be prepared in connection with the approval by the Public Service Commission of Duke Energy Corporation's acquisition of the stock of Westcoast Energy, Inc., based on our determination, in accordance with Article VIII of the Environmental Conservation Law, that such action will not have a significant adverse affect on the environment. The exercise of this approval is an unlisted action, as defined in 6 NYCRR Sec.617.2(a)(i). Based on a review of the record, we find that the proposed action, which will result in Duke Energy Corporation replacing Westcoast Energy, Inc. as the ultimate owner of the Empire State Pipeline Corporation, will not have a significant adverse environmental impact. The change in ultimate ownership will not result in any physical alteration or changes to the operations of the Empire State Pipeline. The address of the Public Service Commission, the lead agency for the purposes of the environmental quality review of this project, is Three Empire State Plaza, Albany, New York 12223-1350. Questions may be directed to Leonard Van Ryn at (518) 473-7136, or the address above. JANET HAND DEIXLER Secretary - --------------------- |PROJECT I.D. NUMBER| | | - --------------------- 617.20 SEQR Appendix C State Environmental Quality Review SHORT ENVIRONMENTAL ASSESSMENT FORM For UNLISTED ACTIONS Only Part I - PROJECT INFORMATION (To be completed by Applicant or Project sponsor) - -------------------------------------------------------------------------------- 1. APPLICANT/SPONSOR 2. PROJECT NAME Duke Energy Corporation Duke Energy Corporation Westcoast Energy Inc., Acquisition of stock of Westcoast 3946509 Canada Inc. Energy, Inc. - --------------------------------------- --------------------------------------- 3. Project Location Municipality Country See Attachment Items 3 and 4 See Attachment Items 3 and 4 - -------------------------------------------------------------------------------- 4. PRECISE LOCATION (Street address and road instructions, prominent landmarks etc., or provide map) See Attachment Items 3 and 4 - -------------------------------------------------------------------------------- 5. IS PROPOSED ACTION [x] New [ ] Expansion [ ] Modification/alteration - -------------------------------------------------------------------------------- 6. DESCRIBE PROJECT BRIEFLY The proposed action is a request for Public Service Commission approval of the sale of Westcoast Energy Inc. capital stock to Duke Energy Corporation and 3946509 Canada Inc., and such other approvals as the Commission deems necessary. There are no planned sales of any existing facilities presently held by Empire State Pipeline, and no construction of new facilities is planned in connection with the transaction. - -------------------------------------------------------------------------------- 7. AMOUNT OF LAND AFFECTED Initially N/A acres N/A Ultimately N/A acres ---- ---- - -------------------------------------------------------------------------------- 8. WILL PROPOSED ACTION COMPLY WITH EXISTING ZONING OR OTHER EXISTING LAND USE RESTRICTIONS? [x] Yes [ ] No If No, describe briefly The proposed action is administrative in nature. It does not involve construction of new facilities or the alteration or removal of existing facilities. No short-term, long-term or adverse impacts to the land will occur as a result of the transaction. Empire State Pipeline will maintain existing permits, licenses and approvals. - -------------------------------------------------------------------------------- 9. WHAT IS PRESENT LAND USE IN VICINITY OF PROJECT? [ ] Residencies [ ] Industrial [ ] Commercial [ ] Park/Forest/Open space [ ] Other DESCRIBE Not Applicable - -------------------------------------------------------------------------------- 10. DOES ACTION INVOLVE A PERMIT APPROVAL, OR FUNDING, NOW OR ULTIMATELY FROM ANY OTHER GOVERNMENTAL AGENCY (FEDERAL STATE OR LOCAL)? [x] Yes [ ] No If yes list agency(s) and permits/approvals See Attachment Item 10 - -------------------------------------------------------------------------------- 11. DOES ANY ASPECT OF THE ACTION HAVE A CURRENTLY VALID PERMIT OR APPROVAL? [x] Yes [ ] No If yes list agency name and permit/approval See Attachment Item 11 - -------------------------------------------------------------------------------- 12. AS A RESULT OF PROPOSED ACTION WILL EXISTING PERMIT/APPROVAL REQUIRE MODIFICATION? [ ] Yes [x] No - -------------------------------------------------------------------------------- I CERTIFY THAT THE INFORMATION PROVIDED ABOVE IS TRUE TO THE BEST OF MY KNOWLEDGE Applicant/sponsor name: Duke Energy Corporation. Westcoast Energy Inc. and --------------------------------------------------- 3946509 Canada Inc. ------------------- Date: October 12, 2001 ---------------- Signature: /s/ ------------------------------------------------- Group President, Energy Transmission, Duke Energy Corporation - -------------------------------------------------------------------------------- If the action is in the Coastal Area, and you are a state agency, complete the Coastal Assessment Form before proceeding with the assessment. OVER 1 PART II - ENVIRONMENTAL ASSESSMENT (To be completed by Agency) - -------------------------------------------------------------------------------- A. DOES ACTION EXCEED ANY TYPE I THRESHOLD IN 6 NYCRR PART 617.47 If yes, coordinate the review process and use the FULL EAF. [ ] Yes [x] No - -------------------------------------------------------------------------------- B. WILL ACTION RECEIVE COORDINATED REVIEW AS PROVIDED FOR UNLISTED ACTIONS IN 6 NYCRR PART 617.57. If no, a negative declaration may be superseded by another involved agency. [ ] Yes [x] No - -------------------------------------------------------------------------------- C. COULD ACTION RESULT IN ANY ADVERSE EFFECTS ASSOCIATED WITH THE FOLLOWING: (Answers may be handwritten, if legible) C1. Existing air quality, surface or groundwater quality or quantity, noise levels, existing traffic patterns, solid waste production or disposal, potential for erosion, drainage, or flooding problems? Explain briefly: The action is approval of the transfer of stock and ownership of a gas corporation; no changes in operation or uses of the gas corporation will ** C2. AESTHETIC, AGRICULTURE, ARCHEOLOGICAL, HISTORIC, OR OTHER NATURAL OR CULTURAL RESOURCES; OR COMMUNITY OR NEIGHBORHOOD CHARACTER? Explain briefly: C3. VEGETATION OR FAUNA, FISH, SHELLFISH, OR WILDLIFE SPECIES, SIGNIFICANT HABITATS, OR THREATENED OR ENDANGERED SPECIES? Explain briefly: C4. A COMMUNITY'S EXISTING PLANTS OR GOALS AS OFFICIALLY ADOPTED, OR A CHANGE IN INTENSITY OF USE OF LAND OR OTHER NATURAL RESOURCES? Explain briefly: C5. GROWTH, SUBSEQUENT DEVELOPMENT, OR RELATED ACTIVITIES LIKELY TO BE INDUCED BY THE PROPOSED ACTION? Explain briefly: C6. LONG TERM, SHORT TERM, CUMULATIVE, OR OTHER EFFECTS NOT IDENTIFIED IN C1-CS? Explain briefly. C7. OTHER IMPACTS (INCLUDING CHANGES IN USE OF EITHER QUANTITY OR TYPE OF ENERGY)? Explain briefly: ** result. There will be no material difference between the action and no action alternatives. Therefore, approval will have no adverse environmental impacts. - -------------------------------------------------------------------------------- D. WILL THE PROJECT HAVE AN IMPACT ON THE ENVIRONMENTAL CHARACTERISTICS THAT CAUSED THE ESTABLISHMENT OF A CEA? [ ] Yes [x] No - -------------------------------------------------------------------------------- E. IS THERE OR IS THERE LIKELY TO BE CONTROVERSY RELATED TO POTENTIAL ADVERSE ENVIRONMENTAL IMPACTS? [ ] Yes [x] No If Yes, explain briefly - -------------------------------------------------------------------------------- PART III - DETERMINATION OF SIGNIFICANCE (To be completed by Agency) INSTRUCTIONS: For each adverse effect identified above, determine whether it is substantial, large, important, or otherwise significant. Each effect should be assessed in connection with its (a) setting (i.e. urban or rural); (b) probability of occurring; (c) duration; (d) irreversibility; (e) geographic scope; and (f) magnitude. If necessary, add attachments or reference supporting materials. Ensure that explanations contain sufficient detail to show that all relevant adverse impacts have been identified and adequately addressed. If question D of Part II was checked yes, the determination and significance must evaluate the potential impact of the proposed action on the environmental characteristics of the CEA. - -------------------------------------------------------------------------------- [ ] Check this box if you have identified one or more potentially large or significant impacts which MAY occur. Then proceed directly to the FULL EAF and/or prepare a positive declaration. [x] Check this box if you have determined, based on the information and analysis above and any supporting documentation, that the proposed action WILL NOT result in any significant adverse environmental impacts AND provide on attachments as necessary, the reasons supporting this determination: New York State Department of Public Service - -------------------------------------------------------------------------------- Name or Lead Agency Leonard Van Ryn Assistant Counsel - ------------------------------------------ ----------------------------------- Print or type Name of Responsible Officer Title of Responsible Officer in Lead Agency /s/ Leonard Van Ryn - ---------------------------------------- ------------------------------------- Signature of Responsible Officer in Signature of Preparor (if Different Lead Agency responsible officer) January 2, 2002 ---------------------------- Date 2 ATTACHMENT TO SEQR SHORT FORM DUKE ENERGY CORPORATION ACQUISITION OF WESTCOAST ENERGY INC. SEQR FORM ITEMS 3 AND 4 Duke Energy Corporation, a North Carolina corporation, is a multinational energy company which owns and manages a portfolio of natural gas and electric supply, delivery and trading businesses. Westcoast Energy Inc., a Canadian corporation, is a leading natural gas company engaged in the purchase, sale, distribution and transportation of natural gas and electric power generation and operates major transmission interconnections from Canada into the United States. Through a series of subsidiaries, Westcoast Energy indirectly owns the Empire State Pipeline. Empire State Pipeline is an intrastate regulated gas transmission pipeline, certificated by the Public Service Commission, extending approximately 157 miles eastward from a point of interconnection on the border with Canada located in the Niagara River, Town of Grand Island, Erie County, to the Town of Schroeppel, Oswego County. 3946509 Canada Inc., a Canadian corporation, is a wholly-owned subsidiary of Duke Energy Corporation formed solely for the purpose of facilitating the acquisition of Westcoast Energy stock from Canadian residents. SEQR Form Item 10 Petitions will be made individually and jointly, as appropriate, for approval of the acquisition of stock to the following agencies of the United States, Canada and Mexico: New York State Public Service Commission Securities and Exchange Commission Hart-Scott Rodino (Federal Trade Commission and Department of Justice) North Carolina Utilities Commission South Carolina Public Service Commission Federal Energy Regulatory Commission ("FERC")1 Supreme Court of British Columbia Investment Review Division of Industry Canada And Minister of Industry Competition Bureau of Canada Columbia Utilities Commission Mexico Federal Competition Commission __________ 1 Petitioners are currently considering whether FERC approval for the transfer of a power marketing certificate is necessary. SEQR Form Item 11 The Public Service Commission, in Opinion No. 91-3, issued March 1, 1991, granted a Certificate of Environmental Compatibility and Public Need ("Certificate") for the operation of the Empire State Pipeline. The acquisition will not affect the operation of the Empire State Pipeline or change the holder of the Certificate. Empire State Pipeline will continue to operate in accordance with the Certificate and any other Federal, State or local permitting and regulatory requirements. Form 50 State of New York ) ss.: Public Service Commission ) THE PRECEDING COPY HAS BEEN COMPARED WITH THE ORIGINAL Memorandum/Order in the Matter of Joint Petition of Duke Energy Corporation, Westcoast Energy Inc., and 3946509 Canada Inc. for Approval of Duke Energy Corporation's Request to Effect the Indirect Acquisition of Empire State Pipeline by Duke Energy Corporation. Case(s) 01-G-1629 (Issued and Effective January 28, 2002) ON FILE IN THIS OFFICE, AND I DO HEREBY CERTIFY THE SAME TO BE A CORRECT TRANSCRIPT THEREFROM AND OF THE WHOLE THEREOF. WITNESS my hand and the seal of the Public (SEAL) Service Commission, at the city of Albany, this twenty-eighth day of January two thousand two. /s/ Janet Hand Deixler ---------------------------- Secretary EX-11 7 doc3.txt EXHIBIT 11 98 FERC P. 61, 207 UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION Before Commissioners: Pat Wood, III, Chairman; William L. Massey, Linda Breathitt, and Nora Mead Brownell. Engage Energy America, LLC Frederickson Power L.P. Docket No. EC02-35-000 Duke Energy Corporation ORDER AUTHORIZING DISPOSITION OF JURISDICTIONAL FACILITIES (Issued February 27, 2002) On December 14, 2001, as supplemented on February 1, 2002 and February 11, 2002, Engage Energy America, LLC (Engage America), Frederickson Power L.P. (Frederickson) and Duke Energy Corporation (Duke Energy) (collectively, Applicants) filed a joint application under section 203 of the Federal Power Act (FPA)(1) requesting Commission authorization for the disposition of jurisdictional facilities resulting from Duke Energy's proposed acquisition of Westcoast Energy Inc. (Westcoast). As discussed below, the Commission has reviewed the proposed transaction under the Commission's Merger Policy Statement(2) and its regulations implementing section 203 of the FPA.(3) We conclude that the proposed transaction will not adversely affect competition, rates or regulation. Therefore, we approve the proposed transaction as consistent with the public interest. - --------------- (1) 16 U.S.C. Sec. 824b (1994). (2) See Inquiry Concerning the Commission's Merger Policy Under the Federal --- Power Act: Policy Statement, Order No. 592, 61 Fed. Reg. 68,595 (1996), FERC Stats. and Regs. P. 31,044 at 30,117-18 (1996), reconsideration denied, Order ---------------------- No. 592-A, 62 Fed. Reg. 33,341 (1997), 79 FERC P. 61,321 (1997) (Merger Policy Statement). (3) Revised Filing Requirements Under Part 33 of the Commission's Regulations, Order No. 642, III FERC Stats. & Regs. P. 31,111 (2000), reh'g ----- denied, Order No. 642-A, 94 FERC P. 61,289 (2001) (Revised Filing Requirements). - ------ Docket No. EC02-35-000 -2- I. Background ---------- A. Description of the Parties -------------------------- 1. Duke Energy ----------- Duke Energy is a public utility and a diversified energy company with holdings in the United States and Canada. It owns and operates generating facilities and provides retail and wholesale electric service in North Carolina and South Carolina. Duke Energy also owns a high voltage transmission system and provides transmission service under its open access transmission tariff and individual contracts. Along with other public utilities, Duke Energy has filed a proposal to form the GridSouth Regional Transmission Organization (RTO) and is participating in ongoing mediation to develop a Southeastern RTO. Through several subsidiaries, Duke Energy owns and operates merchant power plants in various areas of the country, including 860 megawatts (MW) in New England, 140 MW in New York and the Pennsylvania-New Jersey-Maryland Interconnection (PJM), 5,000 MW in the southeastern United States, 1,380 MW in the Midwest and 3,340 MW in the West . Throughout the United States, Duke Energy has underway generation projects involving about 8,000 MW (4,400 MW in the Southeast, 1,200 MW in the Midwest, and 2,400 MW in the West). In addition, Duke Energy and several subsidiaries are authorized to sell wholesale power at market-based rates. Further, Duke Energy subsidiaries own and operate extensive facilities used for natural gas gathering, transportation and storage. These facilities include natural gas pipeline systems extending from New Jersey to Massachusetts, from Tennessee to Virginia, and from Texas and Louisiana to Philadelphia and New York City, as well as pipelines in British Columbia and Alberta. 2. Westcoast, Engage America, and Frederickson ------------------------------------------- Westcoast is principally a Canadian natural gas company with pipeline interests that extend into the northern tier of the United States. Engage America, an indirect, wholly-owned subsidiary of Westcoast, is a power marketer authorized to sell wholesale power at market-based rates(4). Frederickson, a limited partnership in which Westcoast - --------------- (4) The Commission granted Westcoast Gas Services Delaware (America) Inc. (WGSI), an indirect subsidiary of Westcoast, market-based rate authority by unpublished letter order dated August 30, 2000 in Docket No. ER00-3315-000. WGSI changed its name to Engage Energy America Corp, which, in turn, changed its name to Engage Energy America, LLC. Engage America has submitted, under section 205 of the FPA, a notification of change in status to reflect the instant transaction. That filing, which was assigned Docket No. ER01-919-001, will be addressed by a separate Commission order. Docket No. EC02-35-000 -3- indirectly owns an approximately 60 percent interest, is currently developing a 250 MW gas-fired generating facility in the state of Washington.(5) The facility is expected to become operational during the second quarter of 2002 and Frederickson has entered into long-term contracts to sell 50 percent of the output to three public utility districts in the state of Washington. In addition, affiliates of Engage America and Frederickson own or operate generating facilities located in the Canadian provinces of Ontario, British Columbia, and New Brunswick. With the exception of the 285 MW New Brunswick facility, all of the output of these facilities is sold under long-term contracts to Canadian wholesale customers. Although the New Brunswick facility has no long-term commitments for the sale of its output for ten months of the year, it does not currently have import authority under the FPA or a filed rate schedule, which would be required in order to sell wholesale power into the United States. Finally, Westcoast subsidiaries own and operate natural gas gathering and transportation facilities, including a 100 percent interest in a pipeline system in British Columbia serving markets in western United States, and a 100 percent interest in a pipeline that transports gas from Niagara Falls to upper New York State. Westcoast subsidiaries also hold 50 percent or smaller ownership interests in pipelines that terminate in Massachusetts, near Chicago and other points in the midwestern and northeastern regions of the United States. B. Description of the Proposed Transaction --------------------------------------- Pursuant to the Amended and Restated Combination Agreement among Duke Energy Corporation, 3058368 Nova Scotia Company (Callco), 3946509 Canada Inc. (Exchangeco), and Westcoast, dated September 20, 2001, Duke Energy will acquire all of the outstanding capital stock of Westcoast in exchange for a combination of cash, Duke Energy common stock and exchangeable shares of Exchangeco, a wholly-owned subsidiary of Callco that is, in turn, a wholly-owned subsidiary of Duke Energy. Upon consummation of the proposed transaction, Westcoast will be an indirect, wholly-owned subsidiary of Duke Energy. Exchange America and Frederickson will be Duke Energy's - --------------- (5) Frederickson has filed an application for market-based rate authority in Docket Nos. ER01-2262-000 and ER01-2262-001. That filing will be addressed by a separate Commission order. Docket No. EC02-35-000 -4- indirect, wholly-owned and majority-owned subsidiaries, respectively. Duke Energy will assume indirect control of the jurisdictional facilities owned by Exchange America and Frederickson, i.e., contracts, books and records associated with wholesale sales of electric energy. II. Notice of Filings and Intervention ---------------------------------- Notice of the application was published in the Federal Register, 66 Fed. Reg. 67,240 (2001) with motions to intervene or protests due on or before January 11, 2002. On January 11, 2002, North Carolina Electric Membership Corporation (NCEMC) filed a timely motion to intervene raising no substantive issues. III. Discussion ---------- A. Procedural Matters ------------------ Pursuant to Rule 214 of the Commission's Rules of Practice and Procedure,18 C.F.R. Sec. 385.214(c)(1) (2001), NCEMC's timely, unopposed motion to intervene serves to make it a party to this proceeding. B. The Transaction --------------- 1. Standard of Review Under Section 203 ------------------------------------ Under Section 203(a) of the FPA, the Commission must approve a proposed merger if it finds that the merger "will be consistent with the public interest"(6). The Commission's Merger Policy Statement provides that the Commission will generally take into account three factors in analyzing proposed mergers: (1) the effect on competition; (2) the effect on rates; and (3) the effect on regulation. For the reasons discussed below, we find that the proposed transaction is consistent with the public interest. Accordingly, we will authorize the proposed transaction without further investigation. - --------------- (6) 16 U.S.C. Sec. 824b (1994). Docket No. EC02-35-000 -5- 2. Effect on Competition --------------------- a. Applicants' Analysis -------------------- Applicants assert that the combination of Westcoast's generating assets and Duke Energy's generating assets presents no material, horizontal market power issues. Applicants note that horizontal overlap between Applicants with respect to generating capacity and power purchase contracts occurs in markets in New England, the Midwest and the West. However, since Westcoast subsidiaries own or control very little generating capacity, Applicants regard the amount of overlap as so de minimis as to justify an exemption from filing a full horizontal screen -- ------- analysis, as provided for under the Commission's Revised Filing Requirements.(7) Nonetheless, Applicants performed Delivered Price Test analysis, using economic capacity as the relevant product in several relevant markets.(8) Applicants point out that all of the increases in market concentration resulting from the proposed acquisition are substantially less than the thresholds that would trigger horizontal market power concerns under the Department of Justice Merger Guidelines used by the Commission in its merger analysis. With respect to the NEPOOL market, Applicants treat Westcoast affiliates' 75 percent share (214 MW) of the New Brunswick plant as being available during the non-winter months. The effect of combining the economic capacity of this capacity with capacity currently under the control of Duke Energy, however, raises market concentration by a de minimis amount (i.e., the HHI increases no more than 3 points) under any -- ------- of the market prices and load conditions examined in the NEPOOL market. In the Midwest, Westcoast affiliates do not own any generating capacity, but account for approximately 160 MW in power purchases. However, while Duke Energy subsidiaries have over 3,200 MW of generating capacity either in operation or under construction in the Midwest, Applicants' analysis indicates that market concentration under any of the load and market price conditions examined increases by a de minimis -- ------- - --------------- (7) 18 C.F.R. Sec. 33.3(a)(2)(i) and (ii) (2001). (8) Applicants state that in order to conduct the downstream portion of their vertical competitive analysis, it was necessary to perform many of the analytic steps used to conduct a horizontal analysis. Docket No. EC02-35-000 -6- amount (i.e, the HHI increases by no more than 6 points) in all of the destination markets examined.(9) In the West, Westcoast's Frederickson plant provides at most only 75 MW of capacity that can be combined with Duke Energy-affiliated generating capacity. Applicants' analysis shows that market concentration in the West markets, involving the control areas of Bonneville Power Administration (BPA) and the California Independent System Operator (California ISO) increases by a de -- minimis amount (i.e., the HHI increases by no more than 2 points) under any - ------- load condition-market price scenario. Applicants also assert that the proposed transaction does not present vertical market power concerns arising from control of transmission facilities. Applicants claim that they do not have control over potential generating sites or market power in fuel supplies that could be used to frustrate or prevent entry into generation or increase rivals' costs. They also note that Westcoast and its subsidiaries do not own or control any electric transmission facilities and that Duke Energy has committed to turn over control of its transmission facilities to an RTO. With respect to competitive effects in electric markets arising from ownership of natural gas pipelines and control of gas transportation capacity, Applicants address the proposed transaction's effect on (1) incentives for the merged firm to use its position in gas-related upstream markets to raise costs to competitors in downstream electric markets, (2) the merged firm's ability to facilitate coordination of pricing in upstream or downstream markets, and (3) regulatory evasion.(10) Applicants claim that vertical market power would be a concern only if both upstream and downstream relevant markets are highly concentrated. Applicants identify markets of potential concern in New England, the Midwest and the West, noting that in these areas, Westcoast affiliates have ownership interests in natural gas pipelines that are potentially relevant to generation markets in which Duke - --------------- (9) Applicants identified separated destination markets involving the control areas of Cinergy, Commonwealth Edison Company, the American Electric Power System and the Michigan Electric Coordinated System. (10) Applicants state that because none of the Applicants own regulated assets that take service from the other Applicants' upstream pipelines, the proposed transaction presents no regulatory evasion concerns. Docket No. EC02-35-000 -7- Energy participates.(11) To assess competitive conditions in downstream markets for wholesale power, Applicants followed the Revised Filing Requirements and attributed gas-fired generation to the suppliers of the upstream input, i.e., the pipeline that serves the generator. To examine competitive conditions in upstream markets, Applicants principally focused on gas transportation services and allocated control of pipelines to holders of firm capacity rights, with any unsubscribed capacity allocated to the pipeline owner. In the NEPOOL market, Applicants' analysis shows that under all of the load-price combinations, the downstream markets are unconcentrated (i.e., HHI ---- below 1000). Concentration in the upstream market for firm gas transportation capacity into the Northeast was determined to be at just a slightly moderate level (HHI of 1016). Applicants further note that they account for just over 10 percent of firm gas transportation capacity into the NEPOOL market. Applicants' analysis in the Midwest shows that although most of the downstream markets are highly concentrated (HHI greater than 1,800), the relevant Midwest firm gas transportation markets are either unconcentrated or moderately concentrated (HHIs from 534 to 1356). Applicants further note that they control no more than five percent of firm gas transportation capacity in any of the Midwest upstream markets. In the West, Applicants' analysis of downstream markets focuses on separate markets involving the control areas of BPA and the California ISO and shows that many of the downstream markets are highly concentrated. In analyzing upstream markets in the West, however, Applicants first note that their only ownership interest in pipelines in Western North America is Westcoast affiliates' ownership interests in Westcoast Pipeline and Foothills Pipeline in Canada. These pipelines interconnect at the U.S. border in Washington or British Columbia with unaffiliated, third-party pipelines. These facilities are used to deliver gas to one 110 MW generator in Washington. Applicants state that they do not own pipeline assets in or delivering to California, where most of Duke's generating capacity is located. Applicants assert that a pipeline upstream from and not interconnected into the relevant generation market is very unlikely to be able to strategically affect electric markets. Nonetheless, to address this possibility, Applicants analyze concentration in the relevant upstream gas transportation capacity market at the Canadian-U.S. border in Washington and find that the market is unconcentrated (HHI of - --------------- (11) Applicants assert that the very limited amount of generating capacity owned by Westcoast affiliates negates any vertical concerns resulting from the combination of Duke Energy's pipeline assets with Westcoast-affiliated generation. Docket No. EC02-35-000 -8- 747), with Applicants accounting for 17 percent of the market. Applicants further note that, of the gas transportation capacity entering California, Duke Energy affiliates hold less than nine percent and a Westcoast affiliate holds a de minimis amount (less than 0.5 percent). - -- ------- b. Discussion ---------- Based on the information contained in Applicants' analysis, the Commission finds that the proposed transactions raises no competitive concerns. With regard to horizontal effects resulting from the combination of Applicants' generating assets and purchased power, the proposed transaction is unlikely to adversely affect electric competition . The total amount of generating capacity and power purchase contracts owned or controlled by Engage America and Frederickson and their Westcoast affiliates is relatively small, particularly in markets in which Duke Energy participates, and thus the degree of market overlap between Applicants is minor. Applicants' analysis shows that the NEPOOL market is unconcentrated (HHI less than 1000) both before and after the proposed transaction, thus indicating that anticompetitive effects are unlikely to result. We recognize that many of the markets in the Midwest and the West are moderately concentrated (HHI between 1000 and 1800) or highly concentrated (HHI greater than 1800) on a pre-transaction basis. However, in the Midwest, the purchase contracts of Westcoast affiliate Engage America total 160 MW, a minimal addition to Duke Energy's current market presence in those markets that only very slightly raises overall market concentration. Similarly, in the West, Westcoast affiliates will add 75 MW to the market, less than one percent of the supply in relevant markets and, when combined with existing Duke Energy capacity, this results in very small increase in market concentration. Therefore, the Commission concludes that the proposed acquisition will not harm competition through horizontal market power. Regarding vertical market power concerns arising from the combination of generation and transmission assets, the Commission notes that Westcoast subsidiaries own no transmission assets that are capable of delivering power from suppliers to customers. Westcoast subsidiaries also own no generating assets in the Southeast, where the Duke Energy transmission system has the greatest potential to affect power deliveries. The proposed transaction thus will not increase any ability of Duke Energy to exercise vertical market power associated with control of transmission. In addition, the Commission notes that Duke Energy has committed to transfer functional control of its transmission facilities to a Commission-approved RTO, which, when fully functioning, should ensure non-discriminatory access by rival generators. Docket No. EC02-35-000 -9- Based on the facts and information submitted with the application, the Commission is also satisfied that the combination of Westcoast's generation and gas assets with Duke Energy's generation and gas assets will not harm competition. As we have previously held(12), both highly concentrated common upstream and downstream markets are necessary in order to allow effective strategies of foreclosure or raising rivals' costs. It has not been shown that such conditions exist in any of the relevant markets. In the NEPOOL market, while Applicants account for 20 percent of the downstream market under many of the load and price scenarios, concentration is only at borderline moderate levels (HHI of 1016). In this circumstance, buyers of electricity in the downstream market would have adequate alternatives to turn to should a combined Duke Energy-Westcoast attempt to raise costs to rival generators that receive gas transportation services from Applicants. Wholesale purchasers of gas-fired generation in the downstream Midwest markets, on the other hand, lack sufficient alternatives for power supplies, as indicated by the high levels of market concentration in most circumstances. However, any concern that a combined Duke Energy-Westcoast, either by itself or in coordination with other upstream suppliers, would be able to raise the delivered fuel costs of their downstream rivals is assuaged by the fact that upstream markets are either unconcentrated or moderately concentrated. In the West, Applicants' analysis of downstream markets shows highly concentrated markets, predominantly during peak load conditions.(13) However, we note that Duke Energy is acquiring ownership in pipelines that are not directly interconnected to relevant generation markets and that Applicants' analysis of upstream firm gas transportation capacity to the Canadian-U.S. border in Washington, the market in which Duke Energy will obtain rights through its acquisition of Westcoast, shows an unconcentrated market. In these circumstances, we agree with Applicants that such pipelines are not likely to be able to strategically control deliveries into California markets and that any attempts by Applicants to engage in foreclosure will be ineffective. - --------------- (12) See e.g., El Paso Energy Corporation and the Coastal Corporation, --- - - 92 FERC P. 61,076 at 61,332 (2000). (13) The high concentration levels are not attributable to Applicants, but rather are due to BPA's ownership of a large share of the generation in the Northwest and Pacific Gas & Electric Company's position as the only pipeline directly interconnected to all gas-fired generation in northern California. Docket No. EC02-35-000 -10- The Commission further notes that no entity has intervened to allege that the proposed transaction will harm competition in any respect or to challenge the validity of the data and assumptions underlying Applicants' analyses.(14) 3. Effect on Rates --------------- Applicants state that the transaction will not adversely affect rates. They state that they will provide wholesale and transmission service to customers of Duke Energy and its subsidiaries at cost-based rates. Applicants commit to hold these customers harmless from any effects of the proposed transaction by excluding all merger-related costs from cost-based rates for transmission service and wholesale power sales for a period of five years, unless Applicants can prove that merger-related benefits exceed merger-related costs. Applicants state that they have notified wholesale and transmission customers of these commitments. The Commission notes that Applicants are not proposing at this time to allocate acquisition costs, or any of the acquisition premium associated with the proposed transaction, to the costs of serving their jurisdictional, cost-based wholesale and transmission service customers. Our authorization of the proposed transaction does not imply that we would approve the incorporation of these items into the jurisdictional cost of service for such customers. Further, during the term of their ratepayer protection commitment, Applicants will bear the burden of showing that merger-related savings exceed merger-related costs. In light of these considerations and the fact that no customer of Duke Energy has raised concerns about Applicants' proposed ratepayer protection, we conclude that the proposed transaction will not adversely affect rates. 4. Effect on Regulation -------------------- As explained in the Merger Policy Statement, the Commission's primary concern with a merger's effect on regulation involves possible changes in the Commission's jurisdiction, specifically with regard to intra-company sales of non-power goods - --------------- (14) The Canadian Competition Bureau has also informed the Canadian counsel for Westcoast that it finds no grounds at this time to initiate proceedings with respect to the proposed transaction. Letter from Richard Taylor, Assistant Deputy Commissioner of Competition, Canadian Competition Bureau to Lawson A.W. Hunter, Stikeman, Elliott, Barristers and Solicitors, Toronto, Canada, dated January 4,2002. The proposed transaction has also been approved by the Supreme Court of British Columbia and the British Columbia Utilities Commission. Docket No. EC02-35-000 -11- and services, when a registered holding company is formed, thus invoking the jurisdiction of the Securities and Exchange Commission (SEC). The Commission is also concerned with the effect on state regulation where a state does not have the authority to act on a merger and has raised concerns about the effect on state regulation of the merged entity.(15) In this case, Applicants state that the transaction will not adversely affect Commission regulation. Duke Energy is not currently a registered public utility holding company under PUHCA, and Applicants indicate that they have filed with the SEC a request for exemption from PUHCA. Applicants assert that they will remain subject to the exercise of the Commission's regulatory authority. With respect to state regulation, Applicants assert that they will remain subject to regulation by the relevant state commissions in New York, North Carolina, and South Carolina. The North Carolina Utilities Commission, South Carolina Public Service Commission and the New York Public Service Commission have authorized the proposed transaction. No state commission has raised concerns with the filing. In light of the facts contained in the application, the Commission is satisfied that the proposed transaction will not adversely affect Federal or state regulation. 5. Accounting Issues ----------------- Applicants propose to account for the proposed transaction using the purchase method of accounting. The Commission has approved the use of the purchase method and has no objection to its use in recording the transaction proposed here.(16) However, the application does not state clearly how the related acquisition premium and merger-related costs will be recorded in the accounts of Duke Energy, Westcoast, or other affiliates.(17) Accordingly, Applicants are directed to submit their final accounting for the proposed - --------------- (15) Merger Policy Statement at 30,124-1125. (16) See Entergy Services, Inc. and Gulf States Utilities Company, --- 65 FERC P. 61,332(1993). (17) Applicants state that management anticipates a portion of the excess purchase price may (our emphasis) be allocated to property, plant and --- equipment, depending upon, among other things, the extent to which the acquisition adjustments related to regulated operations are allowable costs for ratemaking purposes. See the application, Exhibit M, page 2. Docket No. EC02-35-000 -12- transaction within six months after the transaction is consummated.(18) The accounting submission must provide all accounting entries necessary to effect the proposed transaction, including narrative explanations describing the basis for the entries, and the proposed accounting for merger-related costs. The Commission orders: - --------------------- (A) The proposed transaction is authorized upon the terms and conditions and for the purposes set forth in the application; (B) The foregoing authorization is without prejudice to the authority of the Commission or any other regulatory body with respect to rates, service, accounts, valuation, estimates, or determinations of cost, or any other matter whatsoever now pending or which may come before the Commission; (C) Nothing in this order shall be construed to imply acquiescence in any estimate or determination of cost or any valuation of property claimed or asserted; (D) The Commission retains authority under sections 203(b) and 309 of the FPA to issue supplemental orders as appropriate; (E) Applicants shall submit their proposed accounting for the transaction within six months after the transaction is consummated; and (F) Applicants shall notify the Commission within 10 days of the date that the disposition of jurisdictional facilities has been consummated. By the Commission. ( S E A L ) Magalie R. Salas, Secretary. - --------------- (18)Electric Plant Instruction No. 5, Electric Plant Purchased or Sold; and Account 102, Electric Plant Purchased or Sold, 18 CFR Part 101 (2001). -----END PRIVACY-ENHANCED MESSAGE-----