DF 98-040 NORTHERN UTILITIES, INC. Merger of Northern Utilities, Inc., NIPSCO Industries, Inc., and Northern Indiana Public Service Company Approval of Merger and Related Transactions O R D E R N O. 22,983 July 20, 1998 APPEARANCES: LeBoeuf, Lamb, Greene & MacRae by Meabh Purcell, Esq. and Paul B. Dexter, Esq. for Northern Utilities, Inc.; Day, Berry & Howard by Robert Knickerbocker, Esq. for NIPSCO Industries, Inc. and Northern Indiana Public Service Company; and Eugene F. Sullivan, III, Esq. for the Staff of the New Hampshire Public Utilities Commission. I. PROCEDURAL HISTORY On March 20, 1998, Northern Utilities, Inc. (Northern), NIPSCO Industries, Inc. (NIPSCO) and Northern Indiana Public Service Company (Northern Indiana) jointly filed with the New Hampshire Public Utilities Commission (Commission) a petition for Approval of a Merger and Related Transactions. The petition requested permission for NIPSCO or its affiliate, Northern Indiana, to acquire Northern, or its parent, Bay State Gas Company, Inc. (Bay State) under two alternative acquisition plans. The petition specified a preferred and an alternative plan of merger. Under the preferred plan of merger, Bay State would merge into a newly created wholly-owned subsidiary of NIPSCO, formed for purposes of the merger. Sometime after the merger, Northern's stock would be transferred from Bay State to NIPSCO and Northern would operate as a direct subsidiary of NIPSCO. The preferred merger, however, requires an exemption from the provisions of the Public Utility Holding Company Act of 1935 by the Securities and Exchange Commission (SEC). The alternate merger would have Bay State and Northern merged into NIPSCO's public utility subsidiary, Northern Indiana. Subsequently, Northern and Bay State would operate as divisions of Northern Indiana with no independent corporate identity. Both the preferred and alternate mergers require the approval of the Maine and New Hampshire Public Utilities Commissions because Northern provides service in both States. On April 9, 1998, the Commission issued an Order of Notice setting a prehearing conference for April 28, 1998. No Motions to Intervene were filed; the Office of the Consumer Advocate (OCA) is a statutorily recognized intervenor. On April 22, 1998, Staff submitted a letter to the Commission stating that Northern, NIPSCO and Northern Indiana, the Maine Public Utilities Commission (MPUC), the Maine Public Advocate Office (Public Advocate) the OCA and Staff had agreed, for purposes of administrative efficiency, to hold two joint technical sessions in Portsmouth, New Hampshire to review the essentially identical petitions filed in Maine and New Hampshire and to allow Northern to provide any amendments or updates to the filings. Following the prehearing conference, the Commission issued Order No. 22,930 (May 13, 1998) approving a procedural schedule to govern its investigation into the petition. In accordance with the procedural schedule, the parties and Staff engaged in formal discovery and the joint technical sessions with the State of Maine in Portsmouth. On June 12, 1998, the MPUC issued an order approving the proposed merger under either the preferred or alternative structures. In addition, on June 16, 1998, the MPUC submitted a letter to the SEC supporting the merger and recommending the SEC grant the necessary exemptions to permit the preferred structure. On June 8, 1998, Northern, NIPSCO, OCA and Staff entered into a Stipulation and Agreement (Stipulation) resolving or leaving to subsequent proceedings all of the issues in this proceeding. The Stipulation was substantially the same as a Stipulation and Agreement executed among Northern, NIPSCO, the Maine Public Advocate and the Staff of the MPUC. A hearing on the merits was held on July 1, 1998 at which the parties presented the Stipulation and supporting testimony. II. STIPULATION AND AGREEMENT Pursuant to the Stipulation, Northern, NIPSCO, OCA and Staff agreed that the merger is consistent with the public interest standard of RSA 374:33 under either the Preferred or the Alternate structures proposed in the March 20, 1998 petition, and should be approved subject to the following provisions: 1. Commission Jurisdiction. The jurisdiction of the Commission over Northern's operations will not be changed under either the Preferred or the Alternate Merger structure or form of merger. 2. Support Preferred Structure. Northern, NIPSCO, OCA and Staff agree that the Commission should express its support for the Preferred Merger structure because it simplifies accounting for the subsidiary's operations and regulation of those operations. 3. Alternate Merger. Northern, NIPSCO, OCA and Staff agree that if the Preferred Merger structure is not possible, the Alternate Merger structure is in the public good. 4. Recovery of Acquisition Premium. Northern, NIPSCO, OCA and Staff agree that Northern may request recovery of the amortization of the acquisition premium in future ratemaking proceedings to the extent that Northern can demonstrate that the benefits of the merger to customers equal or exceed the amount of the premium being sought to be amortized. 5. Capital Structure. Northern, NIPSCO, OCA and Staff agree that no Party will be bound in any future ratemaking proceedings to utilize the capital structure of Northern that results from entries to account for the merger. III. COMMISSION ANALYSIS After careful review of the Stipulation and Agreement and the testimony and exhibits offered at the July 1, 1998 hearing, we find that the Stipulation is reasonable and that the proposed acquisitions are lawful, proper and in the public interest. RSA 374:33 Under the public interest standard to be applied by the Commission where a utility or public utility holding company seeks to acquire, directly or indirectly, a jurisdictional utility, the Commission must determine that the proposed transaction will not harm ratepayers. Grafton County Electric Light and Power Co. v. State, 77 N.H. 539 (1915); Id., Eastern Utilities Associates, 76 N.H.P.U.C. 236, 252 (1991); Re Hampton Water Works Company, Inc., 80 N.H.P.U.C. 468, 473 (1995) and Cf., Parker-Young Co. v. State, 83 N.H. 551 (1929)(application of "net benefits" test where there are competing offers to acquire). As was noted above, there are two different acquisition scenarios proposed in this petition, the preferred and alternate plans. The primary difference between the preferred and alternate plans is that Northern remains a corporate entity with its own Board of Directors under the preferred merger. In testimony, NIPSCO/Northern Indiana represented that if the alternate merger was required by the SEC, an Advisory Board could be established for Northern to provide local input into decisions affecting Northern's customers. At this time, we express our support and preference for the "preferred acquisition scenario" because it provides for the continued corporate existence of Northern and the attendant corporate formalities that we believe will provide greater protection or representation of Northern's interests in the new corporate structure, such as a corporate Board of Directors. The preferred merger would also impose a legal requirement that Northern maintain separate books and records which will facilitate our continued review and oversight of Northern and its operations in New Hampshire. In order to ensure that there is no harm to Northern ratepayers, we direct that should the alternate merger be implemented, such an Advisory Board be established. The Advisory Board should be comprised of members involved in the New Hampshire community and it should have real authority to ensure that New Hampshire customers receive the full benefits of this merger and that the Northern Division and its customers' interests are not neglected in the merged company. We expect more than token representation of Northern's interests on either the Board of Directors or the Advisory Board. Under either of the acquisition plans, there is no evidence that ratepayers will be harmed. Under both the preferred and alternative acquisition scenarios Northern's operations are to remain unchanged or will improve as the new Company seeks to expand its area of service. Moreover, separate books and records will be maintained under both the preferred and alternate acquisition scenarios, facilitating the Commission's continued review and oversight of Northern and its operations in New Hampshire. We note, however, that the inclusion of the acquisition premium in ratebase and the effect of the acquisition premium on the capital structure of Northern would in all likelihood lead us to the conclusion that Northern ratepayers would be harmed by the acquisition without the conditions contained in the Stipulation. Those conditions require Northern to substantiate any savings to ratepayers that have resulted from the merger before Northern may include any part of the acquisition premium in ratebase for ratemaking purposes. The same condition applies to the effect of the acquisition premium on the capital structure of the resultant entity. For the purpose of SEC approvals, we note that we have the necessary authority and responsibility to protect Northern's New Hampshire ratepayers and the preferred merger will facilitate our continued exercise of that authority. Accordingly, we will notify the SEC of our support for the preferred merger for consideration in its review of NIPSCO, Inc.'s merger application. As noted above, the provisions in the Stipulation which defer consideration of the capital structure and ratemaking issues for a subsequent proceeding are appropriate. Northern will have the right to request recovery of an acquisition premium in a future proceeding to the extent it can substantiate the reasonableness of that action, just as all parties are free to argue in support of or opposition to such recovery as they see fit. Likewise, in a future rate recovery proceeding, any party may argue that a hypothetical capital structure may be more appropriate in determining a rate of return. We will consider such requests and related arguments when filed. Before such a proceeding, however, Northern shall file its annual reports in a form that allows for an analysis of its earnings with and without the effects of the acquisition premium, both from the perspective of ratebase and the weighted cost of capital. Based upon the foregoing, it is hereby ORDERED, that the Stipulation and Agreement is APPROVED subject to the forgoing analysis; and it is FURTHER ORDERED, that this Order, which indicates our support for the preferred merger, shall be submitted to the Securities and Exchange Commission for consideration in its review of NIPSCO, Inc.'s merger application; and it is FURTHER ORDERED, that if the alternate merger is implemented, a Northern Advisory Board shall be established. By order of the Public Utilities Commission of New Hampshire this twentieth day of July, 1998. Douglas L. Patch Bruce B. Ellsworth Susan S. Geiger Chairman Commissioner Commissioner Attested by: Thomas B. Getz Executive Director and Secretary