VII. Comments on Draft Decision
The draft decision in this matter was mailed to the parties in accordance with Rule 77.7 of the Commission's Rules of Practice and Procedure.
1. This Application is the joint application with a prospective purchaser for a change of control pursuant to Pub. Util. Code § 854 that is referred to in D.01-08-023. This Application and Amendment are unopposed.
2. On August 22, 2001 Western Hub, its owners and WHP executed a Unit Purchase Agreement for the sale of Western Hub to WHP, subject to this Commission's approval. The transaction provides for cash consideration to Western Hub's current owners of $105 million plus up to $3 million in expenses.
3. Western Hub will continue to exist after the change of control. Consequently, this transfer will result in the indirect change of control of LGS and the Lodi Facility but will not result in the transfer of any certificates, assets, or customers of LGS. LGS will continue to be bound by the terms and conditions prescribed by the Commission in D.00-05-048, as modified, which granted LGS a CPCN and certified the EIR for its project, and by the terms and conditions of LGS' filed tariff.
4. The direct owners of WHP are ArcLight and AMS, which will each invest $25 million in the acquisition. Aquila now owns 100% of AMS.
5. The evidence Joint Applicants have presented on market power is at best inconclusive; it does not permit us to find that LGS cannot exercise market power.
6. To ensure LGS does not exercise market power in the storage market, the change of control should be authorized only if LGS complies with the prohibition on affiliate transactions for storage or hub services and with the reporting requirements described in this decision.
7. WHP has a four-member Management Committee, with two individuals designated to serve by AMS and two by ArcLight. AMS will provide construction management at the Lodi Facility, including the "turnkey wrap" function that the banks require, and management of the day-to-day operations of LGS. AMS' managerial fees will be market-based and negotiated with ArcLight on behalf of LGS.
8. Both AMS and ArcLight bring substantial financial resources to the proposed transaction, and between them, sufficient managerial and financial expertise to oversee the successful operation of LGS and the Lodi Facility and to bring the remaining portions of the construction project to fruition.
9. The 50% - 50% ownership position suggests appropriate checks and balances will govern negotiations between AMS and ArcLight for management contracts. Disclosure of those contracts, and any amendments, to the Commission will provide another check.
10. Approval of the management contracts should be provisional and subject to reexamination in R.01-01-001.
11. The Indicative Terms and Conditions for the debt financing under negotiation provide for a market-rate loan to LGS of up to $175 million, repayable within five years, to supplement the equity capital from AMS and ArcLight. The proceeds are to be used to acquire Western Hub and to refinance interim construction financing provided LGS by WHP.
12. Considering the status of LGS as an independent gas storage utility, the Commission need not impose a debt/equity ratio more typical of a monopoly public utility on LGS' capital structure. Concern about the impact of the proposed debt financing on LGS capital structure is mitigated further by several factors: the $20 million performance bond ordered in D.00-05-048 will remain in place and the Banks' financial analysis regarding the sizing of the debt financing is based on a conservative assessment of LGS' cash flow.
13. LGS should provide a copy of the final debt financing arrangement to the Director of the Commission's Energy Division.
14. To ensure that the performance bond will continue without interruption, Joint Applicants should provide the Director of the Commission's Energy Division clear representation that the bonding entities will bond LGS and the Lodi Facility under its new ownership. This representation must be verified, must be in writing, and must be submitted prior to any change of control.
15. The proposed LGM Storage Agreement and LGM Marketing Contract would require contracts between LGS and an affiliate regarding the marketing of LGS' core utility business, the provision of gas storage services.
16. Pending reexamination of application of affiliates reporting requirements to independent gas storage in R.01-01-001, we should treat LGS like Wild Goose in order to avoid, through regulatory policy, creating a competitive advantage for one over another. Therefore, we should continue to: (a) exempt LGS from the Affiliate Transaction Rules; (b) require full compliance with GO 65-A, GO 77-K, and GO 104-A; and (c) decline to authorize a simplified annual report as compliance with Pub. Util. Code § 587.
17. This transfer of control will have no significant effect on the environment since the Lodi Facility will continue to be operated as previously authorized by this Commission, all environmental mitigation measures contained in the certified EIR will continue to apply, and all monitoring requirements and restrictions imposed in D.00-05-048, which certified the EIR, will continue.
18. The Commission should extend the environmental mitigation monitoring restrictions imposed by D.00-05-048, Ordering Paragraph 16, to persons and entities with a beneficial interest in any of LGS' new owners.
19. No hearing is necessary.
20. Joint Applicants' July 11, 2002 request to shorten the comment period on the draft decision to 15 days is unopposed and should be granted.
1. The application should be granted in part and denied in part.
2. As conditioned herein, the portions of the application granted are in the public interest.
3. Following the change of control, LGS will continue to be bound by the terms of its CPCN, by all the requirements and conditions mandated in D.00-05-048 as modified by subsequent Commission decisions, and by the tariff filed with the Commission, as approved and subsequently modified by any approved amendments.
4. The preliminary determinations in Resolution ALJ 176-3074 should be confirmed.
5. Article 2.5 of the Commission's Rules of Practice and Procedure ceases to apply to this proceeding.
6. This transfer of control qualifies for an exemption from the California Environmental Act (CEQA) under CEQA Guidelines § 1506(b)(3)(1) and therefore, additional environmental review is not required.
7. The restriction preventing persons and entities with a beneficial interest in LGS or its present owners from monitoring the implementation of the environmental mitigation measures should be extended to persons and entities with a beneficial interest in any of LGS' new owners.
8. The change of control should not occur until Joint Applicants provide the Director of the Commission' Energy Division with verified representation, in writing, that the bonding entities will continue to bond LGS and the Lodi Facility under the $20 million performance bond ordered by D.00-05-048.
9. Because no action has been taken on Joint Applicants' November 20, 2001 motion for an order shortening time for protests and/or responses to the Amendment to the Application and limiting the scope of response, the motion is now moot.
10. Joint Applicants' July 11, 2002 request to shorten the comment period on the draft decision to 15 days complies with Pub. Util. Code § 311(g)(2).
11. This order should be effective immediately.
IT IS ORDERED that:
1. The Application of Lodi Gas Storage, L.L.C. (LGS), Western Hub Properties, L.L.C. (Western Hub) and WHP Acquisition Company, LLC (WHP), collectively Joint Applicants, is granted in part, as provided in these Ordering Paragraphs, and in all other respects is denied.
2. The transfer of ownership of Western Hub, and indirectly LGS and the Lodi gas storage facility, to WHP and its owners, pursuant to Pub. Util. Code § 854, is approved subject to the conditions listed in Ordering Paragraph 6 and shall not occur until Joint Applicants have complied with Ordering Paragraph 6(a). LGS and its new owners shall continue to be bound by all terms and conditions of LGS' certificate of public convenience and necessity, as granted by Decision (D.) 00-05-048 and modified by subsequent decisions of the Commission.
3. Joint Applicants' request, pursuant to Pub. Util. Code §§ 816, 817, 818, 823 and 851, for authority to enter into a secured, long-term bank financing agreement is approved, subject to the conditions listed in Ordering Paragraph 6.
4. Joint Applicants' requests for authorization to negotiate contracts, on behalf of LGS, for the management of continuing construction at the Lodi Facility and for management of the day-to-day operations of LGS are approved, on a provisional basis, subject to the conditions listed in Ordering Paragraph 6, but shall be reexamined in Rulemaking (R.) 01-01-001.
5. Pending further order of the Commission, LGS shall continue to be exempt from the Affiliate Transaction Rules.
6. The authority granted in Ordering Paragraphs 1 through 5, above, is conditioned upon compliance with the following subparagraphs. Disclosure of the required information, including contracts and other documents, shall be made to the Director of the Commission's Energy Division by LGS and its owners. Competitively sensitive, confidential information may be submitted under seal in accordance with General Order 66-C and Pub. Util. Code § 583. LGS shall:
a. Provide clear representation in writing, prior to the change of control, that the bonding entities will continue to bond LGS and the Lodi Facility under the $20 million performance bond ordered by D.00-05-048;
b. Provide true copies of the contracts with AMS, and any amendments to those contracts, for the management of continuing construction and day-to-day operations at LGS and the Lodi Facility;
c. Provide a true copy of the final, debt financing arrangement from the proposed and/or any alternative lenders, once that arrangement is finalized in accordance with the terms approved herein.
d. Provide prompt disclosure of the following changes in status that reflect a departure from the characteristics the California Public Utilities Commission has relied upon in approving market-based pricing: (i) LGS' own purchase of natural gas facilities, transmission facilities, or substitutes for natural gas, like liquefied natural gas facilities; (ii) an increase in the storage capacity or in the interstate or intrastate transmission capacity held by affiliates of its ultimate parents (Aquila, Inc. (Aquila) and ArcLight Energy Partners Fund I, L.P. (ArcLight))or their successors; or (iii) merger or other acquisition involving affiliates of its ultimate parents (Aquila and ArcLight) or their successors and another entity that owns gas storage or transmission facilities or facilities that use natural gas as an input, such as electric generation.
e. Provide true copies of all service agreements for short-term transactions (one year or less) within 30 days of the date of commencement of short-term service, to be followed by quarterly transaction summaries of specific sales. If LGS enters into multiple service agreements within a 30-day period, LGS may file these service agreements together so as to conserve the resources both of LGS and the Commission. The quarterly transactions summaries shall list, for all tariffed services, the purchaser, the transaction period, the type of service (e.g., firm, interruptible, balancing, etc.), the rate, the applicable volume, whether there is an affiliate relationship between LGS and the customer, and the total charge to the customer.
f. Provide true copies of all service agreements for long-term transactions (longer than one year), within 30 days of the date of commencement of service. To ensure the clear identification of filings, and in order to facilitate the orderly maintenance of the Commission's records, long-term transaction service agreements shall not be filed together with short-term transaction summaries.
g. Not engage in any storage or hub services transactions with it its ultimate parents (Aquila and ArcLight), or their successors, or any affiliated entity owned or controlled by its ultimate parents or their successors.
7. The transfer of control qualifies for an exemption from the California Environmental Act (CEQA) under CEQA Guidelines § 1506(b)(3)(1) and therefore, additional environmental review is not required.
8. D.00-05-048, Ordering Paragraph 16, which prohibits persons and entities with a beneficial interest in LGS or its present owners from monitoring the implementation of the environmental mitigation measures, shall continue and shall extend, following the transfer of control, to persons and entities with a beneficial interest in any of LGS' new owners.
9. Joint Applicants shall notify the Director of the Commission's Energy Division in writing of the transfer of authority, as authorized herein, within 30 days of the date of the transfer. A true copy of the instruments of transfer shall be attached to the notification.
10. The authority granted herein shall expire if not exercised within one year of the date of this order.
11. Joint Applicants' November 20, 2001 motion for an order shortening time for protests and/or responses to the Amendment to the Application, and limiting the scope of response, is moot.
12. Joint Applicants July 11, 2002, request to shorten the comment period on the draft decision to 15 days is granted.
13. Application 01-09-045 is closed.
This order is effective today.
Dated , at San Francisco, California.
