North Carolina OKs Purchase of LDC by Private Equity Group

Six weeks after the proposed transaction had obtained requisite approvals from regulators in Maine, Montana, and Ohio, the North Carolina Utilities Commission (NCUC) gave the final assent needed for the acquisition of a multistate natural gas local distribution company (LDC) by an investment fund entity. The complex arrangement provides for the LDC, Gas Natural Inc. (GNI), to become an indirect subsidiary of ultimate parent company BlackRock Inc.

When the deal was originally announced last October, the merger applicants were jointly listed in filings with the NCUC as Frontier Natural Gas Company (a subsidiary of GNI) and FR Bison Holdings. The latter was owned by First Reserve Energy Infrastructure GP II, which had roots in the Cayman Islands. As initially proposed, First Reserve would purchase 100% of the stock of GNI.

However, in June of this year, First Reserve itself was acquired by New York-based BlackRock. BlackRock thus became a substitute acquisition partner, meaning that upon consummation of the transaction, GNI and its subsidiaries will be affiliates of BlackRock instead of just First Reserve. In advocating for the merger, Gas Natural told the NCUC that while ownership of its stock would be transferred, such that it would no longer be a publicly traded company, day-to-day operations of its LDC subsidiaries would not change.

The company assured the commission that not only would its LDC affiliates remain subject to the NCUC's regulatory jurisdiction, but that GNI intended to maintain its existing corporate and managerial structure. The merger applicants conveyed that none of the parties involved will attain an unfair market advantage as a result of the acquisition and that neither will the energy markets suffer any anticompetitive impacts thereto. To the contrary, the merger parties maintained that far from adverse effects, there will be affirmative benefits from the transaction.

Among the attributes identified by the parties were cost savings in the form of economies of scale, increased access to capital markets for Frontier and GNI, greater financial stability, and further opportunities for growth and expanded facilities within North Carolina. Perhaps most important, the parties said, was their agreement to provide Frontier's North Carolina ratepayers with a one-time bill credit totaling $100,000.

Although finding the purported level of expected benefits to be realistic and achievable, the NCUC expressed some concern about First Reserve's lack of experience in the natural gas LDC business. However, conceding that First Reserve had retained the services of a consultant that does have extensive experience in the utility sector, and aware that BlackRock has experience of its own, the commission deemed the acquisition to comport with the overall public interest.

Nevertheless, the commission attached several conditions to its approval of the merger. For one, it prohibited Frontier/GNI from recovering from customers any direct expenses incurred in executing the transaction. For another, the commission prohibited the LDC from seeking a change in its margin rates before December 31, 2021, although it allowed that exceptions to that moratorium could be made under certain extraordinary circumstances. The commission likewise was careful to put restrictions on some of Frontier's subsequent affiliate arrangements. It explicitly forbade the company from entering into any loan agreement or guaranteeing any other obligation with an affiliate absent express prior approval from the NCUC.

The commission further instructed Frontier to keep its common equity level at or above 45% until such time as a final order is reached in the LDC's next general rate case. That is, the commission clarified, Frontier may make no equity distributions to its parent, whether by dividend or otherwise, if such would cause its equity ratio to fall below that minimum.

The commission concluded that, subject to that outline of conditions, the transaction would augment the financial standing of Frontier/GNI, which in turn could advance the public interest in having natural gas service extended into presently unserved or underserved areas. Re Frontier Natural Gas Co. et al., Docket No. G-40, Sub 136, Aug. 1, 2017 (N.C.U.C.). 

The earlier merger proceedings before the Maine Public Utilities Commission, the Montana Public Service Commission, and the Ohio Public Utilities Commission tracked very closely to the one in North Carolina. For example, in Maine, which involved GNI subsidiary Bangor Natural Gas Company (BNG), the commission determined that the proffered merger plan was consistent with Maine's guidelines for corporate reorganizations, which generally permit such to go forward provided the commission finds the proposal consistent with the state's "no net harm" standard. However, to assure consumers were protected from unnecessary costs, the commission denied BNG authority to recoup any transaction costs from ratepayers and required the LDC to continue its current alternative rate plan. The commission likewise told the company that it must report all payments to affiliates under shared services agreements. In addition, the commission ordered BNG to maintain its principal place of business in Maine and retain local management personnel. Re Bangor Natural Gas Co., Inc. et al., Docket Nos. 2016-00282, 2017-00096, June 26, 2017 (Me.P.U.C.). 

In Montana, two GNI subsidiaries were parties to the transaction: Energy West Montana and Cut Bank Gas Company. In ascertaining whether the merger plan they tendered was reasonable, the commission applied three different tests: the public interest test; the no-harm-to-customers standard; and the net-benefit-toconsumers standard. According to the Montana commission, those tests necessitate a review of whether the acquiring entity has the requisite financial, managerial, and operational ability to assure ongoing adequate and reliable service. Even if it finds that the acquiring party does, though, the commission said it will not approve a transfer or sale if it appears that such will result in a rate increase for customers. With regard to the GNI proposal, the commission reported that the merger terms were reasonable and appropriate and sufficient for clearing all three of the approval screens. Re Gas Natural, Inc. et al., Docket No. D.2016.11.91, Order No. 7534e, June 29, 2017 (Mont.P.S.C.). 

Finally, the Ohio commission addressed a plan pertinent to four GNI subsidiaries: Brainard Gas Corporation, Northeast Ohio Natural Gas Corporation, Orwell Natural Gas Company, and Spelman Pipeline Holdings. In the docket before it, the Ohio commission determined that the proposed acquisition would have virtually no immediate impact on consumers, in that there would be no change in any of the LDCs' rate bases, operations, or customer service. Because its approval was conditioned on the LDCs not reflecting in rates any acquisition premium or transaction costs associated with the reorganization, the commission stated that neither would the companies' rates be affected. The commission concluded that in light of several ring-fencing measures it added to the merger agreement, and given other ratepayer safeguards it was putting in place, it was convinced that the transfer of ownership of GNI would not harm consumers in the state. Re Brainard Gas Corp. et al., Case No. 16-2251-GA-UNC, June 21, 2017 (Ohio P.U.C.).