File No. 70-9813
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
AMENDMENT NO. 1
TO
FORM U-1
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
AGL RESOURCES INC.
817 West Peachtree Street NW
10th Floor
Atlanta, Georgia 30308
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(Names of company or companies filing this statement
and addresses of principal executive offices)
Paul R. Shlanta, General Counsel
AGL RESOURCES INC.
817 West Peachtree Street NW
10th Floor
Atlanta, Georgia 30308
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(Name and address of agent for service)
This pre-effective Amendment No. 1 replaces and revises the Form U-1
Application-Declaration in this proceeding, originally filed in File No. 70-9813
on December 29, 2000, in its entirety, except that it does not replace exhibits
previously filed.
Item 1. Description of Proposed Transaction
(a) Furnish a reasonably detailed and precise description of the proposed
transaction, including a statement of the reasons why it is desired to
consummate the transaction and the anticipated effect thereof. If the
transaction is part of a general program, describe the program and its
relation to the proposed transaction.
A. Introduction
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AGL Resources Inc. ("AGLR"), a Georgia corporation, and a holding company
registered under the Public Utility Holding Company Act of 1935 (the "Act"),
requests authorization to establish a subsidiary captive insurance company
("the Captive") to provide certain key layers of insurance coverage for AGLR and
its associate companies (the "System") as described below. By using the Captive
to underwrite some risks and maintaining traditional insurance with respect to
other risks, the System can minimize its cost of obtaining insurance and
managing claims while maintaining adequate coverage of the risks it encounters
in its businesses.
It is important to note, however, that although the Captive will replace
certain insurance sold to the System by traditional insurance providers, the
Captive will not increase the risk of loss to the System. To the extent
traditional insurance programs are reduced, the System will obtain equal levels
of loss protection and coverage in the reinsurance market available only to
insurance companies such as the Captive. With the exception of a small amount
not to exceed the System's current $1,000,000 self-insured retention in
connection with insurance programs that the Captive may undertake in the future
and discussed within, the Captive will cede to third-party reinsurance carriers
all of the risks that it underwrites. The Captive is essentially an
administrative mechanism that permits the System to access the reinsurance
markets that are
only available to insurance companies or brokers. The Captive also provides a
less costly way to handle the System's claims.
The Captive is expected to result in an immediate reduction in insurance
premiums and will provide other benefits discussed below. AGLR estimates that
it can significantly reduce its cost of purchasing traditional insurance without
increasing the System's risk exposure by accessing the reinsurance market
directly through the Captive and by using its own 15-year loss experience to
"actuarially" identify its losses for property and casualty lines. In the
discussion below, we first describe how AGLR's current insurance program
functions and then explain in detail the operations of the proposed captive
insurance company.
B. AGLR's Current Risk Management Program
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AGLR considers risk management to be a key corporate function. By protecting
the physical and financial assets of each System company, the risk management
program allows the System to reach its goals and objectives without the
disruption that could be caused by a significant unexpected loss. Risk
management is coordinated by AGL Services Company ("AGSC"), a wholly-owned
subsidiary of AGLR and a service company serving the System. One of the AGSC
Risk Management Department's primary responsibilities is the procurement of a
broad array of insurance coverage and services on behalf of the entire System.
On an annual basis, the System spends approximately $5,000,000 for the purchase
of traditional insurance and related services (including payment of
deductibles). This is a significant expenditure and, in view of the
increasingly competitive nature of the System's business, it is important for
the System to maintain and enhance its competitive position by continuing to
aggressively monitor and manage the cost for insurance and related services.
As shown in Exhibit A, under the System's current insurance program, AGSC, on
behalf of the System, maintains a per occurrence deductible, also known as a
self-insured "retention", of $1,000,000 for automobile and general liability
exposures, $200,000 for directors & officers liability, $125,000 for "all-risk"
property coverage and $500,000 for workers compensation liability. AGSC
purchases traditional insurance to cover losses in excess of the self-insured
retention. In addition, certain AGLR subsidiaries maintain separate deductibles
and purchase separate coverage limits outside the System program.
In today's insurance market, and as more fully described below, traditional
insurance programs are relatively expensive to maintain, largely because of the
costs of doing business with a "full service" traditional insurer. Traditional
insurance programs are, in fact, supported and underwritten through a robust
"reinsurance" market that is available, generally speaking, only to insurance
companies. By eliminating the insurance "middleman" for selected transactions
and coverage, opportunities exist for significant savings for those companies
who can deal directly in the reinsurance market for certain elements of their
insurance programs.
AGLR believes that a comprehensive insurance program that blends traditional
insurance and alternative insurance obtained through a captive insurance company
is the best way to maximize cost effectiveness, minimize risk exposure and
provide each System company with the flexibility that each needs to meet its
strategic goals and objectives.
C. The Proposed Captive Insurance Program
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Proposed Lines of Insurance Coverage
AGLR proposes to establish the Captive as a new wholly-owned subsidiary, that
would be authorized to operate as an insurance company in the British Virgin
Islands. As illustrated in Exhibit B, the Captive would underwrite a layer of
risk within each line of
insurance coverage that is now being provided by traditional insurance. In
particular, the Captive will initially focus on providing the following
insurance coverage for the benefit of the System: 1) automobile and general
liability above the $1,000,000 self-insured retention, and; 2) excess coverage
that will include all risk property, boiler & machinery, directors & officers,
crime, fiduciary and workers compensation and that will be placed (a) above the
self-insured retention, and (b) above traditional coverage that will continue to
be maintained by AGLR for the benefit of the System. The Captive will target its
underwriting activity on the portions of the liability program where the
greatest cost savings are possible. As stated, all risks associated with
insurance coverage proposed above provided by the Captive will be ceded in their
entirety to reinsurance companies. Accordingly, providing this insurance
coverage through the Captive will not expose the System to any additional risk.
In the future, the Captive may seek to underwrite additional insurance
coverage and retain a small amount of risk that is within the System's current
self-insured retention. In particular, the Captive may provide performance
bonds and construction-related insurance (wrap-up construction program) for
contractors working on projects for the System. A wrap-up construction program
is utilized by a project owner to provide economies of scale to the general
contractor and all sub-contractors. A wrap-up construction program avoids
costly insurance duplication by providing the general contractor and all sub-
contractors access to the same insurance program versus each contractor
purchasing a smaller separate insurance plan. The cost savings to the
contractors can then be passed on to the System companies that are paying for
the construction projects.
In the case of the wrap-up construction program, the Captive would retain up
to, but no more than, $1 million of self-insured retention risk, which is
consistent with the System's
normal self-insured retention amount. The Captive would then cede 100% of the
risk above the self-insured retention amount to reinsurers and would further
minimize the risk of the retained amount with stop loss coverage protection. In
addition, the Captive's capitalization would be increased, commensurate with any
additional net written premium, to comply with the British Virgin Islands'
capital requirements. See discussion of capital requirements below.
Any additional types of insurance would be underwritten by the Captive only
under the following limited circumstances: (1) where a reinsurer is ceded 100%
of the risk underwritten by the Captive above the System's normal one million
dollar ($1,000,000) self- insured retention; (2) where the insurance is related
to an authorized or permitted System business activity; (3) where direct
placement of reinsurance by the Captive would be reasonably expected to save the
System a portion of the risk premium it would otherwise have paid; and (4) where
normal deductible amounts are retained by System companies and where the Captive
can obtain, as appropriate, excess or stop-loss coverage. In no case, other than
the wrap-up construction program, would the Captive sell insurance to non-
affiliates except as further authorized by the Commission.
Consistent with the above conditions, the Captive will underwrite insurance
that directly protects System companies from risks associated with their
businesses. In the limited circumstance of the wrap-up construction program,
however, the Captive may also provide insurance for nonaffiliates in connection
with System business. The Captive would provide wrap-up construction coverage
for nonaffiliates only for the duration of the particular construction program
undertaken in connection with System company business. In this limited
circumstance, System companies would benefit indirectly in the form of lower
costs from savings accrued by the nonaffiliates. In the wrap-up construction
program, unaffiliated
subcontractors could purchase construction project-related insurance through the
Captive structure. The savings could then result in a lower cost for System
companies in connection with the construction contract. In all cases however,
insurance underwritten by the Captive would be for the direct or indirect
benefit of the System.
The Captive's Capital Requirements
Under the insurance regulations of the British Virgin Islands, an insurance
company must be capitalized in proportion to its net underwritten business. The
net underwritten business consists of the gross amount of insurance that a
company writes less the amount that is reinsured with other insurers. Because
the Captive will initially reinsure all of the insurance that it underwrites,
its net underwritten business will be zero. Accordingly, the minimal
capitalization initially proposed for Captive will be fully adequate and
commensurate with the very low risk, on a net basis, that it will assume.
In connection with insurance that the Captive may underwrite in the future,
the Captive may retain up to, but no more than, $1 million of self-insured
retention risk, consistent with the System's normal self-insured retention
amount. To the extent the Captive retains self-insured retention risk it will
increase its capitalization commensurate with any additional net written
premium. As necessary, the Captive will increase its capitalization to an
adequate level consistent with the insurance regulations of the British Virgin
Islands through the retention of premium surpluses or capital contributions from
AGLR. Excess capital will be returned to System companies through premium
reductions.
Staffing, Services and Organization
The initial Captive participation in the blended insurance program would
represent approximately 30% of the total System coverage. AGSC would continue
to purchase
certain traditional insurance for all other coverage, just as is done under the
current program.
No additional staff would be required to operate the Captive. Instead, as is
the case with most captives, a British Virgin Islands management company will be
retained to provide administrative services. AGSC employees will be directors
and principal officers of the Captive, and will oversee the administrative
functions. Administrative functions would be directed by AGSC through the
management company and would include: (1) accounting and reporting activities;
(2) legal, actuarial, banking and audit services; (3) negotiating reinsurance
contracts, policy terms and conditions; (4) invoicing and making payments, and;
(5) managing regulatory affairs. The existing AGSC self-administration claim
staff would continue to perform the claims adjusting function. All goods and
services provided by AGSC to the Captive would be provided in accordance with
Section 13 of the Act and the rules thereunder and the costs incurred by the
Captive would be recovered in premiums charged by the Captive to the System. In
this manner, savings in premiums will flow through ratably to System companies.
Captive will not be operated to maintain a surplus beyond what would be
necessary to remain adequately capitalized.
AGLR proposes to provide initial funding of $100,000 cash in exchange for
Captive common stock, $1 par value. Funds will be deposited with the Captive's
U.S. bank and will be managed by an investment manager in accordance with Rule
40 under the Act as such rule may be amended from time to time or until the
effective date of any legislation repealing the Act.
D. Benefits Of Captive
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i) Significant reduction in the 30% to 40% overhead charge for traditional
insurers underwriting risk.
Traditional insurers charge insurance premiums based on actuarially projected
losses plus a 30% to 40% overhead charge. Therefore, for every $1.00 in
projected loss, a traditional insurer charges as much as an additional $0.40 for
administrative charges and overhead. In contrast, the Captive would add only
the actual cost of administration. This cost is largely fixed and will result
in substantial savings, particularly as the business of the Captive is expanded
over several lines of insurance.
ii) Direct access to global reinsurers to achieve the most competitive and cost-
effective pricing for AGLR's "unpredictable" insurance exposures.
Reinsurers are generally accessible only by traditional insurers and brokers
who charge a fee. A captive insurance company will provide AGLR with direct
access to reinsurance markets, thereby avoiding the fee. These reinsurers are
not only among the world's largest insurers, they are among the most
competitively priced. AGLR expects the Captive to realize premium savings of
approximately $330,000 in its first year of providing coverage. Financial
projections for the first five years of the Captive's operations are included in
Exhibit FS-1.
iii) Greater control and input over the resolution process of claims management.
Under traditional arrangements, insurers determine to a large extent, if and
when to settle claims. The Captive in partnership with the reinsurers, would
play the lead role in the claims management process.
iv) Reduced reliance on the traditional insurance market for insuring risks
resulting in less volatility of future premiums.
To the extent that the Captive reduces reliance on traditional insurers and
expands the System's participation in the reinsurance markets, vulnerability to
premium changes is lessened. Sixty percent of the Fortune 500 companies
presently utilize a captive insurance company to more effectively control and
manage their insurance costs. A captive insurance
company will be very important in "leveling the playing field" and in providing
access for the System to the most competitive global insurance markets, thereby
resulting in reduced cost for insurance and related services.
E. Reporting
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AGLR's Annual Report on Form U5S will include the financial statements of the
Captive. The Commission may, of course, request additional information on the
operations of the Captive, as necessary, under Section 18(b).
F. Summary of Authorization Requested
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AGLR requests authorization to create a captive insurance company as a wholly-
owned subsidiary for the purpose of engaging in the insurance business as
described above and to fund the Captive initially through the purchase of up to
$100,000 of the Captive's common stock, $1 par value per share.
Item 2. Fees, Commissions and Expenses
(a) State (1) the fees, commissions and expenses paid or incurred, or to be paid
or incurred, directly or indirectly, in connection with the proposed transaction
by the applicant or declarant or any associate company thereof, and (2) if the
proposed transaction involves the sale of securities at competitive bidding, the
fees and expenses to be paid to counsel selected by applicant or declarant to
act for the successful bidder.
AGLR has incurred expenses for certain services in connection with the
preparation of this filing as follows:
Services of AGL Services Company in connection
with the preparation of the Application-Declaration...(to be filed by Amendment)
Services of LeBoeuf, Lamb, Greene & MacRae, L.L.P.....(to be filed by Amendment)
Total............................................. $ (to be filed by Amendment)
(b) If any person to whom fees or commissions have been or are to be paid in
connection with the proposed transaction is an associate company or an affiliate
of any applicant or declarant, or is an affiliate of an associate company, set
forth the facts with respect thereto.
AGL Services Company is a wholly owned subsidiary of AGLR and has performed
certain services at cost as set forth above.
Item 3. Applicable Statutory Provisions.
(a) State the section of the Act and the rules thereunder believed to applicable
to the proposed transaction. If any section or rule would be applicable in
absence of a specific exemption, state the basis of exemption.
The issuance of new securities by the Captive is subject to Sections 6(a)
and 7 of the Act and Rule 43. Sections 9(a) and 10 of the Act are deemed
applicable to the acquisition by AGLR of the capital stock of the Captive. Rule
86 is applicable to the sale of insurance services by the Captive to the System
companies.
The Commission has previously authorized registered holding companies to
organize and fund captive insurance companies. In the matter of Columbia
Insurance Corporation, Ltd., Holding Co. Act Release No. 27051 (July 23, 1999),
the Commission authorized the Columbia Energy Group to expand the reinsurance
activities of its existing captive insurer and to provide additional financial
support to the captive in an aggregate amount of up to $50 million. In that
matter, Columbia's captive insurer was authorized to assume predictable risks
related to the businesses of the Columbia group of companies in lines of
insurance similar to the types of insurance proposed to be underwritten by
AGLR's proposed captive insurance company. Specifically, Columbia's captive
insurance company was permitted to engage in reinsurance activities where: (1) a
primary insurer underwrites the risk; (2) the insurance relates to a permitted
business activity engaged in by a member of the Columbia group; (3) where
captive reinsurance would reasonably be expected to save the Columbia group a
portion of the risk premium it would otherwise have paid; and (4) where the
captive can obtain, as appropriate, excess or stop-loss coverage. Under the
authorization granted by the Commission, Columbia's captive insurance company
assumed various risks itself in addition to reinsuring those risks with third-
party reinsurers. For this reason, it required substantial capital
for reserves and it presented a potential risk to the Columbia associate
companies that did business with the captive.
AGLR's proposed captive insurance company is fully within the Columbia
precedent in terms of the limitations on the lines of insurance in which it
proposes to engage. AGLR's proposed captive insurance company is significantly
different from Columbia, however, because the Captive will cede 100% of the
risks that it underwrites, above the traditional $1,000,000 self-insured
retention, to other insurers. Consequently, it presents a much lower risk to
the System and allows the System to achieve many of the benefits of a
reinsurance program contracted for by the Captive without the potential
financial detriment connected to retaining insured risk.
The provision of insurance to non-affiliates under the wrap-up construction
program is in furtherance of the Captive's main function of primarily serving
the insurance needs of System associate companies. Because savings from the
wrap-up construction program should help to lower the cost of System
construction contracts, the provision of these ancillary services to non-
affiliates in this case is consistent with the requirements of Section 11(b)(1)
of the Act. The savings expected to redound to the benefit of System companies
as a result of this program show that serving non-affiliates in this manner is
functionally related to the operations of the integrated AGL System./1/ For
these reasons, the Commission should authorize the proposed transaction.
AGLR does not own or operate, nor is it an equity participant in any Exempt
Wholesale Generator or any Foreign Utility Company and will not be a company
that owns, operates or has an equity participation in an Exempt Wholesale
Generator or Foreign Utility Company as a result of the approvals requested
herein. AGLR does not have any rights, nor will it have any rights or
obligations under a service, sales or construction contract with an Exempt
Wholesale Generator or Foreign Utility Company as a result of the proposed
transactions.
(b) If any applicant is not a registered holding company or a subsidiary
thereof, state the name of each public utility company of which it is an
affiliate, or of which it will become an affiliate as a result of the proposed
transaction, and the reasons why it is or will become such an affiliate.
Not applicable
____________
/1/See, Jersey Central Power & Light Co., Holding Co. Act Release No. 24348
(Mar. 18, 1987) (authorizing utility to license to nonassociates computer
programs developed by company personnel to detect service theft). Captive's
provision of services to non-affiliates is like Jersey Central because it is
also a use of "excess capacity" in a manner that offers the opportunity for
savings to utility associates without a significant investment of additional
capital.
Item 4. Regulatory Approval.
(a) State the nature and extent of the jurisdiction of any State commission or
any Federal commission (other than the Securities and Exchange Commission) over
the proposed transaction.
No state or federal approval other than the authorization of this Commission
is required to enter into the proposed transactions.
(b) Describe the action taken or proposed to be taken before any Commission
named in answer to Paragraph (a) of this item in connection with the proposed
transaction.
Not applicable.
Item 5. Procedure.
(a) State the date when Commission action is requested. If the date is less
than 40 days from the date of the original filing, set forth the reasons for
acceleration.
It is respectfully requested that the Commission issue its notice by February
23, 2001 and its order on or by March 23, 2001.
(b) State (i) whether there should be a recommended decision by a hearing
officer, (ii) whether there should be a recommended decision by any other
responsible officer of the Commission, (iii) whether the Division of Investment
Management may assist in the preparation of the Commission's decision, and (iv)
whether there should be a 30-day waiting period between the issuance of the
Commission's order and the date on which it is to become effective.
The Applicants hereby (i) waive a recommended decision by a hearing officer,
(ii) waive a recommended decision by any other responsible officer of the
Commission, (iii) specify that the Division of Investment Management may assist
in the preparation of the Commission's decision, and (iv) specifies that there
should not be a 30-day waiting period between the issuance of the Commission's
order and the date on which it is to become effective.
Item 6. Exhibits and Financial Statements.
Exhibits
A AGL Resources Current Insurance Program Structure (previously filed under
request for confidential treatment).
B AGL Resources Captive Insurance Company Structure: Start-Up (previously filed
under request for confidential treatment).
F Opinion of Counsel (to be filed by amendment).
G Past-Tense Opinion of Counsel (to be filed by amendment).
H Proposed Form of Notice (previously filed).
Financial Statements
FS-1 Financial Projections for Captive: Five Year Balance Sheets, Income
Statements and Cash Flow Statements (previously filed under request for
confidential treatment).
Item 7. Information as to Environmental Effects.
(a) Describe briefly the environmental effects of the proposed transaction in
terms of the standards set forth in Section 102(2)(C) of the National
Environmental Policy Act (42 U.S.C. 4232(2)(C)). If the response to this item
is a negative statement as to the applicability of Section 102(2)(C) in
connection with the proposed transaction, also briefly state the reasons for
that response.
As more fully described in Item 1, the proposed transactions relate only to
establishment of a subsidiary company and have no environmental impact in and of
themselves.
(b) State whether any other federal agency has prepared or is preparing an
environmental impact statement ("EIS") with respect to the proposed transaction.
If any other federal agency has prepared or is preparing an EIS, state which
agency or agencies and indicate the status of that EIS preparation.
No federal agency has prepared or is preparing an EIS with respect to the
proposed transaction.
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.
AGL RESOURCES INC.
Date: March 2, 2001 By: /s/ Paul R. Shlanta
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Paul R. Shlanta
Senior Vice President &
General Counsel